David Fuller and Eoin Treacy's Comment of the Day
Category - General

    France's Neighbors Sound Alarm Over Election 'Catastrophe' Risk

    This article by Esteban Duarte  and Patrick Donahue for Bloomberg contains a useful calendar of political events for 2017 and may be of interest to subscribers. Here is a section:

    Polls suggest that National Front leader Marine Le Pen will make it to France’s run-off vote on May 7, giving her a shot at claiming the presidency on anti-euro, EU-skeptic ticket. She shared a stage last weekend with Frauke Petry of Alternative for Germany and Geert Wilders, whose anti-Islam platform has helped propel his Freedom Party to within reach of winning the March 15 Dutch election.

    Europe’s anti-establishment forces are drawing inspiration from Donald Trump’s surprise elevation to the U.S. presidency and unexpected victory of Brexit supporters in last year’s referendum. Another common strand is an anti-immigration stance that has flourished during the worst refugee crisis since World War II, with more than one million people fleeing war and oppression in Syria, Afghanistan and elsewhere having sought asylum in Germany alone.

    Gabriel, who is poised to become German foreign minister in a cabinet reshuffle allied to the Sept. 24 election, pointed to France’s two-round ballot as the key moment that will shape Europe’s destiny. While no recent poll has shown Le Pen coming close to winning the second round, Brexit and Trump’s victory have made political analysts and investors reluctant to rule anything out.

    “If Europe’s enemies, after Brexit last year, manage once again in France or in the Netherlands to be successful, then the threat to us is the collapse of the greatest civilization project of the 20th century, the European Union,” Gabriel said in a speech to lower-house lawmakers in Berlin on Thursday.

     

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    Latin America Abandons Fuel Subsidies in Shift to Austerity

    This article by Sabrina Valle for Bloomberg may be of interest to subscribers. Here is a section:

    "These countries are under enormous fiscal pressure and are reacting to it," said Samar Maziad, a sovereign analyst at Moody’s.

    President Mauricio Macri has made Argentina’s economy more competitive since he took over in 2015, and an 8 percent gasoline price increase this month has contributed to Buenos Aires-based YPF’s recent rally to the highest in more than a year. Argentina is moving to completely liberalize prices by 2018. YPF declined to comment on its stock price.

    Mexico has lifted prices about 20 percent this month as it opens state-owned Petroleos Mexicanos’s monopoly to foreign competition. It has pledged to completely phase out fuel subsidies over the course of the year. The so-called “gasolinazo,” or fuel-price slam, sparked protests across the country that curtailed fuel distribution and has left President Enrique Pena Nieto’s approval rating at an all-time low of 12 percent. Mexico is planning another fuel price increase on Feb.

    The main outlier is Venezuela, the region’s biggest exporter with the cheapest gasoline in the world at about 15 U.S. cents to fill a tank, even after the first price increase in almost two decades last year. Colombia got a head start when it began tracking international prices in 2008, a year when fuel subsidies contributed to an economic contraction.

    In Brazil, where subsidies drained an estimated $40 billion from Petrobras between 2011 and 2014, Chief Executive Officer Pedro Parente has shown greater independence from the government to set fuel rates. Under Parente, the company formally known as Petroleo Brasileiro SA set a new price methodology in October and has implemented five adjustments since then.

     

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    Gold Goes Cold Turkey as Chinese Stop Buying for Year of Rooster

    This article by Eddie van der Walt and Susanne Barton for Bloomberg may be of interest to subscribers. Here is a section:

    "The Chinese holiday can exaggerate some of the moves," Bob Haberkorn, a senior market strategist at RJO Futures in Chicago, said in a telephone interview. "We’re going to get lighter volume coming in. A lot of the focus is moving into risk assets."

    Gold futures for April delivery fell 0.1 percent to $1,191.40 at 11:08 a.m. on the Comex in New York. Futures earlier fell as much as 0.8 percent, touching the lowest since Jan. 11. The four-day losing streak would be the longest since Nov. 14.

    After touching a two-month high earlier this week, gold’s rally has withered as surging stock markets fueled investor appetite for risk. The Dow Jones Industrial Average climbed above 20,000 for the first time this week and the MSCI All- Country World Index is near a record.
    The metal pared earlier losses Friday after a report showed U.S. economic growth slowed more than forecast last quarter on the biggest drag from trade in six years and more moderate consumer spending. Business investment picked up, which may be a harbinger for faster expansion in 2017.

    “We expect full year Chinese demand to still fall short of levels seen in 2015,” Nell Agate, a Citigroup Inc. metals analyst, said by e-mail from London. “It’s possible that Chinese jewelry sales are likely to slow as the Chinese break for new year festivities.”

     

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    Trump Border Tax Threatens Global Dollar Chaos

    The spread of 2-year US Treasury yields over German and Japanese yields - the classic driver of currency moves - has doubled to over 120 basis points since June. This is drawing powerful flows of money into US debt markets. It is a formula for a super-dollar, and it has further to run.

    Everything has a late-cycle feel to it. The Cape-Shiller price-to-earnings ratio for the S&P 500 stocks is already above 24, higher than any time over the last 130 years with the exception of the 1929 and the dotcom peak in 2000.

    Can Wall Street go higher? Certainly. The creator of the measure, Nobel laureate Robert Shiller, told me in Davos that there may be a final blow-off surge. Mood matters - he argues - and the animal spirits unleashed by Trump's pledge to cut taxes and slash regulations by 75pc could push the Cape-Shiller ratio towards the dotcom record of 45.

    This would be followed by a cathartic crash and a day of moral judgment. The Shiller view is that Trump's own supporters will turn against him - and against his wealthy swagger - just as culture turned in the 1930s and people rejected the Coolidge ethos of the Roaring Twenties.

    There is no sign yet that Mr Trump is willing to back down on any of his core policies. So my suspicion is that he will try to break out of this dollar trap by leaning on the Fed to delay rate rises and ultimately by ordering intervention to hold down the US exchange rate.

    There are precedents for such currency action. The Swiss National Bank vowed in 2011 to spend unlimited sums to stop the franc rising above €1.20 as it battled deflation. The Japanese did it on a nuclear scale in 2003. The Chinese pursued a mercantilist strategy during its growth-spurt, keeping the yuan weak to gain export share.

    Recourse to such methods by the holder of the paramount reserve currency would be a different kettle of fish. It would amount to a global free-for-all, a Hobbesian monetary disorder.

    Currency intervention is by law a US Treasury prerogative. The New York Fed must in effect do what it is told, if ever ordered to buy foreign bonds. This is the means by which Mr Trump can bend the Fed to his will. Does anybody really think he will resist such a temptation?

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    May Says Opposites Attract, Before Trump Meeting Tomorrow

    Here is the opening of this article on a very important initial meeting Donald Trump and Theresa May:

    It’s not what every woman would do as she prepares to meet Donald Trump, but on her flight to the U.S., Theresa May was sounding distinctly flirty.

    Asked how a pastor’s daughter with a reputation for caution would deal with a president regarded as brash and impulsive, May smiled. “Haven’t you ever noticed?” she said. “Sometimes opposites attract?”

    While some countries seek distance from the billionaire Trump, May is going all-out for the closest possible relationship. As she prepares to meet him, the premier is hoping to capitalize on that bond as Britain negotiates its withdrawal from the European Union.

    “We’re both very clear that we want a trade deal,” May told reporters aboard her Royal Air Force plane. “It will be in the interests of the U.K. from my point of view, that’s what I’m going to be taking in, into the trade discussions that take place in due course.”

    On Friday, May will become the first foreign leader to meet Trump at the White House since he took office and ripped up the rule book, from trade policy to his use of Twitter. However, she flew into a diplomatic storm after Mexican President Enrique Pena Nieto canceled plans to see Trump because of a growing dispute over the wall he wants built along the border.

    Reagan-Thatcher

    May’s own playful overture will be welcome in the White House -- where Trump has talked of recreating the touchy-feely relationship between Ronald Reagan and Margaret Thatcher -- but they risk causing unease in Britain.

    Tens of thousands of Britons joined the worldwide protests the day after Trump’s inauguration, attacking his statements about women. May faces domestic calls to hold Trump to account over comments he’s made on torture and over his climate policy.

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    UK Remains Fastest Growing Economy in Western World After Expanding 0.6pc In Final Quarter of 2016

    Supermarket price wars will limit the strain on household budgets this year, the Chancellor said on Thursday, as official figures cemented the UK's position as the fastest growing major advanced economy in 2016.

    Philip Hammond said the "incredible market share war" between supermarkets over the past few years would help to curb shop price rises and support consumer confidence, as he signalled that growth in 2017 could outpace official forecasts.

    It came as data published by the Office for National Statistics showed the UK economy grew by 0.6pc in the final three months of 2016, matching the expansion in the previous quarter.

    This is faster than the 0.5pc growth predicted by economists and compares with the Treasury's dire predictions ahead of the EU referendum that a vote to leave the bloc would trigger a year-long recession.

    Thursday's figures mean the economy expanded by 2pc over the year.

    While Britain is the first G7 nation to report fourth-quarter growth figures, International Monetary Fund estimates suggest that growth in Germany and the US, which are expected to have expanded by 1.7pc and 1.6pc respectively last year, will not outpace the UK.

    Mr Hammond said he believed that the current subdued levels of business investment would "come back and mak[e] a significant contribution" to growth as the country's future trading relationship with the EU became clearer.

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    Thanks to Gina Miller, Parliament is Again Supreme. But Now MPs Must Fear Voter Wrath

    Well done Gina Miller. Not only has she won a famous legal victory but she has clarified what the June 23 referendum was all about. For many who voted to leave the European Union it was about restoring control and sovereignty to our nation.

    So perhaps it was not what Mrs Miller intended, but the case before the Supreme Court has made a reality of Brexit. It can now proceed with the full wind of the law and Parliament in its sails. The very people who for decades were utterly indifferent to the fact that our Parliament had been emasculated by its self-imposed subservience to supra-national institutions have given it a new lease of life.

    By challenging Brexit in order to stop it she has supercharged it. Remainers have become the great defenders of the sovereignty they previously wanted to see pooled.

    Mind you, for a legal hearing of such constitutional magnitude it ended with something of a whimper. The Supreme Court reasserted what most people had always thought to be the case – that the Government cannot change the law by executive fiat. Indeed, even the Government never argued that it could. 

    What was at issue was whether triggering Article 50 amounted to a change in the law. But so much of our legislation is tied up with EU membership that once the Attorney General, Jeremy Wright, had accepted that the departure procedure was irrevocable he was going to lose. His only point was that this was a treaty matter and therefore fell within the scope of an executive prerogative, but the judges did not agree (or rather, eight of them didn’t; the fact that three justices found for the Government shows this was not as clear cut as many had assumed).

    What is less easy to explain is why the Remain side also accepted that triggering Article 50 was an irrevocable act. Arguably, Lord Pannick QC had to make this point to win his legal case, but politically it means that any Remainer hope of thwarting Brexit has been scuppered. The main parties too have declined to stand in its way, accepting that, to all intents and purposes, the June 23 referendum was the moment when we decided to leave. This is an important constitutional point that the court has not really addressed.

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    Italexit Risk Low, Debt Re-Profiling Better Option: Mediobanca

    This note by By Francesca Cinelli summarises a report issued by Mediobanca earlier this week discussing the economic implications of Italy exiting the Euro. I’ve read the original report but we are precluded from posting it on the site.

    Time costs money for Italy, due to collective action clauses (CACs) and thus, purely on financial grounds, it reduces Italexit risk and makes any voluntary debt re-profiling a better option to eventually sustain its borrowings, Mediobanca says in note.

    Highlights no growth undermines debt sustainability; Sentix Index, which estimates the one-year probability of Italy leaving the monetary union based on the assessment of investors, signals stress

    Says redenomination in any Eurozone country is a function of the freedom allowed on bonds issued under domestic law and the constraints of the recently introduced EU discipline on
    CACs 

    Quantifies cost of re-denomination, says four variables suggest EU280b loss, partly offset by EU191b gain from the Lex Monetae on bonds under domestic law

    Compares CACs and non CACs pairs of Italian govies displaying similar features in order to test Mediobanca’s “time costs money” finding; that means as time goes by the
    financial incentive for redenomination declines

    Data suggest 30bps yield premium on 3.5yr non CACs bonds actually drops to 10bps on 12yrs

    Says “Quanto” spread captures the “convertibility risk” implied in the premium between USD- and EUR-denominated CDSs

    Data suggest that at end 2016 for the first time Italy’s “Quanto” exceeded Spain’s, confirming Italy crucial role for eurozone future given a 90% correlation the brokerage notes between Italexit probability and a euro break-up probability

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