NEWS

US GDP share and the dollar's global role

GDP USD graph 03.2017

Sources : The conference Board Total Economy Database, IMF International Financial Statistics, Reinhart and Rogogg, and author's calculations

Comment:

- since 1950, the size of US GDP compared to worldwide GDP has declined strongly

- during the same period, the dollar's role has risen substantially.

Which of the two would correct ?

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Brexit countdown

Britain would be "naive" to expect generous trade deals when it quits the European Union, the German minister responsible for its financial center said on Monday, adding that Frankfurt would grab business from London.

 While France has long made no secret about its ambition to take business from London, German politicians have largely avoided such statements and Tarek Al-Wazir's show a desire in Germany to profit from Brexit, potentially complicating Britain's attempt to strike a trade deal with the EU.

Al-Wazir, a minister in the state of Hesse, in Germany's industrial heartland, told Reuters that British politicians were unrealistic in hoping for generous terms for future trade deals.

"It is naive to believe that countries are simply waiting to strike trade deals with Great Britain after Brexit," he said. "Whoever wants to attract companies with tax cuts cannot expect to be rewarded with generous trade deals. It won't happen."

Earlier this year, British Prime Minister Theresa May, when announcing that Britain would quit the European Union's single market, hinted that it could use tax breaks to fight to attract businesses if the EU imposed punitive tariffs.

Al-Wazir said he expected the clearing of trades in euros, a multi-trillion-euro business, to move from London to centers including Frankfurt, which he is responsible for promoting.

"It is hard to imagine that most business in euros will be booked in London after Brexit. Europe needs access if anything goes wrong. From the ECB's point of view, London is offshore after Brexit," he said, referring to the need for the European Central Bank to have oversight of the business.

"You can expect parts of the clearing business to be spread across many continental locations. I'm confident that Frankfurt can attract part of London's euro clearing business."

The collapse of merger talks between Deutsche Boerse (DB1Gn.DE) and the London Stock Exchange (LSE.L), however, could complicate this, with some observers predicting that the LSE is now more likely to move clearing to its Paris-based business.

Although Britain is not one of the 19 countries in the euro currency bloc, London dominates trading in the currency.

The trading of euro-based securities spans trillions of euros of derivatives deals as well as the 'repo' market providing short-term funding for banks – roughly 2 trillion euros of which experts say is based in London. On top of this, there is foreign exchange trading in the currency itself.

The Frankfurt-based ECB wants oversight of this business for a practical reason: if any disaster were to hit these markets like the 2008 collapse of Lehman Brothers bank in the United States, it would be responsible for dealing with it.

Reuters - By John O'Donnell and Andreas Kröner | FRANKFURT 

Market sentiment or social mood

As said many times before, markets are not driven by the substance of news or exogenous events. Many social experiments have been conducted over the last 30 years which prove this to be true, despite the public's belief to the contrary. And, as these experiments have proven, what does control market direction is something we term "market sentiment" or "social mood."
The prevailing social mood or market sentiment interprets the exogenous events we hear about, and then "spins" that news based upon the prevailing social mood. This is what moves the market. If sentiment is positive, then the market will react positively, even if the news is negative, and vice versa. This is why we often see markets go up on bad news and down on good news, and it makes so many scratch their head, especially if they are looking to "logic" in the markets or if they are looking for directional cues from the substance of the news or fundamentals.
Avi Gilburt          from Elliott Wave Trader.net

A few speeches from numerous European Central Bankers about ECB monetary policy

Mario Draghi: Hearing at the Committee on Economic and Monetary Affairs

It is easy to underestimate the strength of this commitment. But that would overlook the progress we have made. With the single currency, we have forged bonds that survived the worst economic crisis since the Second World War. This was in fact the original raison d'être of the European project: keeping us united in difficult times, when it is all too tempting to turn against our neighbours or seek national solutions.

But the objective of Economic and Monetary Union should be to strive to achieve "economic and social progress" as was the intention of the signatories to the Maastricht Treaty. And for this, we need sustained growth and job creation.

The resilient recovery we have witnessed in recent times has been a welcome step towards this objective. Over the last two years GDP per capita has increased by 3% in the euro area, which compares well with other major advanced economies. Economic sentiment is at its highest level in five years. Unemployment has fallen to 9.6%, its lowest level since May 2009. And the ratio of public debt to GDP is declining for the second consecutive year.

These are steps in the right direction. But these are just first steps. We need to continue on this path so that unemployment decreases further and more Europeans can benefit from the recovery.

Addressing financial risks in the euro area

One of those side effects concerns the impact on banks' profitability. Let us first look at the data. Following a slowdown in profit generation in the first quarter of 2016, the profitability of euro area banks stabilised in the second quarter. According to preliminary data, developments for the third quarter seem to be in line with those observed for the second quarter.

A second issue is the potential risk of credit or asset bubbles. Currently, we do not see compelling evidence at the euro area level of stretched asset valuations. Both corporate bond spreads and equity prices appear to be broadly in line with fundamentals.

Similarly, real estate price growth remains moderate in the area as a whole, although significant cross-country heterogeneity is observable. This assessment is corroborated by the fact that credit growth is still modest, which suggests that asset price developments are not accompanied by increasing leverage.

Nevertheless, the longer the accommodative measures need to be kept in place, the greater the risks of unwarranted side effects on the financial system become. For instance, asset prices may increase to levels that are not in line with fundamentals because investors might be tempted to take on more risk during times of low yields.

Such developments are best addressed by enacting appropriate macro and microprudential policies.

The euro area's resilience in 2016 despite a range of negative shocks shows that we are on the right track. It also suggests that reforms at national and European level are paying off in terms of economic growth.

Introductory statement by Mr Mario Draghi, President of the European Central Bank, before the Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 6 February 2017.

 

Andreas Dombret interview with Handelsblatt on Feb. 23rd, 2017

Banks need to set capital aside to prepare for a rise in interest rates in the Eurozone, chair of German Bundesbank’s (Buba) regulatory body, Andreas Dombret (pictured), told Handelsblatt on Thursday.Dombret noted that increases in inflation in both Germany and the euro area are pointing towards a potential rate hike from the European Central Bank. He added banks need to prepare capital buffers to address the potential rate rise and pointed out: “The longer the low interest rate phase goes on, the greater the risks in the event that interest rates increase.”However, the Buba executive stated that, in the long term, higher interest rates are good for banks and they will help the sector stabilize.

Bundesbank Chief Jens Weidmann on Feb. 23rd, 2017

  • Eurozone's policymakers need to see whether they should keep communicating they are ready to increase asset purchases, Bundesbank chief Jens 

  • Weidmann said on Thursday as Germany's central monetary authority presented its annual results. The appropriate scope for easing is seen differently in the European Central Bank, according to the prominent member of its rate-setting panel, who revealed he didn't agree with the decision to extend the duration of the program at the meeting in December. Weidmann explained he believes expansive policy fuels risk. The monetary union faces no danger of price swings in either direction and the economic recovery is stabilizing, according to the central banker's remarks, but he did point to what he considers relatively strong uncertainty. He warned protectionist moves by the administration of United States President Donald Trump could create a domino effect, possibly shaking the "pillars of prosperity" that are upheld by international trade. Bundesbank revealed it booked €1.8 billion in provisions related to interest-rate risks for the first time, which drove down profits for the government. Net income came in at €399 million or 87% lower. The indication of caution also points to the need to shield the system before easing measures are scaled back and bigger interest rates start to impact earnings.

  •    

  • Peter Praet, the European Central Bank's chief economist
  • The departure of the United Kingdom from the European Union shows integration can change its course, said Peter Praet, the European Central Bank's chief economist. "A more widespread reversal of European economic integration would durably jeopardize economic prosperity," he said on Thursday at a conference about Brexit's impact on financial services in London, and claimed there will be widespread damage from the current process. Britain faces difficulties in trade with the rest of the bloc as barriers are seen building up, the central banker stressed, adding consequences will need to be mitigated on the other side as well. Praet attributed the developments to the "culmination of a broader anti-establishment and anti-globalization narrative" in advanced economies as, how he put it, uncertainty strengthened after the financial crisis. He also played down the role of monetary policy, reiterating the need for structural reforms "to build resilience to country-specific shocks and ensure the full diffusion of innovation" for balanced benefits across population groups. Asked about the measures in the pipeline of the administration of United States President Donald Trump, the member of the ECB's Executive Board said there are some "worrisome" indications, but that particular actions remain to be seen. "Despite the resilient recovery in the euro area, and strong indicators of confidence across all sectors, measures of political and policy uncertainty have been rising recently, although asset markets are not significantly pricing in tail risks. The recent bouts of uncertainty are a source of concern, and represent a downside risk to the economic outlook," Praet stated in prepared remarks.TeleTrader Newsroom / IT

     

     

    2017 could be the year of the active investor


    “The outcomes of Brexit and the U.S. election have brought fundamental change, which equates to investor opportunity,” said Candace Browning, head of BofA Merrill Lynch Global Research. “If investors choose asset classes, sectors and stocks carefully, they can meaningfully outperform the market. 2017 could be the year of the active investor.”

    Key Themes:

    • S&P year-end target 2300

    • Fundamental investors to outperform the market

    • Focus on higher dividend growth companies

    • Return of value investing

    "We still think dividends are a very important part of the investment decision. But where you get your dividends will matter, and we prefer companies that are growing their dividends to those are simply paying out the maximum level of their earnings as a dividend."

    Michael Hartnett

    Chief Investment Strategist, BofA Merrill Lynch Global Research

    TOP