News Summary

Hello from Hong Kong.

Spanish elections on Sunday Dec 20 and corruption takes the
centre stage.
There are four parties involved. PM Mariano Rajoys Peoples
Party, which in the latest polls attained over a quarter of the
vote, lower than 44.6% in 2011. Then, there is a three-way
tie for second position between the Socialists, Podemos and
Ciudadanos, all close to 20%.
According to Reuters News, about one in three of the 36.5
million eligible Spanish voters are still undecided. The
Spanish constitution does not set a specific deadline to form
a government after the election. Analysts say the
negotiations to secure enough parliamentary support for a
new prime minister to be picked could go over many weeks and maybe even trigger another election.
Interesting article by the Independent on Sunday, on how the
Spanish youth could hold key to the elections during the
recent recession, the unemployment rate for under-25s rose
sharply it is still nearly 50% and thousands of people
emigrated to look for work. A poll earlier this month
confirmed that rejection of the PP is strongest among Spains
younger generations; 58.2% of 18- to 24-year-olds said that
they would never vote for them; and among 25- to 34year-olds, that percentage rose to 64.2%.
So, this is the timeline - polls close at 8.00pm CET on Dec.
20 and exit polls will be out shortly thereafter. Most analysts
expect a coalition between PP and the newly formed
Ciudadanos party but point out it could take weeks or more
for the two parties to reach an agreement. Furthermore,
Riveras party has said it wont back Rajoy for premiership
(see pages 2-5).
On late Friday, Brazils hawkish finance minister Joaquim
Levy resigned sparking fears that a ballooning budget deficit
in Latin Americas largest economy will deteriorate further
and prompting selling of its currency, the real. Levy is
replaced by Chicago University-trained Mr Levy with Nelson
Barbosa, the planning minister, who analysts see as more
dovish on fiscal austerity (page 8).

In Sunday Telegraph, Liam Halligan echoed Stelzers piece Americas monetary policy has just gone from being
astonishingly loose to ever so slightly less astonishingly
loose. The Fed fund futures market tells a rather different
story, with the weight of money pointing to a 0.835 implied
target rate, suggesting ongoing economic weakness and
market nervousness will limit the Fed over the coming year,
for all its efforts to signal the crisis is over, to perhaps just
one more quarter-point rise (page 10).
On Friday, British PM David Cameron signalled that the EU
referendum will take place in 2016. Sunday Times said the
in-out referendum now looks likely to be held in June or
September close to when BOE Governor Mark Carney, is
expected to start raising rates from their record low of 0.5%
as inflation returns. But risk of a British exit could stay
Carneys hand for even longer and potentially push a rate
rise into 2017 (page 5).
Sunday Times Kathryn Cooper wrote most economists think
Britain will be some way behind America, though, despite
similarities in the recoveries on each side of the Atlantic.
Britains economy is growing at an annual rate of 2.3%; in
the US, growth is 2.1%. The jobless rate in the UK fell to
5.2% last week, not far off Americas 5%. Several officials on
the MPC, including its newest member, Gertjan Vlieghe, and
deputy governor Minouche Shafik, have said they want to see
more evidence of healthy wage growth before they follow
the Feds lead (page 6).
UK Shire is preparing to deliver a knockout blow in its longrunning battle to buy American rival Baxalta by adding an
8bn cash sweetener to its bid. Senior City sources said the
move would revive an ambitious 20bn takeover plan that
had appeared on the brink of fizzling out (page 7).
SCMP reported that nine large copper smelters in China have
agreed that they could deepen planned production cuts next
year beyond 350,000 tonnes proposed earlier if prices and
profitability deteriorate (page 12).
This will be my final weekend wrap, see you in 2016, have a
Wonderful Christmas and a very Happy New Year.

FT survey shows Federal Reserve is expected to follow this

weeks first post-crisis rate rise by lifting US borrowing costs
again in March 2016. More than two-thirds of the 42 top
economists polled by the FT expect another 25 basis point
increase in the central banks benchmark rate in three
months (page 8).
Irwin Stelzer in The Sunday Times pointed the US labour
force participation rate is lower than the Fed would like,
and some cyclical weakness likely remains, but if not now,
when would interest rates be raised? Besides, it would be
difficult for the Fed to be regarded as a credible
policymaker if it suddenly refused to consummate its long
and much-trumpeted dalliance with raising them. Zero
interest rates was not the only weapon the Fed deployed
against the recession. It also engaged in a huge bond-buying
programme that pumped $2.5 trillion into the economy. Not
until normalisation of the level of the federal funds rate is
well under way and its effects are clear, says Yellen, will
the Fed begin to shrink its balance sheet. That chore is for
another day, or more likely another year (page 9).
These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

The Spanish Elections 2016

Spain goes to the polls in too-close-to-call
election
Taken from the Reuters News Sunday, 20 December 2015

Spaniards vote on Sunday in a parliamentary election in

which new parties are loosening the grip of the oncedominant conservatives and Socialists, raising the possibility
of a new era of consensus politics - or a period of instability.
With many people saying they are willing to shake up a
political system they consider corrupt and unable to resolve
Spain's economic woes, the outcome is the most uncertain in
the 40 years since the end of the Franco dictatorship and the
return of democracy.
About one in three of the 36.5 million eligible voters are still
undecided.
Opinion polls show the ruling conservative People's Party
(PP) of Prime Minister Mariano Rajoy will win the vote but
fall well short of an absolute majority.
The Socialists are expected to come second with antiausterity party Podemos ("We Can") and a second major
newcomer, liberal Ciudadanos ("Citizens"), vying for the third
place which would make them kingmakers in post-election
talks.
That prediction makes any of three outcomes possible either a right-wing or left-wing coalition government or a
minority administration.
Rajoy said on Wednesday he would consider a cross-party
pact to ensure a stable administration over the scheduled
four-year term, but all the other main parties have come out
against joining the PP in a coalition.
That points to a stalemate that analysts agree would
probably disrupt an economic reform program that has
helped pull Spain - the EU's fifth-largest economy - out of
recession and made inroads into a still high unemployment
rate.
Ciudadanos and Podemos insiders say both parties are
looking beyond Sunday's vote with their main ambition to
keep stealing voters from the PP and the Socialists, giving
them little incentive to agree on a pact unless they win
major concessions.
The Spanish constitution does not set a specific deadline to
form a government after the election. Analysts say the
negotiations to secure enough parliamentary support for a
new prime minister to be picked could go over many weeks and maybe even trigger another election.
While the current government has already passed next year's
budget and low interest rates and cheap oil should keep
boosting economic growth, soothing any market concern
over political instability, such a deadlock may be used by
pro-independence Catalan parties to push their cause.
The Catalan issue is expected to quickly move back up at the
top of the national political agenda as separatist parties
have to decide on a joint government no later than Jan. 9. If
they failed to agree, new elections would have to be held in
the region within two months.
(Full article click - Reuters)
---

Spanish election: How the youth of Spain may

hold the key
Taken from the Independent on Sunday 20 December 2015

Spains youth could be forgiven for thinking they dont

matter. During the recent recession, the unemployment rate
for under-25s rose sharply it is still nearly 50 per cent and
thousands of people emigrated to look for work. Its hardly
surprising that young people are among the keenest to use
todays general election to end the two-horse, left-right
political divide which has dominated the country for more
than four decades.
Its time to move on from what weve seen for so long,
said Adriana Hernando Sierra, an 18-year-old and first-time
voter. Its about giving a chance to new people with
different ideas about how to run this country.
Many of my friends are keen to vote because they see this
as an opportunity for real change. Were all talking about
that.
Ms Hernando Sierras vote will be going to the centrist
Ciudadanos party which, together with the left-wing, antiausterity Podemos, are the two new major political players
hoping to end the familiar battle between the socialist PSOE
and ruling right-wing Partido Popular (PP).
A poll earlier this month confirmed that rejection of the PP
is strongest among Spains younger generations; 58.2 per
cent of 18- to 24-year-olds said that they would never vote
for them; and among 25- to 34-year-olds, that percentage
rose to 64.2 per cent.
The PP has held a parliamentary majority since 2011; the
economy is now showing steady growth, with overall
unemployment at more than 21 per cent, but the PP has
been hit by a number of alleged corruption scandals.
Asked which party they would vote for if elections were held
the next day, 14.2 per cent said Ciudadanos compared with
just 1.9 per cent this January; the PP trailed in fourth place,
at 9.9 per cent. However, in another indication of why these
elections are considered the most unpredictable in Spanish
modern democracy, 52.9 per cent of 18- to 34-year-olds said
they were still undecided which party to vote for, more than
10 points higher than the national average.
According to the latest polls, the PP is expected to gain the
most parliamentary seats following the vote, but lose its
majority. But, all four parties the PP, PSOE, Ciudadanos and
Podemos have received between 18 and 26 per cent
support in recent polls.
The fact that both Ciudadanos and Podemos have not been
involved at elections on a national level before is also adding
to the unpredictability, although the PP and the PSOE are
expected to benefit from Spains system, which gives a
higher proportion of seats to rural areas with fewer voters.
What is clear, though, is that the PPs appeal to Spains
younger generations has ebbed notably. At Ciudadanoss endof-campaign rally on 18 December in a central Madrid
square, during the hour-long wait for leader Albert Rivera to
speak, there was certainly a palpable sense of youthful
energy in the air.
Noisy rock music blared out, with well-dressed young people
predominant among the 3,000-strong crowd. Young parents
wearing orange Ciudadanos scarves watched over their
children in the squares two small playgrounds between sips
of free hot chocolate.
When the partys campaign video started up on the giant
screen, it showed Mr Rivera (at 36 he is 24 years younger
than the current Prime Minister, Mariano Rajoy) writing a
letter to his daughter Adriana about his hopes for Spains
future.
Mr Rivera is not the only youthful leader in the election;
Pablo Iglesias, the leader of Podemos, is a pony-tailed, 37-

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

year-old political science professor, known for preferring

jeans to suits.
At the Ciudadanos rally, as he waited for the speakers, Pedro
Carrasco, 25, made his case for voting for the party. It is
not just a change of old politics vs new, he said.
Its an ideological change from that left and right divide.
After so many young people emigrating to work because
theres none here, trying to create a life for themselves
we need that change.
Francisco, 22, juggled his mobile phone and three
Ciudadanos flags. The PP and the Socialists had forgotten
about the younger generations, and thats why were here,
he said.
However, a clean break with the past may well be tricky,
given the bewildering and unprecedented range of potential
government coalitions that could be thrown up by a new
Spanish parliament with no clear majority for any one party.
The uncertainty of the elections on 18 December has led to
the PP urging last-minute waverers to vote for them if, as Mr
Rajoy put it, you dont want nightmare alliances. He
warned that Spain is not somewhere to play at Russian
roulette.
Others have also tried to make clear that they are the only
viable option; the Socialists described themselves in their
final campaign leaflet as the only alternative to four more
years of Rajoy.
However, Mr Rajoy is perhaps not as confident as he tries to
appear, having also left the door open to an alliance with
other parties in order to prevent a leftist coalition
government from emerging after general election.
Alliances would also not be on the wish list for those who
seek a complete overhaul of the government. It would be a
real let-down if there were alliances, said Jose Ballesteros,
a 31-year-old doctor in Almeria, south-east Spain, who plans
to vote for one of the new parties.
I get the feeling that they [the alliances] were more
interested in political power than in really making a
change.
Cristina Moya, an unemployed cleaner from Andalusia, said:
It would be terrible if after all this talk of change, the new
parties let the old parties back in power. The 27-year-old
said that she would probably vote for Podemos, although
Im severely disillusioned with politics in general.
But even those members of the younger generation who are
still loyal to Spains old-style parties believe that the arrival
of Podemos and Ciudadanos has been beneficial in shaking
things up although the process needs to continue.
Its been harder fought than other political campaigns and
thats meant politicians have become more aware of what
people are really talking about, their real concerns, said
Ainara Hernando, a 28-year-old writer from Vitoria in the
Basque country and who admitted to being a life-long PSOE
voter.
The politicians still need to be more in touch with the real
world, she said. There are still too many who have no idea
what such a high level of youth unemployment really means,
or even how much a cup of coffee costs in a local bar. That
basic stuff too often its still lacking.
(Full article click - IOS)
---

Spanish Vote Wraps But Real Outcome May Take

Weeks
Taken from the Bloomberg Sunday, 20 December 2015

The final opinion polls before Sundays election show Spains

ruling Peoples Party is on track to garner the highest
number of seats but may fall short of a majority.
Most analysts expect a coalition between PP and the newly
formed Ciudadanos party but point out it could take weeks
or more for the two parties to reach an agreement.
And the swing toward the radical left Podemos in the most
recent surveys adds to the uncertainty about how easily a
government can be formed.
If that trend continues, the combined number of
PP/Ciudadanos may also fall short of a majority, Deutsche
Bank says. Reforms may slow irrespective of who forms the
next government, analysts say, with any extended period of
political uncertainty potentially slowing the recovery.
Whos who
PP, led by current Prime Minister Mariano Rajoy, had its
worst local election result in 24 years in May, amid a
proliferation of new parties and number of political
scandals.
The partys share of the vote has been edging lower with
two polls this week showing a 25 percent to 26 percent
share, compared with a five-poll average of 28.1 percent.
The Socialists, alongside PP were, part of the traditional
two-party system that had dominated the Spanish political
landscape. Its five-poll average is 20.7 per cent.
The pro-European Ciudadanos partys Albert Rivera is seen as
the likely king-maker after a meteoric rise for his party with
about 19 percent share of voters intending to back his party.
This week, one poll showed the anti-austerity Podemos
overtook Ciudadanos to take the third spot in voter
intentions.
Whats next
Polls close at 8 p.m. local time on Dec. 20 and exit polls will
be out shortly thereafter.
Even if PP and Ciudadanos parties secure enough seats to
form a government, it may take some time for them to agree
on who will lead it as Riveras party has said it wont back
Rajoy for premiership.
Following the election, the king of Spain will hold
consultations with the leaders of political parties to propose
a candidate. And congress will be convened within 25 days
after the elections to vote on the candidate proposed by the
king. If his nominee doesnt get an absolute majority, there
will be a second vote 48 hours after where only a simple
majority will be required.
In case congress fails to agree on the next PM, it has two
months to elect a candidate through the same procedure,
after which new elections will be called. Societe Generale
analyst Yvan Mamalet believes a government will take office
in the second half of January, although a longer process is
possible.
What are the likely outcomes?
According to latest polls, the PP is set to win up to 124 seats
vs the 185 seats it currently holds and the 176 needed for a
majority.
Societe Generales Mamalet sees a 75 percent chance of a
PP/Ciudadanos government, a 15 percent likelihood of a
PSOE-led left wing government and a 10 percent probability
of a PSOE-Ciudadanos coalition.
Only if the PP and Ciudadanos fail to find an agreement,
PSOE leaders will decide to lean toward the center and
Podemos implicitly backs such a deal.
HSBC analyst Fabio Balboni says while Spain has a history of
stable minority governments, that outcome is less likely this

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

time as the gap between the winning partys number of seats

and whats needed for a majority looks set to be wider.
Balboni says a coalition between PP and Ciudadanos is most
likely, followed by a three-way alliance involving PSOE,
Podemos
and
Ciudadanos
while
calculating
a
PSOE/Ciudadanos alliance might not have a majority. The
parties are unlikely to rush to make concessions, he says and
that it could take time before a government is formed.
Indeed, new elections cant be ruled out. A prolonged period
of uncertainty could start weighing on consumer and investor
confidence, affecting the recovery, Balboni adds.
Berenberg economist Holger Schmieding says while
Ciudadanos are still modestly ahead of Podemos in the polls,
the fact that the latter has gained ground means that the
lead is within the statistical margin of error. A formal or
informal conservative-liberal coalition may need the support
of some smaller regional parties who would press their
regional demands, he says. The risk that Podemos could
heavily influence Spanish policy after the elections is though
much smaller than it was a year ago and the party seems to
be less radical than it was, he adds.
What else is at stake?
A government made up of the PP and Ciudadanos would be
the best outcome for Spains economy in both the short and
long term, according to around 2/3 of respondents in a
Bloomberg survey.
Barclays analysts Apolline Menut and Antonio Garcia Pascual
believe the policies of the next government could determine
whether Spains growth prospects move closer to Irelands or
stay closer to its Southern neighbors. Even if a minority
government were appointed, political risks could emerge
from a more fragmented parliament, which could weaken
the governments ability to deliver further reforms, they say.
Deutsche Banks Marco Stringa says domestic demand growth
needs to remain strong enough to reduce unemployment to
avoid a new shift toward populist parties and needs to be
balanced by a strong external performance in order to
decrease the countrys large net external debt. Meeting
these objectives requires a decent improvement in
productivity and leaves very little room for populist policies,
he says.
Societe Generales Mamalet says the focus of the electoral
manifestos is on household income, not on economic
reforms, suggesting any significant fiscal consolidation or
structural efforts even after the elections is unlikely.
RBC analyst Timo del Carpio says the coalition negotiations
themselves could at the very least imply a prolonged period
of policy uncertainty, which could weigh on business
investment at a time when the economy is increasingly
reliant on domestic demand.
In all scenarios, theres a risk of fiscal slippages, which could
raise fresh concerns about Spains debt sustainability, HSBCs
Balboni writes.
Will it mean the end of Catalan secession moves?
A new PM may make negotiations about enhanced autonomy
for Spains regions easier, Berenbergs Schmieding says. The
abrasive way in which Rajoy has brushed off Catalan
demands for more autonomy had led parts of the Catalan
mainstream to demand full independence instead.
The issue of Catalonian independence is unlikely to
disappear but expect the next govt to mitigate this risk and
some concessions toward Catalonia (and other regions) are
likely, Barclayss Menut and Pascual write. These may
include a reform of the redistribution of the fiscal balances
and further devolution of powers, possibly even greater
fiscal responsibilities, they say.
RBS credit strategist Alberto Gallo expects more clarity on
the political situation and on the negotiating strategies of

both the secessionist groups and the national government,

with a negotiation for greater financial autonomy likely. The
possibility of a Catalan presence in the central govt could
facilitate negotiations, he adds.
What does the vote mean for markets?
Deutsche Banks Stringa says the main risk remains political
impasse and the chance of an unstable govt as a result of
unprecedented fragmentation of parliament is building.
Events this year show this matters as Spains economy
outperformed Italys but financial assets underperformed, he
adds.
The spread between Italy and Spanish government bonds is
tight, suggesting markets are complacent, HSBCs Chris
Attfield writes. Most scenarios are benign, but if PSOE gets a
strong result concerns of a coalition involving Podemos could
cause volatility. Market moves around Portugal elections
shows market pricing can be slow with the selloff taking
nearly a month to take off, he adds. If a deal was reached in
principle before January, the spread to Italy could narrow,
possibly to parity.
Commerzbank analysts expect Spanish and Italian
government bonds to struggle relative to core European
government bonds around the vote.
And Danske Bank analysts point out ECB will stop buying
bonds between December 22 until the new year making
market interesting.
RBS macro credit strategist Alberto Gallo though says
political risks are overblown and after the political dust
settles. Spains economy will continue to show strong
fundamentals as investment, lending and employment are
growing. Favors Spanish credit over Italys on improving
fundamentals and wider valuations even as he recommends a
more cautious approach to Spanish names with high
emerging market exposure.
(Full article click - BBG)
---

Spain's moderates become election kingmakers

by promising 'reasonable change'
Taken from the Sunday Telegraph 20 December 2015

The centrist Citizens' Party is poised hold the balance after

Sunday's election
A centre-ground political party with demands for moderate
reforms has shocked Spain by coming through the middle to
become most likely kingmakers in Sunday's general election.
A year ago insurgent orators of left and right were cutting a
swathe through European politics, men like Pablo Iglesias,
the pony-tailed professor who led Spain's leftist antiausterity party Podemos. But now the rising stars in Spain
are a middle-of-the-road lawyer, Albert Rivera, and his
modestly named Ciudadanos or Citizens Party.
Mr Rivera, an immaculately turned out 36-year-old, opposes
radical steps in any direction and says he is in favour of
stability.
He is from Barcelona, but opposes Catalan independence,
and while attacking the consequences of the financial crisis,
which has devastated Spain, has economics advisers who
insist that capitalism remains a good thing.
Opinion polls all point to a fragmented Congress, with the
ruling conservatives of the Partido Popular in the lead on 2530 per cent, and the establishment centre-left PSOE on
about 20 per cent.
But a poll of polls last week showed Spaniards were warming
to Ciudadanos's uncontroversial policy positions, placing it
ahead of Podemos in the crucial third-place position, at 19
to 17 per cent respectively.
Mr Rivera is by far and away the most popular candidate,
with an approval rating of over 50 per cent.

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

The country is beleaguered by sky-high unemployment and

its public services are creaking under the austerity cutbacks,
and both Mr Iglesias and Mr Rivera have risen to prominence
by attacking the corruption and mediocrity of the
longstanding ruling parties.
But it is only Mr Rivera who has been able to appeal to the
disaffected of both sides of the spectrum. Podemoss support
for Syriza, the similar insurgent party in Greece which
plunged the EU into months of chaotic bargaining over a
debt bail-out this year, may also have damaged Mr Iglesias.
Mr Rivera says he aspires to bring transparency to political
life and overhaul the electoral system.
Socially, Ciudadanos is liberal, favouring Spains current
abortion on demand, the legalisation of prostitution and
reducing Catholic Church privileges. On the economy, the
party says it wants capitalism to work, but to be less of a
club of politically connected cronies.
Attacks from the left, who say that Ciudadanos proposed
rises in VAT, cuts in income tax and more flexible work
contracts make it just another right-wing party, have not
stopped its rise.
I think capitalism is a great tool, said Luis Garicano, the
London School of Economics professor put in charge of
Ciudadanoss economic policies.
Mr Garicano said that his party shares the diagnosis of
Spains problems with Podemos, but not the cure.
We agree that the effects of the crisis have been shared
very unfairly, he said. We share the view that there has
been impunity with regard to corruption.
We are saying to Spaniards that we dont have to go the
way of Venezuela or Greece right now, but we can build
another country; we can be the Denmark of southern
Europe.
Whether Mr Rivera will be able to put his vision into practice
depends on whether he can manipulate the wrangling that
will follow the election results. But he has already applied a
lawyers mind to his strategy.
He says his party will abstain from any vote to install a
Partido Popular or PSOE prime minister - which would almost
certainly make it impossible for the prime minister, Mariano
Rajoy, to stay in office. However, he says he will actively
vote against any attempt to bring Podemos into government
- which rules out a left-of-centre coalition.
The only option would appear to be government with himself
as prime minister.
If that appears to be a tactic drawn straight from the world
of university politics, that too is explicable by his
background. When a student at at Barcelonas Ramon Llull
University, he won the national university debating
championship.
He was always among the first to raise his hand and argue,
said Gerard Guiu, a journalist and lawyer who was a fellow
team-member. He was that kind of person. He is a
politician who grabs the bull by the horns.
Defeating Spains electoral system to become kingmaker on
a vote of less than 20 per cent represents a pretty fearsome
bull.
But Mr Rivera is forging ahead with a campaign slogan that
seems to have struck a nerve with those tired of
revolutionary solutions. He says he wants to bring
reasonable change.
(Full article click - Telegraph)

European News
Brexit referendum may delay rate rise to 2017
Taken from the Sunday Times 20 December 2015

Timetable for Europe vote may force Carney to hold back

interest rate rise even if inflation returns
BRITAINS interest rates could stay low for even longer
because of David Camerons referendum timetable,
economists have warned.
The prime minister last week cleared the way for a vote on
Britains EU membership next year, after closing in on a
reform deal at a two-day summit in Brussels.
The in-out referendum now looks likely to be held in June or
September close to when Mark Carney, governor of the
Bank of England, is expected to start raising rates from their
record low of 0.5% as inflation returns.
The risk of a British exit could stay Carneys hand for even
longer and potentially push a rate rise into 2017.
Uncertainty about the referendum outcome could hurt UK
growth next year, even ahead of the actual vote, said
Robert Wood, UK economist at Bank of America Merrill
Lynch. The Bank of England will need to take account of
any actual or potential drag, [and] the timing of the
referendum could affect its decisions; it is hard to imagine
policymakers hiking rates a few weeks before.
Americas Federal Reserve last week became the first
leading central bank to lift rates, for the first time in 10
years. Britains recovery has been as strong, but the Bank of
England is in no hurry to follow as inflation remains low and
wage growth has slowed.
Inflation is expected to start picking up next year and could
be closing in on 1% by the spring, giving Carney justification
for a rate rise in May.
Cameron is expected to secure a deal for reform of the
single market at the European Council meetings in either
February or March, starting the clock on a referendum.
A notice period of four months is required between the
announcement of a referendum and the vote, pointing to a
June poll or September if the government wants to avoid
the summer holidays.
We would expect [rates] to stay on hold in May if the Brexit
referendum is set for June, said Jacob Nell, chief UK
economist at Morgan Stanley, the investment bank. [There
is] a risk that 2016 turbulence a mid-year growth trough
and the wider impact of the referendum may postpone the
second hike to 2017.
Figures this week will paint a mixed picture of the economy.
Public finance data on Tuesday is expected to show that
government borrowing fell to 11.5bn in November, while
the Office for National Statistics should confirm on
Wednesday that GDP grew 0.5% in the third quarter.
But figures are expected to show that the current account
deficit widened to 21.5bn in the third quarter from 16.8bn
in the second, a rise from 3.6% to 4.5% of GDP.
The International Monetary Fund has warned that central
banks and investors are in the dark about the risks of
retail bond funds because of the growing use of derivatives.
The assets of large bond funds that use derivatives have
surged from $200bn (135bn) in 2007 to more than $900bn
this year or about 13% of the worlds retail bond-fund
sector.
(Full article click - Times)
---

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

Kathryn Cooper
Carney waits for wages
following Feds rate rise

to

Taken from the Sunday Times 20 December 2015

grow

before

Britain will lag behind America on raising the cost of

borrowing
WHEN Paul and Helen Fletcher remortgaged their home this
month, they decided to play it safe and fix their rate for five
years.
The couple, from Alton in Hampshire, have two children
Anna, 3, and John, 1 and want certainty over their
monthly outgoings. They do not want to be caught out when
Mark Carney, governor of the Bank of England, finally raises
interest rates from the record low of 0.5%.
Through the mortgage broker London & Country, the
Fletchers found a new loan fixed at 2.29% for five years.
I would be very surprised if rates do not go up in the next
six months, said Paul, 35, a sales account manager for a
manufacturing company. Even if they dont, I like to know
what Im paying.
Millions of borrowers like the Fletchers will be wondering if
a UK rate rise has moved closer after Americas Federal
Reserve became the first of the leading central banks to call
time on the era of easy money last week.
Janet Yellen, chairwoman of the Fed, announced the first
hike for nearly a decade, drawing a line under the financial
crisis and signalling that the American economy is finally
strong enough to withstand higher rates.
She raised rates by a modest quarter point to a range of
0.25% to 0.5% and indicated that future increases would be
gradual. The Fed expects another four quarter-point rises
next year, while markets are pricing in just one or two.
Either way, increases over the next two to three years are
expected to be half the pace of previous rate-hiking cycles.
This dovish hike cheered markets, which were expecting
an increase but do not want the Fed to take away the easymoney medicine too quickly. The FTSE 100 index ended the
week up 1.7% at 6,052.42.
For some, the Feds decision makes it easier for Carney to
raise rates because there is less chance of a surge in the
value of sterling than if he moved alone. The pound dropped
to an eight-month low last week.
Most economists think Britain will be some way behind
America, though, despite similarities in the recoveries on
each side of the Atlantic. Britains economy is growing at an
annual rate of 2.3%; in the US, growth is 2.1%. The jobless
rate in the UK fell to 5.2% last week, not far off Americas
5%.
Headline inflation is low, at 0.5% in America and just 0.1% in
this country, but core inflation stripping out volatile
energy and food costs is higher across the Atlantic at 2%
against 1.2% in Britain.
Also, wage inflation is rising in America, whereas here it is
moving in the opposite direction despite hopes earlier in the
year that it was returning to permanently healthy levels.
Last week, figures showed that private sector regular pay
growth the measure favoured by the Bank of England
fell to 1.8% in October alone, down from 3.4% in July.
The UK seemed to be resolving a puzzling divergence
between strong employment and weak wage growth, but
that puzzle has re-emerged, said Robert Wood, economist
at Bank of America Merrill Lynch.
Several officials on the Banks rate-setting committee,
including its newest member, Gertjan Vlieghe, and deputy
governor Minouche Shafik, have said they want to see more
evidence of healthy wage growth before they follow the
Feds lead.

Britain also faces a bigger drag from government policy than

America. The chancellors autumn statement set out plans
for spending cuts and tax rises totalling 5% of gross domestic
product over the next five years, the biggest fiscal squeeze
of any advanced economy, according to Michael Saunders of
the investment bank Citi. By contrast, Americas budget
deficit is set to increase as the country heads into a
presidential election year.
While displaying a number of superficial similarities, the UK
and the US economies are in truth very different, said Phil
Lachowycz of the consultant Fathom. Divergent trends in
productivity are but one example. While the Fed pulled the
trigger on interest rates last week, current market pricing
suggests the [Bank of England] is expected to wait 12 months
or so.
The Banks policymakers may also be concerned that British
households are far more sensitive to interest rates than their
American counterparts. In the US, more than half of
mortgages are fixed for 15 or 30 years. By contrast, in this
country more than half of the stock of mortgages is on
variable rates, and fixed-rate deals tend to be much shorter
than in America only two to five years.
Counter intuitively, the US tightening cycle will hurt British
households more than their American counterparts that rely
on long-term fixed- rate mortgages, said Sahil Mahtani of
Deutsche Bank.
This may be one of the reasons why Carney has signalled he
would prefer to cool the housing market using restrictions on
lending rather than interest-rate policy. Last week, the
Treasury said it would consult on giving the Banks financial
policy committee greater powers over the buy-to-let
market, seen as one of the weakest links in the British
economy.
For now, then, the Bank looks likely to wait until well into
next year before following the Fed. Some think it could be
2017 before it brings easy money to an end.
Yet borrowers have been warned there are still risks. If
markets start to price in a faster pace of rate hikes,
borrowing costs could rise even if the Bank decided against
any move. This could throw emerging economies and bond
markets into turmoil.
The Feds dovish hike may have averted a crisis for now,
but markets are likely to remain volatile as they are weaned
off the easy money that has propped them up since the
financial crisis.
(Full article click - Times)
---

Brexit is greatest threat faced by UK firms,

warns industry boss
Taken from the Sunday Telegraph 20 December 2015

Talk of Britain leaving the EU is damaging my business, says

boss of Brandauer, maker of components for the Large
Hadron Collider
"The UK must not leave the EU, and any discussion around it
just creates uncertainty and more barriers to trading with
the region, says Rowan Crozier, the boss of Midlands
manufacturer Brandauer.
The Birmingham-based company, which is 153 years old,
makes high-end components for a range of clients: most of
the domestic kettles currently in use around the UK feature
a Brandauer widget, and its parts were used to discover the
God particle in the Large Hadron Collider.
In the last three years, we have started supplying a number
of different marketplaces in Europe, especially Germany,
says Crozier, adding that 75pc of Brandauers sales are
generated from exports.
Leaving the EU would make it much more difficult to do
business there. We stand to lose far more than we gain.

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

According to a report, now in its third year, which canvassed

the opinions of more that 1,000 business owners, around
two-thirds of small-to-medium sized enterprises (SMEs) have
said that the threat of Brexit is affecting their long-term
growth plans.
Its the biggest uncertainly facing businesses in 2016, the
report from Collaborate UK 2015 found, beating skills
shortages.
Brandauer competes directly with the Mittelstand
Germanys industrial midmarket with around 50
competitors from the country.
We run high-speed presses with minimal labour costs, which
makes us globally competitive, says Crozier. We prototype
in-house, manufacture the tooling, and then work on longterm supply contracts for five or 10 years and beyond.
It can take up to five years for a new customer to start
placing orders of any significant size with Brandauer, and the
8m-turnover company spends a lot of time building
relationships with clients.
Britains potential exit from the EU, now known as Brexit,
is affecting demand for these far-reaching contracts, Crozier
says. They are favouring shorter-term planning because
theyre not sure what will happen.
The company is forecasting revenues of between 12m and
15m within four years, but Crozier fears that further talk of
a Brexit could hit revenues in the years that follow, given
the firms long lead times.
Brandauer, which trades in pounds, dollars and euros, has
also been hit by currency fluctuations but, like many
companies with strong exposure to overseas markets, buys in
the same currencies it sells in to hedge risk.
First everyone was talking about Grexit and now its the
Brexit, says Crozier. Its the last thing we need in an
already uncertain global economy.
According to Logan Naidu, chief executive of recruitment
firm Dartmouth Partners, which is about to open an office in
Frankfurt, A Brexit would have a significant adverse effect
on our business.
He added: The City would grind to a halt in the run up to it.
Everyone would go into 'watch and wait mode, decisionmaking would be paralysed and hiring would be put on hold.
In relation to us, doing business in Europe would get harder
because wed be perceived as being 'outside the club. I
have no doubt wed lose revenue.
Oliver Sloane, whose 8m-turnover consultancy SCM World
generates 30pc of sales from Europe, said the ability to
move employees freely around the EU has been key to the
firms success. Around 25pc of our employees are non-UK,
he says.
These warnings follow research published by Lord Rose, who
heads the Britain Stronger in Europe lobbying body, which
claims that Britain would be landed with 11bn in new tariffs
if Britain failed to negotiate a free trade agreement with the
bloc and was forced to do business with the EU using World
Trade Organisation rules.
Business leaders in the pro-Brexit camp believe that the UK
would flourish when unshackled from EU law, however.
The UK is being slowly suffocated by employment
legislation, said Paul Farrer, boss of 14.7m recruitment
firm Aspire.
Breaking free of European regulations and bureaucracy will
enable UK plc to take a very competitive position in
empowering employers to flex their staffing requirements to
the demands of their organisations. The result should see
higher productivity, more job opportunities and higher levels
of investment.
The EU is not the only trading block to trade with, adds
Pip Witheridge, chief executive of Grove Group, which

supplies to the vehicle repair and refinish industry. We are

culturally, linguistically and legally aligned with the
Commonwealth countries in some cases better than with
the EU.
(Full article click - Telegraph)
---

Shire lures US rival with 8bn cash promise

Taken from the Sunday Times 20 December 2015

Pharma giant aims to break deadlock in six-month pursuit of

blood disorder specialist Baxalta with sweetened offer
FTSE 100 drug giant Shire is preparing to deliver a knockout
blow in its long-running battle to buy American rival Baxalta
by adding an 8bn cash sweetener to its bid.
Senior City sources said the move would revive an ambitious
20bn takeover plan that had appeared on the brink of
fizzling out.
Shire made an all-share offer for Baxalta five months ago
and has since made little progress. However, relations
between the two companies improved after Shire indicated
recently that it would be prepared to pay a large portion of
the price in cash.
As much as 40% of the 20bn offer could be in cash, said
sources close to the talks.
The dramatic shift in sentiment means a deal could be
finalised within weeks. Bankers are expected to work long
hours over the Christmas period to iron out the details. It is
thought that Shire wants to seal the transatlantic takeover
before an annual pharmaceuticals conference held in San
Francisco in mid-January.
Shires chief executive, Flemming Ornskov, is attempting to
lessen the companys dependence on Vyvanse, its
blockbuster treatment for attention deficit hyperactivity
disorder. Baxalta would bring with it a stable of high-priced
speciality drugs, especially for haemophilia patients. The
enlarged company could have $20bn (13.4bn) of sales by
2020.
There is still a chance of the deal falling through, sources
said. Ornskov is known to be willing to walk away if Baxalta
holds out for too high a price. Shire declined to comment.
Shires first offer for Baxalta came hours after the American
developer started trading as an independent company in
July. The bid was all shares to ensure Baxalta retained tax
benefits gained from its spin-off from the healthcare giant
Baxter. Shire now believes it can pay for Baxalta partly in
cash without jeopardising the tax benefits, sources said.
There is another reason for Shire using cash: since August, its
share price has slumped more than 20%. In part, that
reflects a widespread sell-off of pharmaceutical shares, but
it also underlines shareholder unease over its pursuit of
Baxalta.
If the deal is confirmed, it would be the latest in a series of
mega-mergers in the sector. The biggest was agreed last
month the $160bn takeover of Allergan, maker of Botox,
by Pfizer, home of Viagra. Deals worth more than half a
trillion dollars will take place this year, the most ever.
Dublin-based Shire is part of a new wave of big pharma
companies. Unlike Astra and Glaxo Smith Kline, it prefers to
buy in promising treatments rather than developing them inhouse.
Shire has completed almost 20 deals since 1997 in what has
proved a successful strategy. It listed in London almost two
decades ago with a market value of 100m. Today it is worth
more than 25bn.
(Full article click - Times)

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

News Americas
Brazils finance chief Joaquim Levy resigns
Taken from the FT Saturday 19 December 2015

Brazils hawkish finance minister Joaquim Levy resigned late

on Friday, sparking fears that a ballooning budget deficit in
Latin Americas largest economy will deteriorate further and
prompting selling of its currency, the real.
Left-leaning President Dilma Rousseff replaced the Chicago
University-trained Mr Levy with Nelson Barbosa, the planning
minister, who analysts see as more dovish on fiscal austerity.
The real weakened 2.7 per cent to R$3.9831 while the
Ibovespa benchmark index ended down 2.98 per cent at
43,910 points.
While Levy advocated a stronger stance on fiscal
adjustment, Barbosa is seen as a more heterodox economist,
more in favour of countercyclical measures and likely to be
more receptive to interference from President Rousseff,
said Joo Ribeiro and Mario Robles, economists at Nomura,
in a note. Markets are reacting accordingly by adjusting to
weaker levels.
Ms Rousseff appointed Mr Levy at the start of her second
four-year term in January this year to rebalance the nations
sinking public finances after years of prolonged fiscal
stimulus.
But Mr Levys attempts to raise taxes and cut government
expenses ran into a barrage of opposition from a rebellious
congress and from within Ms Rousseffs government and her
left-leaning ruling Workers party, the PT.
His fate was sealed after Standard & Poors in September
and then Fitch this month slashed Brazils credit rating to
junk. One of his stated aims on taking the finance minister
job was to avoid Brazil losing its treasured investment grade
status.
The departure of minister Levy may complicate fiscal
consolidation efforts as it suggests an adjustment in fiscal
policy to support economic growth, said Samar Maziad, a
senior sovereign analyst at Moodys, which still has Brazil on
investment grade.
Mr Levy was further weakened after the opposition began
impeachment proceedings against Ms Rousseff in congress.
Analysts say this has increased the presidents dependence
on the far-left of the PT, which is opposed to the fiscal
adjustment, leaving little room for Mr Levy and his austerity
programme.
Leftist legislators are her first line of defence in congress,
and the president needs social movements and unions
both traditional bases of support within the PT to rally to
her defence on the streets, said Chris Garman of Eurasia
Group, in a research note.
Brazils economy has suffered a dramatic decline this year.
Economists surveyed by the central bank expect economic
growth to contract 3.6 per cent this year and 2.7 per cent in
2016 while inflation is expected to reach 10.61 per cent this
year and 6.8 per cent in 2016. The central banks inflation
target is 4.5 per cent plus or minus 2 percentage points.
The soaring budget deficit is driving up the governments
interest payments, widening a budget deficit that is
presently running at 9.5 per cent of gross domestic product
and increasing gross public debt.
Analysts say that Mr Barbosa resigned from Ms Rousseffs
previous administration after disagreeing with accounting
tricks that her former economic team was using to disguise
the budget deficit. These accounting tricks were later
condemned by Brazils accounts watchdog, the TCU.
But he is seen as less hawkish on fiscal policy and more
amenable to intervention from Ms Rousseff, whose
preference is for a state-driven economic model with large

government-owned companies and heavy public lending,

economists said.
Others said it hardly mattered who held the finance minister
job.
Ms Rousseff would be too distracted with the impeachment
proceedings and with a sweeping corruption investigation
into state-owned oil company Petrobras to focus on fiscal
adjustment in the coming months, said Neil Shearing of
Capital Economics.
He predicted higher interest rates in Brazil in the coming
weeks. Growing dysfunction at the heart of Brazils
government adds to the reasons for monetary policymakers
to be hawkish, Mr Shearing said.
(Full article click - FT)
---

Fed seen raising US interest rates again in

March
Taken from the FT Saturday 19 December 2015

The Federal Reserve is expected to follow this weeks first

post-crisis rate rise by lifting US borrowing costs again in
March, according to a Financial Times survey of leading
economists.
More than two-thirds of the 42 top economists polled by the
FT expect another 25 basis point increase in the central
banks benchmark rate in three months, taking the Fed at its
word even as most investors bet that the pace of future
increases will be more gradual.
This contrast with market expectations means Fed chair
Janet Yellen faces a fresh set of challenges next year, even
though investors this week credited her with having pulled
off a long-debated rate move smoothly, without the market
tantrums many feared.
Traders and investors now expect the federal funds rate to
remain below 1 per cent into 2017. That implies a far
shallower pace of increases than the median of the dots
the individual projections of Fed policymakers which point
to the federal funds rate reaching 1.375 per cent by the end
of 2016 and 2.375 per cent in 2017.
Economists surveyed by the FT aligned more closely with the
Fed, with slightly more than half of them expecting the
central bank to follow with its third rise by June, to take the
funds rate to 0.75-1 per cent.
The Feds meeting landed in a volatile week for global
equity and credit markets, with US mutual funds and
exchange traded funds invested in high-grade corporate debt
hit by a record wave of redemptions.
Yields on both Merrill Lynch US investment grade and junk
bond indices hit their highest level since 2012 this week,
energy prices fell and the trade-weighted dollar logged its
greatest weekly gain since the start of November
complicating the picture for Ms Yellen.
Economists have cautioned that lacklustre global economic
conditions could stay the Feds hand as the dollar depresses
exports and sliding oil prices weigh on inflation, a point
policymakers have emphasised they will watch.
Its critical: everything flows into financial conditions. The
trade weighted dollar impacts conditions. Credit spreads
play into financial conditions. Equities play into financial
conditions, Ellen Zentner, Morgan Stanleys chief US
economist, said. To the extent the dollar rises further
depressing inflation in the coming months will play into
how they feel about raising rates.
Risk markets, which rallied on Wednesday as the Fed
confirmed it would tighten policy at a gradual pace, have
since retreated, with the S&P 500 slipping back into negative
territory for the year.
Defining gradual and divining how the Federal Open
Market Committee will implement a gradual rate increase

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

will become the new parlour game for financial markets and
monetary policy wonks, said William Lee, an economist
with Citi.
Further tweaks to policy from the Bank of Japan on Friday
and European Central Bank president Mario Draghis
insistence earlier this week that the potential remained for
further stimulus have not been enough to stem selling in
equity markets.
The Federal Reserve has finally raised interest rates in a
widely expected move. What has really changed? The FTs
Roger Blitz asks Roger Hallam of JP Morgan Asset
Management how significant the move is and what signals
were sent about the pace of future tightening.
Major global bourse have declined since the months start
including roughly 7 per cent falls in German and French
indices.
The recent step down in energy prices has unnerved some US
portfolio managers, with several concerned about the effect
distressed fund closures will have on investor behaviour and
subsequent flows.
Economists surveyed by the FT said that the risk remained
that the Fed would raise rates two or three times next year,
below its current forecast. Only two said the Fed would
increase rates just once in 2016.
Yellen sowed the seeds of a potential pause later on by
tying further rate increases to the trajectory in core
inflation and also to financial-market developments, said
Thomas Costerg, an economist with Standard Chartered, who
expects the Fed will have to cut rates by the end of next
year.
On both fronts, [the] risks are [that] things dont go
according to the Feds plans...and therefore the Fed hiking
cycle may eventually be very short and shallow.
(Full article click - FT)
---

Other central banks are not obliged to follow

the Feds lead
Taken from the FT Saturday 19 December 2015

This week the US Federal Reserve raised interest rates, not

that you necessarily noticed. Thanks to careful signalling
from Janet Yellen, who looks increasingly authoritative as
Fed chair, financial markets had priced in the quarter-point
rise with nearly 100 per cent certainty, limiting the fallout
across a wide range of asset markets.
Whether investors will remain as sanguine if the rise is the
first of many is a little more doubtful, however. There is a
divergence between the expectations of Fed policymakers
that rates will be raised several more times next year and
the more modest increases priced into financial markets.
Still, if subsequent moves are telegraphed as clearly as this
one was, the central bank should be able to minimise the
immediate disruptive impact.
There is another group of observers who will have been
watching the Feds actions and communications very closely.
Other central bankers will, one way or another, be affected
by interest rate changes in the worlds dominant currency.
Some will have found that the Feds move poses immediate
challenges. Those emerging markets that still have some
kind of target, formal or informal, against the US currency,
such as China, will have to make a decision about whether
they also tighten policy and, if necessary, follow the dollar
higher.
In a world of largely floating exchange rates, most central
banks, particularly those in developed economies, can
consider the decision calmly without any immediate need to
move.
Indeed, the central banks managing the worlds second- and
third-most widely traded currencies, the European Central

Bank and the Bank of Japan, may find the Feds rate rise
helpful. Both, facing weak economies and dangerously low
inflation, have engaged on programmes of quantitative
easing. A widening of interest rate differentials with the US,
increasing the chance of further currency depreciation, is
likely at the margin to make their task easier.
True, the eurozone and Japanese economies are not
particularly open to trade, and hence the exchange rate is
one of the lesser channels for monetary policy. But
nonetheless, with the leadership of both central banks keen
to show results for their monetary experiment, the Fed
taking off in a different direction is likely to help.
The impact is more ambiguous for the Bank of England.
Having embarked on its own QE programme earlier than the
ECB or BoJ and been rewarded with steady growth, the BoE
finds itself in a position closer to the Feds, debating the
timing of its first rise rather than whether to extend easing.
Mark Carney, the BoEs governor, has had less success with
managing expectations than Ms Yellen. Having adopted and
then quit forward guidance for interest rates based on
unemployment, he this year predicted that the decision to
tighten policy would come into sharper relief around now.
Mr Carney may have spoken too soon in signalling rate rises
that did not arrive. Yet in practice his BoE has sensibly
allowed the monthly data to determine decisions. There are
good reasons for the BoE not to follow the Fed, notably that
weak global growth may affect an open economy like the UK
more than the US.
The reality is that the synchronised global economic cycles
of past decades are not repeating themselves this time
round. Policymaking should reflect that. The Fed raising
rates just before Christmas may sound like the birth of a
new era. But for wise central banks in the developed world,
an event long prophesied is not a star they should find
themselves compelled to follow.
(Full article click - FT)
---

Irwin Stelzer
American Account: Rate rises are only a start,
theres trillions of QE to be undone
Taken from the Sunday Times 20 December 2015

If it were done when tis done, then twere well it were

done slowly. That is the Federal Reserve Boards official
policy. The announcement of the Feds first interest rate
increase for almost a decade, of 0.25%, said, twice, that
future increases will be gradual. That was the main
message of Fed chairwoman Janet Yellen: abrupt is bad,
gradual adjustments in the stance of monetary policy is
the way to avoid central bank errors of the past, when
abrupt rate rises after lengthy waits threw the economy
back into recession.
The policymakers mid-range forecast is that the federal
funds rate an important tool in the Feds kit will rise to
1.375% at the end of 2016, then 2.375% and 3.25% in the
next two years before 3.5% for the longer term.
Dont be fooled by the neatness and apparent precision of
all this. The real world is messier, as Yellen well knows. She
warned that future rises will depend on how the economy
reacts to this one:
Whether the economy does indeed grow at the Feds
predicted annual rate of 2.4%, faster than it has been able
to do during the current recovery;
Whether remaining cyclical weakness can be overcome
and shocks avoided;
Whether the current 0.22% annual inflation rate rises to
the Feds 2% target;

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

 Whether emerging economies successfully navigate past

both the Scylla of recession, looming before those that
follow the Fed by raising rates, and the Charybdis of a
depreciating currency and consequent capital flight if they
decide not to match the Feds move;
Whether . . .
You get the idea. Certainty is not a gift that Yellen and her
colleagues are likely to find in their Christmas stockings. She
admits that theories underlying economic forecasts are not
perfect. As well she should. The forecasting models used by
the central bank have missed their targets by large
amounts . . . [and have] not worked out empirically over the
past five years, according to former Fed governor Larry
Lindsey. So it might not be a bad thing that policy is Well
see, as it has been dubbed by another former governor,
Richard Fisher, who stepped down as head of the Federal
Reserve Bank of Dallas this year. Fisher went on to liken Fed
policy to that of the long-time leader of China, Deng
Xiaoping, who suggested crossing a river by feeling for stones
under your feet rather than guessing the depth.
The Feds policy team believes that the US economy is on a
path of sustainable improvement and is confident about
the fundamentals driving it. The labour market, to which
Yellen pays considerable attention because of her strong
views on the terrible social effects of unemployment, has
improved further. The unemployment rate is at 5%, half its
recession peak, with the Fed contending that its monetary
easing accounted for 1.75 percentage points of the decline.
The broader measure of unemployment, which includes
discouraged workers and those involuntarily working parttime, is also down, to 9.9% from a peak of 17.1%.
True, the labour force participation rate is lower than the
Fed would like, and some cyclical weakness likely
remains, but if not now, when would interest rates be
raised? Besides, it would be difficult for the Fed to be
regarded as a credible policymaker if it suddenly refused to
consummate its long and much-trumpeted dalliance with
raising them.
So up they went, ignoring critics who contend that the Feds
rosy outlook is simply wrong. The manufacturing sector is
not doing well. The level of new home building, although
picking up, remains low (Yellens description). Wages have
not responded to the tighter labour market; inflationadjusted after-tax incomes in this recovery have grown at an
annual rate of only 1.8%, far below the 3.3% average of the
last three expansions according to The Wall Street Journal.
The very strong auto sector is heavily dependent on low
interest rates and lenders attitude to credit quality, which
is reminiscent of that held by mortgage lenders before the
financial crisis. The word bubble is being heard by
developers of commercial property.
Larry Summers, Harvard economist and former Treasury
secretary, has been arguing in a series of op-eds that the
case for hitting the brakes in an economy with sub-target
inflation, employment and output is not there regardless
of whether the brakes are going to be pressed hard or softly,
singly or multiple times. The central banks of several wellrun advanced economies Chile, Israel, Australia, Sweden,
Canada, New Zealand, Norway and South Korea have been
forced to reverse course after raising rates, as was the
European Central Bank. Yellen would not like to add America
to that list, especially since those clamouring to rein in the
Feds independence would see it more as evidence of
ineptitude than of a flexible, data-driven response to
events.
The game of who wins, who loses is already being played.
After the Fed decision last Wednesday, Wells Fargo,
Americas fourth-largest bank, immediately announced that

the rate it charges its most creditworthy borrowers would

rise from 3.25% to 3.5%. Most other banks followed suit. One
analyst said they have borrowers dangling over the sword of
Damocles, which could prove less life-threatening than
being under the sword but is a bad place to be nevertheless.
The banks will not immediately raise the rates they pay
depositors, and then not by the full amount of their higher
charges for borrowers. Banks win, borrowers lose, savers
wait, unless money funds come to their rescue by raising
rates paid to their investors.
The interest rate rise is what in boxing is called the
undercard, the preliminary bout before the main event. Zero
interest rates was not the only weapon the Fed deployed
against the recession. It also engaged in a huge bond-buying
programme QE1, 2 and 3 that pumped $2.5 trillion into
the economy. Not until normalisation of the level of the
federal funds rate is well under way and its effects are
clear, says Yellen, will the Fed begin to shrink its balance
sheet. That chore is for another day, or more likely another
year.
(Full article click - Times)
---

Liam Halligan
Fed returning America to normality? Its just
the start
Taken from the Sunday Telegraph 20 December 2015

While Janet Yellens move to increase US interest rates

makes a rise by the Bank of England more likely, the markets
are still pricing the first UK rate hike for the start of 2017
So, the Federal Reserve finally did it. I half-suspected Janet
Yellen would find yet another excuse not to raise interest
rates last week.
But the chair of the worlds most important central bank
made her move, with the Feds Open Market Committee
coming to a unanimous decision.
For the first time in almost a decade, US policymakers put
up the Fed Funds Rate. Having been steadily cut from late
2007, as the ghastly sub-prime crisis loomed into view, then
dramatically slashed to historic lows after the Lehman
Brothers collapse a year later, Americas benchmark price of
money has sat at 0pc to 0.25pc for an incredible seven
years.
Last Thursday, this target band was raised to 0.25 to 0.5pc.
While only a tiny technical increase, US authorities and
policymakers worldwide view it as hugely symbolic, and
hope it will mark a decisive break with the past.
Since December 2008, as America fought to avoid a
wholesale banking collapse, then tried to stage a convincing
economic recovery, US monetary policy has remained locked
in crisis-management mode. There have been several false
dawns, as Americas GDP numbers have shown promise for a
quarter or two, leading to official talk of policy
normalisation, only for growth to slump back.
Then, in mid-2013, the mere suggestion of an imminent
reduction in bond purchases by the Federal Reserve, funded
by virtually printed money of course, was enough to cause a
global sell-off. Government bonds from America to
Germany to Japan got hammered in a so-called taper
tantrum, as yields sky-rocketed just at the thought of
America coming off the monetary steroids.
Last spring, too, even though US quantitative easing (QE)
had by then been paused, we saw further volatility on global
markets again, spreading from America, across Europe and
to the emerging markets as the Fed floated the idea that
rates could soon rise, the years of easy money possibly
coming to an end.

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

The US authorities tried yet again over the summer, building

up market expectations of a rate rise in September. Once
more, though, the Fed retreated pointing this time to a dip
in the Chinese stock market, despite the markets relatively
small size.
Even now, numerous Western financial analysts are sucking
their pencils, gripping and re-gripping their stress balls,
given that the market for so-called junk bonds highyielding corporate debt has lately hit the skids.
Made up mostly of smaller firms, particularly in the oil and
gas sector, volatility on this market hit a five-year high prior
to the Feds announcement last week, not least as low oil
prices continued to rock Americas upstart shale energy
producers.
Given the extent to which such outfits have borrowed not
just to get started, but to keep going as the Opec exporters
cartel has driven down crude in a bid to protect market
share, smart people now view energy junk bonds as the
next sub-prime.
Despite such carnage on a bellwether market, one with a
history of sparking wider systemic problems, Yellen and Co
hiked rates last week anyway mindful that delaying yet
again risked unnerving markets even more.
The impact of this Fed rate rise on global stocks and bonds,
together with the future path of US borrowing costs, is
probably the most important economic question not just of
2016 but the rest of this decade. America has taken its first
tentative steps away from an unprecedented economic
experiment.
When the Fed began its emergency QE programme in
November 2008, it was billed as a $600bn (403bn) exercise.
The US central bank has, in fact, since expanded its balance
sheet by $4,200bn from 5pc to no less than 25pc of GDP in
just seven years. On top of that, rates have been nailed to
the floor.
So, while the market reaction to the Feds heavily signposted
action last week has so far been benign, dont for a minute
think that were back in the world of normal.
While Id love to agree with the raft of commentary telling
of a new post-crisis era and pointing to the sunlit economic
uplands, I fear that would be somewhat premature.
The Fed has raised rates to 0.5pc. US inflation, meanwhile,
is 0.5pc. In real terms, then, rates in America are now
precisely zero.
Americas monetary policy has just gone from being
astonishingly loose to ever so slightly less astonishingly
loose.
And, given that Western financial markets have been
pumped up by years of printed money, sporting high
valuations that belie broader economic weakness, why did
the Fed feel able to pause QE (while not ruling out its
return) and now finally venture a tiny rate rise?
Because the money-printing baton has been taken up not
just by the Japanese but also the Europeans.
The Bank of Japan is in the midst of expanding its balance
sheet from 40pc to no less than 70pc of GDP over three
years. When trying to convey how historically unusual it is
for an advanced economy, the worlds third-biggest, to be
conducting such a crackpot policy, I run out of superlatives.
The eurozone, meanwhile, is now nine months into a
1,100bn (806bn) QE programme, as the eurocrats attempt
to solve structural imbalances, to say nothing of the single
currencys inherent contradictions, by hosing down the
region with printed money.
Would the Fed have dared to put its own QE on hold, and
would it now be raising rates, if large central banks
elsewhere werent still pumping out liquidity like billy-o,
doing their bit to placate global markets? I think not.

For all the predictability of Yellens statement last week, the

Feds move has served only to highlight ongoing differences
in the views of central bankers and investors.
Such differences, if theyre sustained, tend to result in
volatility, sharp corrections and damaging economic fallout.
Trying to instil confidence, Fed officials insisted last
Wednesday that strong US growth will allow rates to rise
gradually but steadily over the coming year, to a median
forecast of 1.375pc by the end of 2016 pointing to three or
even four more quarter-point increases next year.
The Fed fund futures market tells a rather different story,
with the weight of money pointing to a 0.835 implied target
rate, suggesting ongoing economic weakness and market
nervousness will limit the Fed over the coming year, for all
its efforts to signal the crisis is over, to perhaps just one
more quarter-point rise.
What most Telegraph readers want to know, in the here and
now, is the extent to which Yellens move will affect thinking
at the Bank of England given that UK base rates have been
down at 0.5pc since March 2009.
While this increase by the Fed makes a move by the Bank
more likely, the markets are still pricing the first UK rate
rise for the start of 2017.
Britain and the US are expanding at similar rates 2.3pc and
2.2pc respectively year-on-year and have almost identical
rates of unemployment (around 5pc).
Having said that, UK fiscal policy is tighter and our pay
growth remains subdued (not least due to high immigration)
both of which make a rate rise less likely.
Credit trends here, also, are far less expansionary than in
the US which, again, suggest there will be less pressure on
the Bank to immediately follow the Fed.
The only certainty, though, is further uncertainty. UK rates
could be forced up sooner, particularly if our still enormous
external deficit weighs down on sterling and oil bounces
back, causing inflation to spike.
This Fed move has been billed as a return to normality. Its
just the start, though, with a long way to go.
(Full article click - Telegraph)

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.

News Asia
Large Chinese copper smelters eye deeper
production cuts
Taken from the SCMP Sunday, 20 December 2015

Nine large copper smelters in China have agreed that they

could deepen planned production cuts next year beyond
350,000 tonnes proposed earlier if prices and profitability
deteriorate, an executive at one of the smelters said.
The agreement followed a quarterly executive meeting by
the producers on Saturday in Shanghai to discuss the
concentrate and metal markets, and to assess progress since
the production cuts agreed in late November.
The smelters are members of the China Smelters Purchase
Team (CSPT) and most are state-owned companies, including
Jiangxi Copper, Tongling Nonferrous Metals and Jinchuan
Group.
The smelters had agreed that the planned cut of 350,000
tonnes would be the minimum, and could be bigger if metal
prices fell further and/or treatment and refining charges for
spot concentrate imports were lower than smelters costs,
the executive said.
We all agreed that we won't conduct loss-making business...
our production will depend on profit, he said, declining to
be identified since the meeting was private.
The smelters were responding to pressure from the central
government to tackle oversupply issues facing the metals
industry.
Previously, some smelters had resisted cutting production
because local governments were targeting higher economic
growth rates, the executive said.
The smelters were now willing to close capacity that did not
meet environmental standards, or that was high cost, the
executive said.
He did not give a price level at which the smelters could
start making deeper cuts in refined copper production, nor
specify spot treatment and refining charges that would be
above the smelters costs.
(Full article click - SCMP)

These information have been obtained or derived from sources believed to be reliable, but I make no representation or warranty as to their accuracy or completeness.
Copyright 2013 The Poon Report by Vincent Poon. All rights reserved.