20 ★ Tuesday20 August 2019Jean Boivin
Markets Insight
ChipmakersNvidia,Micron Technology
andAdvanced Micro Devicesgained after
the US Commerce Department pushed
back implementation of the trading ban
withHuaweiby 90 days.
Nvidia received a further boost from
Microsoft, announcing it would use its
technology to offer more realistic
graphics inthe Redmond company’s
Minecraftgame.
Shares inApplerose after it emerged
that chief executiveTim Cooktold
President Donald Trump that US tariffs
on Chinawere making it harder to
compete with rivalSamsung.
Estée Lauderrose more than 9 per
cent on the back of strong sales in the
Asian markets. The cosmetics company
beat revenue expectations in the
previous quarter with growth in its
skincare, make-up and fragrance units.
The big banks includingGoldman
SachsandWells Fargowere up alongside
a rise inTreasury yields that were
expected to improve lenders’ margins.
Retailers such asGapandKohl’spicked
up to regain losses from last week after
Macy’scut its profit forecast.
PG&E, the Californian electric utility,
slipped after thecourts ruled it liable for
as much as $18bn in damage from
wildfires.Harry DempseyWall Street Eurozone London
The shares of European banks made
gains — led byDeutsche Bank— after
reports on Friday that Germany’s
coalition government would be willing to
take on fresh debt to prevent a possible
recession.
Lundin Petroleum, the Swedish oil
group, rose more than 5 per cent after
announcing it made an oil discovery in
the North Sea.
European chipmakers headed by
Dialog Semiconductorwere also up after
the US Commerce Department Huawei
announcement.
CNH Industrial, an agricultural
equipment manufacturer, gained after
Morgan Stanley upgraded it due to a new
chief executive targeting cost-cutting
and higher prospects of margin
improvement.
IMCD, the Dutch chemicals company,
slipped lower after its earnings report
released last week said a difficult
macroeconomic environment had
negatively affected growth in the second
quarter.
Seafood companiesMowiandSalMar
both slipped lower after the National
Trust for Scotland damaged the groups’
growth prospects by opposing a new
salmon farm proposed by Mowi.
Harry DempseyPub groupGreene Kingsurged after
agreeing to a takeover by Hong Kong
billionaireLi Ka-shing’sCK Asset
Holdings for £4.6bn.
The pub owner has 11.3 per cent of the
UK pub sector by turnover. Shares of rival
mid-cap pub companies including
Marston’sandJD Wetherspoonalso
shifted higher.
Ocadorose more than 4 per cent after
a report by JPMorgan said the firm had
reached a “tipping point” for profitability
and would benefit from the transition to
online shopping.
CompetitorSainsbury’srose after it
said it was not talking to internal
candidates for the chief executive job.
GlencoreandAntofagastatraded
higher, aided by a rally in copper prices
after China announced new stimulus
measures in response to the ongoing
trade war.
Gold and silver minerFresnilloslipped
as its half-year results undershot market
expectations.
BPandRoyal Dutch Shellwere
boosted by the jump in oil prices as a
drone was attacked on a Saudi Arabian
oilfield by Yemen’s Houthi rebels.
DS Smithrose after analysts at UBS
Group restated its “neutral” rating for the
packaging group.Harry Dempsey3 Global stocks rise on hopes of further
central bank stimulus
3 Bonds yields climb as investors shift
out of haven assets
3 Brent crude closes in on $60 a barrelStocks rallied and government bonds sold
off as investors’ focus shifted to signs
that central and bankswere poised
introduce further stimulus to perk up a
slowing global economy.
Ahead of the US Federal Reserve’s
annualconference at Jackson Hole in
Wyoming, China’s central bank
introduced interest rate reforms over the
weekend that added to hopes that other
leading economieswere about to embark
on accommodative policies thatwould
boost asset prices.
Such optimism led the FTSE All-World
to climb more than 1 per cent yesterday,
helping to chip away at an almost 3 per
cent fall for the month.
On Wall Street, the S&P 500 index was
up 1.3 per cent while the technology
Nasdaq Composite index rose 1.5 per
cent. Meanwhile, the Dow Jones Industrial
Average advanced more than 1 per cent
by midday in New York.
Lee Hardman, currencies analyst at
MUFG, said: “Risks to the global growth
outlook have increased. It has made the
US rate market more confident that the
Fed will deliver another rate cut at their
next meeting on the 18 September.”
The change in sentiment led to a sell-off in haven assets such as sovereign
bonds and gold.
The yield on the benchmark 10-year US
Treasuries rose 6 basis points to 1.60 per
cent while the yield on the more rate-
sensitive two-year note was up more than
6bp at 1.54 per cent.
The price of gold was down almost 1
per cent to $1,501 an ounce, although it
remained within sight on its six-year high.
In Europe, the yield on Germany’s 10-
year Bunds rose 4 basis points to minus
0.65 per cent as investors digested a
report by the country’s central bank thathinted at stimulus measures. The
Bundesbank said it expected Germany’s
economy to remain “lacklustre” in the
three months to September, adding itwas
likely to tip into recession in the third
quarter of the year.
Mirroring equity moves across the
Atlantic, the European stocks climbed.
The continent-wide Stoxx Europe 600
index rose 1.1 per cent while Germany’s
Xetra Dax firmed 1.3 per cent.
Brent crude, the international oil
benchmark, rose 1.7 per cent to close in
on $60 a barrel.Nikou AsgariWhat you need to know
Global stocks rebound as risk appetite returns
FTSE All-World indexSource: Bloomberg Mon Tue Wed Thu Fri MonThe day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2918.51 1470.25 20563.16 7190.68 2883.10 100672.
% change on day 1.03 0.97 0.71 1.03 2.10 0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 98.211 1.110 106.495 1.213 7.044 4.
% change on day 0.070 0.000 0.103 -0.082 -0.001 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.585 -0.651 -0.235 0.467 3.030 7.
Basis point change on day 1.950 3.700 0.650 0.200 1.500 3.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 333.24 59.04 55.18 1515.25 17.16 2768.
% change on day 0.37 0.72 0.53 -0.03 -0.75 -0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index||||||||||||||||||||
Jun 2019 Aug2800288029603040||||||||||||||||||||
Jun 2019 Aug14001440148015201560||||||||||||||||||||
Jun 2019 Aug7040736076808000Biggest movers
% US Eurozone UKUpsEstee Lauder Companies 8.
Wynn Resorts 5.
Nvidia 5.
Tapestry 4.
Ipg Photonics 4.Persimmon 0.
Bae Systems 0.
Bp 0.
St. James's Place 0.
Itv 0.
%DownsMccormick & -2.
Nektar Therapeutics -2.
Davita -1.
Centene -1.
Cboe Global Markets -1.
Prices taken at 17:00 GMT
Based on the constituents of the FTSE Eurofirst 300 Eurozone
Persimmon 0.
Bae Systems 0.
Bp 0.
St. James's Place 0.
Itv 0.
All data provided by Morningstar unless otherwise noted.A
t the Jackson Hole Eco-
nomic Policy Symposium
in 2014, the European Cen-
tral Bank’s Mario Draghi
made a polite departure
from the usual rhetoric around
austerity, saying “it would be helpful” if
fiscal policy could play a greater role in
boosting demand.
Five years later, central bankers meet
again in Jackson Hole as Mr Draghi pre-
pares to leave his role as president of the
ECB. They should not just heed Mr
Draghi’s advice but take it much further.
The next policy response to a down-
turn will probably require an unprece-
dented venture into “going direct” —
finding ways to get money more directly
in the hands of entities that can spend it,
including consumers.
The issue at stake is that there is not
enough monetary policy space to deal
with the next downturn. Conventional
and unconventional monetary policy
mainly boosts growth by lowering short-
and long-term interest rates.
But this requires rates to go lower and
there is nowhere left for rates to go. The
global economy is still expanding and
yet in Europe more than 60 per cent of
government bonds have negative yields.
In the US, the 10-year Treasury yield is
already approaching record lows and
could head towards zero in a recession.
Going direct could include such steps
as tax rebates with the explicit aim of
bringing inflation back to or above tar-
get. But a clear framework will be
needed to avoid undermining central
bank independence or opening the door
to reckless fiscal spending.
Going direct requires the following:
first, defining the circumstances that
would call for such unusual co-ordina-
tion. Second, an inflation objective that
fiscal and monetary authorities arejointly held accountable for.Third, a
mechanism that ensures nimble
deployment of fiscal policy. And finally,
a clear exit strategy.
For example, policymakers could cre-
ate a Standing Emergency Fiscal Facility
that would be activated only when mon-
etary policy is tapped out and inflation
is expected to systematically under-
shoot the target over the policy horizon.
The size of this facility would be deter-
mined by the central bank and cali-
brated to achieve an inflation goal,
which would include making up for past
inflation misses.
The fiscal authority would deploy thefunds. Once medium-term trend infla-
tion was back to target and monetary
policy regained some room for manoeu-
vre, the facility would be closed. Impor-
tantly, such a set-up would help pre-
serve central bank independence and
credibility.
Going direct relies on the ability for
fiscal policy to boost aggregate demand
and the longer term potential of the
economy. Fiscal policy can boost activ-
ity without relying on lower rates and
there is a strong case for fiscal policy to
do more of the heavy lifting.
The “lower for even longer” rate envi-
ronment provides more fiscal space. If
rates stay lower than trend growth, it is
possible to expand deficits and still see
debt-to-GDP ratios fall.
The proponents of fiscal expansions
point to powerful forces that shouldkeep rates low: a persistent global sav-
ings glut and demand for the perceived
safety of government bonds.
But fiscal policy will not be thewhole
answer. Low rates cannot be taken for
granted. A large fiscal expansion would
materially reduce the global saving glut.
With global debt at record levelsand
increasing, perceptions of debt sustain-
ability could change, reducing the
“safety bid” for sovereign bonds.
Ensuring fiscal space goes towards a
productive and efficient allocation of
resources has proven difficult.
In recent years, central banks have
been exploring changes to their policies,
including strategies that would involve
correcting undershoots of the inflation
target with a commitment to generate
above-target inflation.
The idea is this change will lead to
higher inflation expectations, reducing
the real burden of borrowing.
But these ideas are too timid for the
situation we face today. When interest
rates cannot be meaningfully lowered,
how will the central bank generate
higher inflation?
Mr Draghi saidhe would do “what-
ever it takes” to preserve the euro. We
need that same courage from central
bankers as they prepare for another
downturn.
Greater clarity on how to successfully
combat the next recession is more
important for building confidence than
any short-term easing of monetary
policy.
Policymakers will need to embrace
ideas that are not just unconventional
but unprecedented. Let us hope that at
Jackson Hole this year, policymakers
start embracing a bolder approach.Jean Boivin is global head of the BlackRock
Investment InstituteGoing direct is how
policymakers can fight
threat of recession
Fiscal policy can boost
activity and there is a
strong case for it to do
more of the heavy lifting
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