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EM corporate defaults up 40%
<p>The I.M.F. warned about the threat of widespread debt defaults by emerging market companies back in late September. Slower economic growth and higher U.S. interest rates could create a credit crunch after a decade-long binge on cheap borrowing; a systemic risk to the global financial system was a likely hangover, it said.</p> <p>It looks like it is already happening. The Wall Street Journal (paywall) reports:<br /> Corporate defaults in emerging countries have hit their highest level since 2009 this year, and are already up 40% over last year, according to [credit rating agency] Standard &amp; Poor’s.</p> <p>For the first time in years, emerging-market companies are defaulting more often than their U.S. peers. The default rate on emerging-market corporate high-yield debt over the past 12 months has reached 3.8%, compared with 2.5% in the U.S., according to Barclays. Four years ago, the emerging-market default rate stood at 0.7%, well below 2.1% in the U.S.</p> <p>[Companies] and countries in emerging markets are due to repay almost $600 billion of debt maturing next year, according to the Institute of International Finance, of which $85 billion is dollar-denominated. Almost $300 billion of nonfinancial corporate debt will need to be refinanced next year.<br /> What are the chances that this will cause the Fed to hold off a rate hike in December?<br /> Photo: Frédéric Poirot</p>
Mario Draghi: Economic man of the year
<p>&nbsp;</p> <p>Editor’s note: We are publishing early this week in advance of Thanksgiving weekend here in the United States. For those celebrating with us, our best wishes for a warm holiday with friends and family.</p> <p>With December just around the corner, awards for full-year achievement are beginning to come out. Sport, politics and the arts are recognizing those who reached the highest heights in 2015.</p> <p>There is no trophy given for outstanding achievement in financial policy. And even if there were, it would not be a rival for the Ballon d’Or or the Palme d’Or in the public consciousness. Nonetheless, Mario Draghi deserves significant acclaim for the work he has done as president of the European Central Bank (ECB) in 2015. He is, arguably, the economic man of the year.</p> <p>Late last year, many feared the potential “Japanification” of Europe. The Continent was suffering from a damaged banking system, an aging population and high levels of unemployment in most countries. The gap between actual and potential growth in gross domestic product (GDP) was still widening, six years after the onset of the financial crisis.</p> <p>This was all reflected in a falling inflation rate, and diminishing inflation expectations. Once entrenched, these conditions are very difficult to dislodge; they are a central banker’s worst nightmare. To combat this outcome, the ECB had brought rates down to very low levels, but policy was clearly limited by the zero lower bound.</p> <p>Quantitative easing (QE) had been suggested for quite some time in Europe, but many resisted it. There was skepticism over whether it would work; QE has shown mixed results in the United States and the United Kingdom, with early rounds having more of an impact and later rounds more effete. Japan continues to press ahead with the largest QE program in the world (in relation to its GDP), with only modest effect to date.</p> <p>The structure of Europe’s credit system argued against QE. Most borrowers in Europe get the capital they need from banks, and not the financial markets. (QE programs have the most effect when the opposite is true.) And eurozone banks had been conserving capital by limiting the growth of their balance sheets, restricting credit at a time when more was needed.</p> <p>As conditions worsened, Draghi worked hard to fulfill his pledge “to do whatever it takes.” He worked tirelessly to bring his governing council on board with the idea of QE, and his staff worked out the intricate details of which assets to buy and who would bear the risk of any underperformance. Finally, in mid-January, Draghi delivered a program that was larger than expected, gaining some psychological points from investors.</p> <p>Quantitative easing works in mysterious ways. As we discussed in our October 16 commentary, QE programs encourage risk taking by making safe assets less attractive; the resulting capital flows provide money for investment and can create wealth effects that augment consumption. Since mid-January, European equities are up by 14%, and consumption is growing at its fastest pace since 2008.</p> <p>The road to improvement reached a fork in the middle of the year, as Greece teetered on the brink of exit from the eurozone. Some parties to the negotiations thought that the Greeks should be excused, but Draghi argued forcefully for keeping Greece in the fold. (That took on a literal meaning during a late night meeting in July, when Draghi reportedly engaged in a shouting match with German Finance Minister Wolfgang Schäuble.)</p> <p>Draghi put a lot of the ECB’s money at risk to support Greece, at great personal risk. But in the aftermath, Draghi has been hailed for acting in the best interest of all of the eurozone’s members. He is a leading European, transcending the parochial politics of individual countries.</p> <p>But job well done is not mission accomplished…far from it. Inflation readings from the eurozone are still well below the ECB’s objective, even after adjusting for recent declines in energy and commodities prices. And while growth seems t
Renminbi set to join IMF currency basket
<p>The Chinese renminbi is expected to reach another landmark on Monday. The IMF is likely to include it as the fifth member of its basket of reserve currencies that values the fund's own de facto currency, the "special drawing rights", reports the Financial Times. (paywall)</p> <p>However, the renminbi's inclusion at this stage is contentious.</p> <p>"Several western diplomats in Beijing have said the renminbi’s inclusion in the SDR basket was a heavily political decision and that the Chinese government had been very effective at lobbying countries to support the inclusion regardless of whether the currency met the requirements or not," according to the FT.</p> <p>Basically, the renminbi has to meet two criteria: first, a significant role in global trade - which it has easily passed; second, that it is widely used and "freely usable" internationally - which is doubtful because of remaining capital controls.</p> <p>"However, the IMF’s management insists that its review of the case for including the renminbi was purely 'technical' in nature and focused on practical issues of whether the renminbi could be used in IMF transactions with its members," says the FT.<br /> Photo: David Dennis<br /> &nbsp;</p> <p>&nbsp;</p>
Weekend Scan: Turkey agrees to slow flood of migrants to Europe in exchange for cash
<p>November 29, 2015</p> <p>Now that we are recovering from Thanksgiving feasting and family it's time to turn to the serious agenda of the week: On Friday the jobs report for November lands at 8:30 a.m. ET. As we all know by now, decent numbers all but assure a December rate hike, the first in the U.S. in nine years. Janet Yellen will be speaking on Wednesday and Thursday -- unlikely she will give any hints about the employment outlook.</p> <p>Here's what else you need to know:</p> <p>Turkey to stem migrant flow to Europe in exchange for cash. The European Union will also consider Turkey's application to join the 28-member group. The Sunday talks promised a package promises $3.2 billion in aid for the 2.2 million Syrians flooding Turkey.</p> <p>Obama sets his sites on Paris climate talks to clinch legacy. The U.S. President is the first to create a climate policy. He joins more than 120 leaders Sunday to launch two weeks of talks designed to create regulations that would lower greenhouse gases. Obama faces opposition both abroad and home. New York Times (paywall)</p> <p>Online rules on Thanksgiving, Black Friday. Online consumers spent $4.45 billion over the two-day shopping period, accounting for 34% of spending -- a record, says Adobe Digital Index. Brick and mortar traffic fell slightly to $12.1 billion on Thursday and Friday from $12.29 billion last year. Reuters </p> <p>Chinese 'pull back' from U.S. real estate -- unless their cash 'floods' the market. You vote: The NYT says the U.S. real estate market is awash in Chinese cash but the Wall Street Journal says Chinese investors are pulling back. Let us know what you think. New York Times, Wall Street Journal (paywall)</p> <p>Richest man in Philippines places big bet on China. Henry Sy is planning on building more shopping malls in China, his native country. His company SM Investments plans on opening three more by 2017 -- bringing his total to nine.  Wall Street Journal (paywall)</p> <p>Three killed, nine wounded at Planned Parenthood clinic in Colorado. Robert Lewis Dear surrounded after a six-hour standoff with police in Colorado Springs. He was heard muttering "baby parts" -- which suggests he was motivated by anti-abortion sentiments. An Iraqi war veteran and father of two was killed. CNN, The Denver Channel</p> <p>Adele sets one week record. Her new album "25" sold more than 3 million copies. Wall Street Journal<br /> You won't believe this:<br /> Men are putting glitter in their bears. So they can garner likes on their Instagram accounts. How do they get the glitter out? Vice<br /> Photo: Freedom House</p>
Here is the $1.1 trillion reason central banks shouldn't be regulators
<p>News came this week that European banks have about $1.1 trillion of non-performing loans. In several countries, the loans represented well over 10% (in a few over 20%) of total loans, quite astonishing numbers. Indeed they are numbers and one that suggest threatened insolvency.<br /> But it is tragic how little the new data have told us. They have not told us when all those bad loans were made. Are they mostly a hangover from 2008 that is only gradually being recognized because the banks kicked the can down the road for seven years? That would be a terrible statement about the reliability of European bank accounting, auditing, and supervision. Or is the state of affairs even worse than that because the loans that now have gone sour were loans made after 2009, when loans made in the U.S., for example, except for energy loans, have performed extremely well?<br /> The question is of more than academic interest because the answer would go a long way to telling us just how broken the European idea of bank may be.<br /> The basic idea of a bank that takes deposits at short term and lends at longer term to lesser credits is dangerous. Without adequate capital to cushion the losses that necessarily come in recessions, all such banks are bound to fail fairly frequently. But maybe in Europe the situation is even worse than that. Maybe the loans that banks make to small and medium-sized businesses, the so-called SME sector that depends heavily on bank finance, are flawed in concept to begin with. Maybe such firms actually borrow only when they are not stable. Maybe family firms that have survived for generations do not borrow much at all. They self-finance, whereas the newer, riskier firms look to banks to fund their inventory, receivables, and growth. That kind of lending is, by its nature, riskier than a highly leveraged bank should do. Yet the various forces of European society press banks to make exactly such risky loans.<br /> My guess is that both phenomena are responsible for the high reported level of NPLs. Slow recognition that loans have gone bad is a factor—and it is a factor that suggests that the $1.1 trillion figure is low, probably by quite a bit—and the style of lending that European banks are expected to engage in also is a factor in the continuing magnitude of bad loans. If I am right, this combination is continuing bad news for the European banking sector. Indeed, it is bad news that we should not expect to see rectified any time soon.<br /> And if I am right, then the ECB is stuck with a Herculean task to bring the banks up to snuff in terms of stability. And that task will be made more complex by the fact that the goal of stability will require banks to make fewer loans of the types that have got them into trouble, while the job of the central bank as monetary policy manager is to induce the banks to make more such loans in order to produce economic growth.<br /> The U.S. Federal Reserve Board has a similar set of conflicts of interests, and in the run-up to the Great Recession, it flunked the regulatory side of the test as well as the monetary side. Can we expect the ECB to do better? Despite my great admiration for Mario Draghi, I am not optimistic that the ECB can overcome its conflicts of interests. It simply should not have been designated the European bank supervisor.</p> <p>Photo: ECB European Central Bank<br /> &nbsp;</p>
Week ahead: All eyes on the central banks; a double dose of Yellen
<p>All times GMT</p> <p>We have a big macro week ahead of us with a slew market-moving speeches and data downloads in the offing.  There will be meetings at the European Central Bank and Swiss National Bank, both of which are expected to add more stimulus ahead of the Federal Reserve’s expected interest rate hike. This is expected to keep the dollar supported and boost U.S. bond yields ahead of Friday's U.S. jobs report.  This will help make clear where the Fed is likely to stand in two weeks' time. There is also the possibility that in the week ahead the IMF will make its decision on the inclusion of the Yuan in its benchmark currency basket.</p> <p>Markets will get a double dose of Federal Reserve Chair Janet Yellen as she drives home the U.S. central bank’s message that it wants to raise interest rates. On Thursday, Yellen will give her testimony on the economic outlook before the congressional Joint Economic Committee.  She will also speak before the National College Fed Challenge Finals and at the Economic Club of Washington on Wednesday.</p> <p>Here are some of the week’s other major developments, a full list is available at WBP online:</p> <p>Monday: The global week will kick off with Japan’s preliminary y/y industrial production figures which will be coming out Sunday evening and are pegged to shift down 0.9% . The Bank of Japan’s (BOJ) Kuroda will speak at 1 a m. India will also come out with its GDP growth data for the third quarter, which is expected to hit 7.2% y/y, versus last quarter’s 7%.  </p> <p>Tuesday: China will be in focus early on in the day as it releases its PMI manufacturing data at 1am. The focus will then shift over to Europe where the Bank of England Governor Mark Carney is due to hold a press conference about the Financial Stability Report and UK Bank Stress Testing in London. The U.K. wil also be releasing its PMI Manufacturing data along with Germany and France,</p> <p>Wednesday: The day will be led by the EU’s y/y consumer price index data for November, released at 10 am. It is expected to shift up by 0.3% after remaining flat the previous month.  Over in the U.S we will have the ADP employment change figures, followed by a speech the Fed’s Yellen at 1.30pm along with q/q unit labor costs data for the third quarter, pegged to rise 1%.  Yellen will speak again at 5:25pm.</p> <p>Thursday: The day will start will a deluge of data from Europe as Germany, the U.K, and E.U. all release PMI Services data for the month from 9am onwards. At 1.30pm the U.S will come out with its initial jobless claims data. Yellen will also testify before the Joint Economic Committee.</p> <p>Friday: The day will kick off with OPEC Meetings in Vienna which will be quickly followed by E.U. GDP data for the third quarter. Then, from 1.30pm, the U.S. will release its all-important trade balance and unemployment rate data for October and November, respectively, with the latter set to be unchanged at 5%.  The week will then round off with the publication of the Baker Hughes U.S Rig Count at 6pm.<br /> Photo: Day Donaldson</p>
World markets weekend update: The rally moderates
<p>Six of the eight indexes on our world markets watch list posted gains last week, down from all eight the previous week, and the weekly advances were noticeably smaller. Germany's DAX was the top performer, up 1.56%, well off its 3.84% gain the previous week. India's SENSEX had the next best week, up an even one percent. The FTSE and CAC 40 straddled the half percent line, up 0.64% and 0.39%, respectively. The S&amp;P 500 and Nikkei hovered just above the flat line. The worst performers were the Hang Seng and Shanghai Composite, with -3.02% and -5.35% declines.</p> <p>Here is an overlay of the eight for a sense of their comparative performance so far in 2015.</p> <p>Here is a table of the 2015 data performance, sorted from high to low, along with the interim highs for the eight indexes. Five of the eight have year-to-date gains, unchanged from last week.</p> <p>A Closer Look at the Last Four Weeks</p> <p>The tables below provide a concise overview of performance comparisons over the past four weeks (through year's end) for these eight major indexes. We've also included the average for each week so that we can evaluate the performance of a specific index relative to the overall mean and better understand weekly volatility. The colors for each index name help us visualize the comparative performance over time.</p> <p>The chart below illustrates the comparative performance of World Markets since March 9, 2009. The start date is arbitrary: The S&amp;P 500, CAC 40 and BSE SENSEX hit their lows on March 9th, the Nikkei 225 on March 10th, the DAX on March 6th, the FTSE on March 3rd, the Shanghai Composite on November 4, 2008, and the Hang Seng even earlier on October 27, 2008. However, by aligning on the same day and measuring the percent change, we get a better sense of the relative performance than if we align the lows.</p> <p>A Longer Look Back</p> <p>Here is the same chart starting from the turn of 21st century. The relative over-performance of the emerging markets (Shanghai, Mumbai SENSEX and Hang Seng) up to their 2007 peaks is evident, and the SENSEX remains by far the top performer. The Shanghai, in contrast, formed a perfect Eiffel Tower from late 2006 to late 2009.</p> <p>Check back next week for a new update.</p> <p>Note: We track Germany's DAXK a price-only index, instead of the more familiar DAX index (which includes dividends), for consistency with the other indexes, which do not include dividends.</p> <p>All the indexes are calculated in their local currencies.</p> <p>This post orignally appeared on Advisor Perspectives.</p>
Video: High Frequency Trading 101: A defense of HFTs in markets
<p>People often criticize high frequency traders for abandoning the market when things get tough. "There's a lot of myths around that," says Bill Harts, CEO of Modern Market Initiatives, a spokesman for the industry. In an interview with NexChange Harts says data suggest HFTs play in creating liquidity -- though some market analysts say the case is clear-cut.</p>
Video: Bill Harts defends HFT role in August market upset, proposes new rules
<p>Bill Harts, CEO of Modern Market Initiative says HFTs are some of the biggest market makers for ETFs providing liquidity. HFTs play a controversial role in the markets and in this interview with NexChange, Harts defends their role. He also outlines suggestions on how to prevent the kind of volatility that roiled the markets on August 24.</p> <p>&nbsp;</p> <p>&nbsp;</p>
Weekend Scan: Crackdown sparks China rout; vital U.S. employment data loom
<p>November 28, 2015</p> <p>Chinese shares fell more than 5% on Friday after industrial sector concerns and a renewed crackdown on the Mainland spooked investors. The Shanghai Composite index and the CSI300 both saw their biggest one-day declines since the turmoil seen over the Summer. China also reported a 4.6% drop in profits among large industrial firms. </p> <p>But, the rout did not carry through to other major equity markets, which ended modestly lower. The Dow took a small hit Friday during the short trading day, falling 0.1%. The Nasdaq added 0.2%, and the S&amp;P 500 was largely unmoved. The Stoxx Europe 600 was down 0.2%, after ending Thursday with a three-month high. The dollar and bonds ended higher this week and oil tumbled.</p> <p>In the week ahead, global markets are likely to be driven by  a number of major macro developments. The European Central Bank (ECB)  is poised to expand its easing program and cut its already negative deposit rate, meanwhile U.S. jobs report will be coming out on Friday. It will be among the most important information the Federal Reserve will consider when it meets on December 15. </p> <p>Here's what else you need to know:</p> <p>Chinese dredging firm delays IPO over South China Sea work.  CCCC Dredging, the world’s largest dredging firm, has delayed a planned initial public offering in Hong Kong over queries from the city’s stock exchange about dredging work done for Beijing in disputed territory in the South China Sea. Wall Street Journal </p> <p>Indian villagers blame Coca-Cola for water shortage. Eighteen village councils in northern India are demanding a local Coca-Cola bottling plant be prohibited from extracting water from the ground, claiming its over usage has led to water scarcity in the area. SCMP</p> <p>Japan to resume whaling in Antarctic. Japan has decided to resume hunting whales in the Antarctic after a break of more than a year, despite  an International Court of Justice (ICJ) ruling for Japan to cease all whaling. BBC</p> <p>Moscow beefs up Syria defences. Russia has strengthened its anti-aircraft defences by moving a cruiser towards the coast and deploying new missiles at its main base. The move follows a row over Turkey's downing of a Russian combat jet on Tuesday. BBC </p> <p>Three killed at Planned Parenthood clinic in the U.S. A police officer and two civilians were killed on Friday after an hours-long shooting standoff at a Planned Parenthood clinic in Colorado Springs. The male shooter was armed with a long gun and also brought into the building several suspected explosive devices. Washington Post </p> <p>Brazil to file $5.3B suit against dam owners. Brazil’s government said it is preparing to sue mining giants Vale SA, BHP Billiton and their joint venture Samarco Mineração SA in response to a catastrophic dam failure earlier this month. A civil suit is expected to filed on Monday. Wall Street Journal (paywall)</p> <p>Barclays fined by British regulators. The bank will pay 72 million pounds for "failing to minimize risk" around a product used for clients in 2011 and 2012. Regulators say the anti-money-laundering control failings are related to a 1.88 billion pound deal used for rich clients. Wall Street Journal (paywall)</p> <p>Suicide bombing hits Nigeria. A male suicide bomber attacked a procession of Shi'ite Muslims in Kano, killing 21 people and wounding many more. Reuters<br /> You won’t believe this…<br /> The so-called Islamic State turned in rubber ducks. The new internet meme is turning the violent terrorists into cute rubber ducks. In a bid to "castrate" the group, netizens are photoshopping jihadists with features of the popular bath toy. The Mirror </p> <p>Eight-legged visitor puts Sydney police on high alert. Sounds of a woman screaming hysterically, a man yelling “I’m going to kill you, you're dead! Die, Die” and furniture being tossed around, caused frightened neighbours to call police with reports of a violent dispute. But when New South Wales police rushed to the address at 2 a.m., they found the frightened occupants had been chasing a ver