Fed's Williams sees issues abroad as biggest US recession risk

JAN 16, 20169:53 AM

[WASHINGTON] Federal Reserve Bank of San Francisco President John Williams said international risks pose the greatest threat to the US economic expansion, and China in particular is a concern.

"If you were to ask me what keeps me up at night, or what are the shocks that could cause a recession, I would say almost all of them are outside the US borders," Mr Williams said Friday on a panel discussion in San Francisco.

"I'm actually feeling a little bit more positive around Europe," he said, but "China's the wild card." The Fed is assessing when the economy will be strong enough to withstand another interest-rate increase after the central bank made its first hike since 2006 last month. Policy makers have said that the path forward will be gradual and data- dependent, and are keeping an eye on economic indicators, markets and the outlook overseas.

Their discussion comes against a backdrop of modest expansion in Europe and uncertainty in China. Growth in the world's second-largest economy is expected to slow to 6.3 per cent this year from 6.8 per cent in 2015 and 7.3 per cent in 2014, based on the International Monetary Fund's World Economic Outlook from October. "It's very hard" to know what's happening in China, Mr Williams said, though what he's worried about is a sharp decline in growth rather than a gradual slowdown.

"We are very connected to the rest of the world," Mr Williams said. "The reason the Fed is keeping interest rates still so low, the reason the economy, in my mind, is still growing only 2 per cent even with very low interest rates, even though a lot of things are getting better, most of it is because of weakness abroad and the strength of the dollar."

Mr Williams, who does not vote on policy this year, reiterated that the big question for the Fed domestically is how inflation will shape up. Price pressures have remained below the Fed's 2 per cent target since 2012, and their preferred index stood at only 0.4 per cent in November, weighed down by cheap oil and a strong dollar.

The Fed retains the option to pause its hiking cycle to reassess economic conditions as it moves forward, Williams told reporters. During the panel, he said that he will "stick with the view that right now it's going to take a gradual three-year process to get interest rates back to normal."

"Things look like they're doing well, but that was in the context of basically the Fed having the pedal to the metal," Mr Williams said. "We still need to give the economy a bit of a nudge," to keep growth within the range of 2 per cent to 2.25 per cent he thinks is appropriate, he said.

Market participants do not expect a rate increase at the Federal Open Market Committee meeting this month, based on federal funds futures pricing assuming that the rate will settle between 0.5 per cent and 0.75 per cent after the increase. Almost 30 per cent expect an increase in March.

Mr Williams told reporters that he is aware that expectations for a January increase are low, but declined to comment on the prospect for a move this month.

BLOOMBERG

    
 

US: Wall St plunges; Nasdaq at lowest since August

A plunge in oil prices sent US stocks sharply lower at the open on Friday, with the Nasdaq falling over 3 per cent to its lowest since Aug 24 and S&P 500 less than 30 points away from its August lows. 

PHOTO: REUTERS

JAN 15, 201610:46 PM

[NEW YORK] A plunge in oil prices sent US stocks sharply lower at the open on Friday, with the Nasdaq falling over 3 per cent to its lowest since Aug 24 and S&P 500 less than 30 points away from its August lows.

The Dow Jones industrial average fell 159.22 points, or 0.97 per cent, to 16,219.83.

The S&P 500 lost 24.49 points, or 1.27 per cent, to 1,897.35 and the Nasdaq Composite index dropped 146.07 points, or 3.17 per cent, to 4,468.94.

REUTERS

    
 

Chinese yuan steady, stocks down after weak lending data

China's yuan steadied on Friday as fears of a market meltdown faded thanks to central bank support for the currency during the week, though Chinese shares dropped after weaker-then-expected bank lending data and falling oil prices unsettled markets. 

PHOTO: BLOOMBERG

JAN 15, 20161:49 PM

[SHANGHAI] China's yuan steadied on Friday as fears of a market meltdown faded thanks to central bank support for the currency during the week, though Chinese shares dropped after weaker-then-expected bank lending data and falling oil prices unsettled markets.

Slight gains in early early trade put the yuan 0.1 per cent up on the week, but it was still nearly 1.4 per cent weaker against the dollar than it started the year and has lost nearly 5 per cent since August.

The turbulent start to 2016, with the currency and stock markets tumbling, had stoked concerns that Beijing's policymakers were in danger of fumbling as the country headed toward its slowest growth in 25 years.

The International Monetary Fund called on China to be clearer about its exchange rate policy. "More clarity and communication around the exchange rate regime would be useful," IMF spokesman Gerry Rice told a regular news briefing in Washington on Thursday.

The People's Bank of China (PBOC) set a slightly weaker mid-point rate for the yuan on Friday, but the fix has been broadly steady for more than a week, signalling a determination to hold the line against expectations of sustained depreciation.

Dealers expected the yuan would resume its decline if the central bank loosened its grip.

The midpoint for the tightly managed currency was set at 6.5637 per dollar on Friday, weaker than the previous fix of 6.5616 but 253 pips stronger than Thursday's closing quote 6.5890.

The spot market was changing hands at 6.5867 in afternoon trade, 23 pips firmer than the close. The spot rate is allowed to deviate 2 per cent either side of the daily fix. "The key for the spot rate's move is the central bank's attitude," said a dealer at an Asian bank in Shanghai. "Once it stops holding the midpoint, the spot rate is likely to drop back and break through 6.6 in the short-term." Offshore yuan liquidity was squeezed earlier in the week as a result of state-backed banks buying, at the central bank's behest, to push overnight borrowing rates in Hong Kong to record highs, making it prohibitively expensive to bet against the yuan.

That squeeze has narrowed the gap with the onshore market, though on Friday the offshore yuan was trading a little weaker, and about 0.4 per cent below the onshore spot at 6.6135 per dollar.

Traders said the offshore yuan weakened probably because of strong dollar demand, and expectations that the yuan would weaken going forward.

Other Asian share markets were briefly buoyed on Friday when oil prices rallied overnight, but they gave up their gains when oil resumed its collapse, reigniting fears about the health of the global economy.

China's main indexes opened lower and extended their fall in the afternoon session. The Shanghai Composite Index was down 2.5 per cent, while the CSI300 index shed 2.4 per cent. "Some sense of stability does seem to have been wrestled into the Chinese yuan this week, but the Chinese equity markets have been more immune to muscular shows of state intervention,"said Angus Nicholson, market analyst at IG.

Upbeat economic figures earlier in the week, including forecast-beating trade and inward investment data, had tempered some of the fears about the slowdown in the world's second-largest economy, but Friday brought news that fresh lending by Chinese banks was weaker than expected in December and well down on the previous month.

China's economic growth is expected to slow to 6.5 per cent in 2016 from a forecast 6.9 per cent in 2015, prompting the government to ease policy further, a Reuters poll showed.

The IMF spokesman said that while China's rebalancing of its economy has been bumpy, the IMF's view of the country's economic fundamentals were unchanged. If Beijing's own growth target slips, however, the IMF would recommend fiscal stimulus, he said.

China's major share indexes have lost about 16 percent so far in 2016 and are not far from their 2015 lows, chalked up in August after losing more than 40 percent from early June.

The August low might have been lower still, had regulators not wheeled out a raft of measures to support the market, and some think Beijing would do the same again to stop the indexes breaching those levels.

Weekly data from the Shanghai Stock Exchange shows money shifting into exchange traded funds (ETFs) tracking bonds, gold and money markets at the start of January.

REUTERS

    
 

Tougher rules on trading books target global banks

JAN 15, 20166:42 AM

[LONDON] Some of the world's biggest banks will have to set aside a combined US$77 billion in extra capital from 2019 under new trading book rules unveiled on Thursday by global regulators hoping to prevent another financial crisis.

In the latest sign of how regulators are being more accommodative as policymakers emphasise the need to help economies grow, the Basel Committee of banking supervisors has eased its initial proposal for a hike in capital requirements.

Banks had warned that overly burdensome demands would make trading uneconomic, crimp lending and thin already stressed liquidity in markets.

Basel did not name the banks likely to be affected, but major US trading firms such as JP Morgan as well as European players such as Deutsche Bank are likely to be in the frame.

Policymakers hope that publication of the rules will give clarity on the final, post-crisis regulatory picture for banks so they can forge sustainable businesses.

While the new rules won't represent a huge overall hike in capital requirements, they could dampen ambitions to expand trading. Some lenders are already scaling back on trading activities.

Under its final, long-awaited rules on how much capital banks must hold in case stocks, bonds and other markets turn sour as they did in 2007-09, Basel has raised the trading book assets of a bank's total risk-weighted assets to around 10 per cent from 2019 from about 6 percent.

Each percentage point difference is equivalent to less than 20 billion euros in extra capital, and an impact study by Basel study shows that for most lenders there will be little change, if any, in capital requirements.

The bulk of the 70 billion euros in extra capital requirements will fall on just a handful of big trading banks, though they are unlikely to need fresh capital as they typically hold far more than the overall minimum needed.

JPMorgan's Chief Financial Officer, Marianne Lake, told analysts on a conference call on Thursday that the final rules mark the start of a race to understand the changes and make necessary adjustments.

The rules are exceptionally complex and earlier drafts and proposals varied too much for the bank to spend a lot of time and money preparing for different outcomes, Lake said.

Under the new rules, the amount of capital needed against non-securitised assets, which make up the bulk of trading books and include shares, foreign exchange, swaps and commodities, will rise by a median of 27 per cent, Basel said.

For securitised or pooled debt, the capital increase will be a more modest 22 per cent as far heftier hikes were introduced in the immediate aftermath of the financial crisis in a quick-fix known as Basel 2.5.

The International Swaps and Derivatives Association welcomed"a more consistent and coherent market risk framework," but it is too early to comment on the overall capital impact, said Mark Gheerbrant, head of risk and capital for the group, in a statement. "We note, however, that even the Basel Committee's own estimate of a 40 per cent average increase in total market risk capital requirements would impose a considerable burden on banks on top of the increases already introduced following the crisis, as part of Basel 2.5," he added.

The association put out a statement with two other major trade groups, the Global Financial Markets Association and the Institute of International Finance, saying, "we worry that the rules may have a negative effect on banks' capital markets activities and reduce market liquidity." A core aim of the rules is to end incentives for banks to shift assets between their banking and trading books to exploit variations in capital charges. Regulators also want more consistent capital calculations.

Larger banks use their own models for calculating capital, which typically lead to lower requirements than under the standard method set out by regulators and used by the vast majority of lenders.

The new rules will still allow the use of models but within a much stricter framework, with the vetting of models by supervisors toughened up.

Approval for models will also be made more granular, with regulators able to stop their use at individual trading desk level at banks.

Banks that use models will also have to run the same calculations using the "standard" approach to act as a capital floor, irrespective of what models come up with.

Draft versions of the rules sparked accusations from banks of a Basel IV in the making, meaning a step change in capital requirements on top of Basel III, the world's core regulatory response to the financial crisis.

Central banks have dismissed this and the Basel Committee said on Thursday the changes it has to earlier drafts of the new rules "have led to an overall reduction in the capital impact".

REUTERS

    
 

Opec's oil basket price drops to US$25 a barrel

JAN 15, 20167:35 PM

[DUBAI] The average price for a basket of crudes from Opec producers fell to US$25 a barrel on Thursday, the group said, even before unrestrained exports from Iran hit the market.

Benchmark global oil prices took a fresh hit on Friday with the market bracing for more supplies from Iran earlier than expected.

The Organization of the Petroleum Exporting Countries said the price of a basket of crudes produced by its 13 members was assessed at US$25.69 on Wednesday.

Iran expects the United Nations nuclear watchdog to confirm on Friday it has curtailed its nuclear programme, paving the way for the unfreezing of billions of dollars of assets and an end to bans that have crippled its oil exports.

For the past 18 months, oversupply has been the main factor responsible for dragging down prices by two-thirds, after Saudi Arabia led Opec in a shift of its policy by deciding against cutting production to support prices.

Low prices have also spurred global demand to multi-year highs, but just as Saudi Arabia's strategy was showing signs of success, the United States has lifted a decades-old ban on its oil exports and Iran is bracing to boost output after lifting of the sanctions, adding to bearish sentiment in oil market.

Gulf oil sources have been sceptical about a quick return of Iranian barrels and Tehran's ability to raise production as swiftly as it says it can. They have expected sanctions to be lifted by the end of March with around 200,000-300,000 barrels per day of extra production flowing from Iran later this year.

Some now see oil prices falling further to around US$25 a barrel. Brent was trading at US$29.53 on Friday at 10.23GMT.

Opec's Reference Basket of Crudes (ORB) is made up of: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Minas (Indonesia), Iran Heavy, Basra Light (Iraq), Kuwait Export , Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine, Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).

Saudi Arabian oil minister Ali al-Naimi has said that growing global demand could absorb an expected jump in Iranian production this year.

Tehran plans to lift production by 500,000 barrels per day (bpd) post-sanctions and gradually raise shipments by the same amount a few months later.

Tehran is expected to target India, Asia's fastest-growing major oil market, as well as its old partners in Europe with the increased exports.

China's state-run oil refiner SinOpec Corp has purchased its first ever batch of US crude oil for export, a source told Reuters on Thursday, a landmark transaction after the ending of a four-decade ban on domestic exports.

REUTERS

    
 

China to invest US$4.2b in Beijing-Hebei high-speed rail link

      

JAN 15, 201610:09 AM

[BEIJING] China's state planner said it has approved a 27.4 billion yuan (S$6 billion) high-speed rail project which will link Beijing's new airport with neighbouring Hebei province.

The project will take three-and-a-half years to complete, the National Development and Reform Commission (NDRC) said on its website on Friday. It did not provide a project start date.

The government has flagged that it intends to spend more on infrastructure to shore up the cooling economy.

REUTERS

      

Juncker sees euro, EU trade at risk in unresolved refugee crisis

JAN 15, 20168:14 PM

[BRUSSELS] Europe's bickering over refugees has drained its credibility and ultimately puts continental free trade and the euro at risk, European Commission President Jean-Claude Juncker said.

"We're running the risk of major reputation damage worldwide," Juncker said Friday in a Brussels press conference that dwelt on the cascade of crises - from immigration and Britain's potential exit from the European Union to political small-mindedness - that he said bedevil the EU.

The glut of refugees - with eastern European countries balking at EU laws to house their fair share, and animosity in the wealthier west as well - has triggered the reintroduction of passport checks at some internal borders and threatens to fragment the economy, he said.

"Without the freedom of movement of workers, without the freedom of the citizen to travel, the euro makes no sense," Juncker said. "What's the point of having one currency which you can use across the continent if you can't travel across the continent as we have been able to do up to now?" Generation of Giants Juncker, 61, recently called a united Europe "the love of my life" and, as Luxembourg's prime minister, was a key figure in both the setup of the euro in the 1990s and its defense after the debt crisis hit in 2010.

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"A certain number of member states" are frustrating the EU- wide relocation of refugees, he said in a thinly veiled jab at Hungary and neighbors in the east.

Juncker parceled out criticisms toward the north, west and south as well. There was an implicit rebuke of Germany for shunning EU-wide bank deposit insurance and an explicit one of Italian Prime Minister Matteo Renzi for finding fault with most projects originating in Brussels.

Today's European leaders "stand on the shoulders of the giants who came before us," he said. "But my generation isn't a generation of giants. We're a generation of weak heirs who forget quickly."

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