The shadow of slowing Chinese growth expectations hangs over market sentiment. Economic indicators for April released today, showed mixed results. Industrial production and retail sales data were positive, though fixed-asset investment showed the lowest level of growth in more than a decade at 11.4 percent year-over-year. This news comes on the back of an announcement yesterday from the People’s Bank of China that it had lowered its 2015 GDP projections to 7 percent. With the Shanghai Composite and Shenzhen Composite indexes now up over 60 percent and 100 percent for year-to-date respectively, expectations are palpable among Chinese investors that Beijing will take more actions to secure a soft landing for the nation’s economy.
S&P downgrades Greek debt. Yesterday Standard and Poor’s reduced the credit rating assigned to long-term Greek sovereign debt from CCC+ to CCC. In its decision, the ratings agency noted that barring a last-minute deal with creditors, the nation will “likely default on its commercial debt within the next 12 months.” Equities in Greece rose sharply in morning trading with the Athens Stock Exchange General Index up more than 6 percent on the day as traders wagered that an extension of terms is likely. Greek Prime Minister Alexis Tsipras is scheduled to meet with European Commission President Jean-Claude Juncker later today to discuss options.
Korean rates hit historic low. In the second cut year-to-date, the Bank of Korea today reduced its benchmark policy rate 25 basis points to 1.5 percent, a historic low. South Korea’s economy has been dogged by concerns over weak exports and the outbreak there of Middle East Respiratory Syndrome. The move was a surprise. Consensus forecasts had called for no change from today’s announcement but volatility for the won versus primary currencies remained muted after a press conference by Bank of Korea governor Lee Ju-yeol.
New Zealand slashes rates. The New Zealand dollar, also known as the Kiwi, slipped by more than 2 percent against the U.S. dollar in trading today, following the Reserve Bank of New Zealand’s overnight interest rate cut to 3.25 percent from 3.5. In a statement accompanying the announcement bank policymakers noted that despite a drop in both commodity prices and demand, the nation’s currency remained fundamentally overvalued.
World Bank cuts U.S. forecast. In an interview with Bloomberg on Wednesday evening, Kaushik Basu, the World Bank’s chief economist, called on the Federal Reserve to delay a hike in rates until fundamentals improve for the nation. Separately, the bank today reduced its 2015 GDP projections to a growth level of 2.7 percent versus a prior 3.2.
U.K. to sell RBS holdings at a loss. During his annual Mansion House address yesterday evening, U.K. Chancellor of the Exchequer George Osborne announced that his government would divest its 79 percent stake in Edinburgh–headquartered Royal Bank of Scotland. The sale of shares is expected to come at a loss to the government after the £46 billion ($71.2 billion) bailout of the financial institution in 2008. Separately Osborne also announced details of the upcoming sale of the government’s holding in Royal Mail.
Portfolio Perspective: ECB TLTRO Remains Attractive — Giuseppe Maraffino, Barclays
A week from today the European Central Bank will conduct its fourth targeted longer-term refinancing operation (TLTRO). During the previous three operations, the ECB allotted a total of €310 billion ($349 billion). We expect a take-up of about €80 billion at the upcoming operation. This would be lower than in March as the three banking systems that so far have borrowed more — France, Italy and Spain — could borrow less according to our estimates, given their past large TLTRO take-up. Risks are skewed to the upside, however.
Economic activity is improving, supported by cheap oil, weak currency and stronger consumer and investor confidence. Monetary aggregate and bank lending data for April 2015 showed a slight growth in loans to the real economy. We expect lending dynamics to improve further, though the recovery will not be V-shaped, as deleveraging dynamics are still occurring.
We continue to believe that TLTRO remains attractive even in the context of quantitative easing. In March, the total TLTRO take-up was about €100 billion, while since the beginning of quantitative easing, banks have sold a tiny fraction of their government bonds.
Giuseppe Maraffino is a fixed-income strategist with Barclays in London.
