Hi Eoin Like most of your subscribers I avidly follow your video commentaries. In yesterday’s broadcast while discussing India I was a little surprised that you did not mention the effects of the Monsoon on the economy which is starting now. Latest predictions are for an above average monsoon which is of course highly significant for food prices and thus for inflation.
Thanks to a subscriber for this article from the Financial Times confirming the ECB has reduced purchases of BTPs following the Italian election. Here is a section:
The central bank purchased a net €3.6bn of Italian government debt under its long-running programme in May, new figures show. Although this is higher than the amount it bought in some recent months, such as March and January, it was smaller as an overall proportion of its net purchases.
The ECB insisted that the reduced Italian share had nothing to do with political events, and was purely linked to practical issues such as the need for the bank to reinvest in German bonds after a chunk of its holdings matured.
But the numbers were nonetheless seized on by members of Italy’s new governing parties, who have been arguing for weeks that the eurozone’s central bankers have been putting pressure on them to adopt more conventional economic policies.
I have read with interest many comments regarding the difficult situation that has developed in Italy, and I feel I have to make a couple of points which I hope will help clarifying some aspects of it:
1/ of the 2 so called populist parties (Lega and M5S) only the former had an explicit anti-EU bias during the election campaign, while the latter had moved to a pro-EU stance; the alliance formed past the elections included a marked anti-EU stance (specifically through the appointment of an anti-Euro candidate to the Ministry of Finance); This is of course unacceptable (the coalition has no anti-EU mandate), hence the decision to appoint someone else with a short mandate to take the country to new elections where Italy's position in the EU is openly and explicitly debated. Was an anti-EU coalition to be elected of course they would be in power, there is no shadow of doubt about that. So, no democratic deficit here, in fact there is an extremely robust democratic process in place.
2/ There is no doubt the current events are an existential threat to the Euro area; it will be difficult to navigate, as a "quitaly" would have an extremely dramatic impact on the lives of many people in the country. I hope qualified majorities will be required to take the most important decisions, but given the pressure from financial market I doubt it will be possible; on the other hand, was a government to unilaterally pull the plug on the Euro and re-introduce the Lira, I think it would be nothing short of a coup.
With no further EU reforms, I think the spreads we have seen opening between BTPs and Bunds are deemed to stay. The ECB won't add additional risk to that already present into its balance sheet. However, I do not see how any reform could take place given the current anti EU climate. I am very pessimistic.
Finally, 2 interesting articles I wanted to share with you, one from the FT suggesting there is convenience for leaving the Euro (I share this view 100%, completely absurd), and another suggesting some reforms the EU could do. I hope they can be of interest.
This transcript of a talk George Soros gave for Project Syndicate may be of interest to subscribers. Here is a section:
But since the financial crisis of 2008, the EU seems to have lost its way. It adopted a program of fiscal retrenchment, which led to the euro crisis and transformed the eurozone into a relationship between creditors and debtors. The creditors set the conditions that the debtors had to meet, yet could not meet. This created a relationship that was neither voluntary nor equal – the very opposite of the credo on which the EU was based.
As a result, many young people today regard the EU as an enemy that has deprived them of jobs and a secure and promising future. Populist politicians exploited the resentments and formed anti-European parties and movements.
Then came the refugee influx of 2015. At first, most people sympathized with the plight of refugees fleeing political repression or civil war, but they didn’t want their everyday lives disrupted by a breakdown in social services. And soon they became disillusioned by the failure of the authorities to cope with the crisis.
When that happened in Germany, the far-right Alternative für Deutschland (AfD) rapidly gained strength, making it the country’s largest opposition party. Italy has suffered from a similar experience recently, and the political repercussions have been even more disastrous: the anti-European Five Star Movement and League parties almost took over the government. The situation has been deteriorating ever since. Italy now faces elections in the midst of political chaos.1
Indeed, the whole of Europe has been disrupted by the refugee crisis. Unscrupulous leaders have exploited it even in countries that have accepted hardly any refugees. In Hungary, Prime Minister Viktor Orbán based his reelection campaign on falsely accusing me of planning to flood Europe, Hungary included, with Muslim refugees.
This article from Bloomberg News may be of interest to subscribers. Here is a section:
“This isn’t a deep liquid market anymore,” said Peter Tchir, the New York-based head of macro strategy at Academy Securities Inc. “Everyone was overweight, positioned long Italian debt and the price declines created a hot potato down in prices. The volatility was so insane that people’s risk managers likely just told them you have to cut these positions.”
Helping to escalate investor fear was the fact that the European Central Bank, the region’s most captive and price-insensitive buyer, may be stepping away from the market later this year, Tchir said.
BlackRock’s Scott Thiel, who has been short Italian bonds, or BTPs, since before Italy’s March 4 vote, on Tuesday cited poor trading volumes as being behind the “extraordinary” moves in the securities.
This article by Shuli Ren for Bloomberg may be of interest to subscribers. Here is a section:
Actually, it’s China’s fault: Non-investment-grade issuers from the mainland have already raised more than $30 billion, following a record $77 billion last year. China Inc. now has half the weighting of the Bloomberg Barclays Asia USD High-Yield Bond Index.
So if China sneezes, the rest of Asia gets sick. Global fund managers hesitate to deviate substantially from their benchmarks; the most likely action is fleeing the asset class altogether. Already, in the last month, global funds pulled more than $5 billion from emerging-market bonds, data provided by Jefferies Group show.
And it looks like China may be catching something worse than a little cold: The feared D-word is being whispered. Beijing has already allowed China Energy Reserve & Chemicals Group Co. (which counts state oil behemoth China National Petroleum Corp. as a major stakeholder) to default, as well as a financing vehicle in Inner Mongolia. Will the authorities blink if private-sector enterprises miss their obligations?
China is now on track to achieve an unhappy annual record. There have already been 19 bond defaults this year, totaling $3.1 billion.
This article by Peter Millard for Bloomberg may be of interest to subscribers. Here it is in full:
The reaction was swift and severe. Petrobras Chief Executive Officer Pedro Parente woke up this morning to a wave of downgrades from the same Wall Street analysts who had been praising him since he took the helm of the state-controlled oil producer two years ago.
Bank of America Merrill Lynch, Morgan Stanley and Credit Suisse Group AG all cut their recommendations after Parente announced a 10 percent cut in wholesale diesel prices late Wednesday to help the government negotiate an end to a nationwide truckers strike that has wrought havoc on Latin America’s largest economy.
“The just announced diesel price reduction in response to truckers’ protest is likely to materially damage Petrobras’ perceived independence in a way that may be difficult to recover,” Frank McGann, an analyst at Merrill Lynch, wrote in a report where he cut his recommendation on the company’s American depositary receipts to neutral and his price objective to $17.
“We think that the investment case for Petrobras has been seriously damaged, and the risk profile has risen.”
While Parente said Petrobras isn’t bowing to pressure and that the temporary measure doesn’t mean a change in its pricing policy, shares extended losses in after hours trading to as low as $13.40 in late New York trading.
This article by Onur Ant and Benjamin Harvey for Bloomberg may be of interest to subscribers. Here is a section:
Turkey’s central bank raised interest rates to halt a slide in the lira that’s seen the currency post a series of record lows.
The central bank raised its late liquidity window rate by 300 basis points to 16.5 percent, after an extraordinary meeting of its monetary policy committee on Wednesday to “discuss recent developments.” It kept other rates unchanged, describing the move as a “powerful monetary tightening” and saying it’s ready to continue using all instruments.
The lira reversed Wednesday’s losses after the bank’s move. It was trading 0.7 percent stronger at 4.6367 per dollar as of 7:32 p.m. in Istanbul. The currency earlier fell as much as 5.5 percent.
The central bank acted after three weeks of turmoil on Turkey’s currency markets. Turkish President Recep Tayyip Erdogan, who’s seeking re-election next month, has publicly opposed any moves to raise interest rates, while investors and economists argued that was the only way to halt the rout.
Erdogan told Bloomberg in an interview this month that he’ll seek more control over monetary policy if he wins the vote.
The central bank’s rate-setting committee hadn’t been scheduled to meet until June 7. After news broke of its emergency session on Wednesday, Finance Minister Mehmet Simsek said on Twitter that it’s time to restore the credibility of Turkey’s monetary policy.
This article by Molly Smith for Bloomberg may be of interest to subscribers. Here is a section:
Moody’s Investors Service said it may cut Campbell Soup Co.’s credit rating after the company posted a steep drop in profitability and its chief executive officer suddenly stepped down.
All of the company’s ratings are under review, including its Baa2 senior unsecured rating, Moody’s said in a report Monday. That’s only two steps above speculative-grade. Moody’s did not say how many levels the downgrade could amount to.
Campbell Soup has short- and long-term debt of $9.84 billion and its leverage as measured by debt-to-Ebitda -- earnings before interest, tax, depreciation and amortization -- was about five times at the March closing of the Snyder’s-Lance Inc. acquisition. Moody’s says it’s now doubting that the company can meet its expectations to reduce that metric to below four times within two years via cash flow and cost savings.
“The sharp and unexpected decline in profitability in the third quarter casts serious doubt that Campbell will be able to meet its deleveraging plans following the Snyder’s-Lance acquisition,” Moody’s analyst Brian Weddington said in the report. “Additionally, the departure of the CEO adds further uncertainty about whether the company will respond successfully to its operating challenges in the near term.”
