Following the last ECB meeting on Thursday 10th, market expectations were met by Draghi’s speech regarding further quantitative easing and negative interest rates.
More specifically, the ECB lowered all three key basic interest rates, the marginal lending facility rate is at 0.25%, the rate for main refinancing operations is at 0.00% and the deposit facility rate went from -0.3% to -0.4%. On the other hand, the increase in monthly bond purchases from previous €60 billion to €80 billion beat expectations, and the ECB decided to include investment grade corporate bonds in its purchases.
Moreover, Targeted Longer-term Refinancing Operation II (TILTRO) was introduced in order to provide loans from the ECB to commercial banks at extremely low interest rates to offset any deposit flight that may follow the negative interest rates. The market reaction was significantly positive; this was reflected on the euro as the currency lost more than 1.5₵ against the dollar, whereas European equities and US equity futures surged. Also, sovereign bond yields plunged all over Europe, except for Germany, the region’s safe haven.
What does all this mean and what are the implications for the US and Europe? Monetary policy has severe limitations at extremely low interest rates in keeping markets up, or sustaining an economic recovery. This can be seen in Japan’s move of introducing negative rates in January which resulted in the Yen appreciating rather than depreciating as the Bank of Japan had hoped. Now the ECB is learning from this. If the central bank went more negative on rates and decided to include corporate bonds in its purchases because it was running out of qualified sovereigns to buy, financial markets showed that they won’t boost equity and bond prices except for a short time.
For now, some Fed members fear that another rate hike could push US into deflation and lead to a market correction, a rate cut or another QE may not be the efficient and reliable bazookas they have been since the financial crisis. The experience in Japan and Europe suggests that other central banks such as the Fed will run out of time and tools to address deflation and economic slowdown. As of now, what seems like a policy limited to a few countries with strong currencies such as Switzerland and Sweden, will now likely stay for a long time. This means bad news for companies that depend on high-yielding assets to make money, such as some banks and most insurers. As the monetary easing continues, the yields on low risk bonds will keep falling.
From this chat from Deutsche Bank we see that Insurance, banks and autos tend to benefit the most when European credit spreads fall.
Furthermore, Draghi’s decision to cut rates even lower could grow to be a big problem for banks. As explained by analysts at Bank of America Merrill Lynch, deposits kept at the ECB skyrocketed since 2014, meaning that 0.4% charge will cost lenders around €20 billion by 2018. Here is a chart that explains just that:
Analysts also explain that:
‘Excess deposits placed by banks at the ECB have risen by 60% of the amount of quantitative easing undertaken to date. If this persists, the current pace of QE would see €2 trillion in excess liquidity by end 2018.’
So how effective are all these policies in the upside down world of interest rates and monetary policy? Remains to be seen.
At the end of 2015 Spain saw how the rise of rival political parties were threatening the long-established Popular Party under the command of Prime Minister Mariano Rajoy.
During the general elections on December 20, Spain understood that the alternation of power between the Popular Party and Socialists had come to a possible end. They now find themselves challenged by the new rising parties of ‘Podemos’ and ‘Ciudadanos’, a far-left party that came third in the general elections and a centrist party that came fourth, respectively. It was indeed one of the most closely-fought legislative polls that Europe has seen in the last decade, and now Spain is experiencing uncertainty since the Popular Party lost its absolute majority and it’s now forced to form an alliance with other party in order to govern.
Since Spain welcomed a new government led by the president of right wing ‘Popular Party’ (PP) in 2011, the country has had major changes in its economy after suffering from the impact of one of the biggest financial crisis the world has experienced. Mariano Rajoy’s administration has intended to put Spain on a new path towards economic recovery by establishing new reforms. The prime minister had positioned himself as the head of state who managed to drag the country away from economic collapse. However, unemployment remains substantially high at more than 21 percent and, during the last political campaign, Rajoy’s rival parties also made emphasis on the increasing inequality that the country is suffering from, brought on by the Popular Party’s drastic spending cuts, tax rises and health reforms. But how does Spain’s economy really look over the last years of the Popular Party administration? How would a government led by the socialist party PSOE, assisted by far-left wing government ‘Podemos’, affect the economic landscape of Spain in the short and long run?
Economic policy under PP has remained static due in part because the party’s administration has already seen a substantial improvement of the economy in terms of less unemployment and more GDP growth than other EU countries. Nevertheless, economists agree that there is a lack of action by the current government and that improvements in the form of innovative reforms should take place right now in order to keep boosting the economy. But Rajoy’s administration is reluctant to intervene with more reforms because they see progress with those imposed back in 2011 (mainly fiscal and labour reforms). In this sense, if the decisions they have made since 2011 have improved the economy, why should they try new things? Some would say that a lack of intervention by the government will keep the economic recovery going, in fact, the Popular Party is waiting for the economic cycle to do its job and bring things back to normal like they were in 2006 before the crisis hit.
We should start by giving a detailed look at how the Spanish economy has evolved after the crisis of 2008 under the command of the Popular Party, and then we’ll move on to analyse the possible economic scenarios under a probable left wing administration led by ‘Podemos’ party.
After the housing crisis and subsequent employment crisis, domestic demand in Spain decreased substantially, for this reason the country needed to become more competitive in the global markets and so the Popular Party decided that decreasing labour costs was the best option, because this would in turn allow Spanish exporters to reduce their prices and foreign companies to settle businesses in Spain, thus creating more jobs. More specifically, Rajoy enacted a monumental labour reform in 2012 with the Royal Decree Law 3/2012, which consisted in reforming the collective bargaining aspect of Spanish labour and adjusting the employment protection legislation. These reforms were aiming at reducing Spain’s labour costs and wrest power from its employees. In this sense, businesses could hire and fire employees without incurring high costs. The fact that a company was less profitable was reason enough to lay off a certain number of employees. With this flexibility, corporations were more eager to hire people. This in fact had a major impact on the unemployment rate, which supports the idea that the reforms imposed by the Popular Party appeared to have achieved a mechanism of decreasing unit labour costs and increasing productivity.
On the other hand, left wing party Podemos is proposing a substantial increase in public spending (96.000 million euros in four years) which most analysts agree would bring consequences to the Spanish economy. A boost in public spending could hit company profits and thus lead to a reduction in private investment and economic growth. This could also increase inflation and, since firms are less certain investment will be profitable, unemployment and inequality could rise in the long term. The anti-austerity measures by the left party include an increase in spending on health, education, dependency and social protection, and an investment fund that will be used for energy transition, which will intervene and nationalize the electricity market. This is a crucial point in Podemos administration since people are more aware of climate change and how important a transition from traditional energy sources to clean renewable energy is for the economy. There can’t be a growth model in this century that neglects the challenge of climate change. Consumption and production subsidies for fossils fuels that damage the environment are serious obstacles to a new green growth model, and this is where the Popular Party and Podemos differ. Spain is still subsidising domestic coal production for power generation (traditional means of energy) and there is limited taxation on fossil fuels, which do nothing to promote the transition to new sources of renewable energy. If the Popular Party keeps its policies away from renewable energy and innovation, the costs for Spain’s economy could be even higher in the long run.
Moving on to the government budget, Spain has had a notable reduction of the deficit since Mariano Rajoy took office in 2011. However, even though the economy has been put on a new path towards substantial recovery, the European Commission estimates that the deficit in 2015 was about 4,8% in 2015, compared to a 4,2% that they had as their objective, and it’s probable that the deficit will stay around 3,6% this year, compared to an objective of under 3%. These numbers are important to consider because Spain could see a coalition of both socialist party ‘PSOE’ and far-left wing party ‘Podemos’, which could take the deficit even higher due to the amount of increasing spending that both parties proposed in their campaigns. But how will the economy react to this? Firstly, not complying with the deficit limits imposed by the European Commission would lead to a conflict between the Spanish government and the Commission in Brussels, this in turn could result in an increase in interest rates as Spain would become a riskier investment, especially if there was a risk that the ECB would stop buying Spanish government bonds. However, this scenario is less probable given that an increase in government bond rates will generate pressure on both parties and will eventually make PSOE and Podemos back off from its public spending decisions, which are key pillars of their political campaigns.
Overall, it seems that the Popular Party has imposed the appropriate fiscal and labour policies, this is evident in the reduction of the unemployment rate and the GDP growth that the country has enjoyed during 2015. However, there is a conflict between meeting the European Commission’s deficit objective for Spain (which is one of the main goals of the Popular party) and meeting the needs of many Spaniards who strongly want to see changes in health, labour, education, and innovative solutions for the younger generations and the environment, which are the investments that PSOE and Podemos are really committed to do.
In brief, Spain’s economy is at a stable position waiting for a final agreement between the parties, unemployment and economic growth are at stake, and it seems that a coalition between parties will still result in conflict and will negatively affect the economy. The Popular Party has done things right but the economy needs new and innovative reforms if Spain wants to boost its economy to the levels it enjoyed back in 2006 before the crisis. In any case, one thing seems to be crystal clear, the two ancient parties, the old left and the old right, won’t have power anymore. For now, a vast number of the population wants to see drastic changes.
The new year 2016 has started in negative zone in terms of interest rates. We saw central banks moving into deeper rates as inflation in the Eurozone remains far below the targeted 2%, while global economic growth is slowing down,
especially in emerging economies, and it doesn´t look like this slowdown will stop any time soon. If we take a look at how financial institutions are responding to negative interest rates, we see that there is fear of financial instability caused by this new policy. Banks may not be interested in passing negative rates on to depositors in fear of losing their customers to other financial institutions or simply of seeing their own customers withdrawing all their deposits. Also, some banks have assets like mortgages, from which they receive payments that are linked to the interest rate. These financial institutions would see lower profits and, overall, this will not help to power a rapid economic recovery of nations given that these institutions are key pillars of the economy, and if they are less profitable or go bankrupt the economy will suffer huge consequences, like many nations did during the 2007-2008 global economic crisis. In this sense, the best hope for success relies on the foreign exchange markets. In theory, negative interest rates will move capital from a given country to offshore markets because investors will be looking for better returns abroad, this will lead to a depreciation of the currency which will raise the price of imports, helping to combat deflation and giving a growth environment for exporters.
Recently, the Eurozone has adopted negative interest rate policies in hopes of encouraging banks to put their excess cash into the economy and stimulate inflation. Now Japan has become part of the club of countries (Sweden and Swiss included) that have cut rates below 0%, but what has been the real effect of negative rate policies in the foreign exchange market?
Source: Business Insider
In 2014 the ECB, along with Sweden and Swiss, decided to bring deposit rates down below 0%. This had an impact on the Euro, which was at its highest level since 2012, declining 20% from 1.4 to 1.20 after the ECB announced its new negative rate policy, and hitting bottom at the beginning of 2015 at 1.10. Despite Japan’s recent rate policy, and market sentiment that the ECB may cut interest rates even deeper into negative territory, the Yen and the Euro haven’t been much affected by this announcements, this could mean that the EUR has arrived to a limit and that it will hardly go further down during the next months. It is also important to consider that the US dollar index closed on the second week of February 2016 at its lowest since October 2015. Moreover, even though the Euro and the Yen strengthened in part because markets are not expecting a further increase in the US rate hike, the CBA stated this month that there is a greater reason than just rate differentials that could explain the currency move: the big surplus in current accounts run by both Japan and the Eurozone. This factor alone could explain why negative interest rate policies have done little to weaken the Euro and the Yen.
With a huge current account surplus, the savings of a given country are greater than its investment which lowers the need to attract capital from foreign markets. As a consequence of this, negative interest rate policies from central banks seek to stimulate greater investment and inflation by using domestic savings, instead of trying to weaken their own currencies.
The depreciation of the dollar against other currencies can be seen clearly over the first months of 2016 and it matches market expectations regarding the U.S. Federal Reserve increasing interest rates. We should emphasize the fact that the market had bet for an appreciation of the USD when the Federal Reserve announced it was going to increase rates on December 2015, and therefore the market was increasingly buying USD hoping that there would be more rate hikes (at least more than 3 hikes) during 2016. However, the Federal Reserve became reluctant to increasing rates too much because this could do more harm than good to the economy in the long run, and now the market is increasingly selling USD causing a depreciation of the currency against the Euro or Yen. Given all these facts there is volatility in FX markets right now, but Japan is hoping to stabilize the Yen with its new policy rather than getting into a currency war with other nations. However, this policy seems to have little effect on weakening a nation’s currency because we would have seen the Euro and the Yen drop even lower than 1.10 against the Dollar, but the case has been the exact opposite since the USD is the currency that is depreciating the most and more rate hikes would not exactly mean that the economy will follow. It seems that the current account surplus of the Eurozone and Japan is indeed responsible for the weak Euro and Yen. However, markets are just starting to react to negative rates, there could be more swings in the market during the upcoming months. On the other hand, we should be asking, will the global economic slowdown continue?
SINCE the New Year, the price of oil has surprised even the most bearish punters, plunging by 18%. On January 12th,West Texas Intermediate (WTI), America’s benchmark, briefly dipped below $30 a barrel, its lowest level since 2003.
The next day an incipient rally was undone by the news that American stocks of crude oil and petroleum products had reached 1.3 billion barrels, a new record. Firms are hunkering down. BP this week announced hefty job cuts; Petrobras, Brazil’s state-controlled oil firm, slashed planned investment.
Some blame factors other than supply and demand for turning increasingly bearish. For instance, Standard Chartered, a bank, said oil might need to fall as low as $10 a barrel before speculators concede that “matters had gone too far”. But it’s mostly guesswork. Such is the level of uncertainty that American derivatives contracts tied to deliveries in April imply an oil price of anything from $25 to $56 a barrel, according to official number-crunchers.
Neil Atkinson of the International Energy Agency (IEA), a forecasting outfit, finds lots in the physical oil market to be bearish about—particularly regarding consumption, which was one of the few factors supporting prices last year. The sell-off in oil in the past fortnight has occurred concurrently with a slide in the Chinese stock market and the yuan, which some investors think reflects weakness in China’s economy and hence in demand for oil. Though Mr. Atkinson acknowledges that possibility, he thinks this risk is overplayed: figures on January 13th showed China imported a record 6.7m barrels a day (b/d) of oil in 2015.
The trouble, though, is that apart from India and a wobbly China, demand is not looking promising anywhere this year. Europe is unlikely to see a repeat of its relatively strong oil-demand growth in 2015. Although America’s economy continues to grow, tightening fuel-efficiency standards cap the upside. Drivers in the Middle East, where fuel use rose last year, are more likely to keep their cars off the road after their governments raised petrol prices or eliminated fuel subsidies altogether to shore up public finances. “There are now considerable uncertainties about oil-demand growth globally,” Mr. Atkinson says.
Adding to the gloom, producers are not turning off the taps as fast as people expected. The latest rout stems from an OPEC meeting in early December in which the producers’ cartel abandoned output quotas. Saudi Arabia, which used to curb output to rescue prices, now refuses to play that role, and instead is bent on driving high-cost producers out of business. Saudi officials privately say that they expect the price of oil to rebound late this year or early in 2017 as global output begins to lag behind demand. The natural decline as fields are depleted saps production by at least 5% a year, they argue, even before accounting for the effects of reductions in new drilling by embattled oil firms.
But there remains huge uncertainty about how much Iran will export when UN sanctions are lifted, possibly in coming weeks. What is more, Mr. Atkinson says, production continued to rise last year from high-cost wells in the Gulf of Mexico and Canada’s tar sands because, however much oil prices fell, operating costs were lower. “The habit of the industry is to keep producing for as long as you can. Anyone who blinks first is handing a lifeline to their competitors,” he says.
To be sure, production in America is falling, thanks chiefly to cutbacks by struggling shale-oil producers. With oil prices at $30 a barrel, America’s oilmen will have an even tougher task shoring up output by drilling new wells, and will face further pressure from their bankers to reduce borrowing. AlixPartners, a consultancy that advises troubled firms, says more will go bankrupt this year. It forecasts a funding gap of $102 billion this year between American oil firms’ projected cash flows and their interest payments and capital spending, up from $83 billion in 2015. It said the downturn “could be one of the most severe and prolonged ever”.
But however big the cutbacks, they are not yet enough to reduce the glut. Global inventories are at record highs, the IEA says. The Energy Information Administration, an American government agency, predicts they will rise a further 700,000 b/d before supply and demand begin to balance out in 2017.
It adds that storage at Cushing, Oklahoma, which can hold 73m barrels, is at record highs of 64m barrels. Brian Busch of Genscape, an industry data gatherer, says it’s a similar story in China, with ships carrying oil spotted waiting at anchor out at sea because storage tanks appeared to be full. Based on the high level of stocks, Mr Busch thinks it could take up to a year and a half before the bear market ends. The only certainty is, the quicker the oil price falls, the sooner that day will come.
FRANKFURT ’ The European Central Bank adjusted its asset purchase program known as quantitative easing on Thursday, extending the scheme's duration into 2017 and agreeing to buy euro-denominated municipal and regional bonds, ECB President Mario Draghi said.
Purchases of mainly government bonds – at 60 billion euros a month – are now seen running until at least March 2017 instead of next September.
He also said that proceeds from the various assets bought would be reinvested back into the scheme.
« We decided to extend the asset-purchase program. The monthly purchases of 60 billion euros (£43.2 billion) under the asset-purchase program are now intended to run until the end of March 2017 or beyond if necessary and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation below but close to 2 percent over the medium term, » Draghi said.
Analysts polled by Reuters last week had expected the ECB to increase the monthly purchases to 75 billion euros as well as extending the purchases.
The purchases have pushed down yields and boosted lending, indicating that quantitative easing (QE) was working, even if only slowly and with a lag, supporting calls for more asset buys.
But critics have said QE has done little for inflation so far, the ECB’s biggest worry, with headline figures hovering near zero and core inflation around 1 percent, well short of the central bank’s target of nearly 2 percent
(The New York Times : Reporting by Balazs Koranyi Editing by Jeremy Gaunt.)
With some rate-setters advocating immediate policy easing last week, European Central Bank President Mario Draghi struck a compromise to keep the doves on side and set up expectations for action in December.
Several influential Governing Council members argued that the ECB’s balance sheet was still relatively small, especially compared to the U.S. Federal Reserve while Denmark’s deeply negative deposit rate illustrated that there was still room to reduce rates, one source with knowledge of the discussion said.
Instead of delivering the wait and see message the market expected, Draghi opted for one that was more dovish and crystal clear, keeping with the ECB’s tradition of building a consensus and putting to shame the Fed, which has fumbled with its communication at a critical juncture.
« It needs to be understood: there is consensus at the ECB Governing Council, » a rate-setter, who asked not to be named, said. « A move in December is likely. »
« Inflation is just not moving higher, there is a risk of falling into a Japanese-style liquidity trap, » the Governing Council member said.
With inflation in negative territory, the ECB is far from its target of getting price growth to near 2 percent and its 60 billion euros ($66 billion) a month asset buys have proven insufficient as lower energy prices and slower growth in emerging economies have worked against it.
Meeting in Malta, the Governing Council discussed a wide range of possible measures and the general view was that instead of one or the other, a combination may be effective, the sources said.
With the Fed postponing its rate hike, Draghi’s comments also had the desired effect of weakening the euro, a key result as the exchange rate is an important channel for policy transmission, another Governing Council member said.
Although increased asset buys could further squeeze liquidity in the market, one source with direct knowledge said concerns over market supplies were overdone as the ECB could move into new instruments and had plenty of room to maneuver even with government bonds.
The ECB could consider corporate debt or equities while there was also room to buy more supranational instruments. Sovereign debt was plentiful due to high net issuance and the ECB could always release debt to be held until maturity, the source said.
There is a constraint about having to buy national instruments in proportion to how much share each country has in the ECB, but substitution rules also provide some flexibility.
Still, another insider warned that the market may have overreacted to Draghi’s words and waiting until December, when the ECB releases fresh inflation forecasts, was normal.
And with monetary policy already ultra-accommodative, room to do more may be limited.
« Itâ€™s hard to do much more monetary stimulus than this, » said French Finance Minister Michel Sapin, who has no direct say in policy but who less than a year ago was one of the loudest voices urging the bank to do more.
« Draghi said there is still scope to respond to certain situations if needed, so there is still a possibility to do more but weâ€™ve already come a long way. »
The consensus from almost 60 economists in a poll conducted by Reuters after Thursday’s meeting shows there is an 80 percent probability of the ECB easing at the next policy review on Dec. 3.
Draghi has been a masterful communicator, repairing the reputation of the ECB, which is run by a 25-member Governing Council that sometimes speaks with as many different voices, leaving the market guessing.
From promising to do « whatever it takes » to save the euro at the height of the bloc’s crisis in 2012 to delivering an unexpectedly large 1 trillion euro plus quantitative easing (QE) program this year, Draghi has become an expert in understanding what the market needs to hear and delivering more.
« The ECB really has become masters of communication: leading the market along, and then over-delivering, » UniCredit chief economist Erik Nielsen said in a note. « I think Draghi more or less gave it away on Thursday: QE2 (in size, composition, duration) and (unfortunately) a rate cut. Remember, they are not in the habit of under-delivering. »
Draghi’s clear stance is now in stark contrast to the Fed, which meets on Tuesday and Wednesday.
Markets have been confused by top Fed officials sending conflicting signals and rate hike expectations have been pushed into next year even as Fed Chair Janet Yellen said she expects that a hike will be needed by the end of this year.
« It is never a good thing when the vice chairman of the FOMC and the vice chairman of the board are saying two different things at a critical juncture for policy, » former Fed research director David Stockton said.
« When comparing the communications of Draghi and Yellen, it is important to remember that Draghi has been dealing with a crisis, » said Stockton, now with the Peterson Institute for International Economics and Macroeconomic Advisers. « Yellen has been in a much different environment, one in which careful nuance has been more important than dramatic statements. »
WORDS NOT ENOUGH
Draghi’s problem now is that he must deliver and the entire world will be watching as market moves induced by the ECB reverberate across the globe.
« If you don’t meet words with action, the market backlash could be quite big » said one Japanese policymaker on condition of anonymity.
The second round of quantitative easing is always less effective than the first one while the consensus in the Governing Council may also be at risk as more easing means lower borrowing costs for governments, which some central bankers see as de facto monetary financing since the ECB is making it cheaper for governments to borrow.
Governments are also not always doing their fair share to boost growth and accommodative policies by the ECB take pressure off governments to enact long-term measures that may be politically costly now but would support growth over the long term.
(Reporting by Frank Siebelt, Balazs Koranyi, and Francesco Canepa in Frankfurt, George Georgiopoulos in Athens, Leigh Thomas in Paris, Howard Schneider in Washington and Leika Kihara in Tokyo; editing by Susan Thomas)
The U.S. Federal Reserve kept interest rates unchanged on Wednesday and in a direct reference to its next policy meeting put a December rate hike firmly in play.
Investors had expected the Fed to remain pat on rates, but the overt reference to December came as a surprise.
The central bank also downplayed recent global financial market turmoil and said the U.S. labor market was still healing despite a slower pace of job growth.
« In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation, » the Fed said in a statement after its latest two-day policy meeting.
Investors quickly placed bets reflecting a higher chance the U.S. central bank will raise rates in December, with futures contracts implying a 43 percent possibility compared to 34 percent prior to the statement.
« The Fed is seriously considering a December rate hike, » said Harm Bandholz, an economist at UniCredit in New York.
Going into the Fed meeting this week, the market had viewed March as the most likely time for the central bank to begin its rates « liftoff, » but it now sees a greater chance of that happening in late January.
The U.S. dollar rose sharply and yields for U.S. government debt soared in anticipation of higher rates. U.S. stock prices initially fell but regained momentum and closed sharply higher.
Michael Feroli, a former Fed economist now at JPMorgan, said the Fed statement was the first since 1999 in which policymakers pointed to a possible rate increase at the next meeting.
« By specifically referring to that meeting they are basically testing the waters a bit, » said Aneta Markowska, an economist at Societe Generale in New York. She described it as a « subtle attempt » to gently nudge the market in that direction.
LEAVING DOOR OPEN
The Fed has been struggling to convince investors a rate hike was imminent in the wake of data this month that showed U.S. employers slammed the brakes on hiring in August and September.
But it countered the skepticism on Wednesday by saying even slower hiring was still enough to get it closer to its goal of maximum employment.
Central bank policymakers also pointed to « solid rates » of growth in consumer spending and business investment, while eliminating a reference from their previous statement warning a global economic slowdown could sap U.S. economic strength.
Fed Chair Janet Yellen has been saying for much of this year that a rate hike would likely be needed in 2015 to keep the economy from eventually overheating.
More recently two Fed governors urged caution over rate hikes while questioning Yellen’s views on inflation, though such doubts appeared muted in Wednesday’s statement.
The Fed now has several important economic readings to parse, including two monthly employment reports, before it makes up its mind on whether to tighten policy at its Dec. 15-16 meeting.
It will also get a chance to see how monetary policy easing in Europe, Japan and China plays out in financial markets. Easy money policies abroad push the dollar higher, hurting U.S. exporters and making it harder for the Fed to get inflation back up to its 2 percent target. That may explain why the Fed sought to leave the door open for a rate hike rather than paint the economy as fully ready for a monetary policy tightening.
« The Fed has dialed down its anxiety over international developments, but it’s best to play it safe, » said Brian Jacobsen, a portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
(Reporting by Lindsay Dunsmuir and Jason Lange; Editing by Paul Simao)
Les pays Ã©mergents ont assurÃ© un relais de croissance depuis le dÃ©but de la crise en 2008 mais aujourdâ€™hui, alors que les Ã©conomies dÃ©veloppÃ©es ne sont pas encore relancÃ©es totalement, les pays Ã©mergents se retrouvent en grande difficultÃ©.
La situation dans les pays Ã©mergents de 2008 Ã 2014
Depuis 2008 et le dÃ©but de la crise dans les pays dÃ©veloppÃ©s, les pays Ã©mergents Ã©taient devenus un eldorado pour les investissements mondiaux. Alors que les Ã©conomies europÃ©ennes et amÃ©ricaines Ã©taient lancÃ©es dans une spirale de rÃ©cession et de hausse du chÃ´mage, les principales banques centrales ont unanimement dÃ©cidÃ© de lancer des plans dâ€™envergure dâ€™injection de liquiditÃ© sur le marchÃ© et de rÃ©duction de leurs taux directeurs Ã des niveaux nuls. Les pays Ã©mergents, dont les Ã©conomies sont plus axÃ©es sur lâ€™industrie et les matiÃ¨res premiÃ¨res que les pays dÃ©veloppÃ©s Ã©taient moins touchÃ©s par la crise mondiale, prÃ©sentaient de belles perspectives de croissance et surtout des taux attractifs, bien plus hauts que les taux pratiquÃ©s dans les Ã©conomies dÃ©veloppÃ©es.
Tout naturellement, lâ€™argent gratuit et en abondance distribuÃ© par les banques centrales occidentales a Ã©tÃ© massivement investi dans les Ã©conomies Ã©mergentes comme le BrÃ©sil, le Mexique, la Turquie et les pays dâ€™Asie du Sud-Est comme la ThaÃ¯lande.
Selon Mediapart, qui relaie les donnÃ©es de la BRI, la dette extÃ©rieure des pays Ã©mergents est passÃ©e de 2800 Ã 7500 milliards de dollars. Lâ€™endettement a augmentÃ© de plus de 50 points pour atteindre 167% du PIB.
A court-terme, les pays Ã©mergents ont surfÃ© sur cette manne financiÃ¨re. En effet, les Ã©conomies Ã©mergentes, aidÃ©es par une opinion favorable des marchÃ©s qui voyaient en elles un relais de croissance nÃ©cessaire pour la croissance mondiale et entrainÃ©es par la bonne santÃ© chinoise, ont affichÃ© une croissance Ã©conomique trÃ¨s intÃ©ressante.
Cependant, malgrÃ© un bon comportement de faÃ§ade, de nombreux dÃ©sÃ©quilibres sont apparus.
Quels ont Ã©tÃ© les facteurs de risque expliquant la situation actuelle des pays Ã©mergentsÂ ?
Dâ€™une part la nature des investissements rÃ©alisÃ©s par le transfert de capitaux en provenance des pays dÃ©veloppÃ©s. Les pays Ã©mergents ont peu mis Ã profit les investissements Ã©trangers pour se dÃ©velopper structurellement (construction dâ€™infrastructures, diversification de lâ€™Ã©conomie, etc..) et les capitaux Ã©trangers ont plutÃ´t Ã©tÃ© dirigÃ©s vers des placements opportunistes en lien avec les marchÃ©s.Les pays Ã©mergents sont restÃ©s Ã la merci dâ€™une fuite de capitaux aussi rapide que leur arrivÃ©e avec peu de changement structurel en mesure de pÃ©renniser la bonne santÃ© de lâ€™Ã©conomie. Ainsi, ils sont restÃ©s trÃ¨s dÃ©pendants des politiques monÃ©taires des banques centrales des pays dÃ©veloppÃ©s car les investisseurs ont finalement investi dans les pays Ã©mergents en attendant que les pays dÃ©veloppÃ©s se remettent en marche.
Dâ€™autre part les pays Ã©mergents sont trÃ¨s liÃ©s Ã la Chine qui est le premier importateur des matiÃ¨res premiÃ¨res quâ€™ils produisent en abondance. On ne peut pas dire quâ€™ils avaient le choix, tant la Chine sâ€™est posÃ© en moteur de la croissance mondiale depuis 2008. Le risque de cette relation Ã sens unique Ã©tait doubleÂ : La dÃ©pendance au prix des matiÃ¨res premiÃ¨res et la pÃ©rennitÃ© de la bonne santÃ© chinoise.
Quelle est la situation aujourdâ€™huiÂ ?
2015 a marquÃ© un retournement de tendance fort pour les pays Ã©mergents.
La Fed a amorcÃ© un resserrement de sa politique monÃ©taire avec la fin du QE et a annoncÃ© un relÃ¨vement de taux qui, mÃªme sâ€™il tarde Ã se concrÃ©tiser, a provoquÃ© un retour dâ€™une partie des capitaux des pays Ã©mergents vers les pays dÃ©veloppÃ©s jugÃ©s aujourdâ€™hui plus sÃ»rs.
Le prix des matiÃ¨res premiÃ¨res est en chute depuis 2014, notamment dans le sillage du pÃ©trole qui reste bas pour des raisons Ã©conomiques et politiques, et les petits pays Ã©mergents dont les matiÃ¨res premiÃ¨res sont la principale richesse en souffrent.
La Chine connait une annÃ©e 2015 particuliÃ¨rement difficile. En effet, les perspectives de croissance ont Ã©tÃ© revues Ã la baisse par rapport aux annÃ©es prÃ©cÃ©dentes, la bourse chinoise a connu un mini krach en aoÃ»t et la banque de Chine a lancÃ© un signal trÃ¨s prÃ©occupant en dÃ©valuant lÃ©gÃ¨rement son Yuan en aoÃ»t, rompant momentanÃ©ment le peg liant le Yuan au Dollar.
Croissance du PIB chinois par anÂ :
|Croissance du PIB||9.3%||10.4%||9.4%||7.7%||7.7%||7.4%||7.0% (annoncÃ©)||6.3% (annoncÃ©)|
SourceÂ : Bureau national des statistiques
GRAPH INDICE COMPOSITE SHANGHAI en YTD
GRAPH USD/CNY en YTD
Quelles ont Ã©tÃ© les consÃ©quences pour les pays Ã©mergentsÂ et sur les marchÃ©s ?
Les Ã©conomies des pays Ã©mergents se sont retrouvÃ©es dans une situation difficile avec une croissance en perte de vitesse du fait de la baisse dâ€™activitÃ© de la Chine et le retour des capitaux vers les pays dÃ©veloppÃ©s. Alors que les banques centrales des pays Ã©mergents auraient pu baisser leurs taux directeurs afin de contrer la baisse de la croissance, elles Ã©taient bloquÃ©es du fait dâ€™une inflation importante rÃ©sultant des annÃ©es dâ€™investissement qui se sont Ã©coulÃ©es.
Ainsi, lâ€™un des seuls leviers restant est la dÃ©valuation de la monnaie. Le double impact de la dÃ©valuation volontaire de la monnaie et de la fuite des capitaux vers les USA et lâ€™Europe a eu un effet incroyable sur la valeur des monnaies des pays Ã©mergents.
Performance depuis le dÃ©but de lâ€™annÃ©e des devises Ã©mergentes
La 2e consÃ©quence plus inquiÃ©tante pour les pays Ã©mergents se rapporte Ã la dette. Alors que la tendance et lâ€™opinion des marchÃ©s sur les pays Ã©mergents sâ€™est retournÃ©e, les taux de financement des Ã©conomies Ã©mergentes ont fortement augmentÃ©, ce qui est matÃ©rialisÃ© par le marchÃ© des CDS.
Graph du CDS 5Y du BrÃ©sil, Afrique du sud, Turquie, Mexique, ThaÃ¯lande et Chine
Aujourdâ€™hui les pays Ã©mergents se trouvent dans une situation oÃ¹ les capitaux sâ€™en vont, les financements sont plus durs Ã trouver et plus chers et lâ€™Ã©conomie locale ne sâ€™est pas suffisamment solidifiÃ©e pendant la pÃ©riode Â«Â fasteÂ Â» de 2008 Ã 2013.
Lâ€™eldorado annoncÃ© ces derniÃ¨res annÃ©es pourrait donc bien connaÃ®tre une crise semblable Ã ce que les pays dÃ©veloppÃ©s ont connu depuis 2008.
The recent EURUSD spot move is drawing a new FX world picture. The acceleration of the move has been quite unusual for the last 5years (between the summers 2014 and today EURUSD spot lost almost 25%).
The market seems consolidating the current level around 1.0500-1.0700 which gives us the opportunity to analyze the situation.
What has changed in the EURUSD market which can explain this spot acceleration?
We can easily find arguments to demonstrate that what happened was predictable but without back trading consideration lets summarize some facts.
At the countries levels, Europe has to manage social tensions and political crisis. Greece, Ukraine, France (extreme right party increase) are elements which can explain the lack of trust in European countries to manage those issues. Terrorism represents as well in Europe a threat particularly imminent. European institutions have, by consequences, to deal between urgent threats with heavy political process and unlikely consensus making any solution very slow.
At the financial level, Central banks seem more and more isolated with a bigger distance with real problematic and finally a panel of solution quite limited to fix the economic situation. The SNB PEG release has been the perfect demonstration of this situation. By unexpected decision EURCHF collapsed from 1.2000 to 0.8500 in less than one day, making the FX market much more volatile and strengthening the trust issue in those institutions. All CHF exporters have seen their margins considerably reduced by that decision jeopardizing the Swiss economy. Even if the PEG was probably very expensive to maintain and unilateral decision created an extra tension to a situation already uncomfortable. In Europe, ECB decision to unleash QE seems to convince less than in the others countries due to the fact that it is difficult for nineteen Europeans nations to do the same thing. In New Momentum, we saw a lot of our customers (corporates and Institutional) believe finally in a limited centrals banks impact on the economic world.
What are the market anticipation and why the idea of breaking the parity is more and more credible?
One of the best way to have the market feelings about a trend is reflected in the market prices and more particularly in the FX options pricing. Why those products particularly because every parameter is priced: the level of volatility given by the implied volatilities and the smile which included the asymmetry between the upside or downside level (given by the Risk Reversal or RR).
The implied volatilities for example moved from the lowest levels ever this summers at a level almost three time higher (3 Months implied volatility moved from 4.88% the 30june14 to 11.31% actually (Bloomberg source)). The acceleration of the move is as important as the current level itself because it traduces the market tension with the current situation. All the elements explain in the previous part contributed for sure for a good part of it but the technical level of the current spot around 1.0500 very close of the psychological level of the parity maintains a high level of uncertainty. LetÂ´s relativize a bit those levels, in capital market world, FX remains an asset with the lowest volatilities. For example Lehman crisis brought EURUSD 3 Months implied volatility at 23% when the VIX reached more than 45%. Last point, does an asset with 25% move in few months is worth 11% vol Implied? The ratio seems to us still interesting even if the best level of the last summer seems definitively gone.
The smile component completed this analysis by the information regarding a trend. The 3 months 25d RR is quoting 2.10% PUT EUR over, it means that a PUT EUR 25d (strike 1.0165 with 1.0600 spot) will have a volatility 2.10% higher than CALL EUR 25d (strike 1.1003 with 1.0600spot). In other word the market is paying more to buy a hedge in the downside than the upside. Higher is the extra cost, more the market is ready to pay for the downside. To translate that with the market data the 3 months 25d RR moved from 0.55% PUT EUR over this summer at 2.10% currently, or almost 4 times higher.
The Graphic aboveÂ shows the 3 Months Implied volatility and 3 Months 25d Risk Reversal, confirming all the elements explained above with first an Implied volatility much higher and Risk reversal paying more for PUT EUR (-0.55% to -2.10%). The green curve reflects the spread and we see that during the last summer we were in a configuration where volatility and smile were the cheapest. It traduces a very interesting idea probably more explicit in the graphics below that PUT EUR 25d was on its cheapest level.
Between this summer and today, the PUT EUR 25d increased from 5.30% to 12.67%. This reflects all the ideas expressed above, the market prices the bearish trend much more than 8 months ago. An interesting exercise can complete this demonstration, letÂ´s consider the current spot 1.0600 (to be able to compare the volatility and smile effect we will assume a constant spot at 1.0600) and letÂ´s take the 01july2014 market data and the current one:
01july2014 : EUR PUT 25d with Spot at 1.0600 would be equivalent to a strike of 1.0415
17march2015 : EUR PUT 25d with Spot at 1.0600 is equivalent to a strike of 1.0202
What does that mean? If we had the July market data today, the strike would be closer than the current spot. The fact that we see more than 200pips between the two strikes reflects that today the market anticipates a much bigger potential on a downside movement. A corporate exposed to a EURUSD lower will have to pay a more expensive premium to get a hedge at a similar strike.
The previous elements finally have shown that the market anticipates all the current events as a serious and credible risk for EUR against USD (or others currencies). It would be probably interesting to quantify that risk and get some answer about a potential timing. Once again a part of the answer will be given by the market pricing but instead of considering vanillas options we will focus on One Touch options which reflects the price during a maturity to touch a certain level. On a spot ref of 1.0600, a 3 Month One Touch 1.0000 is priced 28% and a 6 Months One touch around 50%. In other words, the EURUSD Spot has 50% to reach 1.0000 in 6 months regarding the market anticipation.
Beside the mathematics, what would change a break of the parity?
LetÂ´s consider another effect very important and probably underestimated by the market, the psychological impact of a EURUSD below the parity. In New Momentum, we see a lot of customer under hedge on a level below 1.0000. That fact mixed with the bank risk aversion is creating a perfect situation for an acceleration below the parity. It means that the market is probably long EUR and will contribute to a panic situation when everyone will run behind their exposures. A lot of market experience disappears from the banks with the new bonus regulation, making the market with less memories than before. The recent EURCHF movement can give us a good idea of what can be a market panicking. Even if for the moment we believe in a consolidation of the spot (if any politic announcement or critical event happens), however we are firmly convinced than below the parity all the negative effects will accelerate the trend.