EU: No agreement on Failing Banks

"European Union finance ministers are under pressure to agree who pays for failing banks after failing to reach a deal last week, with Germany and France at odds on how to distribute the costs.

The law on rescuing and closing banks in the EU is central to the 27-nation bloc's banking union, which aims to prevent future financial crises and get the economy out of recession.

It is also a highly controversial element as it will dictate who decides what happens to a failing bank and who is to pay for it, bringing national sensitivities to the fore.

After talks failed last Friday following almost 20 hours of talks, EU leaders have asked for a deal on the directive by Thursday and talks have been scheduled for Wednesday.

Any slippage could further set back the banking union project, which has been delayed twice because of the complexity of negotiations between EU governments and institutions.

Ever since banking union started to take shape in mid-2012, Germany has been wary, concerned that as the currency union's largest and most powerful economy, it will end up on the hook for other countries' debts if a single, EU-wide system for sorting out problems is put in place.

While there is no immediate deadline for an agreement, the risk of a negative market reaction to another failure has been growing since the U.S. Federal Reserve made clear that it might not be printing any more money by this time next year.

Adding to the pressure are rising peripheral euro zone borrowing costs, which threaten to reignite the sovereign debt crisis, in abeyance since the European Central Bank declared it could buy unlimited amounts of bonds.

"Failure to comply with this agenda would cast serious doubt on the ability of European member states to implement the banking union on time, and would undermine its credibility, with possible adverse impacts on bank funding costs," British bank Barclays said in a research note to clients"

Source:  Reuters.

Gold Prices fell on Monday, after 7% drop last week

Gold prices fell Monday, following last week’s 7 percent drop, weighed down by a stronger U.S. dollar and increasing fears over an early end to the Federal Reserve’s stimulus efforts.

The metal sank back towards a three-year low hit last week in a sharp sell-off triggered when the Fed said it would cut back its stimulus by mid-2014, which supported interest rates and therefore made gold comparatively less attractive.

Spot Gold was down 1% at $1283.68 per ounce at 11:52 a.m. ET (15:52 GMT), after suffering the worst weekly performance since September 2011 last week, which saw gold drop as low as $1268.89 per ounce.

Gold is down around 24% so far this year.

The dollar traded near its highest in nearly three weeks against a basket of currencies, bolstered by expectations the Fed was considering scaling back its $85 billion monthly bond purchases.

The Fed`s remarks helped push up the benchmark 10-year U.S. Treasury yield to its highest in almost two years at above 2.5 percent.

Given that gold pays no interest, the rise in returns from U.S. bonds and other markets is seen as a negative signal.

Gold was also hurt as interest rates for short-term funds in China rose to extraordinary levels last week after big commercial banks held back on lending in the interbank market.

Bullish Outlook cut

Hedge funds and money managers slashed their bullish bets in gold futures and options for a second consecutive week to the lowest level in a month, a report by the Commodity Futures Trading Commission showed.

Holdings in SPDR Gold Trust, the world`s largest gold-backed exchange-traded fund, fell a further 0.54 percent to 989.94 tonnes on Friday, the lowest in over four years.

Goldman Sachs cut its year-end 2013 gold price forecast to $1,300 an ounce from $1,435.

Source:  Forextribe

Space Dream is part of a Dream to make China Stronger. President Xi Jinping

 China will take bigger steps in space exploration in pursuit of its space dream, President Xi Jinping said during a video call with the astronauts on the Shenzhou X manned mission on Monday.

Speaking via a video link from the Beijing Aerospace Control Center, Xi said the space dream is part of the dream to make China stronger.

"With the development of space programs, Chinese people will take bigger strides to explore further into space," Xi said.

Having blasted off on June 11, the Shenzhou X spacecraft is scheduled to return to Earth on Wednesday. The spacecraft's re-entry capsule is expected to land on the prairie of the Inner Mongolia autonomous region.

Having been in space for 13 days on Monday, the three astronauts — crew commander Nie Haisheng, Zhang Xiaoguang and Wang Yaping — reported to Xi that they are in good condition.

Xi expressed his sincere greetings to the astronauts and especially asked how Zhang and Wang felt, as the mission is their first time in space.

Zhang, who was one of China's first batch of astronauts recruited in 1998 but only realized his space dream 15 years later, said he and his fellow astronauts had adapted to the microgravity environment quickly.

Wang, China's second woman in space and first space teacher, said they all had normal appetites and were able to rest seven to eight hours each day.

Wang, China's second woman in space and first space teacher, said they all had normal appetites and were able to rest seven to eight hours each day.

Xi said the country's first space lecture would play an important role in fostering young people's interest in sciences and exploring space.

The manned space mission also reflected the courage to defy hardships and explore, a spirit that would inspire the entire nation, he said.

Source:  Xinhua

China's Vice-Finance Minister is elected Director General of Unido

China's Vice Finance Minister Li Yong is elected to the post the Director-General of the United Nations Industrial Development Organization (UNIDO) in the Board session on Monday.

Li won 37 ballots from member states in the first round of voting in the Development Board of UNIDO, and the selection process will conclude with a final decision by the General Conference at a special session on 28 June. He is supposed to be officially appointed the Director-General of UNIDO in the General Conference on 28 June.

The newly elected Director-General said UNIDO is faced with both opportunities and challenges, and that he would try his best to work together with member states to win a bright future.

Li is a senior economic and financial policy-maker of China and has been a member of the Monetary Policy Committee of the Chinese central bank for a decade.

"I am very optimist that we will have even better situation from now on with the support of China," Asghar Soltanieh, Iran's envoy to UNIDO told Xinhua after Li Yong won the election, adding that he hopes to witness further progress of UNIDO's work and promote the South-South corporation.

Source: Xinhua

Takahiro Mitani,World's Biggest Manager of Retirement Savings , Doubts 2% Inflation in Japan

Japan’s central bank probably promised too much when it set a goal of lifting inflation to 2 percent within two years, according to Takahiro Mitani, president of the country’s public pension fund.

History is against the Bank of Japan as it undertakes unprecedented asset purchases in pursuit of a pledge to overcome 15 years of deflation, Mitani, the 64-year-old head of the 112 trillion yen ($1.14 trillion) Government Pension Investment Fund, said in a Tokyo interview June 21. The world’s biggest manager of retirement savings, which said on June 7 that it’s cutting local bond holdings to buy more stocks and foreign securities, plans to leave its asset allocations at the new levels until at least March 2015, he said.

The BOJ has pledged to double the monetary base by the end of next year while Prime Minister Shinzo Abe is promising public spending, tax reform and freer markets to reinvigorate Japan’s economy. It’s been 21 years since annual inflation in Japan exceeded 2 percent, according to the World Bank.

“It’s going to be very difficult,” Mitani said. “The BOJ think that if they say they will take bold measures to bring about inflation, then inflation expectations will rise and as a result prices will rise. But reality isn’t that smooth. Even in the bubble, inflation was only about 1 percent."

Harsh Outlook

Mitani said in February that if Abe and the BOJ are successful then a 67 percent allocation for local bonds would look “harsh.” The fund cut its target holding for local government bonds to 60 percent from 67 percent, while the proportion of foreign and local shares will rise to 12 percent each, from 9 percent and 11 percent respectively. The allocations announced this month are close to what the fund already holds, he said.

The central bank can add to its unprecedented monetary easing announced two months ago should economic conditions change significantly, BOJ Governor Haruhiko Kuroda told lawmakers last week. The bank is buying 7.5 trillion yen of bonds a month, which Kuroda said in April will mean the bank is buying the equivalent of 70 percent of government bond issuance, along with more risk assets like real estate investment trusts and exchange-traded fund

Another Angle

“I don’t know what they will do next,” Mitani said. “If they do need another hand, I don’t think they can buy much more bonds. So they’ll have to come at things from another angle. Kuroda-san said something about J-Reits and they have increased up to upper limit but they could expand that, so maybe they could buy other things.”

The BOJ’s policy is to boost its holdings of exchange-traded funds and Japan real-estate investment trusts by about 1 trillion yen and about 30 billion yen per year respectively. That contrasts with about 50 trillion yen for purchases of Japanese government bonds.

Benchmark 10-year government bond yields have swung from an all-time low of 0.315 percent to as much as 1 percent since the BOJ announced its plan in April. The yield rose 1.5 basis points to 0.865 percent on June 21.

Yields will “calm down below 1 percent,” Mitani said. “I don’t think many in the market think it’ll be 2 percent in two years.

ON JAPAN'S STOCK MARKET CORRECTION

Stocks surged after the BOJ’s April announcement, taking gains since elections were announced that brought Abe to power to as much as 77 percent before the rise in bond yields triggered a correction that began on May 23. The Topix index, the country’s broadest equity measure, closed at 1,099.4 on June 21, almost 14 percent below its May 22 high.

“The markets are very demanding,” Mitani said. Even if the BOJ increases its stimulus efforts “just a little bit, it’s not as good as they want, they will ask for more. I don’t think the BOJ have to keep dealing with what the market wants at every turn. I don’t know what hand they have. I’d like them to think about it.”

The GPIF will release results and more details on its holdings in July, Mitani said. The fund didn’t alter the structure of its holdings during the 2008 financial crisis or in response to the 2011 earthquake and nuclear disaster. The reweighting of its portfolio wasn’t a response purely to the change in policy by the BOJ or Abe, Mitani said.

Historical Analysis

“Some people think that we changed our core portfolio just because of market changes,” Mitani said. “But it’s not like that. We decided to look back over past data and recalculate things. That was how we came to our new portfolio decision. For instance, we use data looking back to 1973.”

The shift toward higher-yielding assets comes as the manager prepares to fund retirements in the world’s oldest population. Stocks extended their declines after Abe said on June 6 that a legislative campaign to loosen rules on businesses, the “third arrow” of his economic plan, won’t begin until after upper house elections next month.

“Maybe some have been disappointed by the economic growth strategies they have seen from Japan so far,” Mitani said. “When people tell me they are disappointed, I tell them that there is the elections, so once the elections are over, we may see an Arrow 3.5. Abe has basically said that too.”

Source : Bloomberg.net

POBC Country's liquidity remains at a reasonable level

BEIJING, June 24 (Xinhua) -- China's central bank on Monday told the country's overextended lenders to manage liquidity risks to stabilize the monetary environment.

In a circular posted on the People's Bank of China (PBOC) website, the central bank said the country's liquidity stance remains at a reasonable level.

However, with multiple changing factors in the financial system, including regularly high borrowing demands in the middle of the year, commercial banks should strengthen liquidity management.

The statement comes as short-term interbank rates rose steeply in the past two weeks, but the PBOC has been reluctant to pump cash into the money market, a necessary move to restrain the lending binge, which is blamed for inflating the asset bubbles.

Banks should allocate positions beforehand and keep abundant reserves. Prudence is needed to arrange asset portfolios and control the liquidity risks arising from the credit binge, the circular said.

Marc Faber's thoughts

Gold is Very Oversold Posted: 23 Jun 2013 10:13 PM PDT “Well, right now equities, bonds and gold are very oversold. They can easily rally on the S&P. We could rally 43, 50 points, but I don’t expect a new high. Just in case a new high would be achieved in the next two months or so, it would not be confirmed by the majority of shares. In other words, very few stocks would lead the advance. In terms of bonds, they are also incredibly oversold. Where the sentiment about equities is actually still rather positive and all of these super bulls still predicting the market to continue to rise into 2014, 2015. In bonds and gold, sentiment is by historical standards incredibly negative. As a contrarian, I would rather buy bonds and gold than equities.”

Investor's Confidence Indicators in US markets

Fear and Greed Index      10            Extreme Fear

Vix Index                        20.35             + 7.72%

From the WSJ, the $11.9 trillion U.S. government-bond market showed no signs of respite today, sending the yield on the benchmark 10-year note to as high as 2.667%, the highest level since Aug. 1, 2011.

In early trade, the benchmark 10-year note fell 1 5/32 in price, yielding 2.663%. Bond prices move inversely to their yields.

Since May 1, the 10-year yield has soared from 1.61%, the low for the year.

Demand for safe assets has diminished as the outlook for the U.S. economy has brightened. That, in turn, has raised fears that the era of accomodative monetary policy by the Federal Reserve may soon come to an end, generating heavy selling of Treasury debt over the past few weeks. 

Fear of Domestic Credit Squeeze in China

The WSJ reports today China's stock market had a big correction as fear of a domestic credit
squeeze, pushed Shanghai -5.3%.
"The selloff was sparked by further signals over the weekend that China's cash crunch would persist, after a commentary by state-run Xinhua suggested that the government won't be taking any action soon. In addition, the People's Bank of China made no direct reference to the recent surge in borrowing costs for banks, at the same time saying that it will maintain prudent monetary policy.

China's medium sized banks continued to suffer heavy losses, despite a drop in the interbank lending rate, as the market was worried about their large exposure to wealth management products. Fitch Ratings estimates that more than 1.5 trillion yuan worth of these products will mature in the last 10 days of June.

China Minsheng Banking Corp. 600016.SH -9.95% plunged 9.9% in Shanghai andIndustrial Bank 601166.SH -9.98% skidded 9.9%.

China's broader indexes were weighed by financial concerns, with the Shanghai Composite crashing 5.3% to 1963.24 in the mainland. Hong Kong's benchmark Hang Seng Index fell 2.2% to 19813.98, while the city's measure of Chinese companies, the Hang Seng China Enterprises Index, dropped by 3.2% to 8938.63.

The fear over the banking system also translated into a shock for the local currency, as the yuan fell to 6.1411 to the dollar, compared with 6.1343 late on Friday".

Bank for International Settlements. It is Time to Exit from Easy Money Policies. Part 1

Since the beginning of the financial crisis almost six years ago, central banks and fiscal
authorities have supported the global economy with unprecedented measures. Policy rates
have been kept near zero in the largest advanced economies. Central bank balance sheets have
doubled from $10 trillion to more than $20 trillion. And fiscal authorities almost everywhere
have been piling up debt, which has risen by $23 trillion since 2007. In emerging market
economies, public debt has grown more slowly than GDP; but in advanced economies, it has
grown much faster, so that it now exceeds one year’s GDP.
Without these policy responses of easy money, the global financial system could
easily have collapsed, bringing the world economy down with it. But the subsequent global
recovery has remained halting, fragile and uneven. In the United States, the expansion
continues, albeit at a moderate pace. In major emerging market economies, growth is losing
momentum. Most of Europe has fallen back into recession. At the same time, the general
downward trend in productivity growth has not been receiving enough attention from
policymakers.
As the risks mounted around mid-2012, central banks rode to the rescue yet again. The
ECB addressed market fears with the promise that it would do “whatever it takes” within its
mandate to save the euro. It followed up with a conditional programme to buy sovereign debt
of troubled euro area countries. Central Banks of the U.S., U.K. and Japan likewise pushed forward with additional expansionary measures.

As global financing conditions eased further, private credit continued to grow at a rapid
pace in some countries, lending standards weakened, equity prices reached record highs
worldwide, long-term yields hit record lows and credit spreads compressed. Even highly
leveraged firms could borrow at long-term rates far below the rates they had to pay before the
crisis.
But easy financial conditions can do only so much to revitalise long-term growth when
balance sheets are impaired and resources are misallocated on a large scale. In many advanced
economies, household debt remains very high, as does non-financial corporate debt. With
households and firms focused on reducing their debt, a low price for new credit is not terribly
relevant for spending. Indeed, many large corporations are using cheap bond funding to
lengthen the duration of their liabilities instead of investing in new production capacity. It does
not matter how attractive the authorities make it to lend and borrow – households and firms
focused on balance sheet repair will not add to their debt, nor should they.
 And, most of all, more stimulus cannot revive productivity growth or remove the
impediments that block a worker from shifting into a promising sector. Debt-financed growth
masked the downward trend in labour productivity and the large-scale distortion of resource
allocation in many economies. Adding more debt will not strengthen the financial sector nor
will it reallocate resources needed to return economies to the real growth that authorities and
the public both want and expect.

As the stimulus is sustained, it magnifies the challenges of normalising monetary policy; it increases
financial stability risks; and it worsens the misallocation of capital.
Finally, prolonging the period of very low interest rates further exposes open economies to
spillovers that are now widely recognised. The challenges are particularly severe for the
emerging market economies and smaller advanced economies where credit and property
prices have been rapidly growing. The risks from such a domestic credit boom at a late stage of
the economic cycle are hard enough to manage. Strong capital inflows exacerbate such risks
and challenges for market participants and authorities; and they expose economies to large
sudden reversals if markets expect an exit from unconventional policies, as volatility during the
past few weeks seems to indicate.

Source:  Bank of International Settlements, June 2013.