Month: January 2017

Markets in Europe open lower on Thursday after minutes from the last US Federal meeting showed willingness to increase rates at a faster pace.

The pan-European Stoxx 600 opened 0.39 points lower with most sectors trading in negative territory.

The retail sector should draw some attention, after contracting during Wednesday’s trading, with the release of the latest retail PMI figures in the euro zone. Meanwhile, in the US, Amazon and Forever 21 are reportedly among those considering bidding for American Apparel.

Volkswagen will have to defend investor lawsuit in the US related to the emissions scandal, a US judge ruled, Reuters reported.

The U.K will see the publication of the latest new car registrations for December and the entire 2016. Also in the U.K., the British Chambers of Commerce said Thursday that the economy has kept its momentum in the last quarter of 2016 but inflation pressures have increased at a near 20-year high, Reuters reported.

In part, that reflected the yuan’s climb onshore, as well as move by the People’s Bank of China (PBOC) to set its yuan mid-point at 6.9307 against the dollar, down from 6.9526 on Wednesday.

But analysts noted that the offshore yuan’s move was also driven by mainland policymakers’ apparent efforts to tighten capital controls.

China regulators introduced new rules, which will take effect in July, requiring financial institutions on the mainland to report domestic and overseas cash transactions of more than 50,000 yuan (around USD 7,217), down from 200,000 yuan previously, Reuters reported.

Starting from January 1, the country’s foreign-exchange regulator also planned to step up scrutiny on foreign-currency purchases, Reuters reported.

Additionally, overnight Hibor, or the Hong Kong interbank offered rate, for the offshore yuan, was pushed higher, reaching as high as 17.76 percent on Monday, before slipping to around 16.95 percent on Wednesday. On Thursday, Reuters reported the rate was set at 38.335 percent.

Mirza Baig, head of foreign exchange and interest rate strategy for Asia at BNP Paribas, said that level, similar to what would be seen in economically troubled Brazil, served up a punitive interest rate on any short renminbi position in the offshore-yuan market.

“That high cost of funding combined with more measures to restrict capital outflows” buoyed the yuan, noted Baig.

Economists at Citi also pointed to short-covering in the offshore yuan.

“We have often pointed out that tight offshore-yuan funding is a low-cost option for authorities to shake out speculative offshore-yuan shorts — because it poses a negligible risk to the mainland economy — and can thus be persisted with for longer than investors anticipate,” Citi said in a note dated late Wednesday U.S. time.

It noted that shorting the offshore yuan — or taking a long dollar/offshore yuan position — had become “rather expensive.”

The analysts cited several reasons for the sudden resilience of the offshore yuan.

“The widely-held view that pressure on the renminbi would intensify at the start of the year is being rapidly reassessed amidst persistently high funding costs in the offshore yuan, reports suggesting U.S. dollar sales by state-owned enterprises, stricter monitoring of capital outflows, and an apparent change in methodology for setting the daily dollar/yuan midpoint,” Citi said.

In a previous note, Citi has said that policymakers appeared to be setting the midpoint for a slightly stronger yuan than would be suggested by the currency’s trade-weighted basket.

The mainland’s currency has recently become a source of political tension with the U.S., with President-elect Trump vowing during his campaign to label the country a currency manipulator for the purposes of a competitive trade advantage and threatening to impose a 45 percent tariff on its exports to the U.S.

In the wake of the Trump win, the yuan fell to nearly eight year lows against the dollar, touching its weakest since at least January 2009, during the global financial crisis. But analysts attributed the slide primarily to the strength of the dollar, with the dollar index, which measures the greenback against a basket of currencies, surging to a 14-year high after the election.

Some analysts had noted that, based on currency movements within the yuan’s trade-weighted basket, policymakers appeared to be supporting the yuan somewhat.

Analysts generally don’t expect the yuan will continue to climb much against the dollar, even as the country faced the likelihood that capital outflows would remain relatively high.

Geoff Lewis, global market strategist at Manulife Asset Management, told CNBC’s “Squawk Box” on Thursday that he expected the yuan to fall around 4-5 percent against the dollar this year, a slower pace of depreciation than 2016’s around 7 percent.

“I think what we’re talking about here is a renminbi which weakens in line with other currencies. There’s no harm in that. I don’t think Beijing will try and resist that,” Lewis said.

“The capital account is relatively poor,” he said, but he added, “China still has enough reserves to prevent the renminbi from crashing.”

He noted that while there were concerns that the mainland’s foreign-exchange reserves might fall below the psychological USD 3 trillion mark, he didn’t attach much real significance to psychological levels as USD 3 trillion was still a sizable pot.

In November, China’s foreign reserves fell to USD 3.052 trillion, a nearly six-year low, Reuters reported. December’s data were due on Saturday.

Lewis wasn’t alone in shrugging off the upcoming data.

“I think it is not of huge significance to the market, because it does not convey the full picture of Chinese authorities’ intervention in the foreign-exchange market,” BNP Paribas’ Baig said. “This is partial information and it has become a less important market driver. The market does not move on this number much anymore.”

Federal Reserve officials in December approved their first interest rate hike in a year based in large part on market reactions to the presidential election and the anticipation of aggressive fiscal policy ahead, according to minutes of the meeting released Wednesday.

The summary showed that while the Federal Open Market Committee steers clear of political chatter, the fallout from Donald Trump’s victory was on their minds.

The FOMC unanimously approved a quarter-point hike that pushed the target range for its short-term lending rate to between 0.5 percent and 0.75 percent, and indicated a somewhat more aggressive path forward.

Indeed, markets had reacted sharply to the election outcome, pushing up bond yields and stock prices, and increasing expectations that the Fed would hike at the meeting, the minutes showed. While there is no mention of Trump, the impact from the election on markets and the economy seemed to be discussed extensively.

“Asset price movements as well as changes in the expected path for US monetary policy beyond December appeared to be driven largely by expectations of more expansionary fiscal policy in the aftermath of US elections,” the minutes said at one point.

In the period between the November and December meetings, “market participants saw a nearly 95 percent probability of a rate hike” as “most of the steepening of the expected policy path occurred following the US elections, reportedly in part reflecting investors’ perception that the incoming Congress and Administration would enact significant fiscal stimulus measures.”

“Many” officials worried that letting the unemployment rate fall too far without hiking rates could necessitate a more aggressive path ahead. In line with that thinking, the committee increased its projections for 2017 from two rate hikes to three.

“There’s still a lot of uncertainty with the incoming Trump administration. I think we’re just going to sit tight until after Jan. 20,” said Peter Ng, senior FX trader at Silicon Valley Bank. “If these actions do come to fruition, then we’ll probably get a faster response from the Fed.”

But it was more than the usual factors weighing into the decision.

Members looked at what the future held and figured that the possibility for more aggressive growth had to be taken into account. Trump wants to spend as much as $1 trillion on infrastructure while cutting taxes and reducing regulations, the latter of which is “posing upside risks” to some members’ economic forecasts.

“Most participants attributed the substantial changes in financial market conditions over the intermeeting period — including the increase in longer-term interest rates, the strengthening of the dollar, the rise in equity prices, and the narrowing of credit spreads — to expectations for more expansionary fiscal policies in coming years or to possible reductions in corporate tax rates,” the minutes said.

However, the economic projections overall nudged only slightly higher, with the committee now indicating that GDP growth would hit 2.1 percent in 2017 as opposed to the 2 percent estimate in September. They did indicate that those projections could change.

Almost all members “also indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,” the minutes said.

Markets in Europe open slightly higher continuing the gains seen in Asia on Wednesday after the US dollar nearly reached a 14-year high.

The pan-European Euro Stoxx was 0.11 percent higher on Wednesday with the major bourses trading in positive territory.

The new year has started with the release of upbeat economic data, boosting global equities.

The Bank of England is also publishing the latest mortgage lending numbers.

US carmaker Ford has canceled plans to build a new car plant in Mexico.

Also in the corporate world, the European Commission has extended its deadline for a decision over ChemChina’s proposal to buy the Swiss pesticide firm Syngenta.

The Italian lender Intensa Sanpaolo is to loan 5.2 billion euros ($5.4 billion) to Glencore and Qatar’s sovereign wealth fund who are purchasing a stake in Russian oil firm Rosnef.

After a long rough patch, Indian aviation is finally booming, but that burst of growth is now taking a toll on the industry’s infrastructure.

High operating costs, intense competition and the collapse of Kingfisher Airlines had weakened both business and civil sectors in previous years, but recently the Indian market has turned a corner into the world’s fastest growing, largely thanks to supportive government policies.

India is currently the sole bright spot in Asia’s aviation sector, Neil Book, CEO at the largest independent aviation firm JSSI, told CNBC’s “Squawk Box” on Wednesday.

Private jet sales are up and the emerging middle/upper classes have witnessed double-digit growth rates in travel, he explained.

The upper middle class made up 8 percent of the population in 2015, and is set to hit 12 percent by 2020, according to Boston Consulting Group. Meanwhile, the ultra-high net worth population–defined as those whose net worth exceeds USD 50 million–stood at 178,000 in 2016 and will increase 57 percent by 2021, estimates Credit Suisse.

Unlike his predecessors, Prime Minister Narendra Modi has loosened industry restrictions that are set to increase new aircraft deliveries as well as in-service and used business jets, Book continued.

Indeed, 2016 was a landmark year for Indian carriers as Modi unveiled a national civil aviation policy aimed at expanding air travel. Under the policy, domestic airlines are no longer required to log five years of domestic routes before getting an overseas permit, known as the 5/20 rule.

The government also said it would limit base fares on regional routes to 2,500 rupees (USD 37) per hour of travel in an attempt to make flying more viable for commercial passengers.

As strong economic fundamentals boosts air traffic, India may even overtake Japan this year to become the world’s third largest domestic market behind the US and China, the Centre of Aviation (CAPA) stated in a new report.

But the skies aren’t entirely clear. The biggest risk to Indian aviation is the same one plaguing the national economy: creaky infrastructure.

“India faces the very real prospect of an airport capacity crisis,” CAPA noted. “Slot constraints and congestion are key issues at most metro airports and are expected to remain so for the near term as new terminals and runways will take 2-3 years to develop.”

The developments of new airports, such as the Navi Mumbai International Airport, have also been subject to lengthy delays, CAPA added.

Airspace is another potential concern on the supply side, with CAPA recommending that the air navigations services division of the Airports Authority of India be hived-off as a separate entity and corporatized.

If airports remain saturated, choking off air connectivity to India’s centers of commerce, industry and tourism, the economic ramifications could be severe, CAPA warned.

When it comes to Asia’s growth outlook, the south still reigns supreme. India, Indonesia and Thailand are seen as the region’s best performers of 2017 thanks to healthy fundamentals, economists told CNBC.

An external backdrop of tighter monetary policy in the United States—the Federal Reserve is expected to hike interest rates three times this year—and slowing global trade in anticipation of a protectionist stance from Washington also works in the favor of these three nations.

“Export-dependent economies such as Korea, Taiwan, Singapore, and even China are unlikely to see a rebound this year. Our advice is to look at locally-driven economies like India and Indonesia, where debt levels are relatively low, there’s positive credit impulse and strong domestic consumption,” said Frederic Neumann, managing director and co-head of Asian economics research at HSBC.

Thailand’s benchmark SET index was Asia’s second-best performer last year, up 20 percent, boosted by the recovery in oil prices since 35 percent of the stock market is leveraged towards oil, pointed out Kelvin Tay, regional chief investment officer for southern APAC at UBS.

Investors were also relieved that Thailand’s monarchy succession ended up being a benign and steady process, noted Vishnu Varathan, senior economist at Mizuho Bank. In October, fears were widespread that the death of King Bhumibol Adulyadej and subsequent mourning period would result in a power struggle and spark both economic and political damage.

Meanwhile, the Indian and Indonesian currencies, which suffered wild swings against the greenback in 2013 when the US central bank first indicated it would hike rates, are now predicted to be relatively stable even as the Fed tightens its taps. Neither the rupiah or the rupee will see a re-run of 2013’s taper tantrums this year, predicted Neumann.

Game-changing tax reforms in both countries also made both nations a favorite among investors. Indonesian President Joko Widodo launched a tax amnesty program in July last year that collected around USD 7.7 billion in government revenue as of Dec. 20, a major coup for the leader’s plans to ramp up infrastructure spending. Meanwhile, Indian Prime Minister Narendra Modi’s demonetization program that began in November is also aimed at widening state coffers and promoting digital payments.

Wellian Wiranto, economist at OCBC, was particularly bullish on Indonesia, Southeast Asia’s largest economy.

“Its domestic consumption serves as an important buffer [to external risks]. While its relatively shallow financial markets mean that it remains a hostage to global capital flows volatility, policymakers have exhibited commendable finesse in preserving currency stability without resorting to measures that might spook markets.”

Furthermore, investment growth, a key indicator of economic health, is set to tick up to 5.6 percent this year, from 4.5 percent in 2016, according to DBS.

Ultimately, the biggest factor that could weigh on Asia’s outlook is how Chinese demand holds up, warned Varathan.