HSBC Explains How Markets Will Behave in a World of 'Quantitative Exhaustion'
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by Luke K
- Unconventional monetary policy has passed its best-before date, according to economists and strategists at HSBC.
- They argue that the failure of the extraordinary stimulus deployed in the wake of the financial crisis can be demonstrated by the sugar high, rather than sustained lift, these actions gave to market-based measures of inflation expectations:
- "We have reached the point of diminishing returns, so much so that if global growth disappoints, policymakers will need to consider a number of options," they conclude, deeming the market to be at "the point of quantitative exhaustion."
- To this end, Global Chief Economist Janet Henry, Chief European Economist Karen Ward, Global Head of Fixed Income Steven Major, and Strategist Subhrajit Banerjee pose and answer two questions:
- What are the options if the global economy—and even the U.S.—can't handle any degree of normalization and policymakers are forced to add more stimulus? And How will the bond market react?
- Many of these options, they note, could happen in conjunction with one another, with the policy mix making it more difficult to discern the potential reaction in sovereign debt markets.
- One course of action would be to double down on bond-buying programs known as quantitative easing. But not only would doing the same thing over and over and expecting a different result be insane, to paraphrase Einstein, but there are also central banks rubbing up against technical constraints under the structure of their ongoing asset-purchasing programs.
- "The BoJ, with a commitment to continue expanding the monetary base at a rate beyond new issuance, will at some point exhaust the entire JGB market. If it adheres strictly to its current modalities, the ECB will hit technical constraints at a much smaller purchase programme because of European-specific issues surrounding the capital key and collective action clauses (CACs)."
- Major and Banerjee indicated that expanded QE would first likely result in a steepening of the yield curve, then a flattening as optimism gives way to disappointment.
- In the event that QE's lack of transmission to the real economy becomes clear, fears of global deflation could spur a rush into safe-haven assets and a flattening of yield curves.
by Luke K
- A second option would be to refuse to let the zero lower bound bind and cut policy rates into negative territory. Several central banks in Europe have gone down this road, with the ECB seemingly poised to lower its deposit rate further into negative territory in the near future.
- There are potentially perverse side effects to this policy and, under the prevailing monetary regimes, a floor on how low rates could actually go.
- Negative policy rates typically translate into lower yields further down the curve, albeit with a quite limited impact on longer-dated debt.
- HSBC's fixed income strategists see the potential for a "banana effect" as negative rates are enacted, in which the front end of the curve flattens while the longer end steepens.
- But if monetary easing offers fewer and fewer benefits, as HSBC claims, the alternative route warrants greater consideration.
- Strong demand for fixed income and, in most cases, the ability to print their own money means debt capacity constraints for national governments might be higher than ever imagined. As the economists note, fiscal policy is "potentially the only unlimited tool" to boost growth and inflation.
- "Governments should focus on projects that would ease private sector bottlenecks and encourage business activity. This is the type of government spending that is most likely to boost GDP and tax receipts, in turn paying for itself," they said.
- History suggests that increased issuance to fund this expansionary fiscal policy would tend to steepen the curve, according to Major and Banerjee.
- If a government and central bank were sufficiently ambitious—or desperate—they could turn to "helicopter money" to rejuvenate the economy. That is, central banks could directly monetize government debt, which would be used as stimulus via public works programs or direct transfers to citizens.
- "Even in a report that is considering the various future policy options that could be considered in the event of further nominal growth disappointment, we put this in the category of something that would only be considered in the event of a sudden panic or collapse in activity," Henry and Ward cautioned.
- In the event that this radical step were taken, the interest rate strategists believe that there would be a knee-jerk move higher in inflation expectations and risk premium, prompting a selloff in bonds.
- The final possibility—and the most depressing of the bunch—is that policymakers simply give up on stimulus.
- "When there is not a strong enough consensus in governments and central banks to pursue new policies, especially because the previous radical policies like QE were so controversial, the risk is that nothing will happen," wrote Major and Banerjee.
The Good, The Bad and The Ugly in China's Provincial Economies
- China’s leadership is signaling a new growth minimum for the nation of 6.5 percent. At the local level, what that means depends on where you sit. A closer look at the most recent data shows diverging conditions across China’s 31 regions, from the booming southern beach resorts to the northeast’s rust belt.
- The good news is that 20 of the 29 provincial-level regions that have reported gross domestic product figures for the first nine months saw an acceleration from the first six months. The bad news is that the pickup doesn’t reflect how companies are struggling, as many growth rates are puffed up by statistical compensation for deflation, not rising output. The ugly: fears of a hard landing are materializing in the industrial northeast.
- This fragmentation in the regional growth outlook is mirrored by increasing divergence among industries as old growth dynamos linked to residential construction and low-end manufacturing wane and new services and innovation-led industries bloom. Against this backdrop of increasing complexity, the government is seeking to reform the economy while maintaining medium- to high-speed growth.
- “You should think of China as lots of regional markets,” said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai. “It’s a continent and you need different strategies for different parts of the country.”
- President Xi Jinping, whose government is transforming the $10 trillion-plus economy from one driven by debt-fueled investment and exports into a more sustainable one led by consumer spending and services, said Tuesday average annual growth should be no less than 6.5 percent in the next five years. China’s GDP rose 6.9 percent in the three months through September from a year earlier, the slowest quarterly expansion since the first three months of 2009. The Good
- Most provinces that posted a growth acceleration attributed the pickup to gains from services and consumption. That’s in line with the nation’s goal to rebalance its investment-driven economy and reinforces the good news story out of the world’s second-biggest economy this year.
- The capital of Beijing and the financial center of Shanghai both got boosts from financial services, which surged 19 percent and 27 percent respectively, while technology saw double digit jumps in both provincial-level municipalities. That helped offset an overall growth slowdown in both provinces.
- But there were some surprise packets on the services front too. Jilin province in the industrial north reported a 22 percent surge in the value-added of financial services, even higher than the national level of 17 percent.
- Output in Guangdong, the biggest regional economy and one of China’s manufacturing heartlands, saw a pickup to 7.9 percent in the third quarter. Officials there attributed the strength to having a relatively developed services sector, while its population of 107 million makes it a massive consumer market.
- The baton has been passed from investment to consumption, according to Michael Spence, the Nobel laureate and economics professor at New York University’s Stern School of Business. China’s household consumption is increasing to about 50 percent, and that’s supporting relatively high-speed growth, he said in a speech in Beijing on Wednesday.
- A recovery in property prices helped the southern island province of Hainan, where growth surged to 8.2 percent in the January through September period, compared with 4.7 percent in the first quarter. Local officials cited a 26 percent jump in real estate development investment and a 5.5 percent increase in property sales.
The Bad
- Nineteen of 29 provinces reported a negative GDP deflator, meaning their "real" growth rates were adjusted higher from "nominal" levels to account for falling prices.
- "Only economists should care about real GDP growth, because it’s intangible. What’s tangible are people’s income, companies’ revenue and governments’ taxes, and those are all in nominal GDP," said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. "Income growth and corporate profits are facing higher risks than the slowdown shown by real GDP."
- That’s not good news for a nation with a heavy debt load, since debt doesn’t deflate along with prices.
- It’s a bleaker picture looking at nominal figures: While just four regions out of the 29 that have reported data for the first nine months had slower real GDP growth compared with the first half, in nominal terms 13 provinces slowed in the third quarter.
- That means the strength in services is largely being offset by lackluster manufacturing, which is confronting a record stretch of declines in prices of products leaving the factory gate. The Ugly
- Now to the ugly. While the world worries about a hard landing for China, it’s already there in some parts of the continent-sized economy. The hardest hit areas in China’s slowdown are all in the industrial north: Liaoning, Shanxi, Jilin and Hebei.
- A fifth province, Heilongjiang, is one of the last holdouts in posting its third-quarter figures. Its longer-term prospects also look dim as it confronts an oil price slump and slowdown in heavy industry. The largest coal miner in the northeast, Heilongjiang LongMay Mining Group Co., said in September it will cut 100,000 jobs in the fourth quarter, according to China Daily. That’s a workforce reduction of more than 40 percent.
- The economies of steel-producing Hebei and coal-mining Shanxi contracted in the first three quarters, when growth is unadjusted for inflation. The provinces reported a 6.5 percent and a 2.8 percent increases in real growth rates. Hebei’s GDP deflator was minus 8.5 percentage point, driven lower by collapsing steel prices. That compared to minus 0.7 percentage point for the country.
- Plants in the northeastern region bordering Russia have suffered the heaviest blow from overcapacity. The economy of Liaoning, also facing a major property stock overhang, expanded 2.7 percent. Unadjusted for inflation, that narrowed to just 0.2 percent.
The Airfare to China is $0. Do You Take It or Leave It?
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by Justin B
- On St. Patrick’s Day, American Airlines set round-trip business class fares from several U.S. cities to Beijing and Shanghai at $0 and $20 for five hours.
- Nearly 1,200 people who weren't preoccupied with shamrocks and green beer jumped on the fares, about half of them buying immediately and half putting the reservation on a hold, per federal rules allowing people to cancel a ticket at no cost within 24 hours. The airline canceled the itineraries on hold, prompting some 100 complaints to the Department of Transportation.
- Today, regulators announced that they had settled the case with American. The airline will offer the 605 holders of the past reservations a free economy-class flight to China or a business-class seat discounted by $1,500, with no AA miles. All travel must be completed by Oct. 26, 2016, a year from when American sent them its offer.
- When it comes to “mistake” fares, the use of Twitter and Facebook can quickly lead to a surge of bookings exploiting a glitch ordinarily caused by a human or a technical failure. The 1,194 bookings to China on March 17 far surpassed the typical 100 or fewer bookings made in the prior five days during the evening hours, the airline said in its argument to the DOT.
by Justin B
- Are social media helping people indulge their worst instincts as consumers?
- “In American’s view,” the DOT wrote in the consent agreement, summarizing the airline’s argument, “social media posts acknowledging or recognizing that the fares were offered by mistake yet urging readers to rush to book them shows an intent to cheat, as many consumers knew the fares were not valid.” Further, the airline "believes that the proliferation of social media sites publicizing mistake fares has resulted in individuals purchasing mistaken fare tickets in bad faith, and not on the honest belief that a good deal was available.”
- Fliers may have won this round, but it appears that the larger issue isn't settled yet. In May, the DOT sided with United Airlines, which had mistakenly sold some first-class seats for $50 three months earlier, signaling that airlines probably wouldn't be required to honor fares offered because of a glitch. A final rule on the issue is pending. As for the ethics, what can we say? Look in your heart.
Sell Out: China Deals Soar as Investors Push Startups to Combine
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by Shai O, Browning J, Lulu Y C
- To understand why China is in the midst of a surge in dealmaking and why that won’t slow down anytime soon, consider the arranged marriage of two of the country’s largest travel websites.
- Qunar Cayman Islands Ltd. and Ctrip.com International Ltd. were bitter rivals for years, bickering in public and sacrificing profits to grab customers in the growing China market. Then Qunar’s largest shareholder, Baidu Inc., forced it into a deal that gave Ctrip control over the combined entity, according to a person familiar with the matter. Qunar’s management learned their fate only two days before the announcement, the person said.
- China’s Internet market, after a surge in startups and record venture-capital investments, is entering a new phase of consolidation as investors grow weary of money-losing battles for customers and push for profitability. Acquisitions by Chinese companies rose 75 percent this year to $413.2 billion, according to data compiled by Bloomberg, with domestic deals in the Internet industry nearly quadrupling to $55.6 billion.
- “Investors and VCs are beginning to worry about the sustainability of these models,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP. “It doesn’t matter if you are the founder or a professional management team, if the money says no, then it’s a no.”
- China’s biggest Internet companies -- Baidu, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., known collectively as BAT -- are driving the consolidation, accounting for more than 40 percent of domestic dealmaking in the industry. They helped finance many of the country’s startups, and now they’re combining ventures in the most fragmented niches. Deals Double
- The waves of deals started in February when Alibaba and Tencent merged their competing taxi-hailing applications to create Didi Kuaidi, creating a clear leader with more heft to hold off Uber Technologies Inc. Classified-ad provider 58.com Inc. followed in April, buying control of rival Ganji.com while also getting additional funding from Tencent. Then last month, the group buying and review startups Meituan.com and Dianping.com, separately backed by Alibaba and Tencent, respectively, agreed to combine into a $15 billion giant.
- The deals come as venture-capital investments in China surged this year to about $29 billion, double the amount for all of last year.
- “There was an abundance of capital that created this group of competitors, and that now brings out the need for strategic consolidation,” said Zhang Xiaoyin, head of China telecom, media and technology investment banking at Goldman Sachs Group Inc. “The deals are for the good of the company even if it may not be the way that the founders prefer.”
- For Meituan’s investors, money was the driver. Meituan agreed to the merger only after it had unsuccessfully tried to raise money at a valuation of $15 billion. Instead, it settled for about two-thirds of that, a person familiar with the matter said last month.
by Shai O, Browning J, Lulu Y C
Internet ‘Kingmakers’
- Qunar, whose shares trade on Nasdaq, has been facing mounting losses amid the intense competition in China. Part of its trouble was the unraveling of a deal in which Baidu was supposed to deliver Internet traffic to their site. As users shifted from desktop PCs to smartphones, the agreement yielded less traffic than expected.
- Even when Qunar raised $800 million this year amid losses, it couldn’t escape the shadow of competition. A few days later, Ctrip said it had raised $1 billion. Baidu finally had enough. It agreed to put its Qunar shares into a combined entity with Ctrip, essentially forcing Qunar’s management into the deal without consulting them.
- “Baidu, Alibaba and Tencent have become kingmakers,” said Richard Robinson, who teaches at Peking University’s business school and mentors startups in Beijing.
- The deals also reach into the public sector. China’s government is reforming many of the nation’s state-owned enterprises, resulting in more M&A activity. In the biggest such deal, the three wireless carriers are combining their tower assets in a $36 billion combination.
- The Internet dealmaking is far from over. China’s food-delivery firms are potential candidates for their own round of consolidation after going through major funding rounds this summer. Tencent-backed Ele.me raised $630 million, valuing the company at $3 billion in August, while Alibaba and its financial arm invested almost $1 billion in Koubei Co. in June.
- “A lot of companies are using similar business models trying to subsidize consumers,” said Xia Mingchen, a principal at private equity firm Hamilton Lane Advisors LLC. “Many of these types of companies won’t survive.”
Cheap Oil Helps China Unseat Canada as Top U.S. Trade Partner
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by Victoria S
- China is poised to become the biggest U.S. trading partner this year, eclipsing Canada for the first time as the slump in oil prices reduces the value of energy exports for America’s neighbor to the north.
- Trade in goods with China reached $441.6 billion this year through September, exceeding the $438.1 billion balance with Canada for the first time in U.S. Commerce Department data going back to 1985. Figures published Wednesday also showed that the U.S. trade shortfall with China is now at an all-time high, fueled by record imports.
- Crude oil is among Canada’s biggest exports, and its price has collapsed to about half of its 2014 peak. That’s helped send the value of its trade with the U.S. so far in 2015 down 11.6 percent from the same time last year even as the world’s biggest economy buys more barrels.
by Victoria S
- “It’s completely an oil story,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets LLC in New York. “In nominal terms, yes, the trade with China overtakes Canada, but in real terms, it’s very different. It’s not economic activity or output. It’s a price story all the way.”
- In September, the U.S. imported 101.3 million barrels of crude oil from Canada, the most this year and the second-highest level in records going back to 2010, according to data from the Census Bureau. However, the $3.9 billion customs value of those imports was the second-lowest.
- Meanwhile, as other emerging markets struggle to accelerate, China is increasingly dependent on U.S. consumers buying its goods. Total trade this year with China is up 3.7 percent from the same nine months in 2014.
Taxing the 1%: A Cautionary Tale for Canada Finance Minister
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by Greg Q
- As Bill Morneau takes over the reins of Canada’s finance ministry, among his thorniest tasks will be to implement Prime Minister Justin Trudeau’s pledge to introduce a higher tax rate for the country’s top earners. Data released by Statistics Canada this week show the costs of moving ahead.
- The agency’s report on Canada’s top 1-percent tax filers incorporated for the first time the Quebec government’s decision to pursue a similar strategy in its 2012 budget, and the results aren’t encouraging.
- Quebec was alone among the country’s 10 provinces to see a decline in filers who cracked the top 1 percent of earners in 2013, Statistics Canada said Tuesday from Ottawa, with its share of 1-percenters falling to the lowest in at least 30 years. The number of Quebeckers among Canada’s top earners fell 5.8 percent to 40,825, while increasing in the rest of the country, the data show. Higher taxes for high earners, it turns out, prompts them to move. “The Liberal government would be off to a very bad start if they go ahead with their tax plan by raising the top rate,” Jack Mintz, a fellow at the School of Public Policy at the University of Calgary, said in a telephone interview. Quebec Exodus
- The exodus from the mainly French-speaking province, Canada’s second-most populous, followed a budget measure introduced in November 2012 to create a new top tax bracket for people earning at least C$100,000 ($77,000), lifting the top tax rate to 25.75 percent, from 24 percent. Adding the new federal taxes will make many of Canada’s provinces some of the highest taxed jurisdictions in the world for people earning C$200,000, well above a 50 percent top marginal rate.
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That’s raising some alarm bells in corporate Canada.
“He’s got to be very careful that he watches the competitiveness of our whole tax structure,” Manulife Financial Corp. Chief Executive Officer Donald Guloien said in an interview last month at Bloomberg’s headquarters in New York. “It’s one of the reasons Canada has done so well economically is that we have attracted business and talent while U.S. tax rates are going up.”
Liberal Plan
- Morneau and Trudeau argue that tackling inequality is ultimately good for business. The governing Liberals proposed creating a new tax rate of 33 percent for people earning more than C$200,000 a year, up from today’s 29 percent, while lowering the tax rate for people earning between C$44,701 and C$89,401 a year to 20.5 percent from 22 percent. The promise helped them win a majority in an Oct. 19 election and the government doesn’t look like it will back down. House Leader Dominic Leblanc told reporters in Ottawa the government wants the tax measures to be in place by Jan. 1. “The long-term success of Canada, as well as in business, includes making sure that all Canadians are successful,” Morneau said in an August interview. “So if the rewards of that success only go to a favored few, we will end up with a challenge down the road.”
- A bigger challenge may be if the favored few take the lead from Quebec’s high earners and decide to move elsewhere.
Dollar Reigns Again After Yellen; Asia Stocks Outside Japan Drop
by Emma O, Nao S
- The dollar regained some of its vigor, while Asian stocks outside Japan tracked U.S. losses, after Federal Reserve Chair Janet Yellen said interest rates could be raised before the year is out, sending bets on a December move above 50 percent.
- The greenback resumed gains against emerging-market currencies after Yellen said improvements in the U.S. economy had set the stage for a potential rate increase next month, sentiment echoed by the the New York Fed’s William Dudley. While a weaker yen spurred gains in Japanese shares, Australia’s fell with Korean stocks. Oil was below $47 a barrel after a supply increase sparked losses. Gold traded near a one-month low. “Yellen really means it when she says she wants to raise interest rates this year, so as long as employment or inflation don’t disappoint, it remains a real possibility she will follow up on her words,” said Mitsushige Akino, executive officer at Ichiyoshi Asset Management Co. in Tokyo. “The weaker yen will likely boost Japanese stocks at the start, however a weaker yen that comes with the threat of higher interest rates isn’t a positive. Higher interest rates at a time when the Japanese economy is pointing lower is a negative for Japanese equities.”
- The Fed chief told U.S. lawmakers that a rate hike in December was a “live possibility,” while joining Dudley in saying officials will continue to watch economic data before their last meeting of the year. With Friday’s government payrolls report seen as key to the central bank’s decision-making, the dollar was also supported by a private jobs report that indicated steady improvement in the American labor market. Central banks are in focus in Asia, with Malaysia expected to its key borrowing costs on hold Thursday. Stocks
- The MSCI Asia Pacific excluding Japan Index slipped 0.6 percent by 10:19 a.m. Tokyo time, set for its worst day this month. Australia’s S&P/ASX 200 Index sank 1.2 percent, led by banks and consumer stocks, while the Kospi index in Seoul declined 0.6 percent. The S&P/NZX 50 Index lost 0.3 percent in Wellington, retreating from a record, and the Taiex in Taiwan was down 0.2 percent. “Sentiment towards a December hike is alive and well after Yellen’s comments,” Cameron Bagrie, chief economist in Wellington at ANZ Bank New Zealand Ltd., said in a client note. “The Fed needs to move for credibility reasons and start nudging markets away from the cheap money sugar pill.”
- With Yellen’s remarks driving the dollar to its strongest level since Aug. 31 against the yen, exporters led Japan’s Topix index up 0.4 percent, while the Nikkei 225 Stock Average added 0.3 percent.
- Futures on Hong Kong and Chinese stocks declined, with contracts on the Hang Seng Index down 0.6 percent, while those on the Hang Seng China Enterprises Index, a gauge of mainland Chinese shares listed in Hong Kong, slipped 0.8 percent. FTSE China A50 Index futures also declined 0.8 percent in Singapore. Currencies
- The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, was little changed Thursday after jumping 0.7 percent last session, the most since Oct. 22. The euro was steady at $1.0872 after touching its lowest level since July 21, while the yen traded at 121.41 per dollar following a three-day slump.
- Australia’s dollar fell for a second day, losing 0.1 percent to 71.45 U.S. cents, after central bank Governor Glenn Stevens said in a speech in Melbourne that accommodative monetary policy may stay in place for some time and that any future moves would “almost certainly” be in the form of easing.
- The Malaysian ringgit led declines among currencies in Asian developing nations, slipping for the first time this week, while the Korean won depreciated 0.3 percent from a 1 1/2-week high. The Thai baht retreated 0.2 percent after the nation’s central bank kept rates steady for a fourth straight meeting on Wednesday. “The dollar is being bought gradually, with markets pricing in the rate increase as data come out and yields rise,” said Naohiro Nomoto, an economist in New York at Bank of Tokyo-Mitsubishi UFJ Ltd. “Fed officials appear to be setting up for the move.”
by Emma O, Nao S
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Bonds
- Most Asian bonds tracked last session’s retreat in Treasuries, with yields on 10-year Australian debt rising a sixth straight day, up seven basis points, or 0.07 percentage point, to 2.80 percent. Similar maturity Singaporean yields climbed one basis point to 2.55 percent, while rates on New Zealand notes added the same amount to 3.39 percent.
- Yields on Treasury notes due in a decade were little changed at 2.23 percent following Wednesday’s two basis-point increase. Two-year U.S. debt was particularly hit by Yellen’s comments, with yields rising a seventh day, up a basis point to 0.83 percent, set for their highest close since April 6, 2011.
- A Treasury sale of two-year notes on Wednesday drew the weakest demand for the issue since 2010. The results signal investors’ reluctance to hold the securities, the coupon maturity most sensitive to changes in Fed policy, weeks before the central bank may lift rates for the first time since 2006. Commodities
- West Texas Intermediate crude futures gained 0.4 percent to $46.48 a barrel, not enough to really dent their 3.3 percent slump last session, U.S. oil’s worst day since Oct. 12.
- American crude inventories increased by 2.85 million barrels through Oct. 30 as production climbed for a second week, according to an Energy Information Administration report out Wednesday. There is no clear sign of a recovery in oil prices, Kuwait’s Oil Minister Ali Al-Omair said in an interview.
- Gold for immediate delivery traded at $1,110.45 an ounce, up 0.2 percent after a six-day, 5.1 percent decline. The metal tends to drop when speculation U.S. rates will be boosted is high, as its allure is diminished amid demand for assets that pay out yields.
- Odds the Fed will move at next month’s meeting jumped to 58 percent Wednesday, from 46 percent a week ago and 35 percent last month.
- Toyota Motor Corp. reports earnings Thursday and both Taiwan and the Philippines post consumer prices. Indonesia updates its gross domestic product and Thailand will report on consumer confidence.
Draghi Steals Yellen Limelight as ECB Propels Top Currency Trade
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by Lananh N
- Traders in the almost $1.3 trillion-a-day euro-dollar market have started to take their cues from Mario Draghi rather than Janet Yellen, according to Barclays Plc.
- About half of respondents to a Barclays survey said European Central Bank policy is the most important driver of the euro-dollar exchange rate this quarter. That’s up from approximately 30 percent in September. The ECB bumped U.S. Federal Reserve policy from first place, as about 30 percent of participants called the Fed the most important determinant for the currency pair, down from more than 40 percent in a poll published Sept. 15.
- Draghi, president of the ECB since 2011, suggested on Oct. 22 that the central bank may carry out additional stimulus measures, which typically depress currencies. That contrasts with the U.S., where the greenback has rallied on speculation that the Fed is moving closer to raising interest rates.
by Lananh N
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"Investors remain bearish on euro-dollar, but there has been a clear shift in terms of its drivers, with more thinking it will be driven by ECB easing rather than Fed tightening," Guillermo Felices, head of asset allocation in Europe at Barclays, said in a note Nov. 3. The London-based bank is the world’s third-biggest foreign exchange trader, according to a Euromoney survey.
- The survey is based on responses from 651 Barclays clients, including hedge funds, money managers and traders, from Oct. 22 to Oct. 29.
- More than 60 percent of survey respondents cited the dollar as their favorite bullish bet, while almost half called the euro their favorite bearish position. The currency pair accounts for almost a quarter of the $5.3 trillion traded each day in the foreign-exchange market.
- The common currency dropped 0.9 percent to $1.0866 as of 5 p.m. in New York on Wednesday after touching the lowest in more than three months. It’s fallen 10 percent against the dollar this year.
Facebook Sales Top Estimates, Fueled by Mobile Advertising
by Sarah F
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Facebook Inc. notched another quarter of revenue that beat estimates after stepping up its mobile-advertising efforts.
- The company running the world’s biggest social network reported third-quarter sales of $4.5 billion, compared with the $4.37 billion average analyst estimate, according to data compiled by Bloomberg. There are now 1.01 billion daily visitors checking on other people and sharing status updates, the company said in a statement Wednesday. Monthly users jumped 14 percent to 1.55 billion.
- Facebook isn’t just relying on more users -- it’s also putting more ads in front of this vast, growing audience. The company brought its full marketing firepower to Instagram, its mobile photo-sharing application, for the first time in the quarter, while boosting the number of video ads on its main application. Such efforts are working: the average revenue Facebook earned from each user climbed 24 percent to $2.97 in the latest period. “Their core mobile-advertising business is still very strong and has a lot of runway,” said Josh Olson, an analyst at Edward Jones & Co., who has a buy rating on the stock.
- Profit excluding some items was 57 cents a share, compared with analysts’ prediction for 52 cents. Net income rose to $896 million from $806 million.
- The shares of Menlo Park, California-based Facebook rose as much as 5.2 percent in extended trading. The stock advanced 1.3 percent to $103.94 at the close in New York, leaving it up 33 percent this year.
- Facebook has been working to improve the quality -- and therefore the price -- of ads as Chief Executive Officer Mark Zuckerberg invests in newer initiatives, from WhatsApp to scientific projects such as virtual reality and artificial intelligence. Zuckerberg said that although virtual reality is an exciting investment area for the company, he expects it to grow slowly. David Wehner, Facebook’s chief financial officer, said the company would continue to spend on virtual reality, artificial intelligence and other moves to prepare for the future, especially as the main business remains strong. “We are investing aggressively in the future,” the CFO said in an interview after earnings were announced. “We see great opportunities.”
- Facebook now has 12,000 employees, after adding 1,000 in the past quarter. Sheryl Sandberg, Facebook’s chief operating officer, is aiming for the social network to have a large impact in U.S. elections next year, adding that every member of Congress has an account. Ad Products
- Facebook has been working to convince advertisers that it has the most comprehensive marketing products and tools for reaching potential customers on their mobile phones. Because people sign into Facebook using their real identities, the company is better able to track and target them, boosting its appeal to marketers. By bringing Instagram into Facebook’s advertising system, the company was able to expand the ad audience by more than 400 million users.
- Facebook has more than 900 million users on WhatsApp and more than 700 million on Messenger. The company has been experimenting with ways to get people to interact with brands on Messenger. Neither of those properties is delivering a meaningful boost to revenue, and Wehner said building a business is not a priority.
- Facebook is expected to account for 17.4 percent of global mobile-ad spending this year, a market that’s projected to reach $72.1 billion in 2015, according to EMarketer. That compares with the researcher’s projection for Google Inc. to reach 33.7 percent in 2014. Growth Abroad
- The company makes a lot more money from its users in the U.S. and Canada than it does elsewhere. On average, revenue per user was $10.49 in the U.S. and Canada, compared with $1.39 in Asia-Pacific.
- Although Facebook is blocked in China, it’s one of the company’s biggest advertising markets because exporters there are looking for ways to reach customers outside of the mainland, according to Zuckerberg. Still, he said he’s dedicated to entering China eventually. "You can’t have a mission of connecting the world and leave out the biggest country," Zuckerberg said. "That is a situation we are going to need to find a way forward on."
Commonwealth Bank 1Q Profit Up 4%, Bad-Debt Charges Rise
by Narayanan S
- Commonwealth Bank of Australia posted a 4 percent rise in quarterly profit and joined its main competitors in reporting higher charges for bad and doubtful debts.
- Unaudited cash profit, which excludes one-time items, for the three months ended Sept. 30 was A$2.4 billion ($1.7 billion) from A$2.3 billion reported a year earlier, the Sydney-based lender said in a statement Thursday. Net income was A$2.3 billion from A$2.4 billion last year. Australian banks reveal few details in their quarterly updates.
- Commonwealth Bank’s quarterly snapshot is another indication of slowing earnings at Australia’s largest lenders amid increased competition and regulation. The lenders have raised almost A$20 billion this year to meet regulatory requirements partly intended to shield them from any downturn in the housing market. They have also increased mortgage rates, blaming the cost of holding more capital. “Revenue and margin headwinds, rising costs and capital levels, and a deteriorating credit quality outlook all mean the majors will face significant challenges in the year ahead,” KPMG said in a statement, referring to the nation’s four largest lenders, before Commonwealth Bank’s results.
by Narayanan S
Rising Bad Debt Charges
- Bad-debt charges rose to A$220 million from A$198 million a year earlier, Commonwealth Bank said. The net interest margin, a measure of lending profitability, was slightly lower because the lender is holding more liquid assets instead of using them for loans, it said.
- Trading income was a “little lower” than the quarterly average of the previous year, reflecting a derivative valuation adjustment, it said.
- Customer deposits made up 63 percent of total funding and liquid assets totaled A$137 billion, Commonwealth Bank said.
- Common equity tier 1 capital, a measure of a bank’s ability to absorb future losses, climbed to 9.8 percent from 9.1 percent as of June 30. The lender has raised A$5.1 billion this year by selling new shares to meet new regulatory requirements. Last month, it raised its mortgage rate for owner occupiers by 15 basis points.
- Commonwealth Bank rounds off the largest Australian bank earnings. This week Westpac Banking Corp. posted its slowest profit increase in six years after Australia & New Zealand Banking Group Ltd. had its weakest profit growth since 2008 last week. National Australia Bank Ltd. missed profit estimates Oct. 28.
- Many Thai economic indicators have remained in negative territory this year, though there have been some signs of improvement in recent months. Exports shrank 5.51 percent in September from the same period last year compared with a 6.69 percent contraction a month earlier, and industrial output fell 3.63 percent, from an 8.29 percent slump in August.
- Thailand’s SET Index of stocks rose 0.8 percent Wednesday and the baht gained the most in almost three weeks against the dollar on optimism that the government will accelerate the disbursement of funds to bolster the economy.
- The central bank will include its assessment of the stimulus spending when it announces revised economic forecasts at the next rate meeting in December, Assistant Governor Jaturong Jantarangs said at a media briefing. Thailand’s so-called real interest rate, or the policy rate minus the average forecast for inflation over the next year, is negative 0.4 percent, Jaturong said, leaving little scope for further cuts as the U.S. is poised to start raising rates. support by ZATco & 20News
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