The importance of monetary policy
The most recent data indicate that the environment for the European economies has been mixed over the last months; GDP growth in the European Union and Euro Zone has slowed with year-on-year growth in the second quarter of 2014 standing at 1.2% and 0.7% respectively, down from the previous quarter (1.4% and 1.0%, respectively). There has also been a downward trend in the indicators measuring confidence and economic sentiment in both the Euro Zone and European Union.
It is the decline in the contribution from investment and net external demand that stands out particularly in the Euro Zone’s GDP in 2Q14, though this is partially offset by an improvement in private and public consumption.
The most recent trend is a setback for expectations of a more significant economic recovery in the short/mid-term; this was confirmed when the ECB forecasts for GDP growth in the Euro Zone for 2014 and 2015 were revised down at the meeting held in September to analyze monetary policy.
Specifically, the ECB’s latest forecasts for GDP in the Euro Zone are for 0.9% growth in 2014, down 0.2% from June’s projections. The forecast for GDP growth in 2015 is 1.6% (0.1% down from June), going up to 1.9% in 2016 (0.1% up from June).
In 2014, the ECB has lowered its reference rates twice, although was less than in previous years. After cutting reference rates by 0.50% to 0.25% in 2013 (taking the rate on the main refinancing operations as reference), at the meeting of June 2014 the European Central Bank made a further cut of 0.10% in intervention rates (at the time to record lows of 0.15% for the main refinancing operations). At the September meeting, the European monetary authorities again lowered their key interest rates, setting the rate for the main refinancing operations at 0.05% (a further cut of 0.1%), a new record low for this reference rate.
The rate on the marginal lending facility, which was at 0.75% in the end of 2013, went down to 0.3%, while the rate for the deposit facility fell from 0.0% at the end of 2013 to -0.2%. This is of the utmost importance insofar as the absorption rate of funds moves into negative territory, which means the ECB wants banks to be more available to grant financing to the economy.
In addition to changes to the intervention rates, the Central Bank confirmed other unconventional monetary policy measures aimed at a better transmission of these changes to the economic activity. Under these measures, the ECB gives banks the option to take funds maturing in September 2018 corresponding to the amount of credit granted to the non-financial private sector, excluding loans to households for the purchase of houses, but which could be increased in the future through operations of a similar nature. The first targeted longer-term refinancing operation (T-LTRO) came in September, and a second is planned for December. The ECB also announced the purchase of some assets that the financial institutions have in their portfolios.
As for the United States, the latest indicators point to a more robust growth in economic activity in the second and third quarters following the unexpected fall in GDP registered in the first three months of the year. The improvement is on the back of a more positive performance of investment and private consumption, reflecting the gradual improvement in the labour market. Thus, after going down 2.1% in the first quarter, the GDP growth rate rose to 4.6% in the second quarter and is expected to be around 3.0% in the third quarter.
As a result of this momentum in the US economy, the FED is continuing the process of reducing the monetary policy incentives for economic growth through a steady cutback in the purchase program of assets on the banks’ balance sheets (initially set at USD 85b/month to USD 15b/month at the mid-September meeting).
However, the Fed Chair-woman has already acknowledged the possibility of bringing forward an increase of intervention rates; meanwhile, at the last meeting she again stated that the key interest rates would remain at quite low levels for a long period of time, even after the asset purchase program is withdrawn.
It is again stressed that monetary policy has been the preferred instrument to stimulate the economy since the start of the financial crisis. With the substantial decline in inflationary pressure, monetary policy has become even more accommodating, not only through the lowering of the reference rates to record lows, often to near zero, but also through the use of unconventional measures that inject liquidity into the financial system.
The US Federal Reserve and the Bank of England have kept their reference rates at low levels over the last year (between 0.0% and 0.25% in the United States and at 0.5% in the United Kingdom). These central banks have also undertaken asset purchase programs designed to influence the long-term interest rates, which in the case of the US are now coming to an end.
The ECB has lowered its intervention rates to historic lows (0.05% since the September 2014 meeting) and in mid-2013 started giving the market a perspective on the future evolution of monetary policy, stating that it will remain accommodative for as long as necessary as a way of anchoring long term interest rates.
It should be noted that over recent months there has been a considerable decline in yields on the public debt securities of most European countries; this reflects the expectation that monetary policy will remain accommodative in a context of low GDP growth rates and low inflation rates, particularly in the Euro Zone where reference has been made to the risk of deflation on several occasions. It is also stressed that the neutrality levels of interest rates are perceived to be lower now than in other economic contexts due to the fact that inflation is anchored at record low levels.
There has also been a marked decrease in the credit spreads associated to the more peripheral Euro Zone countries in relation to the German public debt securities with the same maturity, reflecting a reduction in the respective risk premiums. However, this decline was not linear over the whole year and at times of greater instability in the financial markets, the credit spreads associated to the more peripheral Euro Zone countries widened.
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Shares rise as cyclical stocks provide support; yields climb
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – A gauge of global equity markets snapped a 3-day losing streak to edge higher on Friday, as the recent selling pressure on high-flying big technology-related stocks eased even as investors showed a preference for economically sensitive cyclical sectors.
Oil prices fell from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather, while the U.S. Treasury yields extended their recent rise.
The MSCI’s global stock index was up 0.47% at 681.88, after losing ground for three consecutive sessions.
On Wall Street, stocks steadied as cyclical sectors edged higher while tech names made modest advances after concerns about elevated valuations led to some selling in recent sessions.
“What we saw (this week) represents a market that is tired and may not do very much. So we are headed for some sort of a pullback, but I don’t think we’re there just yet,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
“Investors are not really pulling out of the market, but they are becoming more cautious. It already has factored in another good positive earnings season.”
The Dow Jones Industrial Average rose 119.97 points, or 0.38%, to 31,613.31, the S&P 500 gained 12.93 points, or 0.33%, to 3,926.9 and the Nasdaq Composite added 92.58 points, or 0.67%, to 13,957.93.
The S&P 500 technology and communication services sectors, housing high-value growth stocks, were among the smallest gainers in early trading, while financials, industrials, energy and materials rose more than 1%.
European shares edged higher on Friday as an upbeat earnings report from Hermes boosted confidence in a broader economic recovery. The pan-European STOXX 600 index was 0.64% higher.
U.S. Treasury yields on the longer end of the curve rose to new one-year highs on Friday as improved risk appetite boosted Wall Street, while the yield on 30-year inflation-protected securities (TIPS) turned positive for the first time since June.
Core bond yields have pushed higher globally, led by the so-called reflation trade, where investors wager on a pick-up in growth and inflation. Growing momentum for coronavirus vaccine programs and hopes of massive fiscal spending under U.S. President Joe Biden have spurred reflation trades.
The benchmark 10-year yield was last up 5.1 basis points at 1.338%, its highest level since Feb. 26, 2020.
Oil prices retreated from recent highs for a second day on Friday as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude oil production and 21 billion cubic feet of natural gas, analysts estimated.
Brent crude futures were down 28 cents, or 0.44%, at $63.65 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 66 cents, or 1.09%, to $59.86.
Copper jumped to its highest in more than nine years on Friday and towards a third straight weekly gain as tight supplies and bullish sentiment towards base metals continued after the Chinese New Year.
Spot gold XAU= was down 0.58% at $1,785.71 an ounce.
The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite sapped demand for the safe-haven currency and drew buyers to riskier, higher-yielding currencies. The dollar index was off 0.295%.
Bitcoin hit yet another record high on Friday, hitting a market capitalization of $1 trillion, blithely shrugging off analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.
(Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski)
Oil falls after surging past $65 on Texas freeze
By Stephanie Kelly
NEW YORK (Reuters) – Oil prices fell on Thursday despite a sharp drop in U.S. crude inventories, as market participants took profits following days of buying spurred by a cold snap in the largest U.S. energy-producing state.
Brent crude fell 41 cents, or 0.6%, to settle at $63.93 a barrel. During the session it rose as high as $65.52, its highest since January 2020.
U.S. West Texas Intermediate (WTI) crude futures fell 62 cents, or 1%, to settle at $60.52 a barrel, after earlier reaching $62.26, the highest since January 2020.
Brent had gained for four straight sessions before Thursday, while WTI had risen for three.
“The market probably got a little bit ahead of itself,” said Phil Flynn, a senior analyst at Price Futures Group in Chicago. “But make no mistake, this selloff in oil doesn’t solve the problems. The problems are going to persist.”
Though some Texas households had power restored on Thursday, the state entered its sixth day of a cold freeze. It has grappled with refining outages and oil and gas shut-ins that rippled beyond its border into Mexico.
The weather has shut in about one-fifth of the nation’s refining capacity and closed oil and natural gas production across the state.
“The temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected,” SEB chief commodities analyst Bjarne Schieldrop said.
Prices dropped despite a decrease in U.S. oil inventories. Crude stockpiles fell by 7.3 million barrels in the week to Feb. 12, the Energy Information Administration said on Thursday, compared with analysts’ expectations for an decrease of 2.4 million barrels.
Crude exports rose to 3.9 million barrels per day, the highest since March, EIA said.
“The big nugget was the big jump in exports of crude oil,” said John Kilduff, partner at Again Capital in New York. “We’ll have to see what happens with that next week weather in Texas, but I have been looking for a pickup there for a while.”
Oil’s rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping, which includes Russia.
OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.
(Additional reporting by Yuka Obayashi in Tokyo; editing by Emelia Sithole-Matarise, Steve Orlofsky, David Gregorio and Jonathan Oatis)
GameStop frenzy sparks fresh investment in stock-trading apps
By Jane Lanhee Lee
OAKLAND, Calif. (Reuters) – The recent trading frenzy centered on GameStop Corp and other “meme” stocks is sparking a wave of investor interest in start-ups aiming to mimic the success of Robinhood Markets Inc, whose no-fee brokerage app has helped drive a trading boom.
Public.com, a direct competitor to Robinhood that boasts a host of blue-chip backers, said on Wednesday it had raised $220 million, valuing it at $1.2 billion on the private market. Another well-heeled rival, Stash, said earlier this month it had raised $125 million, while Webull Financial LLC, backed by Chinese investors, is also raising fresh funds after enjoying an influx of new users.
Robinhood, meanwhile, raised some $3.4 billion in the midst of the GameStop furor to assure its stability amid rapid growth and demands by its trading partners that it post more collateral.
The fresh investments are coming even as government regulators ramp up scrutiny of Robinhood and others involved in the GameStop trading. A U.S. congressional committee on Thursday grilled the chief executive of Robinhood and a YouTube streamer known as “Roaring Kitty,” among others, as it probes possible improprieties, including market manipulation.
Robinhood came under stiff criticism from some quarters for restricting trading in GameStop and other shares at the height of the frenzy, a move the company says it was forced to make due to requirements of partners that settle trades. It has also drawn scrutiny for a business model that relies on payments for sending trading business to partner brokerages, a practice Public.com and some other rivals are pledging to avoid.
Investors see rich opportunity in bringing easy stock trading to smartphone users globally, though the companies say they are also cognizant of the risks.
Stash, which doubled its active accounts to over 5 million by the end of last year, operates with only four trading windows a day to discourage rapid speculative trading, it said.
U.K.-based Freetrade.io told Reuters by email that its user numbers last year grew six-fold to 300,000 and by mid-February had reached 560,000. It said it had raised a total $35 million, including from crowd-funding rounds from over 10,000 customers.
But it does not offer margin trading or riskier offerings. “These products encourage investors to behave as if they are gambling or speculating rather than investing,” a Freetrade.io spokesman said.
Interest in trading apps is soaring globally. In Mexico, trading app Flink launched seven months ago and already has a million users, according to co-founder and chief executive Sergio Jimenez. He said Mexicans can buy fractions of U.S. stock through the platform, but not Mexican stocks – yet.
“Ninety percent of them are investing for the first time,” said Jimenez.
Flink raised $12 million in a funding round in February led by Accel, an early investor in Facebook. Accel is also an investor in Public.com and Berlin-based Trade Republic Bank Gmbh, which allows European retail investors to buy fractions of U.S. stocks, according to Accel partner Andrew Braccia.
“The bigger story here is there’s just this global trend of… accessibility,” he said.
Start-up investors also see opportunity in the infrastructure behind the trading apps. DriveWealth, which serves Mexico’s Flink and 70-plus other online trading apps around the world, has hundreds more partnerships in the pipeline, according to founder and chief executive Bob Cortright. DriveWealth provides the technology to power digital wallets and trading apps, and also provides clearing and brokerage service to its business partners.
“This is this is only beginning,” said Cortright. “The fact that you could have a smartphone in your hand in India, for instance, and buy $10 worth of Coca-Cola stock at an instant, that’s pretty game-changing.”
Venture capital investments in U.S. fintech companies hit a record last year with $20.6 billion invested, according to data firm PitchBook. Globally, around $41.4 billion was invested in fintech companies in 2020.
(Reporting By Jane Lanhee Lee in Oakland; Editing by Jonathan Weber and Dan Grebler)
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