Tag Archives: Bank for International Settlements

The Week Ahead: Hold On To Your Hats!

When it comes to the global economy, it seems like the fun is just getting started: Regulators are now  calling for extra capital to be imposed on the largest banks, Bank for International Settlements urge economic growth to slow down in order to curb inflation, central bankers are screaming for rate hike and Greek deputy prime minister warns that rebels may block new economic reforms.

“You can’t ask for more taxes in an already overtaxed country, in a market that has been sucked dry, with economic activity at zero and a huge recession.”

Antonis Samaras

Yup! Just when you thought the Chinese was going to save the day, it turns out that it’s not that easy after all. No matter what the bureaucrats of Brussels asks for; the people of Greece may very well give them the middle finger. But that’s not all. The central bankers – who have declared the worst is over  every other week for two years – has suddenly discovered that it’s probably not.

Right now rather disturbing news reports are pouring in.

Here’s some of the headlines of the financial press at the moment:

FINANCIAL TIMES

REUTERS

AP

THE WALL STREET JOURNAL

  • French Banks Seek Greek Debt Rollover. French banks have proposed a plan to reinvest half the proceeds from maturing Greek governments bonds ahead of a meeting of key players, in efforts to encourage private investors to contribute to a new bailout for Greece.
  • Nokia, Siemens fail to secure investors. Nokia Corp and Siemens AG failed to secure a deal for investors for a controlling stake in their unprofitable joint venture.

DER SPIEGEL

THIS WEEKS NUMBERS

Well, I have a feeling we might get a surprise or two, also, during the week.

When it comes to the economic data, European investors will look closely at the PMI surveys, that will indicate whether global soft-patch continued into June.

Th week also sees a raft of data on inflation, the US housing market and consumer trends, plus business conditions in Japan.

Monday
A week in which market attention will remain firmly set on Greece starts with the publication of Italian wages data before attention shifts across the Atlantic to the US, where personal income and outlays numbers will be used to gauge the strength of the consumer sector.

 

 

 

 

Tuesday
Greece’s Parliament is scheduled to vote on its new package of austerity measures on Tuesday. The reforms are a requirement for the next tranche of the IMF/EU loans to be released in time for the funding of bonds in mid-July.
The day also features a number of key data releases, starting with Japanese retail sales numbers for May, Gfk consumer confidence in Germany, plus business confidence and producer price numbers for Italy.
In the UK, final gross domestic product (GDP) numbers for Q1 are released, as well as current account data. According to official estimates, the UK economy expanded at only a modest rate of 0.5% in the first quarter of 2011.
After cooling in May, German consumer price inflation is expected to quicken from an annual rate of 2.4% to 2.6%.
Weekly US Redbook store chain sales are published before the release of the S&P Case-Shiller home price index takes centre stage. The index of home prices in the nation’s largest cities fell below its April 2009 low towards the end of Q1, raising worries about a double-dip in house prices.

The US Conference Board publishes its June barometer of consumer sentiment. Confidence waned in May amid rising fuel and oil prices and concerns about the employment situation. This apprehension among consumers likely continued in June.

Wednesday
Preliminary industrial production numbers for Japan will be eagerly anticipated after trade data showed exports falling at a faster-than-expected rate.
French GDP data (final) for Q1 are released in advance of UK consumer credit, mortgage lending/applications and money supply numbers.
European Commission economic sentiment figures for June follow.
Weekly US mortgage applications data are released, as well as pending homes sales numbers, which plunged in April. However, there is evidence to suggest that temporary factors, such as bad weather, were behind the severity of the decline.

Thursday
The Gfk consumer confidence survey for the UK is published ahead of the Markit/JMMA Manufacturing PMI™ for June. The PMI™ pointed to renewed output growth in May, as easing supply chain pressures enabled firms to restart production lines.
Euro zone inflation comes under the spotlight with producer price data for France and the preliminary estimate of consumer price inflation for the single currency area as a whole. After dipping unexpectedly in May, a further easing in the rate of inflation will make a rate hike later in the year less likely. German unemployment numbers are also published for June.
The usual US weekly jobless claims date are accompanied by the Chicago PMI, which will be watched closely due to its good track record with the ISM manufacturing index, published Friday.

Markit’s release of Manufacturing PMIs for Asia follow, notably final data for China, where the flash HSBC PMI™ survey pointed to a stagnation of output and easing price pressures across the sector. HSBC PMI™ releases for South Korea and Taiwan will be monitored for trends in global trade flows.
The Markit Euro Zone Manufacturing PMI™ data follow last week’s flash estimate, which showed the region’s economic growth surge losing momentum at a worrying rate.
The publication of the Markit/CIPS UK Manufacturing PMI™ follows shortly after. May data signalled that manufacturing moved from rapid expansion to near-stagnation.
Italy publishes final GDP numbers for Q1 and jobs numbers before the unemployment rate for the euro zone is released.
The week ends in the US, where the University of Michigan consumer confidence index will shed light on consumer spending patterns. Construction spending numbers follow.

However, the ISM Manufacturing PMI will be the key release in the US; the headline index posted its lowest reading for 12-months in May, reflecting a marked slowdown in output and new order growth.

Friday
Friday starts with the release of unemployment, consumer price inflation and household spending numbers for Japan, plus the Bank of Japan’s quarterly survey of business conditions.

Now, hold on to your hats, and trade with attitude!

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In The Mind Of Jean-Claude Trichet

Governor Jean-Claude Trichet of the European Central Bank is considered one of the most powerful and influential people in the world, alongside the US FED chief Ben Bernanke. But there are big differences in their fundamental way of economic thinking; Trichet being a product on the European anti inflation policy, Bernanke a traditional US FED banker who don’t hesitate to use the money supply to manage conjunctures at the expense of the possible inflation threats. Jean-Claude Trichet don’t give many interviews. But last week he sat down with two reporters from the Financial Times. Here’s a full transcript of the interview.

“We have permanently to be in a state which I call credible alertness.”

Jean-Claude Trichet

Jean Claude Trichet gestures before his conference in Madrid.

The following interview was conducted by Messrs Lionel Barber and Ralph Atkins from the Financial Times, and published on September 10th. Until now the rare interview has only been available to FT subscribers. However, by the courtesy of Bank of International Settlements, here’s a full transcript:

Financial Times: After the events of the past few years, are you confident that the euro can survive, and if so, why?

Jean-Claude Trichet: Yes, I am confident, of course! You know how much skepticism there was in the run-up to the setting-up of the euro. The best way to measure how much has been done is to conduct a thought experiment and place ourselves at the beginning of 1998 or, perhaps even more boldly, in 1994, and imagine hearing somebody say the euro would be launched on time in January 1999, that it would start with 11 countries, that very rapidly there would be 16 countries. And that after 11 ½ years, for these 16 countries and more than 330m people, not only would the stability of the euro be in line with our definition of price stability – below but close to 2 per cent – but that the level of price stability would be better than that obtained in the previous 50 years by major currencies before the euro. Over the 11 ½ years, euro area inflation has averaged 1.97 per cent. That would certainly have been considered much too bold, much too optimistic, perhaps totally unrealistic – but that is what we’ve been doing. So “yes, sir”, the euro is there. The euro area faces a lot of challenges, as is the case for all major advanced economies. All their central banks have a lot of challenges today, and this is no time for complacency for any of us, but the success of the euro, measured as I just suggested, is obvious.

Financial Times: What would you describe as the main challenges facing the euro today?

Jean-Claude Trichet: I would say that we have all the challenges of major central banks in the advanced world. There is the challenge of coping, in terms of our own responsibility, with the “turbulent episode” in which we find ourselves since three years. We have to cope with the challenge of globalization. We have to cope with the challenges of science and technology, which is developing so rapidly that it creates for the central bankers a lot of additional challenges, in particular in terms of assessing correctly productivity and the impact of IT on the financial sector. Population aging is also a big challenge for all central banks. We have two other challenges that other major central banks do not have. One is them deepening and overall implementation of the single market with a single currency, which has been Europe’s ambition since the very beginning. We are the only central bank which is transforming, by virtue of its own activity, the economy under its jurisdiction. The second challenge is enlargement. We were 11 countries at the beginning. Next January we will be 17, with Estonia joining. This highlights the challenge of permanently strengthening and deepening the governance of the euro area, with new economies coming in.

Financial Times: Before we talk about governance, let me ask you some specific questions about the crisis management measures. How are you going to reduce the dependence of the likes of Greece, Portugal, Spain, Ireland on extra liquidity provided by the ECB?

Jean-Claude Trichet: As you know, the European economy relies very much in terms of financing on commercial banks. So it’s not surprising that our own “non-standard measures” concentrate much more on bank refinancing than on intervening in markets, in comparison with the Fed. As markets gradually stabilize, our non-standard measures, which are fully consistent with our mandate and, by construction, temporary in nature, will continue to be 2 BIS Review 115/2010 progressively phased out. So we are accompanying the market as it progressively goes back to normal. But, as I said already, it is a process which takes time.

Financial Times: Do you have in mind, though, a need to phase out “non-standard” refinancing and do you have a sort of time horizon for this?

Jean-Claude Trichet: We of course have to consider all those measures as transitory. They are there to cope with a situation which is abnormal – to help correct those markets that are dysfunctional and thereby help restore a more normal transmission mechanism for our monetary policy. We have eliminated one-year liquidity, and we have also phased out six-months liquidity. The decisions we took last week take precisely into account, through three fine tuning operations in the last quarter, this progressive phasing out and its impact on liquidity.

Financial Times: Where do you think we are in this crisis? It’s a difficult question. I mean, if I’d asked Roosevelt in 1935 he would have had a hard time answering the question too…

Jean-Claude Trichet: I guess so, yes. I would say that the correct response is that we are in a situation where central banks in particular, and also other authorities, have to remain alert and have to know that we are in an uncertain universe. We always have to be prepared for new challenges that can not necessarily be foreseen and that might be in some respect unpredictable. We have permanently to be in a state which I call credible alertness.

Financial Times: How close did the euro area come to disaster in May?

Jean-Claude Trichet: No, I don’t think that the euro area was close to disaster at all – seen from inside. I know how Europe functions. I know how the constellation of authorities functions, at the level of the various nations and at the level of the European institutions,. Seen from the outside, I would say that it’s always difficult for external observers to judge and analyze correctly the capacity of Europe to face up to exceptional difficulties. There is no other model to which we can refer – either in history or in a fully fledged political federation such as the US, and certainly not in comparison with centralized states such as Japan or the UK. But I’m always confident. In May we had additional proof of the capacity of Europe to cope with new challenges.

Financial Times: Can you explain why [in May] the ECB changed its mind on government bond purchases? There was a lot of criticism in Germany especially.

Jean-Claude Trichet: When I talk of “credible alertness” I really mean it. When we decided on 9 August 2007 that it was appropriate to embark in an unlimited supply of liquidity in our own money market, and we supplied 95 billion euros for 24 hours, that was not a decision that was in the textbooks. We were criticized a little bit at the time, and then, after a while, it was recognized that this decision had been wise and lucid. So in May this year I would say that we were in a situation where it was considered appropriate by the governing council of the ECB to take the decision, as I said earlier, to help restore a more normal functioning of our own monetary policy transmission mechanism. We had previously purchased covered bonds and we had not excluded intervening in other markets.

Financial Times: What lessons do you draw in terms of euro governance from this crisis to date?

Jean-Claude Trichet: First of all, we are on the record as having always asked for full and decisive implementation of the governance measures that already exist. We combated very fiercely the position of the heads of government of the three major countries in the euro area when they wanted to weaken formidably the stability and growth pact, back in 2004 and 2005. It was a very, very fierce battle. They wanted to really unravel the pact. What I would sum up as our position today is very simple. We call for “a quantum leap” in the reinforcement of fiscal surveillance, with, in particular, what I would call the reversal of the BIS Review 115/2010 3 burden of the proof. We have called for the “quasi-automaticity” of procedures and sanctions. We have called for a reinforced independent way of assessing the fiscal situation and we have also called for a quantum leap as regard the surveillance of competitiveness and imbalances in euro area member countries. And, finally, we have called for decisive measures to enhance the quality of statistics. As regards the methodology, we consider that a change of the treaty would be appropriate, but we accept that this would involve a long or very long procedure at the level of 27 EU countries. That’s why we have called for the maximum use of secondary legislation as a first step, to exploit all the possibilities that secondary legislation can offer to go in the direction of the necessary goals. That’s the idea.

Financial Times: And what about temporary suspension of membership or even expulsion of a member that is systematically breaching this…?

Jean-Claude Trichet: No, I don’t call for expelling members, but a temporary suspension of voting rights is something that should be explored.

Financial Times: In retrospect, shouldn’t Europe have undertaken bank stress test earlier?

Jean-Claude Trichet: I think so. The ECB and the Bank of England were very much in favour of this stress test. Of course, we have a very complex institutional environment, involving cooperation in real time among 27 EU capitals. It was really essential to have this exercise undertaken on a unified basis, simultaneously. You know that we particularly welcomed the detailed publication of the results for the 91 banks involved.

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There’s more!

Download a copy and read the rest of the interview here.

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Global Forex Trends

The average daily turnover in the global FOREX market rose to $4,0 trillion from April 2007 to April 2010, the latest survey by BIS show. The increase was driven by a 48% growth in spot transactions, as the market become more global  and trading activity by non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks increased.

“For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions.”

Bank of International Settlements

In April this year, 53 central banks and monetary authorities participated in the eighth Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, conducted by Bank of International Settlements (BIS). The preliminary results indicates a strong growth and increased activity amongst non-reporting financial institutions.

The objective of the survey is to provide the most comprehensive and internationally consistent information on the size and structure of global foreign exchange markets, allowing policymakers and market participants to better monitor patterns of activity in the global financial system.

Coordinated by the BIS, participating institutions collect data from some 1,300 reporting dealers on turnover in foreign exchange instruments and OTC interest rate derivatives.

The triennial survey has been conducted every three years since April 1989, and has been modified since April 1995 to include OTC interest rate derivatives.

Previous triennial surveys have used the expression “traditional foreign exchange markets” to refer to spot transactions, outright forwards and foreign exchange swaps. This expression excludes currency swaps and currency options, which are under OTC instruments, BIS writes in a press release.

Beginning with the 2010 survey, the expression “global foreign exchange markets” will include all five foreign exchange instruments.

(Turnover on global foreign exchange markets and in interest rate derivatives is analyzed in the reports tables 1 to 5,  and in Tables 6 to 9, respectively, BIS points out).

The headline figures from the April 2010 survey are the following:

Turnover on the global foreign exchange markets.

  • Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion.
  • The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
  • The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.
  • As regards counterparties, the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” – a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (ie transactions between reporting dealers).
  • Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.
  • The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.
  • The relative ranking of foreign exchange trading centers has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

Read the full post (and download the report) at The Swapper:

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European Inflation: Now You See It – Now You Don’t

USA Could Be Forced Into Another Trillion Dollar Bank Rescue

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Will The Goldman-Case Kill The OTC Market?

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