FT : Germany is the eurozone’s biggest problem

Germany is the eurozone’s biggest problem

The monetary union will fail if it is run for the benefit of creditors alone

Why is conventional German thinking on macroeconomics so peculiar? And does it matter?
The answer to the second question is that it matters a great deal. A part of the answer to the first is that Germany is a creditor. The financial crisis has given it a dominant voice in eurozone affairs. This is a matter of might, not right. Creditors’ interests are important. But they are partial, not general, interests.

Recent complaints have focused on the European Central Bank’s monetary policies, especially negative interest rates and quantitative easing. Wolfgang Schäuble, Germany’s finance minister, even claimed that the ECB bore half of the responsibility for the rise of the Alternative for Germany, an anti-euro party. This is an extraordinary attack.
Criticism of ECB policies is wide-ranging: they make it unnecessary for recalcitrant members to reform; they have failed to reduce indebtedness; they undermine the solvency of insurance companies, pension funds and savings banks; they have barely kept inflation above zero; and they foment anger with the European project. In brief, ECB policy has become a big threat to stability.
All this accords with a conventional German view. As Peter Bofinger, an heretical member of Germany’s council of economic experts argues, the tradition goes back to Walter Eucken, the influential father of postwar ordoliberalism. In this approach, ideal macro­economics has three elements: a balanced budget at (almost) all times; price stability (with an asymmetric preference for deflation); and price flexibility.
This is a reasonable approach for a small, open economy. It is workable for a larger country, such as Germany, with highly competitive tradeable industries. But it cannot be generalised to a continental economy, such as the eurozone. What works for Germany cannot work for an economy three times as large and far more closed to external trade.
Note that in the last quarter of 2015, real demand in the eurozone was 2 per cent lower than in the first quarter of 2008, while US demand was 10 per cent higher. This severe weakness in demand is missing from most of the German complaints. The ECB is rightly trying to prevent a spiral into deflation in an economy suffering from chronically weak demand. As Mario Draghi, ECB president, insists, the low interest rates set by the bank are not the problem. They are instead “the symptom” of insufficient investment demand.

The history of the German economy since its labour market reforms of the early 2000s demonstrates that “structural reform” is most unlikely to solve this problem. The most important macroeconomic fact about the country is that it is unable to absorb almost a third of its domestic savings at home, despite ultra-low interest rates. In 2000, before the reforms — which cut labour costs and workers’ incomes — German corporations invested substantially more than their retained earnings. The opposite is now true. With households in surplus and the government in balance, a vast external surplus has duly emerged. (See charts.)
Why should others be able to make productive use of savings Germans cannot apparently use? Why should structural reforms elsewhere, as advocated by Germany, generate the investment surge lacking at home? Why, not least, should one expect indebtedness to have fallen when demand and overall growth is so weak in the eurozone as a whole?
Martin Wolf
What has happened, instead, is the conversion of the eurozone into a weaker Germany. The current account balance of the eurozone is expected to shift towards surplus by close to 5 per cent of gross domestic product between 2008 and 2016. Every member is forecast to be in balance or surplus. The eurozone is dependent on the willingness of others to indulge in the spending and borrowing it now eschews.
Yet the rest of the world is cautious, too. The ECB has adopted negative real (and nominal) rates because additional savings are now worth so little. It has also learnt from the dire results of the rise in interest rates in 2011. The easing it has adopted since 2012 is at least bearing fruit in a meaningful, if inadequate, recovery: real demand has risen by 4 per cent since its nadir in the first quarter of 2013; and core inflation, albeit only about 1 per cent, has at last stabilised. This is not failure. It is success.
Martin Wolf
Inevitably, such policies are unpopular in creditor countries. But the argument that the threat is excessively loose monetary policy ignores the dangers posed by excessive tightening. It assumes that deflation would pose no problem. Yet it would raise real indebtedness, undermine the flexibility of real wages and even impair the effectiveness of monetary policy, since it would be far harder to generate negative real interest rates when needed. A deflationary spiral would be a much bigger threat than negative interest rates.
Above all, the eurozone will fail if it is run for the benefit of creditors alone. Policy must be balanced. The ECB’s determination to avoid deflation is an important part of that aim. Achieving better balanced demand at the national level is another. A huge deficiency of demand (relative to aggregate supply) in the eurozone’s biggest economy is highly problematic. The EU’s “excessive imbalance procedure” should be far more critical of Germany’s surpluses.
Germany’s ideas and interests are of huge importance to the eurozone. But they should not determine everything. If Germans believe this fatally weakens the legitimacy of the European project, they should use their exit option. To do so would also entail accepting great short-term disruption. But, so long as the country stays in the euro, it must also accept that the ECB has a job to do. If the latter does so, it will not make the eurozone work well. But it is surely a vital contribution

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Closing Market Summary: Averages End Near Lows as Retailers Weigh

The stock market ended its day broadly lower as weaker-than-expected earnings and guidance weighed on retail names and the broader consumer discretionary sector (-2.0%). Other focal points of today's action included an upswing in oil, weakness in the dollar, a broken support (2074/76) level in the S&P 500 (-1.0%), and the underperformance of the heavily-weighted health care (-1.3%) and financial (-1.1%) sectors. The Dow Jones Industrial Average (-1.2%) finished behind the benchmark index (-1.0%) and the Nasdaq Composite (-1.0%).

Equity indices began under pressure as weaker than expected earnings results and guidance from the likes of Walt Disney (DIS 102.29, -4.31), Macy's (M 31.38, -5.61) and Fossil (FOSL 28.44, -11.66) dampened investor sentiment. However, the major averages ticked off their opening lows ahead of the Department of Energy's weekly stockpile report.

The inventory data came in above consensus with larger-than-expected draws in crude oil (-3.41 million barrels; est. +0.71 million) and gasoline (-1.23 million barrels; est. -0.71 million) stockpiles. In response, the energy component jumped off the $44.20/bbl level, bringing the broader market with it. However, the upswing in equities would prove to be short-lived. The benchmark index fell back to its morning low and continued to test support at 2074/76. The benchmark index would break that support in afternoon trade. 

The major averages ended near their lows with nine sectors finishing in negative territory. The heavily-weighted consumer discretionary (-2.0%), health care (-1.3%), and financial (-1.1%) sectors rounded out the board while the remaining decliners ended with losses between 0.1% (energy) and 0.7% (industrials).

Retail names ended with the largest losses in the consumer discretionary space (-2.0%). Macy's (M 31.38, -5.61) and Fossil (FOSL 28.44, -11.66) led the group lower following disappointing results and guidance. The two names surrendered 15.2% and 29.1%, respectively. The SPDR S&P Retail ETF (XRT 41.72, -1.94) lost 4.4% as it traded lower in sympathy with the names. Elsewhere, Kohl's (KSS 38.70, -2.48) and Nordstrom (JWN 45.43, -3.43) underperformed ahead of tomorrow's quarterly reports.

In the health care space (-1.3%) biotechnology demonstrated relative weakness, evidenced by the 3.0% decline in the iShares Nasdaq Biotechnology ETF (IBB 256.10, -7.95). The ETF trimmed its weekly gain to 0.3%, compared to the 0.2% loss in the broader sector. 

Real estate investment trusts underperformed in the financial sector (-1.1%). In the sub-group, Macerich (MAC 77.64, -3.78) and Simon Properties (SPG 203.24, -1068) fell 4.6% and 5.0%, respectively.

The commodity-sensitive energy space (-0.1%) fell beneath its flat line in the final hour as the broader sector erased a 0.7% gain. Independent oil and gas names ended with the largest gains as ConocoPhillips (COP 43.68, +0.81) and Devon Energy (DVN 32.54, +1.00) gained a respective 1.9% and 3.2%. WTI crude ended its pit session higher by 3.4% at $46.20/bbl.

The U.S. Dollar Index (93.82, -0.40) ended off its low as the greenback pared losses against the yen and the euro. The euro/dollar pair finished higher by 0.5% at 1.1423 while losing 0.8% against the yen (108.44). 

The Treasury complex ended off its high with the yield on the 10-yr note falling three basis points to 1.73%.

Today's participation was above the recent average as more than 922 million shares changed hands on the NYSE floor.

Today's data included the weekly MBA Mortgage Index and the Treasury Budget for April: 

  • The MBA Mortgage Index showed a seasonally adjusted increase of 0.4%. This compares to last week's reading of -3.4%.
  • Bolstered by individual tax receipts, the Treasury Budget for April showed a surplus of $106.5 billion; however, that was much less than the surplus of $156.7 billion seen in the same period a year ago.
    • The Treasury data are not seasonally adjusted, so the April surplus cannot be compared to the March deficit of $108.0 billion.
    • Total receipts in April were $438 billion while total outlays were $332 billion.
    • Receipts were $33 billion less than receipts in April 2015. A large portion of that difference can be attributed to a lower level of individual tax receipts this year ($266 billion) versus last year ($288 billion). Total outlays, meanwhile, were $17 billion more than last year.
    • The 12-month deficit is $510.9 billion versus $460.6 billion in March.

Tomorrow morning the Bank of England will announce its latest policy decision at 7:00 ET. 

On the home front, tomorrow's economic data will be limited to weekly initial claims (consensus 270k) and Import and Export Prices for April, which will all be released at 8:30 ET. 

  • Nasdaq Composite -4.9% YTD
  • Russell 2000 -1.9% YTD
  • S&P 500 +1.0% YTD
  • Dow Jones +1.6% YTD

FT : Commerzbank to stop offering ‘cum/cum’ trades

Commerzbank to stop offering ‘cum/cum’ trades

Commerzbank is to stop carrying out a type of trade that allows foreign investors to avoid a German withholding tax on dividends, after drawing huge criticism for the practice.
Germany’s finance ministry last week lambasted so-called “cum/cum” trades as “illegitimate, since their only purpose is to get around the legal taxation of dividends”, after media reports revealed that a number of the country’s banks offered the trades, although it acknowledged that they are not illegal.

In the wake of the criticism, Michael Reuther, head of Commerzbank’s investment banking division, said on Wednesday that the lender would cease to offer the trades because they are “no longer socially accepted”.
“We as Commerzbank aspire to do business in a way that is socially accepted. We have consciously positioned ourselves like that,” he said in an interview with Germany’s Bild newspaper. “And if that is the case, then we have to deal with the fact that we will be judged against this aspiration.”
However, he rejected the suggestion that banks only changed their behaviour after being criticised. “You cannot anticipate every social change,” he said. “There will always be cases in which a service or a product is socially accepted today, but is not in five or 10 years’ time.”
Cum/cum trades involve a German bank borrowing a foreign investor’s shares in a company in the run-up to a dividend payment, allowing them to take advantage of a loophole in German law that allows domestic investors to claim a credit on taxes on dividends that foreign investors cannot claim.
Commerzbank’s involvement in the practice received particular attention because the bank remains part-owned by the German state after being rescued during the financial crisis.
The German finance ministry declined to comment on Commerzbank’s decision to stop carrying out the trades. However, Gerhard Schick, finance spokesman for the Green party, said the move was an “important success in the battle against tax tricks”.
“The step is the right one, but it comes far too late. Business at the expense of taxpayers should have been stopped at the very latest after they rescued the bank in 2008,” he said. “You can’t accept help with one hand, and with the other take more money out of the pocket of the helper!”
The German government in February drew up draft legislation that will close the loophole that allows cum/cum trades. Under the new law, which will be applied retroactively from January 1, 2016, the taxpayer will have to hold a share for at least 45 days either side of a dividend payout date before they can claim a tax credit.

WSJ : Hyperloop One Accelerates Toward Future With High-Speed Test

Hyperloop One Accelerates Toward Future With High-Speed Test
Startups are racing to commercialize Elon Musk’s idea of transporting passengers at 760 miles an hour in low-pressure tubes

NORTH LAS VEGAS, Nev.—Hyperloop technology this week is accelerating toward becoming a reality.

On Wednesday in the desert north of Las Vegas, Hyperloop One Inc. conducted the first test of the propulsion system that is essential to the high-speed transportation invention when a sled zipped down a track for about two seconds and crashed into a pile of sand.

On the eve of the test, the company announced it has formed ties with more traditional transportation companies and raised fresh capital.

All are milestones in the company’s plan to create a fully operational hyperloop system by 2020.

“The hyperloop is real. It’s happening now,” said Chief Executive Rob Lloyd, during an interview in Las Vegas. The company on Tuesday changed its name from Hyperloop Technologies, to help distinguish it from its main rival.

Hyperloop One is one of the startups aiming to commercialize the idea that billionaire inventor Elon Musk floated in a 2013 paper: transporting people in low-pressure tubes at 760 miles an hour, nearly the speed of sound. Mr. Musk envisioned it as pods powered by propulsion motors that use magnets to hover on a sliver of air in near-vacuum tubes. The lack of air resistance and friction of traditional transportation are what would allow it to achieve such high speeds.

Hyperloop One is jockeying with Hyperloop Transportation Technologies Inc. to be the first to bring Mr. Musk’s idea to life. On Monday, Hyperloop Transportation said it created a way to elevate hyperloop pods using permanent magnets, a new technique that is cheaper and conserves more energy than previous methods. It hasn’t yet demonstrated its propulsion technology. Hyperloop One said it also is experimenting with permanent magnets.

The hyperloop idea has faced significant skepticism, pertaining more to its cost than its technology. Mr. Musk has said that a San Francisco-to-Los Angeles hyperloop would cost $6 billion. Experts expect it could be much more expensive.

“We will reduce the cost of the hyperloop until it is two-thirds the cost of a high-speed rail system at three times the speed,” Mr. Lloyd said.

Established in 2014, Hyperloop One raised an initial $37 million in funding and set up an office in Los Angeles. Last December, the company started building its test site north of Las Vegas, including a half-mile-long open-air track that was to be used Wednesday.

To reduce costs, the company is breaking down its design into different parts such as levitation, propulsion and tube design, and then learning to build each with less expensive materials.

The propulsion mechanism that Hyperloop One tested Wednesday is the first segment of the project. Off a dirt road 30 minutes north of Las Vegas, engineers in a control room started the countdown and a crowd of spectators in a bleacher fell silent.

A roughly 10-foot sled containing the propulsion motor lurched forward, a sign that indicated the engine starting. It zoomed by at 116 miles an hour. Hyperloop One drove it into a pool of sand to stop it, as the company hasn’t yet built brakes for the contraption, creating a giant spray of dust. The sled didn’t carry any passengers.

The focus of the test was more on the propulsion technology—whether it could actually move the sled—than the speed. The track was shorter and there was air resistance, two slowing factors which will be eliminated in future tests.

The propulsion mechanism that Hyperloop One was due to test Wednesday is the first segment of the project. If all goes according to plan, a roughly 10-foot sled containing the propulsion motor will zip forward on tracks, for about two seconds, at 116 miles an hour. It should crash into a pile of sand because the company hasn’t yet built brakes for the contraption. The sled won't carry any passengers.

The focus of the test will be more on the propulsion technology—whether it can actually move the sled—than the speed. The track is shorter and there will be air resistance, two slowing factors which will be eliminated in future tests.

Hyperloop One also is trying to prove that its technology will be worth deploying. The company said Tuesday that it is participating in private-feasibility studies to examine a potential hyperloop route between Stockholm and Helsinki, as well as networks to transport cargo from the ports of Los Angeles and Long Beach, Calif., and throughout Switzerland.

In March, Hyperloop Transportation Technologies signed an agreement with the Slovak government to explore building a hyperloop in the European country.

Hyperloop One’s latest funding comes from new investors that have transportation expertise. The $80 million Series B financing investors include France’s national rail company, SNCF, and GE Ventures, the venture arm of General Electric Co., whose transportation unit makes locomotives.

By the end of this year, Hyperloop One plans to build and test a complete hyperloop, including the tube, pod and the computer that pilots the pod, Mr. Lloyd said. That pod should travel about 700 miles an hour, he said. “We think we will be able to demonstrate full Kitty Hawk capabilities by the end of this year,” Mr. Lloyd added.

FT : Macro funds miss out on trade of lifetime

Macro funds miss out on trade of lifetime

In Moby-Dick, Capt Ahab obsessed over a whale. For fund managers that whale is quantitative easing

In Moby-Dick, Captain Ahab becomes obsessed with the whale that tore off his leg, chasing it through the seas until it eventually destroys him. For the word’s hedge fund managers, the whale is quantitative easing. Those who have obsessively bet against the central banks’ preferred stimulus measure have been battered. Some funds have not lived to tell the tale.
This week has only served to highlight how the hedge funds that specialise in predicting central bank moves have missed one of the biggest macro trades of all time: being long stocks and bonds since the financial crisis.

On Tuesday, the S&P 500 index enjoyed its biggest daily rebound in two months, adding to the confusion of a first quarter in which US share prices swung down and up by more than 10 per cent. Currency pairs have oscillated wildly, and commodity prices have confounded experts.
In this environment, macro hedge funds have struggled, unable to latch on to short-term market trends for long enough to make money from them — and frequently being washed out by bouts of severe volatility.
Their managers complain that central bank market manipulation has hampered their ability to distinguish between winning and losing trades. Very few have managed to make decent returns and some of their biggest clients — public pension plans — are voicing their disquiet.
But if, with perfect hindsight, macro funds had decided at the start of 2009 that central banks’ low interest rates would reflate risky assets, they would have bought up stocks and developed market government bonds. And, had they done so, their S&P 500 equity holdings would have made compounded annual returns of around 15 per cent with dividends reinvested. In reality, though, the average annual return from macro hedge funds, measured by the HFRI index, has been in the low single digits.
Macro fund managers will argue that they are not paid to engage in such trifles as buying up indices of stocks and bonds. They will argue they are not paid to be correlated to the wider market, and that any criticism fails to acknowledge the uncertainty over monetary policy since the crisis. However, none of this hides the fact that they have missed the biggest central bank-driven trade of their careers.

FT : Tie-up hopes dashed for Europe’s telecoms

Tie-up hopes dashed for Europe’s telecoms

Three-O2 merger block raises questions about network investment

T

he telecoms sector has become the battle ground for commissioners and businesses in a battle between opposing visions of future industrial policy for the EU.

Brussels’ decision to block CK Hutchison’s £10.5bn acquisition of O2, the UK mobile operator owned by Telefónica, will spark a debate about how to nurture a globally competitive telecoms sector when investment needs to be made in next generation networks.

Central to the argument is whether the commission can find a balance between protecting its regional businesses and the consumers they serve.

In the case of telecoms, the two strands of policy are in conflict given the importance the antitrust regulator has put on the threat of price rises if businesses are allowed to merge.

This conflict is having a tangible — and costly — effect on a telecoms sector that has suddenly seen the chance to push for widespread consolidation evaporate. Companies will be left scratching around for new ideas to bolster businesses under pressure to deliver next generation infrastructure.

Kester Mann, an analyst at CCS Insight, says the collapse of the deal leaves both Three and O2 in a precarious position.

More broadly, he adds: “It also casts serious doubt over the future structure of a European telecoms sector that had banked on the tie-up paving the way to further consolidation.”

Chris Watson, head of technology, media and communications at law firm CMS, describes it as “a significant statement of change in macroeconomic policy” by Brussels.

The outlook for the telecoms sector had appeared much brighter just a year ago, given a shift to supporting big telecoms businesses felt in the industry.

Chief executives across the sector, including Orange’s Stéphane Richard and Tim Höttges at Deutsche Telekom, spent years telling regulators that Europe needed to help build a strong European telecoms market.

Prices — and revenues — have been falling as the need to invest in infrastructure such as 4G mobile and ultrafast fibre broadband has become critical.

The answer for telecoms executives was simple: merge their businesses within markets to create a company with greater financial firepower.

They pointed to the relative strengths of Asian and US telecoms companies that had been allowed to gain significant market power by building strong positions in their markets.

Brussels appeared to take heed of the calls.

In 2013, the previous commission introduced policies to create a digital single market aimed at encouraging investment across the continent. Commissioners talked loftily about creating pan-European telecoms giants that would champion regional technology innovations such as 5G.

But, more importantly for the telecoms sector, companies were finally given what they had long called for: an open door to consolidation.

Smaller mergers in Austria and Ireland were used to test the waters. Telefónica’s 2014 takeover of E-Plus in Germany showed that Brussels could overrule national competition concerns to create larger telecoms groups.

Bankers, sensing an opportunity, dusted down their books of potential deals that had been considered impossible.

Deals in France, the UK and Italy were quickly proposed. Similar moves were discussed in Scandinavia.

But the opportunity was all too brief for telecoms executives. The change in the commission last year brought in a new, tougher competition regime.

The first warning shot from the commission was in Denmark, the home of the antitrust chief.

Ms Vestager had made sceptical noises about consolidation before, but her words were perceived by the industry as threats rather than a sign of what was to come. But when she opposed the merger of the Danish units of Telenor and TeliaSonera, a clear marker was being laid.

Yet the industry took a while to see it as such. Denmark was a special case, executives argued, given that the merger would have created an unfairly large and dominant group in a relatively small market.

They thought other deals would be fine, and took comfort in Ms Vestager’s assertion that each market would be judged on its own merits. Executives at Telefónica and Hutchison were still confident about the prospects of the deal as recently as a month ago.

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The decision to block the UK merger of Three and O2 will send a chill wind over other attempts to make similar deals elsewhere. Hutchison will worry about the precedent set for a proposed €20bn deal to merge its Italian business with rival Wind. It will now weigh up whether to offer to create a fourth mobile group to meet commission requirements to approve such deals.

Whether or not that is a good result for the regional telecoms market is unclear, with arguments set to continue about the need for further in-market consolidation.

Hutchison continues to strongly believe that the merger would have brought major benefits to the UK by addressing the country’s coverage issues, enhancing network capacity, speeds and price competition for consumers.

The commission asserts that less competition would lead to higher prices, and reduced choice and quality for consumers, as well as impairing the future development of the mobile network infrastructure and cut the number of mobile network operators willing to host virtual operators.

Nonetheless more deals are expected. Brussels will continue to champion cross-border deals — for example, should Deutsche Telekom ever make a bid for BT or KPN, the Dutch operator, or French groups Iliad and Vivendi for Telecom Italia — but executives are sceptical about the benefits to their own businesses.

Competition authorities have also flagged that deals between fixed and mobile groups would be allowed — such as with BT and EE — as well as with media groups. Liberty Global, the cable group, has already said that it may look at O2 in the UK.

However, given the precedent now set by Brussels, any move to cut the number of mobile groups within a country from four to three will prove difficult for the foreseeable future. The next phase of the UK market will be closely watched to see who benefits.