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Samsung chief Lee arrested as South Korean corruption probe deepens

Samsung Group chief, Jay Y. Lee, leaves the Seoul Central District Court in Seoul, South Korea, February 16, 2017. Picture taken on February 16, 2017. Shin Wong-soo/News1 via REUTERS

 

Samsung chief Lee arrested as South Korean corruption probe deepens

By Hyunjoo Jin and Joyce Lee| SEOUL

Samsung Group chief Jay Y. Lee was arrested on Friday over his alleged role in a corruption scandal rocking the highest levels of power in South Korea, dealing a fresh blow to the technology giant and standard-bearer for Asia’s fourth-largest economy.

The special prosecutor’s office accuses Lee of bribing a close friend of President Park Geun-hye to gain government favors related to leadership succession at the conglomerate. It said on Friday it will indict him on charges including bribery, embezzlement, hiding assets overseas and perjury.

The 48-year-old Lee, scion of the country’s richest family, was taken into custody at the Seoul Detention Centre early on Friday after waiting there overnight for the decision. He was being held in a single cell with a TV and desk, a jail official said.

Lee is a suspect in an influence-peddling scandal that led parliament to impeach Park in December, a decision that if upheld by the Constitutional Court would make her the country’s first democratically elected leader forced from office.

Samsung and Lee have denied wrongdoing in the case.

Prosecutors have up to 10 days to indict Lee, Samsung’s third-generation leader, although they can seek an extension. After indictment, a court would be required to make its first ruling within three months.

Prosecutors plan to question Lee again on Saturday.

No decision had been made on whether Lee’s arrest would be contested or whether bail would be sought, a spokeswoman for Samsung Group [SARG.UL] said.

“We will do our best to ensure that the truth is revealed in future court proceedings,” the Samsung Group said in a brief statement after Lee’s arrest.

The same court had rejected a request last month to arrest Lee, but prosecutors this week brought additional accusations against him.

“We acknowledge the cause and necessity of the arrest,” a judge said in his ruling.

The judge rejected the prosecution’s request to also arrest Samsung Electronics (005930.KS) president Park Sang-jin.

Shares in Samsung Electronics ended Friday down 0.42 percent in a flat wider market .KS11.

Ratings agencies did not expect any impact on the flagship firm’s credit ratings, and said Lee’s arrest would accelerate improvements in management transparency and corporate governance.

 

SENSITIVE TIME

While Lee’s detention is not expected to hamper day-to-day operations at Samsung firms, which are run by professional managers, experts said it could hinder strategic decision-making at South Korea’s biggest conglomerate, or chaebol.

Samsung is going through a restructuring to clear a succession path for Lee to assume control after his father was incapacitated by a heart attack in 2014.

Decisions that could be complicated by Lee’s arrest include deliberations over whether to reorganize the group under a holding company structure, as well as its plan to abandon its future strategy office, a central decision-making body that came in for criticism during the scandal.

Staff moves have also been in limbo. Samsung, which employs around half a million people, has yet to announce annual personnel promotions and changes, which it typically does in December.

One employee at Samsung Electronics’ chip division said colleagues were unsettled that prosecutors had singled out Samsung. “The mood is that people are worried,” the person said.

However, another Samsung Electronics employee described the situation as business as usual. “It wouldn’t make sense for a company of that size to not function properly just because the owner is away.”

Both employees declined to be identified, given the sensitivity of the matter.

Lee’s incarceration comes as Samsung Electronics tries to get past last year’s disastrous roll-out of its Galaxy Note 7 smartphones, which were prone to fires. It is under pressure for the upcoming launch of its next flagship phone, the Galaxy S8, to be a success.

 

WIDER IMPACT

Major business groups criticized the decision, worried about the impact on Samsung and the country.

“A management vacuum at Samsung, a global company representing the Republic of Korea, will increase uncertainty and undermine global confidence, posing a big burden on the already struggling economy,” the Korea Employers Federation said.

Lee’s arrest gives a boost to prosecutors who have zeroed in on Samsung to build their case against President Park and her close friend Choi Soon-sil, who is in detention and faces charges of abuse of power and attempted fraud.

Both Park and Choi have denied wrongdoing.

Prosecutors have focused on Samsung’s relationship with Park, 65, accusing the group of paying bribes totaling 43 billion won ($37.74 million) to organizations linked to Choi to secure government backing for the controversial 2015 merger of two Samsung units, a deal that was seen as key to smoothing Lee’s succession.

The prosecution office on Friday accused Lee of bribery not only in seeking to smooth the merger but in the broader process of his succession. A prosecution spokesman did not elaborate.

If parliament’s impeachment of Park is upheld, an election would be held in two months. In the meantime, she remains in office but stripped of her powers.

Her would-be successors praised the decision to arrest Lee.

“We hope it marks a beginning to end our society’s evil practice of cozy ties between government and corporations and move towards a fair country,” said Kim Kyoung-soo, a spokesman for Moon Jae-in, a member of the liberal opposition Democratic Party who is leading opinion polls in the presidential race.

 

(Additional reporting by Ju-min Park and Cynthia Kim; Writing by Tony Munroe; Editing by Lincoln Feast and Ian Geoghegan)

(Why?)
Published at Fri, 17 Feb 2017 08:27:44 +0000

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Mexico doubles down on Trump ‘contingency plan’

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Top Mexico official eyes 'openness' in Trump stance
Agustin Carstens, Governor, Bank of Mexico, eyes ‘openness’ in Trump stance

  @CNNMoney

Mexico is pulling out all the stops to shield itself from President Trump’s looming policies.

The country’s central bank raised interest rates Thursday for the third time since the U.S. election in an effort to save Mexico’s currency, the peso, which is near an all-time low. It raised rates by 0.5%.

Mexican leaders are very worried about all of Trump’s threats — a potential 20% tax on Mexican imports, a wall on the border, and renegotiating a trade deal.

In the big picture, Mexico’s leaders want — as best they can — to ease Trump’s impact on their economy and the peso’s diminishing value.

On Thursday, the peso did jump up a bit after the announcement. However, Trump has largely dictated its fate of late. The currency is down 10% since Trump’s election victory.

“The peso movement has mostly been a reaction to Trump” says Rodrigo Aguilera, an economist at the Economist Intelligence Unit. “Mexico hasn’t really had a huge influence in how the peso has behaved.”

Mexico’s central bank governor, Agustin Carstens, told CNN in November that Trump’s policies, if enacted, would be like a “hurricane” for the Mexican economy.

Mexico sends 80% of its exports north of the border, and its economy heavily relies on the northern neighbor.

The interest rate hikes are a part of what Carstens has called Mexico’s “contingency plan” to deal with Trump. However, Carstens announced late last year that he’ll be resigning from the central bank in June. It’s unclear who will take over for him and see through the contingency plan.

The contingency plan didn’t go well initially. Carstens and his colleagues tried rate hikes and selling dollars to international investors to prop up the peso, but none of it worked. Only recently, has the peso stopped bleeding despite being very low. One dollar equals 20.30 pesos. Before Trump’s election it was 18.30 pesos.

CNNMoney (Mexico City)First published February 9, 2017: 3:23 PM ET

Published at Thu, 09 Feb 2017 20:39:26 +0000

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Asian stocks at 18-month highs as China rises

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A man looks at a stock quotation board outside a brokerage in Tokyo, Japan, April 18, 2016. REUTERS/Toru Hanai

By Saikat Chatterjee
| HONG KONG

Asian shares climbed to their highest in more than 18 months on Thursday, as investors grew more confident about China while the dollar slightly firmed in the wake of growing concerns over political instability in Europe.

MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.3 percent to their highest since July 2015 with Hong Kong, Taiwan and China among the region’s best performing markets.

European stocks are set to follow Asia’s cues, with spread-betters expecting a rise of up to 0.1 percent in Britain’s FTSE, 0.2 percent in Germany’s DAX and 0.3 percent in France’s CAC.

“In China we have an overweight view on equities as we see improved corporate earnings outlook with the Chinese PPI (producer price index) turning around from deflation trend,” said Fan Cheuk Wan, head of investment strategy for Asia at HSBC Private Bank.

It also has overweight recommendation on India and Indonesia.

An ongoing rally in commodity prices led by copper and iron ore, along with gentle policy tightening by Beijing via money market rates, has led to a more optimistic view of Chinese corporate earnings, analysts said.

Earnings growth for MSCI China is expected at nearly 15 percent over the next 12 months, slightly ahead of 13 percent projected for companies in MSCI Asia outside Japan, according to Thomson Reuters data.

 

Pictet Asset Management has cut its exposure to U.S. markets due to expensive valuations, and has turned bullish on emerging markets in Asia, citing strong correlations with commodity prices.

In other markets, New Zealand stocks rose after the central bank signaled that a further cut in interest rates was no longer likely while Japanese shares were in focus before a meeting between U.S. President Donald Trump and Japan’s Prime Minister Shinzo Abe on Friday.

Abe will propose a new cabinet level framework for U.S.-Japan talks on trade, security and macroeconomic issues, including currencies, a Japanese government official involved in planning the summit in Washington said.

“Trade and defense will be in focus,” said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “We need to see if anything is said that has an effect on currencies, or on specific companies.”

 

COMMODITY RALLY

In commodities, copper stepped back after a sharp gain the previous day as the world’s top two mines said strikes and permit delays would force them to cut output.

Helping sentiment was a recent pick-up in China’s producer price index to its highest levels since September 2011. Copper prices are up 27 percent since late October.

 

Oil prices stabilized on Thursday, boosted by an unexpected draw in U.S. gasoline inventories. Brent crude futures was trading at $55.45 per barrel, up 0.5 percent.

However, bubbling political concerns, including a strong showing by far-right candidate Marine Le Pen in France’s presidential race, have pushed up premiums demanded by investors to buy French debt over comparable bonds and pushed the yen and U.S. Treasuries higher.

Uncertainty translated into another day of gains for bonds, with 10-year U.S. benchmark bond yields declining for a third consecutive day to 2.34 percent, the lowest level in three weeks and retracing one-third of its rise since Trump’s victory in early November.

The dollar bounced after the previous day’s drop, but falling yields are set to limit the greenback’s gains.

Against a broad trade-weighted basket of its rivals, the dollar was trading at 100.39 compared to a level of 99.30 last week. The Japanese yen also held its ground thanks to a broad rush to safety.

(Additional reporting by Yoshifumi Takemoto in TOKYO; Editing by Jacqueline Wong and Richard Borsuk)
Published at Thu, 09 Feb 2017 07:02:40 +0000

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Deutsche to pay $425 million to New York regulator over Russian ‘mirror trades’

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By Karen Freifeld and Arno Schuetze
| NEW YORK/FRANKFURT

Deutsche Bank AG (DBKGn.DE) has agreed to pay $425 million to New York’s banking regulator over a “mirror trading” scheme that moved $10 billion out of Russia between 2011 and 2015, the regulator said on Monday.

In addition, Britain’s Financial Conduct Authority is about to penalize the bank roughly $200 million for the suspicious trades, a person familiar with the matter said.

The scheme involved clients buying stocks in Moscow in rubles and related parties selling the same stocks shortly thereafter through the bank’s London branch, the New York Department of Financial Services (DFS) said in a statement.

The trade of a Russian blue chip stock, typically valued at between $2 million to $3 million an order, was cleared through the bank’s New York operations, with the sellers typically paid in U.S. dollars, DFS said.

The regulator, which licenses and supervises the New York branch, found the bank conducted its business in an unsafe and unsound manner in violation of state banking law.

Though the trades appeared to have no legitimate economic purpose, Deutsche’s deficient anti-money laundering controls and know-your-customer policies did not detect and stop the scheme for years, DFS superintendent Maria Vullo said.

Deutsche Bank said “it has been unable to identify the actual purpose behind this scheme,” according to a consent order between the New York regulator and the bank. “It is obvious, though, that the scheme could have facilitated capital flight, tax evasion or other potentially illegal objectives.”

In addition to the penalty, Deutsche is required to retain an independent monitor to review the bank’s compliance programs.

 

Deutsche Bank said in a statement that the settlement monies were already reflected in existing litigation reserves. It said the regulator considered its cooperation and remediation in reaching the penalty.

Deutsche also said it was cooperating with other regulators and law enforcement authorities with their ongoing investigations of the trades.

A spokesperson for the Financial Conduct Authority declined to comment. The source on the FCA’s expected penalty did not want to be identified because the terms were not public.

The New York regulator said it worked closely on the investigation with the FCA.

 

Reuters reported on Monday that Deutsche Bank was poised to settle with British and U.S. authorities over the trades.

The U.S. Department of Justice, which also has been investigating the suspicious trades, is not party to the deal. A spokesman for the department declined to comment on the status of its probe.

Deutsche Bank disclosed last September that it had taken disciplinary measures against certain employees as part of an investigation of the trades and would continue to do so.

The bank also cut back on its investment banking activities in Russia last year.

 

Monday’s consent order found Deutsche Bank’s Moscow traders facilitated the scheme, with most of the trades placed by a single trader representing both sides of the transaction.

Deutsche’s Moscow traders did not question the suspicious trades because it made for easy commissions when their Russian business had slowed, the regulator found.

The regulator also noted that one Moscow supervisor may have been bribed to facilitate the schemes, and that senior bank employees missed red flags and did not take action towards real reform until 2016.

Deutsche Bank had set aside 1 billion euros ($1.1 billion) in provisions for the Russian probes, people close to the matter have told Reuters.

The resolution of the New York mirror trade probe comes on the heels of a $7.2 billion agreement with the Justice Department for misleading investors in selling mortgage-backed securities in the run-up to the financial crisis. The two settlements lift much of the uncertainty swirling around the bank over its exposure to fines and enforcement.

The bank is due to report fourth-quarter financial results on Thursday.

(Reporting by Karen Freifeld and Arno Schuetze; Editing by Bernard Orr)
Published at Tue, 31 Jan 2017 00:33:54 +0000

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U.S. tech leaders sound alarm over Trump immigration ban

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Published at Sat, 28 Jan 2017 21:49:17 +0000

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Swiss private banks see asset influx after U.S. election: Baer CEO

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By Brenna Hughes Neghaiwi
| ZURICH

Swiss private banks have profited from rising stock markets and renewed client optimism since the election of U.S. President Donald Trump, Julius Baer Chief Executive Boris Collardi said on Thursday.

“We have seen client interest in financial markets increasing,” Collardi told Reuters. “With stocks going up, you have assets going up, transaction volumes going up, which is all a positive for the banks because we have more assets, more revenues.”

Over the medium to long term, banks also stand to gain from deregulation in a sector increasingly saddled with mounting compliance efforts since the 2008 financial crisis, he said.

Speaking earlier at a conference in Berne about the implications of Britain’s decision to exit the European Union, Collardi warned Switzerland should not unnecessarily cut off any negotiating possibilities amid a changing political landscape and uncertain future for the EU.

While the consequences of Brexit will remain manageable for Swiss banks in the foreseeable future, Switzerland stands little chance of gaining significantly from the weakness of London’s financial center, he said.

This year would be a year of many changes and he expected consolidation in Europe’s banking sector over the medium term.

“As long as the cost of money remains low and stock valuations go up, we could be in a positive environment for M&A,” Collardi said.

“We still have overcapacity in the European banking sector. I could imagine that some of the Swiss banks, based on their strength, may continue to take advantage of international M&A opportunities.”

 

(Editing by Mark Heinrich)
Published at Thu, 26 Jan 2017 13:48:29 +0000

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Exclusive: Germany calls bankers to Frankfurt for Brexit move talks – sources

FILE PHOTO – The moon is partly covered by clouds as it rises above the skyline of Frankfurt, Germany, early evening November 14, 2016. REUTERS/Kai Pfaffenbach/File Photo

Exclusive: Germany calls bankers to Frankfurt for Brexit move talks – sources

By John O’Donnell, Anjuli Davies and Andreas Kröner
| FRANKFURT/LONDON

German regulators will meet more than 20 foreign banks on Monday to spell out requirements for moving some operations to Frankfurt, people familiar with the matter said, as the city accelerates plans to win over business from London after Brexit.

The meeting, the first such gathering of its kind in Germany, is being hosted by financial supervisor Bafin to cope with increasingly detailed inquiries from banks as Britain prepares to trigger EU divorce talks, people involved said.

“Bafin wants to give the participants an overview of the main issues for those who want to move businesses to Germany after Brexit,” said one of the people involved.

The sources said Bafin would make it clear that no “letter-box” operations would be accepted and that banks would have to have significant risk management arrangements and senior executives based in Frankfurt.

Other people said officials from the German central bank and the European Central Bank would also attend.

Bafin, which has close ties to the finance ministry, confirmed that the meeting would take place but declined to give further details. The Bundesbank and the ECB declined to comment.

About 40 executives will attend Monday’s gathering, to be held as German Finance Minister Wolfgang Schaeuble discreetly starts supporting Frankfurt’s efforts to attract thousands of bankers from London, according to people familiar with government thinking.

Many Germans are skeptical about the practices of largely U.S. and British investment banks, that often run their international operations from London. This view was reinforced when Deutsche Bank – a German bank on Wall Street – had to pay $7.2 billion in U.S. penalties for selling toxic mortgage securities before the 2008 financial crisis.

German politicians, however, are increasingly pragmatic as banks in London search for alternative locations in the European Union to continue selling in the bloc once Britain leaves.

Banks with large London operations are shifting from contingency planning toward more concrete action after Prime Minister Theresa May said last week that Britain would leave the EU’s single market, a move that would isolate the City of London from many of its clients.

 

May has said her government will invoke Article 50 of the EU treaty, starting two years of negotiations to arrange Britain’s departure, by the end of March.

Frankfurt looks set to be one of the biggest winners from any exodus from London, with several major investment banks said to be in talks to base people there.

However the likes of Paris and Dublin are also expected to win some jobs – HSBC has said it will move around 1,000 roles to the French capital – while some U.S. banks may shift some positions back to New York.

Executives, chiefly those in charge of regulatory issues, from banks including Morgan Stanley, Goldman Sachs and Citigroup are due to attend the meeting in Bafin’s Frankfurt offices, the people said. Those banks declined to comment.

The gathering comes after a series of one-on-one meetings involving bank executives, politicians and regulators across EU countries.

It follows months-long attempts to persuade bankers of Frankfurt’s appeal, matching smaller rivals such as Ireland, whose prime minister Enda Kenny this week emphasized ease of access to policymakers.

OPEN FOR BUSINESS

Frankfurt made contingency plans for Brexit even before Britons voted on June 23 to leave the EU. “We’ve been prepared for Brexit in Frankfurt since before the day of the vote,” said Hubertus Vaeth, head of Frankfurt Main Finance, a group backed by local government to promote the city.

He predicts that 10,000 jobs will move to Frankfurt over five years, starting gradually in 2017 before gathering pace the following year, with investment banks among the early movers.

“The demand has been so large from banks that the regulators have to be creative to keep up,” said Vaeth. “That’s why we are having the meeting.”

Stefan Winter, chairman of the Association of Foreign Banks in Germany, whose members include some of Europe’s largest banks, said the mood among politicians in Germany was becoming increasingly welcoming toward banks.

“Germany is open for business,” he said. “Politicians in Berlin are open to having more banks in Frankfurt, so long as they are properly controlled. That is different to what was the case 12 months ago.”

While Schaeuble campaigned earlier for a tax on financial market transactions, the issue does not appear on the agenda for Germany’s current presidency of the G20 group of leading global economies.

Germany’s economic strength and the fact that Frankfurt is home to the ECB makes it attractive for banks. But it faces some hurdles in attracting foreign bankers. There is a shortage of housing for newcomers, while the region’s 13 international schools are already well subscribed.

Nightlife in the city – where many town center bars are largely empty for much of the week – is also seen as a turn-off for bankers used to London’s offerings.

Madjid Djamegari, who owns a night club and cocktail bar in Frankfurt, went to London late last year with a small delegation to persuade business people there of the city’s appeal.

However, even he admits Frankfurt’s evening entertainment can appear a little lackluster. “It’s a bit of a German mentality. They are a bit conservative. We don’t have the habit of going for an after-work drink. This can change if people come from the UK,” he said.

(Writing by John O’Donnell; editing by David Stamp)
Published at Wed, 25 Jan 2017 15:13:45 +0000

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Japan’s PM says will keep seeking Trump’s understanding on TPP

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Japanese Prime Minister Shinzo Abe said on Monday he believed U.S. President Donald Trump understood the value of free trade and that he would keep pitching a multinational trade pact that Trump’s administration has vowed to exit.

“I believe President Trump understands the importance of free and fair trade, so I’d like to pursue his understanding on the strategic and economic importance of the TPP (Trans-Pacific Partnership) trade pact,” Abe told a session of parliament’s lower house.

Abe also said he wanted to strengthen the U.S.-Japan security alliance, based on mutual trust with Trump.

“When we met last time, I believed him to be trustworthy, this belief has not changed today,” Abe added, referring to his November meeting with then-president-elect Trump.

Abe also said Tokyo wanted to explain how its companies have contributed to the U.S. economy, a stance the Japanese government has adopted to try to fend off threats of a “border tax” on imports into the United States.

Japanese Chief Cabinet Secretary Yoshihide Suga said separately that Tokyo would closely monitor any impact of the new U.S. administration’s policies on its companies and that he wanted to deepen economic ties between the two countries.

Trump took office as the 45th president of the U.S. on Friday and pledged to end what he called an “American carnage” of rusted factories and crime in an inaugural address that was a populist and nationalist rallying cry.

The new Trump administration said on Friday its trade strategy to protect American jobs would start with withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact.

The trade deal, which the United States signed but has not ratified, was a pillar of former president Barack Obama’s pivot to Asia, and Abe has touted it as an engine of economic reform, as well as a counter-weight to a rising China.

(Reporting by Kaori Kaneko and Oliview Fabre; writing by Linda Sieg; Editing by Kim Coghill)
Published at Mon, 23 Jan 2017 09:26:46 +0000

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Sterling skids on Brexit anxiety; investors hope for Trump clarity

by lensicle from Pixabay

Sterling skids on Brexit anxiety; investors hope for Trump clarity

By Wayne Cole

| SYDNEY

Sterling slid to three-month lows in Asia on Monday with investors spooked anew by concerns over Britain’s divorce from the European Union, while U.S. policy uncertainty lingered ahead of President-elect Donald Trump’s inauguration.

Regional share markets were hesitant. MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.5 percent, Japan’s Nikkei .N225 lost 0.6 percent and Shanghai .SSEC shed 1.4 percent.

Spread betters pointed to likely opening gains for UK shares, but a drop for German equities.

All the early action was in currencies where the pound sank as low as $1.1983 GBP=D4, depths not seen since the flash crash of October, having finished around $1.2175 in New York on Friday. It was last down 1.2 percent at $1.2032.

Dealers said the market was reacting in part to a report in the Sunday Times that U.K. Prime Minister Theresa May will use a speech on Tuesday to signal plans for a “hard Brexit”, quitting the EU’s single market to regain control of Britain’s borders.

Investors have been worried such a decisive break from the single market would hurt British exports and drive foreign investment out of the country.

“It is impossible to say by how much a hard Brexit could weaken GBP, but we do not believe that a further 5-10 percent depreciation should be regarded as an extreme scenario when set aside the UK’s high dependence on foreign capital,” wrote analysts at JPMorgan in a note.

The flight from sterling benefited the safe-haven Japanese yen, with the pound down 1.5 percent to 137.34 yen GBPJPY= while the U.S. dollar dipped to 114.17 JPY=.

Against a basket of currencies, the dollar was up 0.3 percent at 101.510.

The euro pared initial losses to stand at $1.0611 EUR=.

 

WAITING ON REFLATION

The dollar index put in its worst weekly performance in more than two months last week as investors reconsidered the whole “reflation” trade – that Trump’s promises of debt-funded fiscal spending and lower taxes would stoke inflation and drive the Federal Reserve to raise interest rates faster.

Fed Chair Janet Yellen will have an opportunity to lay out her thinking with speeches on monetary policy scheduled for both Wednesday and Thursday this week.

All eyes will then be on Trump’s inauguration on Friday for any clarity on his economic plans.

“The market is showing greater reluctance to push on with reflation-type trades without more details of proposed fiscal spending plans and the economic data to back it up,” said analysts at ANZ in a research note.

“It looks as though more than just reasonable data will be needed to see yields and the dollar push higher again. Some decent positive surprises may be necessary for the market to gain conviction.”

Asian markets are also waiting anxiously to see if Trump makes good on a campaign pledge to brand Beijing a currency manipulator on his first day in office, and starts to follow up on a threat to slap high tariffs on Chinese goods.

Analysts fret that the specter of deteriorating U.S.-China trade and political ties is likely to weigh on the confidence of exporters and investors worldwide.

Wall Street ended last week mixed, with the Dow .DJI off slightly but the Nasdaq .IXIC at a record high.

Sentiment this week could be driven by results from the major banks with Morgan Stanley (MS.N), Citibank (C.N) and Bank of New York Mellon (BK.N) among those reporting.

In commodity markets, oil prices inched higher after shedding around 3 percent last week. Brent crude LCOc1 was up 18 cents at $55.63 a barrel, while U.S. crude CLc1 rose 16 cents to $52.51.

Spot gold XAU= added 0.5 percent to $1,203.00 an ounce.

(Reporting by Wayne Cole; Editing by Shri Navaratnam and Eric Meijer)
Published at Mon, 16 Jan 2017 05:24:46 +0000

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Davos elites struggle for answers as Trump era dawns

by PeteLinforth from Pixabay

Davos elites struggle for answers as Trump era dawns

By Noah Barkin

DAVOS, Switzerland – The global economy is in better shape than it’s been in years. Stock markets are booming, oil prices are on the rise again and the risks of a rapid economic slowdown in China, a major source of concern a year ago, have eased.

And yet, as political leaders, CEOs and top bankers make their annual trek up the Swiss Alps to the World Economic Forum in Davos, the mood is anything but celebratory.

Beneath the veneer of optimism over the economic outlook lurks acute anxiety about an increasingly toxic political climate and a deep sense of uncertainty surrounding the U.S. presidency of Donald Trump, who will be inaugurated on the final day of the forum.

Last year, the consensus here was that Trump had no chance of being elected. His victory, less than half a year after Britain voted to leave the European Union, was a slap at the principles that elites in Davos have long held dear, from globalization and free trade to multilateralism.

Trump is the poster child for a new strain of populism that is spreading across the developed world and threatening the post-war liberal democratic order. With elections looming in the Netherlands, France, Germany, and possibly Italy, this year, the nervousness among Davos attendees is palpable.

“Regardless of how you view Trump and his positions, his election has led to a deep, deep sense of uncertainty and that will cast a long shadow over Davos,” said Jean-Marie Guehenno, CEO of International Crisis Group, a conflict resolution think-tank.

Moises Naim of the Carnegie Endowment for International Peace was even more blunt: “There is a consensus that something huge is going on, global and in many respects unprecedented. But we don’t know what the causes are, nor how to deal with it.”

The titles of the discussion panels at the WEF, which runs from Jan. 17-20, evoke the unsettling new landscape. Among them are “Squeezed and Angry: How to Fix the Middle Class Crisis”, “Politics of Fear or Rebellion of the Forgotten?”, “Tolerance at the Tipping Point?” and “The Post-EU Era”.

The list of leaders attending this year is also telling. The star attraction will be Xi Jinping, the first Chinese president ever to attend Davos. His presence is being seen as a sign of Beijing’s growing weight in the world at a time when Trump is promising a more insular, “America first” approach and Europe is pre-occupied with its own troubles, from Brexit to terrorism.

British Prime Minister Theresa May, who has the thorny task of taking her country out of the EU, will also be there. But Germany’s Angela Merkel, a Davos regular whose reputation for steady, principled leadership would have fit well with the WEF’s main theme of “Responsive and Responsible Leadership”, will not.

 

‘REJOICING IN THE ELEVATORS’

Perhaps the central question in Davos, a four-day affair of panel discussions, lunches and cocktail parties that delve into subjects as diverse as terrorism, artificial intelligence and wellness, is whether leaders can agree on the root causes of public anger and begin to articulate a response.

A WEF report on global risks released before Davos highlighted “diminishing public trust in institutions” and noted that rebuilding faith in the political process and leaders would be a “difficult task”.

Guy Standing, the author of several books on the new “precariat”, a class of people who lack job security and reliable earnings, believes more people are coming around to the idea that free-market capitalism needs to be overhauled, including those that have benefited most from it.

“The mainstream corporate types don’t want Trump and far-right authoritarians,” said Standing, who has been invited to Davos for the first time. “They want a sustainable global economy in which they can do business. More and more of them are sensible enough to realize that they have overreached.”

But Ian Bremmer, president of U.S.-based political risk consultancy Eurasia Group, is not so sure.

He recounted a recent trip to Goldman Sachs headquarters in New York where he saw bankers “rejoicing in the elevators” at the surge in stock markets and the prospect of tax cuts and deregulation under Trump. Both Goldman CEO Lloyd Blankfein and his JP Morgan counterpart Jamie Dimon will be in Davos.

“If you want to find people who are going to rally together and say capitalism is fundamentally broken, Davos is not the place to go,” Bremmer said.

 

PACE OF CHANGE

Suma Chakrabarti, president of the European Bank for Reconstruction and Development (EBRD), believes a “modern version of globalization” is possible but acknowledges it will take time to emerge.

“It is going to be a long haul in persuading a lot of people that there is a different approach. But you don’t have to throw the baby out with the bath water,” he told Reuters.

Still, some attendees worry that the pace of technological change and the integrated, complex nature of the global economy have made it more difficult for leaders to shape and control events, let alone reconfigure the global system.

The global financial crisis of 2008/9 and the migrant crisis of 2015/16 exposed the impotence of politicians, deepening public disillusion and pushing people towards populists who offered simple explanations and solutions.

The problem, says Ian Goldin, an expert on globalization and development at the University of Oxford, is that on many of the most important issues, from climate change to financial regulation, only multilateral cooperation can deliver results. And this is precisely what the populists reject.

“The state of global politics is worse than it’s been in a long time,” said Goldin. “At a time when we need more coordination to tackle issues like climate change and other systemic risks, we are getting more and more insular.”

(Additional reporting by Ben Hirschler; Editing by Pravin Char)
Published at Sun, 15 Jan 2017 22:06:00 +0000

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London stock market on longest winning streak in history

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2016: The year of the Brexit vote
2016: The year of the Brexit vote

  @CNNMoneyInvest

London’s main stock market index is red hot right now.

The FTSE 100 has risen for 14 days in a row and posted 11 successive record closing highs.

It’s the longest run of consecutive daily gains in the 33-year history of the index, said Tom Gilbert, a spokesperson for the London Stock Exchange.

The index closed up 0.6% at 7,338 points on Friday. All in all, it has soared a stunning 33% since its most recent low in February 2016. That even puts the Dow Jones Industrial Average in the shade — it is up 29% over the same period.

The British benchmark index — which tracks the performance of the largest 100 companies traded in London — has defied expectations after the U.K. voted in June to leave the European Union.

The vote for Brexit caused the currency to drop to a 31-year low against the U.S. dollar, providing a boost for the stock market, said Naeem Aslam, chief analyst at Think Markets in London.

“It is the consistent weakness in the [pound] which is pushing the FTSE 100 higher,” he said.

ftse 100 index london uk
The FTSE 100 has surged by 33% since hitting a recent low in February.

International companies make up the majority of the FTSE 100 and profit handsomely from the weaker currency when they convert their foreign earnings into British pounds. Strategists say investors poured into the index as a currency play.

On top of that, the Bank of England’s move to support the economy, combined with better-than-expected economic data, has also helped the market, said Aslam.

Global miners have also performed well since the start of 2016, giving the index a further lift. For example, mining giant Anglo American (AAUKF) has seen its shares surge by 476% in the past year.

The FTSE 100 has seen remarkably steady gains over the last few weeks, with very little volatility.

“It’s interesting that the number of points it’s gone up by since it started this run [in late December] is only about 200 points, which is not that many. The rises each day have been very small,” said Gilbert from the London Stock Exchange.

This slow-and-steady move stands in sharp contrast to the extreme volatility seen both immediately before and after the Brexit vote in June.

Published at Fri, 13 Jan 2017 16:55:32 +0000

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Dollar loses altitude, Asia shares at 11-week top

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By Wayne Cole
| SYDNEY

The U.S. dollar nursed widespread losses on Thursday after President-elect Donald Trump’s long-awaited news briefing provided scant clarity on future fiscal policies, disappointing bulls wagering on major stimulus.

Yet neither did Trump mention possible tariffs against Chinese exports, a relief for Asian share markets that have feared the outbreak of a global trade war.

It was enough to help MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climb 0.8 percent to its highest since late October.

Australia’s main index added 0.3 percent, aided by strength in bulk commodity prices, while Shanghai stocks were flat .SSEC.

Going the other way, Japan’s Nikkei .N225 slipped 0.9 percent as the yen climbed on a retreating dollar.

Wall Street had overcome its brief wobble to end Wednesday firmer. The Dow .DJI added 0.5 percent, while the S&P 500 .SPX gained 0.28 percent and the Nasdaq .IXIC 0.21 percent.

Health stocks were not so lucky after Trump said pharmaceutical companies were “getting away with murder” by charging high prices.

The S&P 500 healthcare index .SPXHClost 1 percent, while the Nasdaq biotechnology index .NBI sank 2.96 percent.

Trump’s first news conference since the Nov. 8 election contained no details on tax cuts and infrastructure spending, two factors that had fueled the five-week rally in stocks and a selloff in global bond markets.

“President elect Trump’s first news conference since late July has left a veritable laundry list of questions unanswered for markets,” wrote analysts at Westpac.

“The news conference was a far cry from the market friendly, pro-growth “presidential” comments that Trump delivered at his acceptance speech on 9 Nov,” they added.

“The issue is that markets arguably priced in too much reflation without any solid policy detail.”

The uncertainty about what policies will actually be pursued has seen yields on 10-year Treasury notes US10YT=RR rally from a 2.64 percent peak over the last month to stand at 2.349 percent on Thursday. [US/]

The U.S. dollar, likewise, has had to surrender some of its gains in the last week or so. Wednesday’s session was especially volatile with the dollar rallying hard into the Trump event, only to recoil at his vagueness on policy. [USD/]

The dollar index was nursing a grudge at 101.520 .DXY on Thursday, having been as high as 102.950 at one stage overnight.

The euro had rallied to $1.0602 EUR= from a trough of $1.0454, while the dollar lapsed to 114.79 yen from a top of 116.87. Sterling GBP= also bounced from a 10-week low of $1.2048 to stand at $1.2184.

In commodity markets, oil was a shade softer after data showed rising U.S. crude inventories. [O/R]

U.S. crude CLc1 was trading 7 cents lower at $52.18, though that followed gains of nearly 3 percent overnight. Brent crude LCOc1 was off 3 cents at $55.07 a barrel.

 

(Reporting by Wayne Cole; Editing by Eric Meijer & Shri Navaratnam)
Published at Thu, 12 Jan 2017 02:31:48 +0000

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BAT Buyout of Reynolds Reportedly Hits a Roadblock

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Might the tobacco industry’s big looming deal be in trouble? Business news website StreetInsider.com, citing “a person claiming to have knowledge of the matter,” says that British American Tobacco‘s (NYSEMKT: BTI) proposed acquisition of peer Reynolds American (NYSE: RAI) has “hit a snag.” The reason or reasons for the hiccup were not specified.

Neither British American Tobacco nor Reynolds American have commented on the report.

Last October, British American Tobacco offered $47 billion in cash and stock to buy the part of Reynolds American that it does not already own. (At the time, it held just over 42% of the company.) The latter company said it formed a special committee of directors to evaluate the proposal.

The offer was worth $56.50 per Reynolds American share, a premium of around 20% to the stock’s price when the bid was made public. The shares most recently closed at $55.44, indicating a bit of skepticism remains that the deal will be consummated at the offer price.

Reynolds American is no stranger to the acquisition game. It took over Lorillard — maker of the Newport and Kent brands, among others — in a $25 billion deal that was completed shortly before British American Tobacco made its pitch.

British American Tobacco — owner of well-established brands such as Lucky Strike and Dunhill — has said that fully owning Reynolds American “would create a stronger, truly global tobacco and Next Generation Products company.”

The combined entity would be the top cigarette producer in the world in terms of revenue and market capitalization.

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Published at Wed, 04 Jan 2017 23:00:03 +0000

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Nikkei drops to 3-week low on profit-taking; could end 2016 flat

Men walk past an electronic board showing Japan’s Nikkei average outside a brokerage in Tokyo, Japan, November 18, 2016. REUTERS/Toru Hanai

Nikkei drops to 3-week low on profit-taking; could end 2016 flat

* Nikkei braces for fall for 2016, 1st annual fall in 5 years

* Takata soars on hopes it could settle charges with US

* Toshiba gains after falling about 40 pct in 3 days

By Ayai Tomisawa

TOKYO, Dec 30 Japan’s Nikkei share average dropped to a three-week low on Friday morning as investors took profits from the recent gains on the last trading day of 2016.

Takata Corp was under the spotlight again, surging as much as 21 percent to hit the daily limit up on news that the company could settle criminal charges with the U.S. Department of Justice before the Obama administration leaves office next month.

The Nikkei was down 0.7 percent to 19,008.16 in midmorning trade, after falling to as low as 18,991.59 earlier, the lowest level since Dec. 9.

The index looked set to end the year with a drop of about 0.1 percent after a more than 15 percent rally in the fourth quarter, but it could turn around depending on trade in the afternoon.

“Since Japanese stocks have risen sharply since November, profit-taking is natural. Now people are watching whether the Nikkei will end positive or negative for the year,” said Chihiro Ohta, general manager of investment research at SMBC Nikko Securities.

Japanese stocks have surged in the four years since Prime Minister Shinzo Abe took office, with the Nikkei hitting an almost two-decade high in June 2015, on hopes his Abenomics policies of monetary stimulus, fiscal expansion and structural reform would end decades of deflation and stagnation.

Attention has shifted to U.S. politics and economic growth after Donald Trump’s surprising election to U.S. president last month.

Japanese equities were buoyed by the yen’s weakness against the dollar on expectations that the incoming administration would boost U.S. growth and stoke inflation via increased infrastructure spending, tax cuts and reduced regulation.

“The Japanese market has been largely influenced by global events this year such as Brexit and U.S. election. For the next year, the market continues to prepare for risks such as whether Trump can proceed with the policies that he has been promising,” said Kazuhiro Takahashi, an equity strategist at Daiwa Securities.

All subsectors except pharmaceuticals were in negative territory, with real estate, sea transport and iron stocks underperforming.

Mitsui Fudosan dropped 1.7 percent, Mitsubishi Estate shed 1.2 percent, Mitsui OSK Lines declined 1.5 percent and Nippon Steel & Sumitomo Metal tumbled 1.9 percent.

Exporters languished as well. Honda Motor Co dropped 1.5 percent, Nissan Motor Co fell 1.1 percent and Panasonic Corp declined 1.2 percent.

Toshiba Corp rebounded 7.9 percent, after nosediving about 40 percent and wiping about $6.5 billion off of its market value in the past three days until Thursday. The company said earlier this week that it faces a potential multi-billion dollar writedown.

The broader Topix dropped 0.5 percent at 1,510.31 and the JPX-Nikkei Index 400 fell 0.6 percent to 13,539.23. (Reporting by Ayai Tomisawa; Editing by Eric Meijer)
Published at Fri, 30 Dec 2016 02:22:02 +0000

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Just how far will Trump go on China and Mexico?

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America's complicated, critical trade relations with China
America’s complicated, critical trade relations with China

China and Mexico have been put on notice once again: President-elect Donald Trump’s new trade team doesn’t like how they deal with America.

Peter Navarro, the economist tapped to to lead Trump’s newly created White House Trade Council, directed a documentary titled: “Death by China: How America lost its manufacturing base.”

And Commerce Secretary nominee and hedge fund billionaire Wilbur Ross once supported TPP, or the Trans-Pacific Partnership, because he believed it would isolate China economically.

“China…could be heading for some difficulties if the Trans-Pacific Partnership gets approved,” he said in August 2015. Ross has also said negotiating a new trade deal with Mexico is a Day 1 priority for the Trump team.

The two also co-authored a paper where they called China “the biggest trade cheater in the world.”

Now, the president-elect is said to be considering a 10% tariff on all imports or changes to tax policy that could possibly level the playing field.

China and Mexico are among America’s top three trade partners (along with Canada). There’s concern that a tough stance would cause those countries to retaliate with similar measures and spark a trade war.

Remember: America imports lots of everyday items. The top imports from China this year are cell phones and laptop computers, according to Panjiva, a firm that tracks global trade data. From Mexico, it’s cars.

Some see Trump’s trade team as protectionist — putting up hurdles on other countries to shield U.S. businesses.

“They want to get rid of existing trade agreements [and] put up tariffs…Those are all protectionist moves,” says Douglas Holtz-Eakin, president of the American Action Forum, a right-leaning think tank.

A lot will depend on the details.

“If they come in with a 5% [tariff], that’s very different than 35%,” says Derek Scissors, a China expert at the American Enterprise Institute. Scissors also thinks the response from Mexico and China will depend a lot on whether the Trump team takes specific action against those nations or does something across the board on all countries.

At the end of the day, Trump wants U.S. companies to bring production and jobs back to America. Navarro and Ross appear to be considering at least two main options to accomplish that.

One involves taxes, the other tariffs. It’s unclear if Navarro and Ross would use both or just one or even explore others. Here’s an explanation of the two main options:

us china trade

Option A: Put up tariffs on other countries.

Trump’s transition team is floating the idea of a 10% across-the-board tariff on all imports from all countries, sources told CNN.

Several trade experts say tariffs would raise prices on goods in America and risk U.S. jobs that depend on trade.

However, Trump’s team emphasizes that they’re using the threat of tariffs to get better trade deals — they just haven’t said what a better deal looks like. So it’s unclear if the tariff talk is more bark than bite.

“The tariff is not an end game, it’s a strategy — a strategy to renegotiate trade deals,” Navarro told CNNMoney earlier this year. “Tariffs wouldn’t put U.S. jobs at risk.”

Option B: Use taxes to make trade fair

The other leading idea is a border adjustment tax (BAT). It’s different from a tariff, which only affects imports. The BAT affects imports and exports. But it may serve the same purpose of making trade fairer for America.

“If you think about it from a policy and objective standpoint it’s addressing a lot of the same trade issues that were brought up on the campaign trail,” says Bill Methenitis, director of global trade at tax consulting firm EY.

In its simplest form, a BAT makes it more expensive for U.S. firms to import goods and less expensive to export by giving companies a tax adjustment.

However, the U.S. imports far more than it exports and this would many of the goods on the shelves of Walmart (WMT) and Best Buy (BBY) more expensive.

But those in favor of this strategy bet that it will increase the value of the U.S. dollar because foreign companies will buy more American goods and fewer foreign goods will be sold here.

A stronger dollar will in turn make it cheaper to buy goods from overseas so it will cancel out any price increases on goods available in Walmart and Best Buy. In theory, you wouldn’t see any difference in your grocery bill.

But of course, the dollar trades in the free market and there’s no guarantee the dollar reacts that way. Some experts say the BAT won’t get passed because the World Trade Organization would oppose it.

“There would potentially be big winners and losers,” says Paul Ashworth, chief U.S. economist at Capital Economics.

 CNNMoney (New York)First published December 23, 2016: 1:28 PM ET

Published at Fri, 23 Dec 2016 18:28:34 +0000

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Is a Banking Crisis Looming in Europe?

by geralt from Pixabay

Is a Banking Crisis Looming in Europe?

By David Floyd | Updated December 24, 2016 — 6:32 PM EST

Fears of a European banking crisis have been on the rise in recent months, with the anxiety centering on two banks in particular: Germany’s Deutsche Bank AG (DB) and Italy’s Banca Monte dei Paschi di Siena S.p.A. (BMPS.Milan).

Monte dei Paschi, which had previously estimated that its €10.6 billion liquidity position would run out in 11 months, said Wednesday that it would run out in four months (skip to section). Trading in the stock was halted as shares plunged to a low 19.1% below their previous close; they pared losses to 12.1% at close. With its stock at €16.30 per share, the bank is worth just €477.9 million, less than a tenth of the amount it must raise in fresh capital by year-end to avoid being wound down by regulators.

Meanwhile Italy’s parliament approved on Wednesday a €20 billion rescue package for Monte dei Paschi and other struggling banks. The lender’s board is meeting Thursday and is expected to formally request a bailout. The Italian cabinet is then expected to approve the resuce Thursday or Friday. Due to EU rules implemented at the beginning of the year, the bailout will require junior bondholders to take a haircut worth 8% of assets before public funds can kick in. That is a politically toxic prospect, since Italian retail investors have a greater tendency to invest in bank bonds than their counterparts in other countries. A senior Italian official told the Financial Times Thursday that a scheme to compensate retail investors is “ready,” but did not provide details.

Deutsche Bank announced Thursday that it had agreed to a $7.2 billion with the U.S. Department of Justice (DOJ) for its mishandling of mortgage-backed securities from 2005 to 2007. The fine had been a source of anxiety since September, when the DOJ asked for a potentially crushing settlement of $14 billion (skip to section). While the reduced fine has come as a relief, it is still larger than Deutsche Bank’s litigation provisions, and the bank faces further fines that could renew questions about its capital position.

If Monte dei Paschi, Deutsche Bank or another vulnerable lender runs out of options, many fear that financial contagion reminiscent of the fallout from Lehman Brothers’ collapse could drag the world economy back into chaos. What ails European banks generally, and Deutsche Bank and Monte dei Paschi in particular? Can they be saved, and if not, can the financial system be saved from them?

Why Are European Banks in a Crisis?

Europe’s economy is mostly listless and in a few areas deeply distressed. Average unemployment in the 19-nation euro area is nearly 10%, and the rate is over 20% in Greece. The financial crisis in Europe that began when the U.S. mortgage bubble burst is still grinding across the continent in different guises, including the sovereign debt crisis that periodically threatens to pull Greece out of the eurozone.

Despite the lingering effects of the financial crisis in Europe, the continent’s banks are still profitable: average return on equity was 6.6% in 2015, according to the International Monetary Fund (IMF), compared to 15.2% in 2006 and 2007. But borrowing and fee-generating activities have decreased, and non-performing loans continue to weigh on the sector, particularly in the “PIIGS” countries: Portugal, Italy, Ireland, Greece and Spain. (See also, Understanding the Downfall of Greece’s Economy.)

Source: IMF Global Financial Stability Report, October 2016. Legend edited for space and clarity.

If economic weakness has hurt banks, so have policymakers’ attempts to set the continent on a new course. New regulations have increased costs and cut into profits once achieved through risky trading strategies. Even more painful are negative interest rates, an unconventional monetary policy approach that first appeared in Sweden in July 2009 and has since spread to Norway, Switzerland, Denmark, Hungary and the 19 countries of the eurozone (as well as Japan). (See also, How Negative Interest Rates Can Affect Bond Prices.)

Six central banks have introduced negative interest rates to European 24 countries since 2009 (note: not all rates shown are headline rates). Source: central banks.

As a result, banks are finding their margins squeezed. Most are unwilling to pass negative interest on to savers, fearing an exodus of deposits. (Your mattress doesn’t charge a fee.) At least one lender has bowed to the pressure to pass on negative savings rates, however: in August, a community bank in southern Germany announced it would charge a 0.4% fee on deposits of more than €100,000 ($109,000). A spokeswoman for the National Association of German Cooperative Banks described the move, which affected perhaps 150 people, as a reaction to the European Central Bank’s (ECB) “disastrous policy of low interest rates.” (See also, Negative Interest Rates Spread to Emerging Markets.)

A look at Deutsche Bank and Monte dei Paschi’s stocks bolsters the idea that negative rates have been a nightmare for banks: the lenders’ shares lost 88.6% and 99.6% of their value in the nine years to June 30, respectively, as the ECB’s deposit rate fell from 2.75% to -0.4%. Monte dei Paschi’s stock closed at €16.30 on December 21; if it weren’t for a 100-to-1 reverse stock split on November 28, the price would be €0.16. (See also, Gundlach: Negative Rates Will Ruin Europe’s Banks.)

This confluence of factors led Credit Suisse Group AG (CS) CEO Tidjane Thiam to call European banks “not really an investable sector” in September. But according to the IMF, blaming economic lethargy and hyper-accommodative monetary policy is not enough. The fund estimates that a rise in interest rates, an increase in fee generation and trading gains, and a fall in provision expenses on soured loans would, combined, boost European bank profitability by around 40% in terms of return on assets. And yet, $8.5 trillion, or around 30% of the system’s assets would “remain weak.”

For all the cyclical challenges facing Europe’s banks, their problems are not just cyclical. According to the IMF, the sector needs to cut costs and rethink business models. Consolidation is also necessary: the fund estimates that 46% of the continent’s banks hold just 5% of its deposits.

Still Too Big To Fail?

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If another sector fit the description above – bloated, with too many inefficient competitors scrapping over a highly-regulated, barely-profitable market – the solution might be to let competition do its bloody work. Unfortunately, as the world saw in 2008, some institutions are too big to fail.

When Lehman Brothers’s radioactive portfolio of mortgages began to threaten the bank’s future in mid-2008, CEO Richard Fuld hunted for any sort of rescue, be it fresh investment, a merger, a buy-out, a change to Federal Reserve rules or an outright bailout. The bank ran out of options and declared bankruptcy on September 15, 2008, an event that laid bare the fragility of the global financial system.

Over the following days, hedge funds that traded through Lehman’s London office found that their assets were frozen, sowing panic behind the scenes. The crisis erupted into plain view when major money market funds “broke the buck” – announced they would not be able to repay investors in full – sparking a flight from commercial paper that threatened to deprive large corporations in every sector of the cash they needed to pay workers and invoices. (See also, Lehman Brothers: The Largest Bankruptcy Filing Ever.)

Gargantuan, system-wide government bailouts stopped the bleeding, but the world still feels the effects of a crisis triggered by a single bank failure eight years ago.

Monte dei Paschi di Siena

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On Wednesday, December 21, Italy’s parliament approved a €20 billion rescue package for the country’s weakest banks, beginning with its third-largest and most precarious, Monte dei Paschi. The news caused shares to recover slightly after plunging 19.1% – pausing for a trading halt – to €15.00; markets punished the already limping stock after Monte dei Paschi announced Wednesday that its €10.6 billion liquidity position would run out in April, seven months earlier than previously forecast.

The bank continues to try to raise private money in a €5 billion recapitalization effort. The ECB has given it until the end of 2016 to raise the money and dispose of €27.7 billion in bad loans – the net value of which is estimated at €9.2 billion. It has threatened to wind Monte dei Paschi down if it fails to do so. On December 9, the central bank rejected a request for a three-week extension, yanking Monte dei Paschi’s shares down by nearly 11%.

As part of a plan developed by JPMorgan Chase & Co. (JPM) and unveiled in October, the struggling lender began exchanging subordinated bonds for equity in late November, raising around €1 billion by December 2. The plan was to supplement money raised through the debt-for-equity swap with an anchor investment. To sweeten the deal, the bank said it would target €1.1 billion in net profit by the end of 2019. It has already eliminated its dividend; to cut costs further, it announced that it would slash 2,600 jobs and shut 500 branches. Bank of America Merrill Lynch analysts were skeptical, asking in a research note if it is “even possible” to raise €5 billion in fresh capital for a €550 million company (at close on October 25). (See also, Trading in Italian Bank Halted After Survival Plan Unveiled.)

Apparently not. The Financial Times reported Wednesday that the bank had failed to secure a €1 billion anchor investor from a Qatari government fund, prompting the €20 billion bailout.

The failure is due to a number of factors, but politics is front and center. Along with the news that Monte dei Paschi’s swap had come up short on December 2 came reports that the government was in discussions with the European Commission regarding the terms of a bailout for the bank. A referendum on constitutional changes championed by then-Prime Minister Matteo Renzi was scheduled for December 4, and a litany of precedents – Trump, Brexit, the FARC deal, Greece’s rejection of the Troika’s bailout terms – seemed to indicate that Italy’s voters were in no mood to go along with their government’s plans. Sources had told the Financial Times at the beginning of the week that, if the referendum were rejected, eight of Italy’s weakest banks could fail.

Italians did not disappoint, voting “No” to Renzi’s reform plans by a staggering 20 percentage point margin. Renzi resigned and was replaced by Paolo Gentiloni, the minister of foreign affairs. Given that the Democratic Party clearly lacked popular support for its agenda, private investors feared that a less predictable government, led by the Five Star Movement or the far-right Northern League, could come to power. Both parties are hostile to the single currency: Northern League leader Matteo Salvini called it “a crime against humanity” in 2013, while former comedian and Five Star Movement leader Beppe Grillo has campaigned for an referendum on leaving the eurozone.

On December 7, Reuters reported that the Italian government was preparing to take a controlling stake of up to 40% in Monte dei Paschi, in what an unnamed source called a “de-facto nationalization.” The €2 billion injection was reportedly to take the form of bond purchases by the Treasury: retail investors numbering around 40,000 would receive face value for their bonds, which the government would then convert to shares in the bank. According to a Financial Times report Wednesday, Rome is likely to take a majority stake, perhaps up to 70%. The government will have to go deeper into debt to fund the bailout: according to UniCredit economist Loredana Federico, the rescue package is likely to increase Italy’s debt-to-GDP ratio – already the eurozone’s highest, bar Greece – to over 134% in 2017, from a previously forecast 133.2%.

Monte dei Paschi pressed on with its private recapitalization effort anyway, relaunching on December 16 the debt-for-equity swap that had ended earlier in the month. Although the bank’s shares are practically worthless – if it weren’t for a 100-to-1 reverse split in late November, they would be worth less than €0.20 each – the prospect of seeing the bank’s bonds lose their entire value in a bail-in pushed more investors to take the trade. Just not enough: the swap, which ended Wednesday afternoon (local time), is reportedly on track to raise €1.7 altogether, far short of the goal – particularly without a fresh investment from Qatar. A fresh share sale, launched on Monday, also flopped.

Atlante, a fund set up to rescue Italy’s banks, said Wednesday it would not go through with a €1.5 billion investment in the bank’s bad loans unless the state’s cash call was limited to €1 billion and did not violate EU state aid rules.

Bail-in

Barring a miracle, Monte dei Paschi is set to take public money. According to EU rules implemented at the beginning of the year, it must first receive a bail-in, meaning that junior bondholders must take a loss amounting to 8% of the bank’s assets before bailout money can flow in. In countries where bank bonds are mostly held by institutions, that might not be a disaster, but Italy’s tax code and cultural norms encourage retail investors to hold bank bonds – around €200 billion nationwide. A much smaller bail-in caused an Italian saver to kill himself in December 2015. Reports are focusing on the possibility that investors will be compensated, but nothing has been definitively worked out.

The hope is that, once the Italian Treasury has become the bank’s controlling shareholder (it is already the largest, with a 4% stake), private investors will be confident enough to fill in the gap left by the debt-for-equity swap and the government’s investment.

Renzi tried for months to convince Brussels to allow for the use of public money, but Germany and others in Europe’s “core” were in no mood for taxpayer-funded bailouts. “We wrote the rules for the credit system,” German chancellor Angela Merkel, who is facing elections in 2017, told reporters in June. “We cannot change them every two years.” In the wake of the referendum, circumstances appear to have changed. (See also, German 10-year Bonds Trade Negative for First Time.)

A Long-standing Problem

Stress tests conducted by the European Banking Authority in July found that, nearly eight years after the financial crisis began, the continent still harbored at least one bank liable to walk off a cliff in a downturn. Monte dei Paschi saw its fully-loaded common equity Tier 1 (CET1) ratio, a risk-weighed measure of capital, fall to -2.4% in 2018 under the test’s adverse scenario. In other words, the bank would be insolvent, and its collapse could potentially lead to other bank failures. It was the only one among 51 banks surveyed to earn that distinction, though struggling Greek, Cypriot and Portuguese banks were excluded from the test. (See also, Cyprus Exits Eurozone & IMF’s Loan Program Early.)

Monte dei Paschi’s struggles were well-known going into the stress tests. The lender had unveiled a restructuring plan just hours beforehand, showing it was not banking on a pleasant surprise. Founded in 1472, Monte dei Paschi is the world’s oldest surviving bank, but in this case antiquity does not imply stability. Prior to the first quarter of 2015, when it turned a modest profit, it had lost money for 11 straight quarters – over €10 billion in total. In the three months to September the bank swung to loss again, of €1.2 billion.

Note: net revenue and net income figures are shown as restated; share prices are adjusted for splits up to September 30.

Shortly before Europe’s financial crisis struck, Monte dei Paschi bought Antonveneta from Banco Santander S.A. (SAN) for an inflated €9 billion. In 2013 that acquisition – funded by a complex hybrid instrument designed by JPMorgan – became the subject of an investigation that also uncovered complex derivative contracts with Deutsche Bank and Nomura Holdings Inc. (NMR), which Monte dei Paschi management had used to conceal losses in 2009. Three former executives received 3.5-year prison sentences in connection with the fraud in 2014. (See also, Why Spain’s Sovereign Debt Is Outshining Italy’s.)

Monte dei Paschi took a €1.9 billion bailout in 2009 in the form of Tremonti bonds, named for the finance minister at the time. These were hybrid securities designed for sale by struggling banks – four in all, three of which had repaid by mid-2013 – to the Italian government; the proceeds counted towards regulatory capital requirements. Monte dei Paschi ducked out of the European bailout of Spain’s banking system in 2012, but the following year it sold Italy €4.1 billion in rejiggered Tremonti bonds (known as Monti bonds after Tremonti’s successor). Of this sum, €2.1 would substitute for the first bailout, including interest. The bank has raised around €8 billion through additional rights issues since 2014, diluting previous shareholders’ stakes, yet its market capitalization as of December 20 is a mere €501 million.

Deutsche Bank

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Ironically, given Merkel’s avowed reluctance to bail out banks, the other European institution that keeps markets up at night hails from Germany. In June, the IMF named Deutsche Bank “the most important net contributor to systemic risks” among the so-called global systemically important banks (G-SIBS).

Linkages among global systemically important banks. Size of bubbles indicates asset size; thickness of arrows indicates degree of linkage; direction of arrows indicates direction of “net spillover.” Source: IMF Financial System Stability Assessment, June 2016.

On September 15 the angst surrounding Deutsche Bank deepened when it confirmed reports that the Department of Justice (DOJ) was seeking a $14 billion settlement for alleged wrongdoing related to mortgage-backed securities from 2005 to 2007. The bank’s New York-listed shares plunged by over 9% the next day, as it had only €5.5 billion set aside for the purpose – less than the €6.8 billion it had lost the previous year. (A couple of weeks later, Greece’s central bank chief relished the opportunity to announce that his country’s banking system was safe from German spillover.)

On Thursday, December 22, the bank announced that it would pay a reduced fine of $7.2 billion, consisting of a $3.1 billion civil monetary penalty and $4.1 billion in consumer relief in the U.S., primarily in the form of loan modifications. Even with the diminished fine, though, Deutsche Bank is in a precarious position. As of September 30, it had €5.9 billion ($6.4 billion) set aside for litigation expenses, up from €5.5 billion at the end of the previous quarter. JPMorgan analysts wrote on September 15 that a final bill over $4 billion would raise questions about the bank’s capital position. They pointed out that the mortgage-backed security probe is not the last potentially costly legal issue Deutsche Bank could face in the near future: investigations into money laundering for Russian clients, foreign exchange rate manipulation and sanctions violations are also underway. (See also, Deutsche Bank’s Fine and Its Systemic Effects.)

Few had expected Deutsche Bank to pay the full $14 billion, which could have pushed it over the brink. Citigroup Inc. (C) talked the DOJ down to $7 billion in 2014 from a $12 billion initial ask. Other fines for similar activity range from Morgan Stanley’s (MS) $3.2 billion to Bank of America Corp.’s (BAC) $16.7 billion. (See also, German Officials Working to Help Deutsche Bank.)

Following the announcement that the DOJ was seeking $14 billion in September, speculation began to swirl that Germany would flout the bail-in rules it had expended such political energy to defend, though Merkel has ruled out state assistance, according to government sources quoted in Munich-based Focus magazine. (See also, New Lows for Deutsche Bank on No Bailout Promise.)

Deutsche Bank’s CET1 capital ratio has fallen since the end of 2014, though it rose slightly in the third quarter of 2016 to 11.1%. At 10.8% in June, the ratio was around €7 billion shy of CEO John Cryan’s 12.5% end-2018 goal. Selling Postbank and its stake in Hua Xia Bank Co. Ltd. will likely bring Deutsche Bank closer to that target, but stricter rules could push its capital ratio even lower.

While Deutsche Bank has taken a few heavy losses since the financial crisis in Europe began, it could conceivably have built up more capital through retained earnings and avoided looking so brittle when the DOJ came knocking. John Cryan, the bank’s CEO since July 2015, has set his sights on executive pay, telling a conference in Frankfurt that November, “many people in the sector still believe they should be paid entrepreneurial wages for turning up to work with a regular salary, a pension and probably a health-care scheme and playing with other people’s money.” Chief financial officer Marcus Schneck told investors on October 27 the bank would dispense with cash bonuses for the year and may tie executive compensation to the stock price. On November 17 Süddeutsche Zeitung reported that Deutsche bank may cancel six former executives’ unpaid bonuses, without specifying the amount. (See also, Norway’s Huge Oil Fund Gets Tough on Executive Pay.)

In fairness, shareholders have taken a greater share of earnings than executives – though not per head – in the form of dividends, which were discontinued in 2015.

Better-than-expected third-quarter earnings of €278 million, announced on October 27, have given Deutsche Bank a moment to catch its breath, but the firm remains vulnerable, and it does not have to be the European banking crisis’ zero cell to contribute to the carnage – it could serve as a conduit. Deutsche Bank reported net exposure to Italian financial institutions of €1.9 billion at the end of the third quarter, up €1.1 billion from year-end. Its net credit risk exposure to the PIIGS countries is €31.1 billion, up €4.9 billion. (See also, Deutsche Bank Posts Q3 Profit, Boosts Legal Provisions.)

Will There Be a European Banking Crisis?

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The ultimate question is whether, if one of these banks or another were to collapse, the world would see a repeat of the Lehman moment. Kevin Dowd, professor of finance and economics at the University of Durham, answered this question in stark terms in an August report for the Adam Smith Institute: “Once contagion spreads from Italy to Germany and then to the UK, we will have a new banking crisis but on a much grander scale” than in 2007 and 2008.

Not everyone agrees. “No, I don’t see them as the next Lehman,” Harvard Law School professor Hal Scott told Investopedia on October 31. “I think that there are problems that are idiosyncratic to some extent to each bank. I don’t see panic ensuing from how they’re dealt with.” In fact, he sees the European banking system as having “more capability to handle a contagion than in the United States,” due to Americans’ unwillingness to see a repeat of the 2008 bailouts. (See also, Top 6 U.S. Government Financial Bailouts.)

Scott explained that European authorities have three “weapons” that would allow them to put a stop to financial contagion “pretty quickly.” First is the ability of national central banks to act as a lender of last resort, although the ECB can cap the amount these banks lend. “I’m pretty confident that the Italian central bank and [German] Bundesbank would lend,” he said, adding, “I think there would be a strong lender of last resort response in Europe.”

The second weapon is the Single Resolution Mechanism, what Scott called a form of “standing TARP,” which envisions the use of banking industry contributions, creditors’ money and public funds to resolve failing banks. Finally, while the EU lacks a system-wide deposit insurance scheme, there are rules governing national schemes, which guarantee up to €100,000 per depositor per bank. (See also, Are Your Bank Deposits Insured?)

While Scott does not see Deutsche Bank or Monte dei Paschi setting off another Lehman-like chain reaction, he identified flaws in the European banking system’s current design. It would be better, he said, if the ECB acted as the lender of last resort rather than national central banks. He is also doubtful of capital requirements’ ability to stem a panic: “in a run on a system, no amount of reasonable capital is going to be sufficient.” Such requirements are a good thing, he clarified, like enhancing a building’s ability to withstand fire – even so, “you don’t abolish the fire department.” (See also, Bank Crises and Panics.)

If and when something goes wrong in Europe’s fragile banking system, avoiding a full-blown financial crisis in Europe will likely depend on policymakers’ ability to quickly reassure markets and depositors. According to Scott, national and continental authorities’ capabilities are “more than adequate.” On the other hand, judging by the state of Europe’s banks nearly a decade after the initial crack-up, resolving crises quickly may not be the continent’s strong suit. (See also, Could 2016 Be the Year the EU Collapses?)
Published at Sat, 24 Dec 2016 23:32:00 +0000

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World’s oldest bank seeks government bailout in Italy

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Italian banks are drowning in bad debt
Italian banks are drowning in bad debt

  @CNNMoneyInvest

The world’s oldest operating bank needs a government bailout.

Italy’s Monte dei Paschi di Siena (BMDPF) said early Friday it’s seeking “extraordinary and temporary financial support” after an effort to raise funds from private investors fell flat.

The Italian government has been preparing for this situation by arranging a €20 billion ($20.9 billion) rescue fund to help prop up the country’s struggling banks.

But Monte dei Paschi didn’t specify how much money it’s asking for. It had previously tried to persuade investors to put in €5 billion ($5.2 billion), but political and economic uncertainty following the resignation of Prime Minister Matteo Renzi made many of them wary of signing on the dotted line.

Any bailout plan would need approval from the European Central Bank.

If it’s approved, the Italian government won’t be the only one whose finances would be affected by the bailout.

Related: Italy wants $21 billion to prop up its wobbly banks

Under new European rules, investors must take a financial hit before a government can step in with rescue money. That has raised fears that small-time, individual savers could suffer.

But at a news conference early Friday, Italian Finance Minister Pier Carlo Padoan said the bailout for Monte dei Paschi would “safeguard” the interests of mom and pop savers and shareholders.

The bank, which was founded in 1472, has roughly €28 billion ($29.3 billion) in bad debts that it has been trying to spin off into a separate entity as part of a turnaround plan.

Its share price has plunged 88% since the start of the year. Trading in the bank’s shares was suspended Friday.

Related: India’s central bank says cash crisis is hurting the economy

Based on the European bailout rules, junior bondholders are supposed to take a financial hit.

But the Italian government said under the plan for Monte dei Paschi, bonds held largely by institutional investors will be converted at 75% of their face value into shares, while those held mainly by retail customers will be converted at their full value.

The retail investors’ shares would eventually be turned back into bonds of the same value as those they held originally, according to Padoan.

Italy’s banks have been struggling with high costs and low returns for years. Billions of euros in loans have soured due to economic stagnation. The country’s economy has barely grown for a decade.

The country’s lenders are saddled with about €360 billion ($376 billion) in non-performing loans, roughly a third of the eurozone total.

It’s expected that a number of other small Italian banks will soon seek government help to rebuild their financial position. They’ll also look to draw from the €20 billion rescue fund.

Earlier this month, Italy’s biggest bank, UniCredit, announced plans to raise €13 billion ($13.6 billion) and slash thousands of jobs to shore up its finances.

–Chris Liakos and Marta Colombo contributed to this report.

Published at Fri, 23 Dec 2016 11:49:25 +0000

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How Deutsche’s big bet on Wall Street turned toxic

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A statue is pictured next to the logo of Germany’s Deutsche Bank in Frankfurt, Germany September 30, 2016.REUTERS/Kai Pfaffenbach/File Photo

How Deutsche’s big bet on Wall Street turned toxic

By Edward Taylor | FRANKFURT

Deutsche Bank’s pursuit of success on Wall Street has come at a high price, a $7 billion plus penalty illustrating the extent of its decline since 2008 when its then chief executive claimed it was one of the “strongest banks in the world”.

Expanding from its roots in Germany dating back to 1870, Deutsche (DBKGn.DE) transformed itself into a major player on Wall Street over the past two decades, often taking extravagant bets to do so.

But it is now set to cut back its activities in the world’s biggest economy after a penalty for the sale of toxic mortgage securities that contributed to the biggest economic crash in a generation.

“The strategic options open to Deutsche Bank in the U.S.A. are clearly restricted because the profitability of the business will be weakened,” said Ingo Speich, a fund manager at Union Investment, a shareholder in Deutsche.

German regulators also want Deutsche, the country’s largest bank which employs around 100,000 people around the world, to rein itself in.

“Size in itself is no sign of success,” said one senior official in Germany, where the mood among regulators has hardened towards the bank. “They now want to curtail their ambitions.”

Last year, the bank’s U.S. arm, where roughly one in ten of its staff are based, racked up a loss of 2.8 billion euros ($2.9 billion) – almost half the total loss made by the group.

That was a swing from a profit of more than 1 billion euros in the previous year. Much of the damage was done by a writedown on the value of Bankers Trust, while tighter regulation has made it more expensive to trade.

EXPANSION PHASE

The $7.2 billion penalty for the sale of toxic mortgage securities closes a sobering chapter in the bank’s international drive, launched in 1989 by the then chief executive, Hilmar Kopper, when he bought lender Morgan Grenfell in London.

Kopper is remembered for his public description of a multi-million Deutsche mark sum as “peanuts” – opening a divide between an increasingly Anglo-Saxon bank and the prevailing frugal culture among ordinary Germans.

A decade later, Deutsche bought Bankers Trust, paying $10 billion for the American bank and an estimated severance of $100 million to its chief executive. Management even discussed a takeover of Lehman Brothers, which later collapsed at the lowest point in the global financial crisis in 2008.

This strategy of buying to expand in shares and bonds was expanded to add outsized bets on toxic derivatives – and the lender’s total assets swelled to more than 2 trillion euros in 2007.

One former senior Deutsche executive, who asked not to be named and who was instrumental in building the bank’s U.S. business, said he had preferred using leverage to sell more structured debt and derivatives to buying a Wall Street rival.

“Buying a U.S. firm is like climbing Everest without oxygen. It is risky, and the achievement is substantial, but is it really worth it?” the former executive said, asking not to be named. “You may find that the view from the summit is quite cloudy.”

Yet this alternative route proved perilous.

WORLD’S STRONGEST

As the bank placed large trades at the end of 2011, its leverage ratio, which divides the value of assets by equity, reached around 21 – measured by U.S. accounting standards.

As a rule of thumb, the higher this leverage, the steeper the risks. JPMorgan (JPM.N), a much larger bank, had a lower ratio of around 17.

There was another important difference between Deutsche and its U.S. rivals. They had been able to improve their capital with a compulsory $700 billion “Troubled Assets Relief Programme” (Tarp). Rivals JP Morgan Chase, Morgan Stanley (MS.N), Goldman Sachs (GS.N) and Bank of America (BAC.N) all took the money.

At that time, in October 2008, Deutsche Bank’s then Chief Executive Josef Ackermann described the bank as one of the “strongest and best capitalized banks in the world,” privately saying he would have been “ashamed” if it needed state help.

However, analysts and regulators have since bemoaned Deutsche’s thin capital cushion.

NEW MOOD

Encouraged by its apparent success in the early years of the crisis, the bank’s management focused on structured finance and securitization, credit and equity derivatives, distressed debt and leveraged lending.

But the mood in the United States had changed towards banks that juiced profits with large punts.

In September 2016, Federal Reserve Governor Daniel Tarullo demanded a new capital buffer from investment banks, and, crucially for Deutsche, that it be held locally – in the United States.

“Financial regulation should be progressively more stringent for firms of greater importance,” Tarullo said at the time.

Other problems were also brewing. Deutsche had been singled out in a 2011 U.S. Senate committee report that said one of its traders had called reparcelled mortgage debt “crap” or “pigs”.

That trader, Greg Lippmann, who the committee said in its investigation had also described such securities as a “Ponzi scheme”, took a $5 billion short position on behalf of the bank, betting that mortgage related securities would fall in value.

That inspired ‘The Big Short’ film, where actor Ryan Gosling played a character inspired by Lippmann.

Lippmann has declined to answer questions from Reuters on the subject.

The U.S. market no longer has pride of place for the bank, which has begun to lay more emphasis again on its German roots.

People with knowledge of the bank’s strategy have recently said it is looking to cut its loan securitization business, starting with repackaged U.S. mortgages.

A final decision about this core business is set to come early next year, the people said, with a rolling back of the repackaging and resale of U.S. mortgages also expected as Chief Executive John Cryan seeks to move the business ahead.

(Additional reporting by Arno Schuetze; Writing By John O’Donnell; Editing by Keith Weir)

Published at Fri, 23 Dec 2016 11:17:40 +0000

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Be ‘very afraid’ about globalization’s next phase

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by pexels from Pixabay

Be ‘very afraid’ about globalization’s next phase

2016 has been a wake-up call in the U.S., U.K. and beyond on the pain felt by many people from global trade. But this could be just the beginning.

“What comes next in globalization? Be very afraid,” says economist Richard Baldwin, who worked on trade negotiations for President George H.W. Bush and has just published “The Great Convergence: Information Technology and the New Globalization.”

President-elect Donald Trump is focused on the 5 million U.S. manufacturing jobs lost since 2000 due to globalization and technology. That was the Phase 1 of globalization.

Now get ready for Phase II when robots and low-cost workers abroad replace service sector jobs too. Phase II could have an even bigger impact on jobs. Consider that the U.S. has created about 12 million service sector jobs under President Obama alone.

“We could have hotel rooms in New York cleaned by people sitting in Guatemala driving robots,” Baldwin says. “This isn’t Star Trek.”

Higher skilled jobs won’t be immune either. Already surgeons can perform operations by directing robots from remote locations. It doesn’t matter if the doctor is a few feet away or thousands of miles away. He calls it Remote Intelligence or RI.

“I’m amazed people haven’t caught onto it yet,” says Baldwin. “Everyone is fascinated with Artificial Intelligence. What we should be worrying about is Remote Intelligence.”

How to help workers hurt by globalization

This next phase of globalization is “wilder” and “generally less fair” warns Baldwin. He predicts the anger and frustration already felt in many blue collar communities in the U.S. and Europe is only likely to spread.

So what should we do about it?

“You should help individual workers adjust,” says Baldwin. “That means…providing training, relocation support, income support and continuing education.”

The U.S. has some programs like this, especially at community colleges, but overall, the nation spends very little on worker re-training compared to Europe and Japan.

Even poorer nations like Chile spend a greater share of the country’s annual income (known as GDP) on worker aid and training than the United States.

chart trump trade

Baldwin argues that President-elect Trump’s tactic of saving jobs at the Carrier plant in Indiana is a Band-Aid approach. Globalization isn’t going to stop.

“Shutting off trade abroad won’t save workers’ jobs. They might just bring jobs back for robots at home,” Baldwin says. (Already Carrier has said it plans to invest in upgrading technology at the plant in Indianapolis, which may mean machines can eventually perform more tasks that humans once did).

What Trump should do

In his new book, Baldwin makes the case that globalization is still good, but governments and society have to do a far better job of helping workers.

Here are his recommendations for Trump:

Step 1: Accept the 21st Century reality that low-skilled manufacturing jobs are not coming back.

Baldwin says using tariffs (a plan the Trump team is considering) to try to stop factory jobs leaving won’t work.

“If Trump shuts off trade flows, that will just lead to more automation,” he says.

Furthermore, it’s not just blue collar work moving overseas now, but technology and ideas. That’s even harder to stop with tariffs, he argues.

Step 2: Help workers retrain — or even relocate.

“We shouldn’t try and protect jobs; we should protect workers,” he says, which means helping workers transition to jobs where their jobs won’t be immediately under threat again from robots and lower costs abroad.

Step 3: Make the political case that trade can help everyone. Trump can still pursue free and “fair” trade by being the president who enacts policies to help workers retool.

Baldwin says the U.S. may need programs like “Tennessee Valley Authority,” which was started in the Great Depression to revive the economy in and around Tennessee. The TVA ended up building dams and playing a large role in modernizing America’s electric grid.

Such a scheme could bring economic activity back to depressed areas in Appalachia. Otherwise some workers — and their children — may need to move to places that are creating the jobs of tomorrow.

Baldwin isn’t just another academic. He worked in the first Bush Administration as the U.S., Mexico and Canada were putting together key trade deals, including NAFTA. He also spent a lot of time figuring out how to react to the rise of Japan, which was producing a lot of TVs and other electronics that U.S. workers once did (today China plays that role).

He still believes that global trade is the right path, but he does have one regret: The U.S. didn’t have a safety net for the losers.

“I don’t think NAFTA needed to change. It’s the domestic laws that need to help workers whose jobs were destroyed,” he says.

Published at Fri, 23 Dec 2016 17:23:31 +0000

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Asian shares slip in holiday-thinned trade, focus turns to U.S. data

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A man looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan, November 16, 2016.

REUTERS/Toru Hanai – RTX2TVO7

Asian shares slip in holiday-thinned trade, focus turns to U.S. data

Asian shares struggled on Thursday after a lacklustre performance on Wall Street as investors looked to U.S. economic data later in the day for potential catalysts, as markets wind down ahead of the holidays.

The subdued mood was expected to carry over into European trading. Britain’s FTSE 100 index could edge down 0.1-0.2 percent, based on last prices for futures on the index. Spreadbetter IG predicted Germany’s DAX would open 0.2 percent lower.

MSCI’s broadest index of Asia-Pacific shares outside Japan erased early modest gains and slipped 0.5 percent, while Japan’s Nikkei stock index finished 0.1 percent lower, edging down from this week’s one-year highs.

Hong Kong’s Hang Seng index was down 0.7 percent after touching its lowest levels since July, though Australian shares ended up 0.5 percent, extending gains into a fourth straight session.

U.S. stocks, which have been on a tear since the Nov. 8 election on bets that the incoming administration of Donald Trump will embark on growth-stimulating policies, pulled back from the record highs logged in the previous session.

“There weren’t any major market-making data points coming out, and I think that’s why the markets are kind of taking a breather,” said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management in Portland, Oregon.

Later on Thursday, the United States will release a third revision of U.S. third quarter gross domestic product.

“It could be a volatile day if it comes in either substantially stronger or substantially weaker,” she said.

Durable goods orders for November and weekly initial jobless claims were also scheduled to be released.

Thin liquidity could also amplify moves, with many investors already departing ahead of this weekend’s Christmas holiday. Markets in Tokyo will be closed on Friday for the Japanese Emperor’s birthday.

The dollar edged up 0.1 percent against its Japanese counterpart to 117.67 yen, but remained shy of its 10-1/2-month high of 118.66 touched on Dec 15. [FRX/]

Japan’s cabinet approved on Thursday a record $830 billion spending budget for fiscal 2017 that counts on low interest rates and a weak yen to limit borrowing, underscoring the challenge Tokyo faces in curbing the industrial world’s heaviest debt burden.

The euro was up 0.2 percent at $1.0439, not far from Tuesday’s low of $1.0352, which was the single currency’s deepest nadir since January 2003 as it came under pressure from the ascendant dollar and fears over Italy’s bank crunch.

Troubled bank Monte dei Paschi di Siena expects to burn through around 11 billion euros of liquidity more quickly than previously forecast, an updated document on the bank’s website showed on Wednesday.

The dollar index, which tracks the greenback against a basket of six rival currencies, slipped 0.1 percent to 102.960, as investors stepped back after its rise to a 14-year peak of 103.650 earlier this week.

“There’s a lot of year-end book-closing and position-squaring, and less in terms of data and events to go on,” said Mitul Kotecha, head of FX strategy at Asia-Pacific for Barclays in Singapore.

“So all of that suggests we might see more consolidation going through the year-end,” he said.

Crude oil prices erased earlier gains, facing pressure from a report showing a surprise build in U.S. crude inventories last week, as well as news that Libya expects to boost production over the next few months. [O/R]

The contract roll on Wednesday for front-month U.S. crude to the higher-priced February from lower-priced January pushed U.S. crude up about 0.5 percent. But it was last down 0.1 percent at $52.44 per barrel. Brent crude fell 0.1 percent to $54.43.

Spot gold edged down 0.1 percent to $1,130.44 an ounce, though its losses were limited as the U.S. dollar retreated from this week’s highs. [GOL/]

(Reporting by Tokyo markets team; Editing by Eric Meijer & Shri Navaratnam)

My Trading Journal: 30 Day Trading Journal

Published at Thu, 22 Dec 2016 03:52:45 +0000

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