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QE hint sends euro into a dive
THE TIMES JANUARY 05, 2015 12:00AM

MARIO Draghi sent the euro to a 4½-year low by dropping another hint the European Central Bank is poised to launch quantitative easing to boost eurozone economies.

German government 10-year borrowing costs fell to a record low of 0.534 per cent and yields on five-year paper went negative for the first time, as investors ­anticipated money-printing as soon as this month after the ECB president’s interview with ­Germany’s Handelsblatt.

Mr Draghi told the newspaper the risk the ECB would not fulfil its mandate to keep prices stable was greater than it was six months ago, underlining the likelihood it may soon back a sovereign debt QE stimulus package. “We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation,” he said. “There’s unanimity in the ECB council on that.”

His comments drove the euro down 0.6 per cent to $US1.2026, its weakest level since June 2010. The Australian dollar was last night buying 67.47 euro cents.

The prospect of the ECB buying up the sovereign debt of ­eurozone governments pushed yields down across the board.

Ten-year borrowing costs in Italy, Spain and Portugal all hit record lows. Italy’s 10-year yield fell nine basis points to 1.79 per cent, Spain’s dropped seven basis points to 1.53 per cent, and Portugal’s fell 22 basis points to 2.47 per cent.

Mr Draghi’s comments came as manufacturing activity in the eurozone disappointed. The purchasing managers’ index for December showed “factory growth more or less stagnated”, Chris Williamson, chief economist at survey compiler Markit, said.

Output, orders and employment all recorded sluggish growth. Factories cut prices for a fourth month and German activity was weak. In France, the contraction in manufacturing deepened.

Mr Williamson said the data suggested the eurozone was on course for growth of just 0.1 per cent in the final quarter of 2014.

Stockmarkets across Europe slumped. The pan-European FTSEurofirst 300 index fell 0.3 per cent.

The Times

Why 2014 went wrong for the eurozone
SIMON NIXON THE WALL STREET JOURNAL JANUARY 06, 2015 12:00AM

IT was supposed to be the year the eurozone exited its debt crisis, when growth would return to the currency union, bringing with it confidence and jobs.

It didn’t work out that way. While the economy emerged from double-dip recession, likely growth of just 0.8 per cent was even more feeble than the 1.2 per cent forecast at the start of the year; and inflation fell alarmingly close to zero per cent, raising fresh questions about debt sustainability.

A few former crisis countries, including Spain and Ireland, performed better than expected, but the key economies of Germany, France and Italy performed worse.

Hopes of an imminent European Central Bank government-bond-buying program helped drive down borrowing costs for many countries, creating an illu­sion of calm. But the eurozone is arguably now in greater peril of breaking up than ever before.

Where did it all go wrong? Three factors in particular stand out. The first was the impact of the slowdown in growth in China and other emerging markets, a ­response to the prospect of tighter global liquidity conditions as the Federal Reserve ended its own quantitative-easing ­program.

The second was the impact of the Ukraine crisis and sanctions imposed on Russia, which had a particular impact on the German economy.

These were shocks over which the eurozone had little control and which may continue to exert a drag on growth in 2015, ­although the impact of weaker emerging-market demand may yet be partially offset by the stimulatory boost from lower oil and commodity prices.

The third factor in the eurozone’s weak performance last year was homegrown.

Structural obstacles continued to impede the rebalancing of many economies, particularly in southern ­Europe, preventing capital and ­labour being reallocated to where they could be more ­productively employed.

Rigid labour and product markets have made it hard for firms to adapt to the new economic ­environment and have deterred new investment.

Crucially, weak insolvency ­regimes and inefficient judicial systems have prevented restructuring of private-sector debts, ­essential to enable banks to work through their vast portfolios of non-performing loans.

Meanwhile, high levels of taxes, corruption, bureaucracy and protection for vested interests continue to discourage the supply of the new-equity capital the eurozone urgently needs to fund a new cycle of growth.

Removing these structural ­obstacles is crucial not only for the eurozone’s growth, but also for its long-term viability, a point made by ECB president Mario Draghi in a recent speech.

In a currency union that lacks automatic fiscal transfers, member states that don’t have the ­capacity to swiftly and efficiently rebalance their economy are less able to absorb shocks.

Yet the scale of reform that’s required in some countries to ­enable this rebalancing amounts to a cultural revolution, a reform­ation akin to the campaign to sweep away the corruption and abuses of the Catholic Church.

What became clear in 2014 is that achieving this reformation is proving harder than many had anticipated.

Clear signs of reform fatigue have emerged in Spain, Portugal and Greece while in France and Italy even relatively modest reform programs were watered down in the face of powerful ­opposition.

Why is reform proving so hard?

Of course, much of the problem lies with weak political structures. Even determined govern­-ments have struggled to contend with well-organised, well-funded interest groups embedded in ­bureaucracies, trade unions, judi­cial systems and the corporate sector. But crucial has been the political context in which reformers have had to operate.

The eurozone is increasingly paralysed by a sterile debate foc­used on a supposed conflict bet­ween “austerity” and “growth”.

Those who argue that the euro­zone’s core problems are structural are confronted by a simplistic Keynesian analysis that holds the real problem is a lack of fiscal and monetary stimulus; that its challenges are macro rather than micro, reflecting a lack of ­demand rather than impediments to supply.

Policies to eliminate wasteful spending, improve efficiency, ­enhance productivity and boost potential growth are dismissed as growth-sapping austerity.

The anti-austerity banner has become a rallying point for resistance to all reform, reducing the political space for governments to tackle structural problems.

Support for radical leftist parties is being fuelled by the naive belief that if only Germany would repair its bridges or the eurozone would build more roads or the ECB would embark on quantitative easing then governments would have no need for spending cuts or reforms.

It is this deepening ideological divide that now threatens to rip the eurozone apart.

Scramble for safety as fears of eurozone slump grow
MILES COSTELLO AND DAVID CHARTER THE TIMES JANUARY 08, 2015 12:00AM

Investors eye safe-haven assets

RENEWED fears of an economic slump in continental Europe sparked an investor scramble for safe-haven assets yesterday that left returns on a string of benchmark government bonds plumbing record lows.

As bond investors faced up to the prospect of Greece dropping out of the eurozone, and as concerns mounted that economies across the continent had moved into reverse, the yields on German, French, Dutch, Austrian, Belgian and Finnish government debt tumbled. The yield on Germany’s state borrowing, or bunds, fell to 0.48 per cent, its lowest level on record, while the average ­returns across German, American and Japanese debt due for repayment in 10 years fell below 1 per cent for the first time.

Japan’s benchmark 10-year government bonds ended the day yielding 0.289 per cent, a fresh successive low, while yields on 10-year US Treasuries fell below 2 per cent for the first time since the market rout last October.

Luke Bartholomew, at Aberdeen Investment Management, said: “The collapse in German bond yields to record lows is a sign that the ‘Japanification’ of Europe is no longer just a risk but has …­ ­already occurred.”

He said investors were seeking the perceived safety of government bonds, where default was seen as highly unlikely, as well as being spooked about a potential Greek exit from the eurozone. “Such low yields tell us (that) investors do not see any prospect of growth and inflation in the eurozone for the foreseeable future.”

Against the backdrop of an oil price that has more than halved over the past six months, stockmarkets continued to fall yesterday. The FTSE 100, the CAC 40 in Paris and indices in Spain and Italy all closed lower. Only the Dax in Germany ended the day in positive territory, up 12.16 points at 9,485.32. The flight to safety pushed the gold price back above $US1200 an ounce and left silver higher at $US16.60 an ounce.

Greece is due to hold a snap election this month and Syriza, the anti-austerity party, is leading the polls. If elected, Syriza has pledged to renegotiate the terms of its €240 billion bailout, a move that would be resisted by German chancellor Angela Merkel.

Economies across Europe are struggling. This week, official figures showed the German economy grew by an annualised 0.1 per cent last month.

The gloom was compounded this week when surveys of business activity showed that eurozone economies suffered their worst quarter in more than a year during the three months to the end of December.

Italy’s services sector shrank for the first time in three months last month, while overall business activity in France contracted, two purchasing managers’ indices published by Markit showed.

Markit’s final eurozone composite PMI, based on surveys of thousands of companies across the region and regarded as a good indicator of growth, missed an earlier flash reading of 51.7, coming in at 51.4.

The European Central Bank, set to meet this month, is expected to introduce a bond-buying quantitative easing program in a desperate effort to kickstart growth.

Under QE, central banks buy lenders’ unwanted bonds to provide them with capital, which they in turn are expected to inject directly into lending to business and consumers.

The Times

Mayhem Erupts on Trading Floors After Swiss Central Bank Removes Cap on Franc

At 9:30 a.m. today, trading floors across the City of London erupted.

Outbursts of obscenities and confusion followed the Swiss central bank’s surprise decision to abolish its three-year-old policy of capping the Swiss franc against the euro, according to traders in London’s financial district. The U-turn sent the franc as much as 41 percent up against the euro, the biggest gain on record, a move that one trader estimated may cause billions of dollars of losses for banks and their customers.

Dealers at banks including Deutsche Bank AG (DBK), UBS Group AG (UBSG) and Goldman Sachs (GS) Group Inc. battled to process orders amid a flood of customer calls and trade requests, according to people with direct knowledge of the events. At least one electronic currency-trading system temporarily halted transactions, adding to the mayhem.

“This is the biggest currency shocker in years and it’s likely to create more volatility in the short term,” said James Stanton, head of foreign exchange at deVere Group, a financial adviser that oversees about $10 billion. “Trading positions are extremely vulnerable and volume has gone through the roof.”

Deutsche Bank was among currency dealers to suffer disruptions to electronic trading, with its Autobahn platform temporarily ceasing to provide quotes, according to a dealer from outside the bank. The Frankfurt-based lender is among the four biggest dealers in the $5.3 trillion-a-day foreign-exchange market, along with Citigroup Inc., Barclays Plc (BARC) and UBS, according to Euromoney Institutional Investor.
Market Tailspin

Spokesmen for Deutsche Bank, Zurich-based UBS and New York-based Goldman Sachs declined to comment. Some of the bankers interviewed for this story asked not to be identified as they weren’t authorized by their firms to speak publicly.

Sitting in front of their screens, dealers around the globe watched the franc hit 1.10 versus the euro, before surging to parity and reaching a record 0.8517 as the SNB dropped its commitment to defend the ceiling introduced in 2011. The Swiss currency jumped as much as 38 percent against the dollar while volatility climbed to the highest in more than a year.

“The move caught everyone off guard,” said David Madden, an analyst at IG Group Holdings Plc (IGG), which takes bets on financial markets under the IG Index name. “The Swiss central bank has sent the markets into a tailspin.”

As the franc spiked, investors said they found themselves unable to trade it amid a lack of price quotes.
‘No Liquidity’

“There was a good hour when euro-swiss was untradeable,” said Chris Morrison, London-based head of strategy at Omni Macro Fund, a hedge fund which oversees $550 million. “Clearly there was no liquidity.”

Forex.com, a currency-trading website, said it halted services briefly “until we get confirmation from our liquidity providers that we can get Swissie liquidity.” Dealing resumed at about 10:30 a.m. London time.

Spread-betters were also hit. IG Group said in a statement the SNB’s move will cost the firm as much as 30 million pounds ($46 million).

The turmoil forced top bankers to clear their diaries. At Citigroup Inc. ©, Steven Englander, global head of G-10 foreign-exchange strategy, had all his meetings canceled following today’s decision, according to a person with knowledge of the matter.
‘Red Faces’

With the franc largely frozen against the euro since the SNB introduced the ceiling, the turmoil may have left some investors with losses so large they could even be forced to close, according to a trader at one bank who asked not to be identified.

Anthony Peters, a broker at Swiss Investment Corp., said firms that were selling options tied to the Swiss franc may be among today’s losers. They would have lost money as volatility surged.

“Selling puts or vol on the franc was deemed to be SNB guaranteed money for old rope,” he wrote in a note to clients today. “There will be some very red faces around as it begins to transpire who should not have been playing that game.”

Black swan event always reminds us that theory and reality are always different. I dont even know how they going to do stop loss on these kind of environment. People realise price and liquidity are 2 different things.

"Anthony Peters, a broker at Swiss Investment Corp., said firms that were selling options tied to the Swiss franc may be among today’s losers. They would have lost money as volatility surged.

“Selling puts or vol on the franc was deemed to be SNB guaranteed money for old rope,” he wrote in a note to clients today. “There will be some very red faces around as it begins to transpire who should not have been playing that game.”"

penny pickers got flatten by steam rollers.

^^ frankly i know im gonna step on some toes but thats why i dont subscribe to cigar butt investing, unless one has distressed asset capabilities

https://investingsidekick.com/cigar-butts-turnarounds/

While you're picking up the cigar butt delighted with the free puff, you close your eyes in egoistic triumph of why others so dumb not to see it, and didnt see the steam roller coming

ECB, Germany remain split over fresh stimulus
AIMEE DONNELLAN THE AUSTRALIAN JANUARY 19, 2015 12:00AM

A BITTER row has erupted between the European Central Bank and Germany over a giant stimulus program to save the eurozone from a deflationary crisis.

On Thursday, ECB president Mario Draghi is expected to launch a quantitative easing program worth up to €600 billion ($845bn). But German and ECB officials remain at loggerheads over basic points of the plan, with the argument expected to continue right up to the meeting of the bank’s governing council on the day.

Last week, it appeared that ECB officials had made a crucial concession to win German support. State central banks would buy bonds issued by their own governments — but would not have to shoulder the risk of losses on bonds bought by other national lenders.

However, ECB officials denied over the weekend that the bank had abandoned the idea that risk should be spread across the 19 members of the currency bloc. “At this stage, everything is very open,” said an ECB insider. The bank views Germany’s position as being at odds with the fundamental principles underpinning the single currency.

Far from having accepted that the risk of default should not be spread across the eurozone, the ECB is thought to be determined to press ahead with it at Thursday’s meeting. “Risk sharing is vital to the success of the QE program,” said Antonio Garcia Pascual, chief euro area economist at Barclays. “Without it, there will be an increased market perception of euro system fragmentation as well as sovereign risk.”

The ECB is under heavy pressure to launch QE: prices in the eurozone fell last month and the bank is anxious to ensure deflation does not become established. Interest rates are already at record lows of near zero per cent. Late last week, ECB board member Benoit Coeure appeared to confirm that QE would definitely go ahead. He said the bank would take the US and British experiences into account in setting the amount of debt to buy.

“We should also decide if the purchase would concern the debt of certain countries or if it should be balanced across the entire eurozone,” he told the French newspaper Liberation. He said that weaker-than-expected growth and inflation “oblige us to react and, once more, to imagine instruments to support growth”.

The ECB hopes that injecting liquidity into the system will increase bank lending, boosting growth across the eurozone. It is expected to begin printing money within a month.

The Sunday Times

Eurozone’s quantitative easing program could top €600 billion
DOW JONES JANUARY 22, 2015 7:16AM

Jon Hilsenrath on ECB Stimulus Move
A PROPOSAL from the European Central Bank’s Frankfurt-based executive board calls for bond purchases of roughly €50 billion ($71.4bn) a month that would last for a minimum of one year, according to people familiar with the matter, an indication that officials are weighing massive stimulus to shore up the eurozone’s fragile economy and boost inflation.

The ECB’s executive board met earlier this week to decide on the proposal, which will form the basis of deliberations by the entire 25-member governing council tonight. The final number and details could change after the full board weighs in on the plan.

Still, the executive board’s proposal indicates that the ECB could move more aggressively than financial markets have expected. Forecasts among analysts have recently centred on a figure of around €500bn or higher for a quantitative-easing program, but the executive board’s proposal suggests that bond purchases could amount to at least €600bn and perhaps much more.

An ECB spokesman declined to comment.

Markets fluctuated as investors digested the details of the proposal. European stocks briefly rallied while the euro dived before moving higher. The currency traded at $US1.1620 against the US dollar, roughly where it had traded before the news.

ECB officials have sent strong signals in recent weeks that they are prepared to launch large-scale purchases of government bonds, known as quantitative easing, at their January 22 meeting. With official interest rates near zero and abundant loans to banks showing little effect on inflation so far, the ECB is left with few options apart from the public debt market.

Consumer prices in the eurozone fell 0.2 per cent in December on an annual basis, the first such decline since the depths of the global financial crisis in 2009 and well below the ECB’s target of inflation rates just under 2 per cent.

Other major central banks including the Federal Reserve, Bank of England and Bank of Japan relied heavily on quantitative easing to reduce long-term interest rates in the aftermath of the financial crisis.

But the ECB has largely refrained from this measure in recent years, relying instead on interest rate cuts and loans to banks as a means of steering new credit to the economy.

Although buying bonds appears to have broad support within the ECB’s governing council, the bank’s two officials from Germany have signalled they are likely to oppose the measure. Quantitative easing is deeply unpopular in Germany, where it stirs fears of inflation and the use of central bank money-printing presses to finance wasteful government spending.

A summary of market expectation on ECB QE...

Factbox - ECB QE: what markets expect and what it might mean

LONDON - Financial markets are primed for the European Central Bank to launch a quantitative easing program on Thursday in an attempt to revive the moribund euro zone economy and inflation.

The following shows how markets are set up for the meeting, key factors to watch, and possible consequences:

* SIZE

How much new money will the ECB print? Money market traders polled by Reuters expect a 600 billion euro sovereign bond-buying program.

A day before the meeting, media reports said the ECB would buy bonds worth 50 billion euros a month, with one saying purchases would last a year and another that it would extend from March to the end of 2016.

If true, these would suggest total purchases of between 500 billion and just over 1 trillion euros. "500 billion will be slightly disappointing ... (and) 1 trillion euros will be bullish," Deutsche Bank co-CEO Anshu Jain said on Wednesday.

But investors believe 600 billion euros will not be enough to bring inflation back to the central bank's target of just below 2 percent. Market inflation expectations are at record lows and reflect scepticism QE will work.

A surprisingly big or even open-ended program, such as that announced by the Bank of Japan in October, would give further impetus to buying of peripheral euro zone bonds and cut their yield premiums over German Bunds. For a graphic on central bank balance sheets, click http://link.reuters.com/fus62t

* PRICING

Economists polled by Reuters put the probability an announcement on QE will come this week at a median 70 percent, slightly less than the 90 percent money market traders are pricing in.

Yields on top-rated euro zone government bonds with maturities up to six years have fallen below zero as investors have snapped up paper in the hope that they will be able to sell it to the central bank for a profit.

Delaying the decision could cause a massive market upheaval, especially as Greece holds a general election on Jan. 25 that has raised fresh concern about its future in the euro zone.

* POSITIONING

Investors have snapped up euro zone government bonds across the credit spectrum, driving yields to record lows and, for most short-dated top-rated paper, further below zero.

But heading into the meeting, yields rose as investors cut exposure to the bonds after the reports on the extent of ECB purchases. German 10-year Bund yields, which had fallen steadily throughout 2014, rose further on Thursday after notching up on Wednesday their biggest daily rise since December 2013.

In currency markets, traders and strategists at major banks say the sort of extended monthly buying outlined in the media reports is fully priced into the euro. That argues for a clearing out of many of the bets on the euro weakening against the dollar that have made money for investors over the past six months, and the single currency rose almost a cent on Wednesday.

* RISK-SHARING

There is major uncertainty over how the scheme will work, with the main focus on whether individual national central banks will buy their own countries' bonds and bear the brunt of credit risks in a nod to German moral hazard concerns.

This could prompt investors to cut exposure to peripheral euro zone bonds and boost demand for top-rated, more liquid assets. Peripheral bond yields are likely to rise from their record lows and widen their premiums to Bunds.

* EXCLUSION

Speculation is high that the ECB may exclude junk-rated Greek bonds from its purchases as the country heads into an election that could put it at odds with its international creditors and spark a fresh crisis.

Greece triggered the currency bloc's debt crisis in 2009, which saw the country shut out of bond markets. Any exclusion of its bonds from QE could send its borrowing costs spiraling back up to unsustainably high levels that could trigger another default.

Trade in Greek stocks and bonds could be even more volatile in the run-up to Sunday's vote. It would also be bad news for the country's recently upgraded credit rating, the main ratings agencies said. REUTERS
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