Date: September 19, 2018
United States:
U.S. Futures Drift With Europe Stocks; Dollar Dips: Markets Wrap
U.S. equity futures drifted alongside European shares after a positive session in Asia as investors wagered the world’s two-biggest economies can iron out trade differences. The dollar edged lower while the yuan advanced as China said it won’t devalue its currency. Contracts on the Dow and Nasdaq were steady as those on the S&P 500 nudged lower. Carmakers climbed as data showed European auto registrations soared in August, with the sector among the best performers in the Stoxx Europe 600 Index as it traded sideways. Treasuries were steady. The pound gained after inflation unexpectedly accelerated, but reversed on reports of another snag in Brexit negotiations. Government bonds fell across Europe, led by Italian notes as wrangling over the country’s budget continued. Earlier, shares in Japan, Hong Kong and China climbed. Emerging-market equities advanced for the fifth time in six sessions as their currencies strengthened. While the threat to global growth remains, investors have had months to form a view on the trade war, and stock markets have been signaling a turnaround in sentiment: A basket of global shares is rising for the seventh time in eight sessions. As the week grinds on, Brexit remains a key item on the agenda, with the United Kingdom and European Union appearing to move closer to a deal. Elsewhere, oil was steady after gaining Tuesday when Saudi Arabia expressed comfort with Brent prices rising above $80 a barrel. The yen was little changed after the Bank of Japan left its policy unchanged, keeping monetary stimulus in place.
Europe:
BOE Forward Guidance Is Well Understood by Public, Haldane Says
The Bank of England’s policy of forward guidance has been successful because it has been well understood by companies and U.K. citizens, according to Chief Economist Andy Haldane. Haldane launched a defense of the bank’s use of the policy tool, which has drawn criticism for appearing to fumble the message on the timing of interest-rate increases. In a speech on central bank communication in Tallinn, Estonia, he said that the BOE was focused on talking to businesses and consumers — who require more general information on the “direction and destination” of interest rates — rather than the more specific guidance required by markets. The former group had well understood the bank’s message of the need for “limited and gradual” rate increases, he said, and this had well prepared them for the BOE’s hikes in November and August. Haldane added that forward guidance simply cannot be that precise as that called for by some market participants, who were never intended to be its primary audience. When the rate hikes came, “it is interesting to see how well these were understood by companies and households,” he said. “Around three-quarters of households, and around 90 percent of companies, had expected a rise in rates within the year ahead in surveys held immediately prior to the decisions. Simple, directional forward guidance on monetary policy appears, for this non-expert audience who comprise most of the spending in the economy, to have been effective.” The comments echo those made by Governor Mark Carney earlier this year when he was accused of poorly communicating monetary policy. Back then, Carney said what matters most is that the wider public still understands borrowing costs are headed gradually higher. In his speech on Wednesday, Haldane also outlined how global central banks have boosted transparency in recent years. He said while the “central bank secrecy doctrine has been over-turned” more work needed to be done to boost engagement with the public and win back their trust.
Asia:
Indian Debt Default That Has People Worried: QuickTake
One of India’s key shadow banks is in trouble. IL&FS Group, a vast conglomerate that funds infrastructure projects across the world’s fastest-growing major economy, sent shock waves through credit markets when it missed several debt repayments. That’s causing concern among the myriad investors, including private individuals, who had regarded the group’s debt as rock-solid. With the IL&FS cash crunch set to intensify, there are concerns that the impact may spill over into the wider infrastructure industry, pushing up funding costs and possibly putting the brakes on some of Prime Minister Narendra Modi’s investment plans. More than 30 years old, Infrastructure Leasing & Financial Services Ltd. says on its website that it has helped develop and finance projects worth 1.8 trillion rupees ($25 billion). Marquee developments included the Chenani-Nashri tunnel — India’s longest highway tunnel at 9 kilometers (5.6 miles). The company describes itself as the pioneer of public private partnerships, with a portfolio of about 13,100 kilometers of roads. Shareholders include India’s largest insurer, Life Insurance Corp.; its biggest lender, State Bank of India; and Japan’s Orix Corp. Its 169 subsidiaries, associates and joint ventures, critics say, make it too complex for any watchdog or credit-rating firm. It’s run short of cash. As well as a recent drying up of new infrastructure projects in India, IL&FS has felt the pain from interest rates that have soared to multi-year highs for short-term borrowings. On top of that, some of IL&FS’s own construction projects, including roads and ports, have faced cost overruns amid delays in land acquisition and approvals. Disputes over contracts have locked about 90 billion rupees of payments due from the government. In the meantime, Ravi Parthasarathy, at the helm of the IL&FS empire at its inception, stepped down for health reasons in July. The Reserve Bank of India has initiated a special audit. The bottom line: IL&FS Financial Services has only $27 million at hand, and about $500 million of repayment obligations over the next six months.