Euro zone’s 140 billion-euro interest windfall could allow spending boost By Reuters


© Reuters. FILE PHOTO – The German Bundesbank presents the new 50 euro banknote at it’s headquarters in Frankfurt

By Dhara Ranasinghe and Sujata Rao

LONDON (Reuters) – Record-low borrowing costs and falling debt payments could give the euro zone a 140 billion-euro windfall by the end of 2021, freeing cash for projects ranging from new roads to climate protection.

This year’s slide in borrowing costs has put the bloc’s finances in a far stronger position — cutting the interest rates it pays, allowing governments to cheaply refinance older debt, and above all leaving them with cash in hand.

That’s bolstering the case of those who argue the euro zone can and should spend its way out of economic doldrums. With Germany teetering near recession and the European Central Bank’s monetary policy looking maxed out, many now regard government spending as the key to lifting growth and inflation.

At current yields, euro zone governments will save an average 0.10% of gross domestic product in interest this year, or almost 12 billion euros, Frank Gill, senior director in the sovereigns team at ratings agency S&P Global (NYSE:), estimates.

Savings would rise to 0.25% of GDP in 2020 and 0.80% in 2021, Gill says, noting this was above already expected savings, and the long tenor of euro securities means debt savings increase over time.

The savings would total around 140 billion euros — to put that in context, pent-up demand in Germany for public investment amounts to 138 billion euros, state-owned development bank KfW estimates.

“It is very significant, this is a windfall really,” Gill said. “Since 2013-14, the decline in interest expenditure to GDP, especially in places like Italy and Spain, has given governments some breathing space.

“(Savings will be )much greater for those sovereigns which have seen larger yield compression, namely, Italy, Portugal, and Spain, and the savings snowball over the next two years.”

According to Societe Generale (PA:), a 10-basis-point drop in bond yields translates into roughly a fall in interest payments of 0.35% of GDP for Italy, 0.27% in Spain, 0.22% in France and 0.16% in Germany.

From environment projects in Germany to greater education and welfare spending in Italy and infrastructure improvements across the euro zone, the fall in borrowing costs could finally spell the end of austerity.

Ten-year bond yields, the usual reference rate for borrowing costs, have fallen by half to two-thirds this year. With the ECB resuming rate cuts and dropping time constraints on asset purchases, yields have little impetus to rise.

(Graphic: Annual fall in 10-year EZ borrowing costs , https://fingfx.thomsonreuters.com/gfx/editorcharts/EUROPE-BONDS-SAVINGS/0H001QX5L89Z/eikon.png)

Until now, euro zone monetary stimulus has effectively been counteracted by stringent budgets. ECB President Mario said last week that if fiscal measures had been in place, they would have complemented central bank policy and boosted growth.

Globally too, there is a perception that central banks are nearing the limits of what they can achieve. Former U.S. Treasury official Lawrence Summers calls it “black hole monetary economics”, where small rate changes and aggressive stimulus strategies have only limited impact.

Jorge Garayo, senior rates strategist at Societe Generale, noted that U.S. President Donald Trump’s fiscal spending plans had boosted inflation expectations in 2016.

“That had a much bigger impact than QE (quantitative easing),” he said. “With diminishing returns from monetary policy easing, the only thing that could push (Europe’s) inflation expectations sustainably higher is if we go through a credible fiscal stimulus, most likely coordinated in some way.”

(Graphic: The euro zone’s debt load, https://fingfx.thomsonreuters.com/gfx/editorcharts/EUROZONE-BONDS/0H001QX5K89W/eikon.png)

OPPORTUNITY KNOCKS

Euro zone governments have been saving on interest for years as ECB QE drove down yields. The savings amounted to almost 2% of GDP since 2008, Unicredit (MI:) estimates.

The question is, will the budget room now being created persuade fiscal hawk Germany to drop its opposition to more saved over 160 billion euros in interest since 2008. This year’s windfall, following a 70-basis-point slide in 10-year yields, may exceed 5 billion euros, Reuters has reported.

Stewart Robertson, senior economist at Aviva (LON:) Investors reckons if Germany’s 10-year bond yields stay around -0.50% and it can raise debt at this level for four to five years, it would save some 15 billion to 20 billion euros annually.

There are caveats. Lower yields can take years to feed through. Benefits accrue only when yields fall and stay low for some time. Persistently low yields would also signal economic weakness, in turn threatening tax receipts.

ITALIAN JOB

Italy, one of the bloc’s most indebted members, probably has most cause to celebrate low yields. Desperate to revive its sluggish economy, it has frequently clashed with EU authorities for overstepping spending limits.

Now, though, the tumble in its 10-year borrowing costs, to 0.9% from 2.6% in early 2019, is defusing concern over its 2020 budget, due to be submitted next month.

Assuming unchanged yields, Rome can save up to 20 billion euros a year in interest payments, or 1% of annual economic output, Pictet Wealth Management strategist Frederik Ducrozet calculates. That assumes interest payments are spread over the years and yields stay low.

The government hopes to use that budget leeway to avoid an upcoming sales tax increase. Ducrozet noted the Bank of Italy is also profiting from its 400 billion euros of bond holding, most of it bought under ECB QE. That will partly be redistributed to state funds.

“In plain English, the Treasury is saving money on all fronts, probably over 1% of GDP on an annual basis,” Ducrozet said. “If the political situation were to improve for whatever reason – arguably a big IF –  the fiscal picture would improve dramatically.”

(Graphic: Interest costs and Italy govt debt servicing, https://fingfx.thomsonreuters.com/gfx/editorcharts/EUROPE-BONDS-SAVINGS/0H001QX5M8B2/eikon.png)

(Graphic: Spanish debt servicing costs tumble , https://fingfx.thomsonreuters.com/gfx/editorcharts/EUROPE-BONDS-SAVINGS/0H001QX6Y8EX/eikon.png)



Euro zone’s slowing growth confirmed, hit by weak trade By Reuters



BRUSSELS (Reuters) – Euro zone growth halved in the second quarter of this year as Germany’s economy shrank and trade slowed, European Union’s data showed on Friday, confirming earlier estimates.

The EU statistics agency Eurostat said the euro zone’s gross domestic product expanded by 0.2% in the second quarter, after a 0.4% expansion in the first three months of the year.

The data matched Eurostat’s earlier estimates and market expectations, confirming a gloomy outlook for the 19-nation currency bloc which is facing twin threats and uncertainty over Brexit and global trade wars.

Trade as a whole slowed during the quarter, as imports grew less than in the first quarter and exports were flat after a 0.9% growth in the previous quarter. Overall, trade contributed a negative 0.1 percentage point to the GDP figure.

U.S. President Donald Trump intensified the United States’ trade war with China in May by hiking import tariffs on $200 billion of Chinese goods, hitting financial markets.

Though the EU is not directly involved in this dispute, European companies have felt the pinch, such as those producing in China or those supplying for example machinery to Chinese plants. Washington has also repeatedly threatened new trade sanctions on EU companies, after imposing tariffs on steel and aluminum last year.

Germany’s economy, which is the largest in the bloc and relies heavily on exports, contracted by 0.1% on the quarter, posting the worst performance in the euro zone. A new fall in German industrial order in July, reported on Thursday, has increased recession risks in the third quarter in what is traditionally Europe’s economic engine.

Italy, euro zone’s third largest economy, halted its growth after a mere 0.1% expansion in the first quarter. The French economy, the bloc’s second largest, maintained 0.3% growth in the second quarter, matching the result of the first three months of the year.

Eurostat confirmed also that employment growth slowed in the bloc to 0.2% in the second quarter from 0.4% in the first.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Sub-Zero Bond Yields Push Investors From Safety Zones By Bloomberg


Sub-Zero Bond Yields Push Investors From Safety Zones

(Bloomberg) — Europe’s ever growing pile of negative-yielding sovereign debt is pushing investors to venture beyond their safety zones in search of returns.

Pacific Investment Management Co. favors emerging markets with relatively low valuations and better yields, while BNP Paribas (PA:) SA says investors may have to look at riskier corporate debt. Pimco is also seeking to cut duration in its fixed-income holdings on the view that global long-term debt rates no longer compensate buyers for the corresponding credit risk.

Banks and money managers are left struggling to eke out earnings from their investments with over $12.5 trillion of global debt — including benchmark bonds in Germany, France and Austria — slipping into the negative-yielding zone. Adding to investors’ dilemma is the fact that they also need suitably safe assets to guard against a global economic downturn.

“We’re looking pretty closely at emerging markets where we see valuations as less elevated, particularly in some local currencies where you get a decent source of yield and diversification,” said Gene Frieda, a global strategist at Pimco in an interview with Bloomberg Television. “But at the same time, we are trying to reduce the duration of our fixed-income holdings because you just don’t get compensated for taking long-term risk.”

The firm regularly stress-tests portfolios to see how they would perform in risk events similar to the 2008 global financial crisis or the Federal Reserve taper tantrum.

Benchmark yields in Germany and other major euro-area debt markets hit all-time lows this month as markets priced in the prospect of monetary easing by the European Central Bank in response to the region’s economic gloom. The rate on 10-year bunds plunged to a record of -0.41% on July 4, falling below the ECB’s deposit rate for the first time.

“What it means is, you need to be more diversified,” Pimco’s Frieda said. “You can still build a reasonable portfolio with some combination of safe fixed income, credit, some foreign currencies.”

While yields have slipped below zero in a fifth of European investment-grade credit as well, some of the riskier and more cyclically sensitive segments of the market offer better returns, according to Viktor Hjort, global head of credit strategy at BNP.

“The credit market is saying it’s all about central banks, we don’t believe in growth,” he said. “Obviously that’s very consistent with the market environment right now.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Economists trim euro zone’s inflation and growth forecasts: ECB survey By Reuters


© Reuters. A woman buys bread on a supermarket in Lisbon

FRANKFURT (Reuters) – Economists are trimming their inflation and growth forecasts for the euro zone and warning of the risk of further cuts as uncertainties ranging from Brexit to trade wars make companies more reluctant to invest, a European Central Bank survey showed on Thursday.

The ECB’s quarterly Survey of Professional Forecasters showed prices were now expected to grow by 1.4 percent this year, 1.5 percent the next and 1.6 percent in 2020 – a cut of 10 basis points in each year compared to January’s survey.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



XRP/USD trends between core demand and supply zones- Trends of March 28 By FX Street


© Reuters.

  • extended declines under the demand zone between $0.2950 and $0.30.
  • XRP price to stay in the range between the supply zone and the demand zone.

is currently revamping the trend upward following the retracement from the weekly high around $0.3125. Prior to the momentum that formed the weekly high, Ripple made a swing downwards and even extended declines under the demand zone between $0.2950 and $0.30 before finding balance at $0.2869.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Euro zone’s triple-A bond drought persists after ECB steps away By Reuters


© Reuters. FILE PHOTO: Headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the “Luminale, light and building” event in Frankfurt

By Dhara Ranasinghe

LONDON (Reuters) – High-grade euro zone debt remains scarce even though the European Central Bank has stopped its huge purchases of new bonds, intensifying concerns that banks will face future collateral shortages and highlighting the need for safe assets.

The persistent shortage of triple-A rated assets partly reflects a political dispute within the 19-country euro zone over whether to issue bonds backed by the bloc as a whole.

That would boost the amount of risk-free securities in circulation but is disliked by Germany and other countries, who see it as a back door to mutualizing debt obligations among member states with vastly different debt burdens.

Numerous factors, from a scaling-back of rate-rise expectations to growth and political risks, are accelerating demand for safe assets. But triple-A-rated governments like Germany and Netherlands are running budget surpluses and so have less need to borrow than in the past.

That imbalance has pushed Germany’s 10-year yield to just 0.2 percent, even after the ECB stepped out of the market two months ago.

Investors’ scramble for top-rated assets can have damaging consequences. For one, unnaturally low yields distort the bond market’s capacity to act as a signaling tool on the economy. Another worry is the possibility of a squeeze on repo markets, where this debt is used as collateral by banks and businesses trying to raise cash.

Repos, or repurchase agreements, are viewed as the plumbing of the financial system. What many fear is a repeat of the funding market squeeze seen in early 2017, when looming French elections sparked a dash for German debt, exacerbating a shortage of short-dated bonds.

A repo market squeeze due to collateral shortages remains a concern, said Godfried de Vidts, senior advisor to the Repo and Collateral Council at the International Capital Market Association (ICMA), a lobby group. Pressure on the market has currently eased, he said.

With ECB bond-buying, or QE, at an end, German five-year debt yields should be about 44 basis points above current levels of minus 0.31 percent, according to Richard McGuire, Rabobank’s head of fixed income.

This “QE premium” has barely budged since December, just as ECB buying ended, McGuire said.

“That means the loss of (ECB) demand … has been perfectly offset by investors looking for safety,” he added.

“So when investors said that yields should rise because the ECB won’t be buying anymore, they are clapping with one hand because in actual fact other investors have just moved into where the ECB was.”

SWAP GAP

Highlighting how scarce top-rated euro assets are, ECB policymaker Ewald Nowotny recently noted that in the United States, the pool of “strong safe assets” amounted to 74 percent of gross domestic product but was just 11 percent of GDP in Germany.

Even after taking into account other EU countries, the figure is 30 percent, Nowotny said.

Analysts cite the wide gap between German or Dutch bond yields and corresponding swap rates — an exchange of a fixed interest rate versus a series of floating rates — as a supply tightness indicator.

This spread widened after the ECB started QE in 2015 and cash bond yields fell. When asset purchases ended in December, the spread should have narrowed, but in fact, the gap between 10-year German yields and the swap rate is near the widest since the euro zone crisis, at around 60 basis points.

The German and Dutch debt agencies declined to comment on the gap between swap rates and bond yields. The German agency said dealer banks and investors such as asset managers and pension funds had not reported difficulties trading German bonds.

But trading volumes are under pressure, even though Germany’s 2 trillion euro bond market is one of the world’s biggest. Trading volume in German bonds nudged up in 2017 to almost 4.8 trillion euros but is down 27 percent from 2007.

That partly reflects the growing presence of long-term investors like pension and sovereign wealth funds. Around half of all German federal debt is held by the Bundesbank and other central banks, debt agency data shows.

For interactive chart: https://tmsnrt.rs/2U8APwb

Graphic: German Bund yield vs swap rate (https://tmsnrt.rs/2Vm9975)

NEEDED: A SAFE BOND

ICMA’s de Vidts says one solution is to have a capital markets union and, by extension, one central issuer of government bonds for the euro zone instead of 19 different bond markets of varying credit quality.

That idea faces strong opposition from Germany, but the ECB’s Nowotny has added his voice to those calling for joint bonds and ECB officials have delved into the issue in the past.

“It (capital markets union) is not going to happen tomorrow, nor in the next five years, but it could really help — it would be akin to having a U.S. Treasury market,” de Vidts said.

Meanwhile, as bond scarcity keeps yields on two-year German bonds — Schatz — deeply negative, their role as a key gauge of interest rate expectations has faded.

“Look at the Schatz yield, that’s not the market saying the ECB will cut rates but the curve has distorted the information content,” said Ross Hutchison, rates portfolio manager at Aberdeen Standard Investments.

Graphic: Trading volume in Germany’s government bond market (https://tmsnrt.rs/2UaDBRk)

Graphic: Germany’s 2-year Schatz yield (https://tmsnrt.rs/2UeIM32)