Markets are signaling caution after investors greeted President Donald Trump’s election with enthusiasm.
Bets on higher economic growth, inflation and interest rates — which became known as the “reflation trade” — have eased since the election. The yield on the 10-year Treasury note is lower than it was when Mr. Trump took office, including a decline Wednesday after the White House unveiled its tax proposal. The U.S. dollar has retreated from a 14-year high hit after the election.
Many popular postelection wagers took a hit last month after Republicans failed to repeal and replace the Affordable Care Act, which highlighted the difficulties they could face advancing new legislation even while holding the White House and both houses of Congress.
As hopes for swift enactment of business-friendly tax cuts, regulatory rollbacks and infrastructure spending have waned, investors have dialed back on stocks that were expected to benefit from such shifts, like bank and industrial shares. They have poured money into companies that have generally served up better-than-average returns since the financial crisis, such as large technology companies.
Strong earnings reports from bellwether companies including McDonald’s Corp. and Caterpillar Inc. helped stocks rally broadly this week, propelling the tech-heavy Nasdaq Composite past 6000 for the first time.
“People will ultimately look through that stuff and focus on reality, and the reality is we’re on a pretty significant upswing when it comes to earnings data,” said Nathan Thooft, co-head of global asset allocation at Manulife Asset Management. “On top of that, we have a very supportive economic backdrop.”
Other moves have reversed course. The yield on the benchmark 10-year U.S. Treasury note remains above its Election Day level of 1.867%, yet has fallen to 2.291% from 2.466% on Jan. 20. The WSJ Dollar Index, which measures the U.S. currency against 16 others, is above where it was on Nov. 8 but has fallen roughly 2% since inauguration.
Few money managers are ready to declare that the so-called reflation trade is dead. Data pointing to economic expansion in the U.S. and around the world persist. The reflation trade has tended to regain some steam on signs of progress on Mr Trump’s agenda, including in recent sessions as the White House was preparing to release general principles for tax legislation.
“I think the market’s hopeful, but skeptical, and to the extent you get anything of substance, that’s the icing on the cake,” said Erik Davidson, chief investment officer at Wells Fargo Private Bank.
President Donald Trump told Reuters on Thursday that he was “psyched” to terminate the NAFTA trade deal with Canada and Mexico, but changed his mind after their leaders asked for it to be renegotiated instead.
Trump said in an interview with Reuters that he will not hesitate to change course again and pull the plug on the North American Free Trade Agreement if the negotiations become “unserious.”
His comments came at the end of a long 24 hours during which Ottawa and Mexico City were whipsawed over the Trump administration’s intentions over the 23-year-old trade pact.
“You know I was really ready and psyched to terminate NAFTA,” Trump said.
He decided that it would be better to terminate the trade deal after hearing about Wisconsin farmers’ struggles with new Canadian dairy rules that were shutting out their milk protein exports.
“You saw that, you wrote about it,” Trump said. “And I said I’ve had it. I’ve had it.”
But after administration officials said a withdrawal order was being prepared, Trump said he received phone calls from Mexican President Enrique Pena Nieto and Canadian Prime Minister Justin Trudeau asking to renegotiate the pact.
“I’m not looking to hurt Canada and I’m not looking to hurt Mexico. They’re two countries I really like,” Trump said. “So they asked to renegotiate, and I said yes.”
News of the possible U.S. pullout from NAFTA rattled financial markets on Wednesday. Relative calm returned on Thursday after Trump’s comments, and the Mexican peso strengthened 0.86 percent against the U.S. dollar, while the Canadian dollar was flat versus the greenback.
Mexico, Canada and the United States form one of the world’s biggest trading blocs, and trade disruptions among them could adversely affect farm, automotive, energy and other sectors in all three countries. NAFTA removed most trade and tariff barriers between the neighbors, but Trump and other critics have blamed it for deep U.S. job cuts.
Trump campaigned for president last year on a pledge to pull out of NAFTA if he could not renegotiate better terms. The United States went from running a small goods trade surplus with Mexico in the early 1990s to a $63-billion deficit in 2016.
Asked by Reuters what would make NAFTA a fair deal, Trump said: “Open markets. Open borders for trade” and “Fairness, no government subsidies so that it makes it impossible for our people to compete.”
He added that if the NAFTA negotiations “become unserious, I will terminate.”
As Trump spoke, a new trade irritant between the United States and Canada emerged, as Boeing Co asked the U.S. Commerce Department to investigate alleged price dumping and unfair Canadian government subsidies for Bombardier Inc’s new Canadian-made CSeries jetliners.
‘GET TO WORK’
Trudeau told a news conference in Saskatchewan he had urged Trump not to withdraw from the trade pact and warned that doing so “would cause a lot of short- and medium-term pain.”
“That’s not something that either one of us would want, so we agreed that we could sit down and get to work on looking at ways to improve NAFTA,” Trudeau said.
Canada sends 75 percent of its exports to the United States. On Tuesday, Trump said he did not fear a trade war with Canada, a day after his administration moved to impose tariffs on Canadian lumber.
In Mexico City, Mexican Foreign Minister Luis Videgaray said Pena Nieto had called Trump on Wednesday and spoken with him for about 20 minutes in a conversation focused exclusively on the looming talks over NAFTA’s “renegotiation and modernization.”
Trump has accused Mexico of luring away American factories and jobs with cheap labor and other advantages enabled by NAFTA. During the presidential campaign he accused Mexico of sending rapists and criminals into the United States, and as president plans a U.S.-Mexico border wall.
One of Trump’s first major acts after becoming president in January was to pull out of the 12-nation Trans-Pacific Partnership, negotiated by his Democratic predecessor Barack Obama.
Several agriculture lobby groups in Washington were told U.S Agriculture Secretary Sonny Perdue, confirmed by the Senate on Monday, met with Trump on Wednesday evening to dissuade him from withdrawing from NAFTA.
American Soybean Association President Ron Moore said, “When you’re talking about $3 billion in soybean exports a year, any threats to withdraw from agreements and walk away from markets makes farmers extremely nervous.”
Formal NAFTA talks likely will not get started until August. The U.S. Trade Representative’s office must first send Congress a notice that starts a 90-day consultation period preceding any negotiations.
A USTR spokeswoman said the notice would not be sent until the Senate confirmed Trump’s nominee for trade representative, Robert Lighthizer.
Source: Reuters (Additional reporting by Stephen J. Adler, Jeff Mason, Steve Holland, Susan Heavey and Mohammad Zargham in Washington, Veronica Gomez and David Alire Garcia in Mexico City, David Ljunggren in Ottawa, and P.J. Huffstutter and Mark Weinraub; Writing by David Lawer and Will Dunham; Editing by Nick Zieminski and Clarence Fernandez)
US President Donald Trump has told Mexico and Canada he wants to renegotiate – not scrap – the North American Free Trade Agreement.
Media reports on Wednesday had suggested Mr Trump was drafting an executive order to end the pact.
During his election campaign Mr Trump called Nafta the “single worst trade deal ever” and a “killer” of US jobs.
The reversal surprised markets, sending the Mexican peso and Canadian dollar higher after losses earlier this week.
The White House said it had “agreed not to terminate NAFTA at this time” and that the Mexican and Canadian leaders had “now agreed to proceed swiftly to renegotiate… to enable the renegotiation of the Nafta”.
Trump’s trade agenda: Just what are his priorities?
Mr Trump’s comments on Nafta come just days after the US imposed a new tariff on softwood lumber coming from Canada.
He also called a new Canadian tariff regime affecting US dairy products a “disgrace”.
On Tuesday, the US lost a trade battle with the other Nafta signatory.
The World Trade Organization ruled that Mexico could impose more than $160m (£125m) annually in sanctions against the US on commerce in tuna, capping a dispute dating back to 2008.
Early in his presidency, Mr Trump fulfilled a campaign pledge by signing an executive order to withdraw from the Trans-Pacific Partnership (TPP).
The 12-nation trade deal was a linchpin of former President Barack Obama’s Asia policy.
The U.S. Federal Reserve is moving appropriately on the path to unwind asset purchases and normalize rates, while the European Central Bank (ECB) may be too hesitant, said Mohamed El-Erian, chief economic advisor at the Allianz Group.
The Fed, ECB and Bank of Japan (BOJ) need policymakers to step up to take action on structural reforms to be more effective, El-Erian told the Reuters Global Markets Forum in an interview on Friday.
Following are edited excerpts from the conversation:
Q: Are central banks taking the right route to unwind their asset purchases and normalize rates?
A: When it comes to taking the foot off the unconventional stimulus pedal, the Fed appears to be moving appropriately. The ECB may be showing a little too much hesitancy. Importantly, the two of them – as well as the Bank of Japan – need other policymakers, with tools better suited for the task at hand, to step up to the plate more forcefully – especially when it comes to pro-growth structural reforms, more balanced demand management, better cross-border policy coordination and, in some isolated cases, targeted debt reduction (e.g., Greece).
Otherwise, it will be challenging for the central banks to deliver a “beautiful normalization,” adopting a phrase from Bridgewater’s Ray Dalio. As you know, I have worried that the central banks have been “the only game in town” for too long already.
Q: Your thoughts on Fed’s balance sheet trimming? Certain sections of the market, for instance, believe balance sheet reduction should only start once the Fed funds rate is near 2 percent.
A: Yes, I agree. My own inclination would be to go some significant way in normalizing rates before initiating an active reduction in the Fed’s balance sheet. Remember, this is unchartered territory. There are several uncertainties, so it is extra important to sequence carefully and implement in a measured fashion.
Q: How many U.S. rate-hikes are you expecting in 2017?
A: I expect that, absent a major negative shock, there will be a total of three rate hikes in 2017 — so two more in the remainder of the year.
Q: What are your thoughts on the relationship between Trump and Chinese President Xi Jinping, which is proving to be much friendlier than expected given Trump’s campaign rhetoric, and what does that mean for markets or investments? [nL1N1I0067]
A: Yes, it looks like the two leaders had a good meeting in Washington, establishing a working relationship that appears to be deepening. This is very important as you are talking about the most important bilateral economic relationship in the world – between the largest economies.
As such, it has a notable influence on markets/investment. The economic and financial relationships between the U.S. and China are considerable and multifaceted. Indeed, given the current scale and scope of inter-connectedness, the most likely long-term outcomes are either win-win or lose-lose. And the dynamics involved could well be those of multiple equilibria. As such, the stakes are high for the global economy and markets.
Q: Do you think the deleveraging efforts in China are working?
A: The deleveraging process is proving to be a very gradual process. Fortunately, China has time and the pockets of excessive leverage are containable. But there will be the periodic stress, and it’s one that requires timely policy responses.
Q: What is your view on the dollar? Could it get a further boost from U.S. President Donald Trump’s policies?
A: A lot depends on policies. Specifically, the dollar would get a boost from the implementation of pro-growth measures that would also allow the Federal Reserve to normalize both interest rates and its balance sheet. As such, foreign exchange traders should keep a close eye on progress on tax reform, de-regulation and infrastructure in particular.
Q: Do you think inflation, which many thought would see a spike in 2017, has already reversed?
A: No. I think the recent U.S. reversal will prove temporary. I suspect that there is some more inflation in the pipeline in 2017 here, though I would not call it a spike – rather a slow move up.
Q: Would you be a buyer or seller of USD/JPY if the tensions on the Korean Peninsula escalate? How does that reconcile with BOJ’s stance?
A: An escalation of the geo-political tensions you postulate in your question would most probably lead to an appreciation of the dollar versus the Japanese yen – related to economic, financial and technical reasons. I suspect that, in such a scenario, and it is one of many, the Bank of Japan would allow the currency to depreciate rather than take measures to meaningfully counter the move.
Q: Would you be a buyer of gold in this period of heightened geopolitical tensions? Or do you see it underperforming in a rising interest rate environment?
A: Much depends on what else I have in my portfolio. Some allocation to gold makes sense here.
Q: Would you say the populist wave highlighted by the Brexit vote and the U.S. election is already waning given the French election left centrist Emmanuel Macron in the lead? And what is your view on the euro as a whole?
A: No, I think the anti-establishment phenomenon is still with us. Remember, Emmanuel Macron campaigned against the mainstream parties. In fact, he does not have a party – just a “movement.” What we are witnessing is the cumulative effect of too many years of low and insufficiently inclusive growth.
The European Central Bank stuck to its ultra-easy policy stance as inflation continues to undershoot its target but explicitly acknowledged the vigour of the euro zone economy, now on its best run since the global financial crisis.
Despite calls from Germany, the euro zone’s economic powerhouse, for a gradual reduction of stimulus, the ECB even left the door open to further rates cuts or an increase in asset buys.
But ECB President Mario Draghi noted that the euro zone’s economy had further improved and the risk of a new downturn had receded, a signal seen by many as foreshadowing a bolder change at the next meeting in June.
“Incoming data since our meeting in March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished,” Draghi told a news conference.
“At the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upwards trend,” he added, justifying the continued stimulus measures.
Traders argued that Draghi’s comments were more cautious than they had expected and the euro fell against the dollar while yields on euro zone government bonds, which tend to move in tandem with central bank rates, dipped.
Euro zone economic growth is steadily picking up pace and the risks to the survival of the single currency are receding after pro-euro centrist Emmanuel Macron won the first round of France’s presidential vote.
In this context, sources on and close to the ECB Governing Council told Reuters before the meeting they were seeing scope for taking out some of the easing biases, such as the reference to “downside risks”, at their June meeting.
Indeed, Draghi said some ECB rate setters had become more sanguine about the economy.
“There’s enough from today to suggest that we might see a material change in policy in June,” James Athey, an investment manager at Aberdeen Asset Management, said.
“But no one should get ahead of themselves. There’s clearly not enough consensus on the Governing Council.”
Having missed its 2 percent inflation target for years and even flirted with deflation, the ECB confirmed it would buy 60 billion euros worth of bonds per month at least until the end of the year and keep interest rates in negative territory until later.
With its policy arsenal nearly depleted and inflation now comfortably above 1 percent, policymakers from Germany and other northern euro zone countries are calling for mapping out the way to the exit.
However, Draghi said that inflation was still not firmly in place despite better economic growth.
“We have not seen sufficient evidence to alter our assessment of the inflation outlook, and we are not sufficiently confident that inflation will converge to levels consistent with our inflation aim in a durable and self-sustaining manner,” said.
ECB policymakers will have a chance to reassess the situation in June, when the bank publishes new growth and inflation forecasts.
“The ECB is edging closer to the exit at a snail’s pace,” economists at Berenberg said in a note to clients.
Just over half of the economists polled by Reuters earlier this month expect the ECB’s next move to be an extension of its programme.
Draghi’s caution was mirrored on Thursday by the central banks of Japan and Sweden, which stuck to their own bond-buying programmes despite better economic growth.
Source: Reuters (By Balazs Koranyi and Francesco Canepa, Writing by Mark John; Editing by Jeremy Gaunt)
As Mario Draghi faces increasing pressure to map out a path toward the end of European Central Bank stimulus, he might want to respond with a history lesson.
For weeks in the run-up to Thursday’s Governing Council meeting, ECB officials have been publicly debating when they might start to wind down their asset purchases and raise interest rates. Yet the institution’s president is determined not to repeat an error made six years ago this month, when his predecessor Jean-Claude Trichet started tightening policy only to see the region slide back into recession.
On the surface, the euro-area economy is looking robust after four years of growth, with unemployment declining and inflation close to the ECB’s goal. Draghi, who reversed Trichet’s rate increases in his first two months in office, may choose to reiterate that the current recovery is still highly dependent on monetary support as underlying consumer-price growth remains weak and political risks are still elevated.
“Draghi’s 2011 experience probably taught him a lesson from day one: better to tighten later than sooner,” said Maxime Sbaihi, an economist at Bloomberg Intelligence in London. “The experience probably reinforced his dovish stance, and is now helping him to err on the side of caution and patience.”
Economists surveyed by Bloomberg predict the central bank will keep interest rates unchanged and reiterate that its monthly bond-buying program will run until at least December at an already reduced pace of 60 billion euros ($65 billion). The Governing Council’s policy decision will be announced at 1:45 p.m. Frankfurt time and Draghi will hold a press conference 45 minutes later.
Amid a rumbling discussion over the future of ECB’s stimulus, some central banks are signaling their exit from unprecedented monetary easing remains far away. The Bank of Japan kept its stimulus policies unchanged on Thursday while lowering its inflation forecast. Sweden’s Riksbank unexpectedly extended its two-year bond buying program into the second half of the year as policy makers opted to take no chances on inflation backsliding.
Clues that the ECB’s stance may soon need to be reviewed are coming even from within the institution. Executive Board member Benoit Coeure, Draghi’s man in charge of monetary-policy implementation, argued last week that he views risks to the economic outlook as “by and large balanced” and no longer tilted to the downside.
Backing his view, a report on Thursday showed euro-area economic confidence jumped to the highest level in almost a decade in April. Managers grew more upbeat about the current level of order books and a pick-up in consumer confidence was fueled by greater optimism on jobs, the economy and household finances.
Yet risks remain, especially politically. Anti-euro Marine Le Pen is predicted to garner about 40 percent of support in the second round of France’s presidential elections on May 7 — not enough to win against centrist Emmanuel Macron but sufficient to cause nervousness among investors for a few more weeks. Italian politics has been in limbo since former Prime Minister Matteo Renzi lost a referendum in December and quit.
Draghi, who was a member of the Governing Council when it unanimously decided to raise rates in 2011, and ECB chief economist Peter Praet have tried to shut down a debate about an exit. The discussion flared up in earnest at the start of the year when inflation in the 19-nation region — driven by energy and food prices — approached the central bank’s goal of just-below 2 percent.
“I do not see cause to deviate from the indications we have been consistently providing,” the ECB president said on April 6. “We have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook — which remains conditional on a very substantial degree of monetary accommodation.”
Since the ECB lifted its growth and inflation outlook for 2017 and 2018 in March, economic data have demonstrated increasing resilience. Momentum in the private sector accelerated to its fastest pace in six years in April, with France outpacing Germany in a sign that the recovery is broadening. Inflation data due on Friday are forecast to show core price growth accelerated to 1 percent for the first time in just over a year.
Bundesbank President Jens Weidmann has suggested that a “less expansive monetary policy” may be sufficient in light of the strengthening recovery, and argued that a debate about policy normalization was “legitimate.”
Most respondents in Bloomberg’s April 18-20 survey said the ECB will revise its forward guidance as early as June, six months sooner than in the previous poll. The Governing Council currently pledges to keep interest rates at present or lower levels well past the end of quantitative easing.
“Draghi and Praet are trying to avoid making mission-almost-accomplished statements,” said Richard Barwell, an economist at BNP Paribas Investment Partners in London. “There are others who are sufficiently uncomfortable with unconventional monetary stimulus and the pace of reform in the periphery to be willing to pull back even though the likely outcome is inflation consistently undershooting the target seriously.”
Mario Draghi showed growing enthusiasm about the state of the euro-area economy, while cautioning that inflationary pressures remain too weak to contemplate paring back stimulus.
“It’s true that growth is improving, things are going better,” the European Central Bank president told reporters in Frankfurt on Thursday after the Governing Council agreed to keep its stimulus settings unchanged. “In 2016 we were speaking of a fragile and uneven recovery. Now it’s solid and broad.”
Euro-area economic data have demonstrated increasing resilience in recent months, prompting ECB officials to publicly debate when they might start to wind down asset purchases and raise interest rates. Draghi’s reticence to touch on that discussion reflects concern that core consumer prices are too weak and would fade without continued monetary support.
“The risks surrounding the euro-area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside,” he said. “Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.”
Economists predict the first hints of an exit from extraordinary stimulus may come by June 8, when the Governing Council next announces policy and publishes projections on the economic outlook.
Speaking shortly after the European Commission’s economic confidence index showed the highest reading since August 2007, the ECB president acknowledged that the region’s recovery is becoming “increasingly solid.” Data next week is expected to show the economy grew 0.4 percent in the three months through March, and indicators in the past month suggest further strengthening.
Draghi said the Governing Council unanimously agreed to adjust its language on the balance of risks to growth.
That wording spurred a temporary jump in the euro, which then fell back as it became clear the ECB chief remains largely dovish. The single currency was down 0.4 percent at $1.0866 at 4:37 p.m. Frankfurt time.
Policy makers, in a relatively brief meeting, didn’t discuss changes to their forward guidance which says that rates will stay at present or lower levels for an extended period, and well past the horizon of net asset purchases.
Draghi also brushed off suggestion that the uncertainty surrounding the outcome of presidential election in France was holding Governing Council back from acting now, but said it was looking into how “political uncertainty may impact medium-term outlook for price stability.”
Political risks have dominated much of the year so far. With a euro-skeptic victory in the French presidential election looking less likely after Sunday’s first-round vote, risks such as Italy’s political limbo and the U.K.’s Brexit negotiations could still weaken the currency union.
Still, policy makers could change their guidance as a first step toward phasing out QE at the beginning of 2018 and conducting a first rate hike in the third quarter of that year, according to a Bloomberg survey of economists conducted before this week’s Governing Council meeting.
“I find Draghi’s insistence on possibility of rate cuts and on risks being to the downside little hard to reconcile with the reality as I see it,” Holger Sandte, chief European analyst at Nordea Markets, said by phone from Copenhagen. “It seems to me like they already have their ducks in a row and are only waiting for the outcome of the second round of French election to move.”
As Britain prepares to negotiate its EU departure, a number of banks are likely to decide within two months where to set up new continental bases to make sure they can keep serving clients in the bloc after Brexit.
The European Central Bank said it will host a meeting of banks on May 4 at its offices in Frankfurt. It will spell out in detail what those moving some of their operations out of London must do to apply successfully for a licence.
Talks with financial authorities have been underway for several months but the banks are expected to make up their minds imminently on where to move staff and operations.
“We are in the hot phase. In the next six to eight weeks there will be a series of decisions,” Felix Hufeld, head of Germany’s Bafin financial regulator, told Reuters.
Ireland’s central bank will hold a similar gathering next month to advise groups considering a move to Dublin, which along with Frankfurt, Paris and other centres is competing to offer the banks a second base that remains in the European Union.
A spokeswoman for the Irish central bank added that it had regular contact with the industry concerning “the potential consequences of Brexit”.
Authorities expect potentially dozens of international banking groups, currently operating their euro zone business out of London, to move some operations and staff to the 19-member euro zone.
They are likely to shift several thousand staff out of London, as banks based in Europe’s biggest financial centre will lose automatic “passporting” rights to sell services across the EU when Britain is no longer a member state.
Hufeld predicted Frankfurt would play an “important role” in this process, although he said other cities would also gain.
Bankers also say Frankfurt is set to win the most business following a discreet but concerted German campaign to promote the financial centre of Europe’s biggest economy.
German politicians have been reluctant to lobby publicly for big global banks to move to the country. Federal elections will be held in September and some voters remain suspicious of the financial industry after several German banks were forced to seek taxpayer-funded bailouts during the global crisis.
However, they have held a series of meetings with bank executives. Finance minister Wolfgang Schaeuble and politicians from the state of Hesse, home to Frankfurt, have met Wall Street powerbrokers in the United States and Germany in recent months, according to several sources familiar with the matter.
As far back as October, Schaeuble met Goldman Sachs CEO Lloyd Blankfein in Berlin and discussed its post-Brexit plans, according to two sources familiar with the matter. Goldman Sachs is considering moving some operations to Frankfurt.
James Gorman, the chief executive of one of the world’s biggest banks, Morgan Stanley, recently visited Frankfurt where he met local regulators, one person familiar with the matter said.
Morgan Stanley intends to move jobs from London to cities such as Frankfurt, people involved in the process have said.
A spokesman for Schaeuble declined to comment, as did both banks.
France is still pushing for banks to move to Paris and HSBC has a big presence in the city. But many of its peers are reluctant to move to the city, where rents are high and they would face a special tax on wages in the financial sector.
Hufeld’s comments and the regulators’ meetings show how banks are rapidly advancing towards a move.
Last month Prime Minister Theresa May formally declared Britain’s intention to leave the EU, opening a two-year period for both side to negotiate the divorce. Talks are expected to begin in June, although May’s surprise calling of an election for June 8 has added to the uncertainty.
Given the tight Brexit timetable, bankers are keen to get cracking. “March 2019 is not far away and we are running out of time,” said Lutz Raettig, president of Frankfurt Main Finance, a group that promotes the city.
“The time for making decisions is soon. People want to know for sure what direction they are taking by the summer,” said Raettig, who is also chairman of Morgan Stanley’s supervisory board in Germany. “They can wait a little longer but not much more.”
The ECB, which takes the final decision on granting a bank licence, has said they should allow at least six months to get one.
However, Barclays Chief Executive Jes Staley said on Wednesday that obtaining a licence to trade on the continent and changing financial contracts to another jurisdiction takes a year to 18 months.
Initially, banks had hoped that the immediate impact of Brexit would be softened by a so-called transition arrangement to delay the full effect.
But Hufeld, who also sits on the ECB’s supervisory board, said this offered little consolation. “Even if there were to be transition arrangements, they would come at such short notice,” he said. “If they come four weeks ahead of time, then that does nothing for you.”
Despite the high prize in terms of jobs and tax revenue, many country regulators are treading carefully for fear of getting lumbered with high risks. This is particularly the case in Ireland, which had to seek an international bailout in 2010 due to the huge cost of bailing out its banks.
The ECB is likely to caution banks against relying on ‘shell companies’, with operations effectively run by people still in London but the responsibility for handling any mishaps lying with continental authorities.
“If it’s high-risk and low value-added, then you don’t want it,” said one person familiar with the thinking among the Irish authorities. “Let Frankfurt have it.”
Source: Reuters (By John O’Donnell and Anjuli Davies, editing by David Stamp)
Euro zone government bond yields nudged up on Thursday with the bloc’s central bank expected to reiterate Japan’s acknowledgment of better growth prospects in a move that could pave the way towards tighter monetary policy.
The European Central Bank’s meeting on Thursday comes immediately after the Bank of Japan overnight offered its most optimistic assessment of the economy in nine years.
While the BOJ kept monetary policy unchanged, for the first time since 2008 it used the word “expansion” in describing the state of the economy, signalling that it sees no need for additional stimulus.
The ECB is also expected to keep its ultra-easy stance firmly in place but may talk of a rosier economic outlook, setting the stage for a small signal as early as June about an eventual reduction of stimulus.
That could involve interest rate hikes and a slow withdrawal of its asset purchase scheme likely to precipitate a decline in the value of bonds and a rise in yields.
David Lloyd of British asset management firm M&G Investments said that his “conversations with central bank staffers” suggest the ECB is not concerned about market ructions that tightening policy would cause.
“Any sense of systemic risk, like the vulnerability of major financial institutions, they are all over that like a rash. But if we get a massive sell-off in the bond market and people lose money then they are entirely relaxed about that,” said Lloyd, the firm’s head of institutional portfolio management.
Benchmark German Bund yields — which move inversely to prices — climbed 2 basis points to 0.37 percent in early trades on Thursday, heading back towards 14-month highs of 0.51 percent seen in the wake of the ECB’s last meeting at which it signalled a diminishing urgency for policy action.
Policymakers tried to downplay those signals in the wake of that meeting, while nerves around the French election and disappointing economic data have since reversed some of the yield rise and tempered rate hike expectations.
But Reuters reported this week that policymakers, relieved after the first round of France’s presidential vote put a pro-euro centrist in pole position, may in June once again change the wording of the ECB’s opening statement.
Any comments on Thursday about the bloc’s improving economic prospects could be a nod to that, but some investors still feel the data is too weak to justify a major policy shift.
“Should inflation go back towards the 2 percent target, the ECB would need to be more hawkish – that is obvious,” said Eric Vanraes, a fund manager at investment fund EI Sturdza. “But inflation is slowing now so the ECB is likely to stay in wait-and-see mode.”
Source: Reuters (Additional reporting by Dhara Ranasinghe; editing by John Stonestreet)
The Bank of Japan kept its stimulus policies unchanged while lowering its inflation forecast, underscoring that any exit from its unprecedented monetary easing remains far away.
The central bank will continue to use its two policy rates and asset purchases to spur prices higher, it said in a statement Thursday. The decision was expected by almost all economists surveyed by Bloomberg. The BOJ made a small increase to its growth forecasts for this fiscal year and next.
While global demand is supporting exports and contributing to modest economic growth, four years of extraordinary monetary stimulus is generating only the smallest of increases in prices. Governor Haruhiko Kuroda said last week that the accommodative policy and asset purchases will continue for some time because inflation is “quite sluggish,” underscoring how far the BOJ lags behind its counterparts in the U.S. and Europe.
“The forecasts didn’t change much but reading between the lines of the statement you can see their rising confidence,” said Maiko Noguchi, senior economist at Daiwa Securities and a former central bank official. “The divergence between their price outlook and that of private economists continues, but it shouldn’t be a big problem for now because it’s been that way for a long time and few economists believe the BOJ’s projections.”
In its quarterly outlook report, the BOJ cut its inflation projection for the fiscal year that started this month to 1.4 percent from 1.5 percent. The central bank continued to say it will hit the price target around fiscal 2018, which starts next April.
While this indicates the BOJ’s broad scenario hasn’t changed from three months ago, Kuroda said at a post-decision briefing that CPI probably won’t stabilize above 2 percent until after fiscal 2018.
While the BOJ’s goals are distant and Kuroda’s term as governor is due to end in April next year, the Federal Reserve is increasing interest rates and policy makers at the European Central Bank, who meet later Thursday, have been debating tapering their stimulus program.
Kuroda said it’s premature to be discussing an exit by the BOJ now, which would only serve to confuse markets. He added that 2 percent inflation must be met first and the BOJ will communicate properly about an exit when the time comes.
Still, analysts surveyed by Bloomberg do expect that the BOJ’s next step will be tightening, rather than further easing of its policy. This is because many expect consumer prices to pick up somewhat later this year, thanks to rising oil costs and the relatively weak Japanese yen.
Japan’s economy is turning toward a moderate “expansion,” the bank said. That was the first time they’ve used the word in this context in about nine years. Exports and industrial output are on an increasing trend, according to the BOJ. However, the bank’s statement also said that risks to both prices and economic activity were “skewed to the downside” and that momentum toward the 2 percent inflation target isn’t sufficiently firm yet.
“It doesn’t make sense that the BOJ upgraded its GDP outlook because domestic demand hasn’t recovered remarkably,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo, who expects the bank to keep policy unchanged for the time being.
Below are new projections of economic growth and inflation by the BOJ. They are the median estimates of the nine board members. The inflation forecasts exclude the effect of the planned sales tax increase in fiscal 2019.
Inflation forecast for fiscal 2017: 1.4 percent (previous 1.5 percent) Inflation forecast for fiscal 2018: 1.7 percent (previous 1.7 percent) Inflation forecast for fiscal 2019: 1.9 percent Growth forecast for fiscal 2017: 1.6 percent (previous 1.5 percent) Growth forecast for fiscal 2018: 1.3 percent (previous 1.1 percent) Growth forecast for fiscal 2019: 0.7 percent
Southeast Asian countries will prioritise creating an Asia-focused trade pact this year that includes China, India and Japan, while trade issues with the United States will be put on the back burner, the Philippine trade minister said.
The U.S. withdrawal from the Trans-Pacific Partnership (TPP) and policy uncertainties cast by President Donald Trump’s protectionist leanings, have spurred Asian countries to push ahead with the Regional Comprehensive Economic Partnership (RCEP), Trade and Industry Secretary Ramon Lopez told Reuters late on Tuesday.
“That to us would be more of a priority rather than other countries working on another agreement,” Lopez said of RCEP during an interview ahead of a summit of the 10 members of the Association of South East Asian Nations (ASEAN) in Manila.
“Everybody would of course like to have a greater economic relationship with the U.S., they are a big country, one of the biggest consumers as well, but it may not rank high in the ASEAN agenda.”
ASEAN first pushed the idea for RCEP in 2012, but it became eclipsed by the TPP, which former U.S. President Barack Obama had promoted as a progressive deal that would prevent China from”writing the rules of global trade”.
Four ASEAN members – Brunei, Malaysia, Singapore and Vietnam – had signed up to TPP, but the pact has lost two-thirds of its members combined gross domestic product when the U.S. backed out.
And with China putting its weight behind RCEP, it has emerged as best alternative to lowering tariffs in the region for Asia’s export-driven economies.
RCEP would bring ASEAN – a trading community of 620 million people with a combined GDP of $2.6 trillion – together with six other countries: Japan, India, New Zealand, Australia, South Korea and China.
Since the election in November of a protectionist-minded U.S. president, China has emerged as arguably the biggest advocate of trade liberalisation.
China denies it is leading RCEP, and Lopez said the deal would not be skewed in favour of larger nations.
“All the countries are looking at what’s mutually beneficial for all, it won’t be lopsided, let’s say, in favour of China. China is one of the participants,” he said.
“What we’re all talking about in RCEP is to what extent can we review the products, the products that need to be liberalized for free trade.”
Lopez said trade was not expected to figure prominently at the ASEAN summit starting on Saturday, but leaders would be pushing for a conclusion of RCEP by the end of this year.
The Philippine minister said Trump’s rhetoric on trade was a concern for Southeast Asia’s export-driven economies, but they hoped he would soften his stance, recognising that an inward looking approach would ultimately hurt the U.S. economy.
“What we just hope is that the U.S. won’t really come up with policies that will really be protectionist,” he said.
US commerce secretary Wilbur Ross said there has been no serious discussions on India-US free trade agreement though the Trump administration has no inherent objection over the pact.
The US does not have a free trade agreement (FTA) with India and as a result India-US trade relationship is currently governed under the World Trade Organization (WTO), Ross told reporters at a White House news conference.
“The US does not have a free trade agreement with India at this point. So the trade relations between US and India are governed by the WTO rules. There’s nothing in the actions we’ve taken,” Ross said.
However, he said there has been no serious discussion on this with India. “I don’t believe that there has been any serious discussions with India of late on the topic of a free trade agreement. But there’s no inherent negative attitude on our part on that,” Ross said when asked if he favoured a free trade agreement with India.
Currently the US has free trade agreements with 20 countries – Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Moroccan, Nicaragua, Oman, Panama, Peru and Singapore.
While there is no such move in this regard right now, the previous American administrations have been open to the idea of a India-US FTA. “I think that (FTA) is something that in the future we see as a very important and positive development. There are certainly concerns between the US and India in terms of some of the protective tariffs and trade barriers that we think that India needs to address,” the then assistant secretary of state for south and central Asia Nisha Desai Biswal had told Senator John McCain during a Congressional hearing in September of 2013.
US-India bilateral trade relationship is far away from FTA. In the previous Obama administration, the two countries talked about a bilateral investment treaty. In a recent document, US-India Business Council said it encourages the US and India to negotiate a bilateral investment treaty (BIT) that promotes the free flow of economic resources – capital, people, and technology.
“This is a critical step to unleash the full potential of industry in both countries. The process of treaty negotiation would provide a platform to resolve deadlocks and challenges on issues such as tantalisation, the high-skilled work visa program, intellectual property protection and product conformity by aggregating the benefits and mitigating costs,” it said.
“There is an opportunity for both countries to also sync their regulatory and standards system to increase trade and investment. The more convergence there is on standards, the more jobs and prosperity will likely be created in both nations. This is a critical foundation for more collaboration in technology,” USIBC said.