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Europe’s central bank intensifies focus on climate change

FRANKFORT: The European Central Bank has adopted a new approach to managing the economy that would allow the bank to tolerate transitory periods of inflation moderately above its 2% goal and to take greater account of climate change in its forecasting and stimulus programs.

The new strategy announced Thursday for the 19 countries that use the euro currency also recommends including house prices in the EU’s key measure of inflation.

A key aspect is replacing the bank’s previous inflation goal of “below but close to” 2% annual inflation. The new target is described as 2%, but “symmetric.” That means it would allow a “transitory period” of above-target inflation. In theory, that would allow the bank to maintain low interest rates and stimulus programs such as bond purchases with newly created money for a longer period of time.

The bank said that counting the rise in house prices would better represent inflation as it’s relevant to households. Including owner-occupied housing in the EU’s inflation index would take years, however; therefore the bank said it plans to use initial estimates of housing costs to supplement its inflation measures.

The bank said it would do more to take the impact of climate change into its monetary policy, saying that global warming could have “profound implications” for price stability. It said it would expand its economic models and statistics to better assess the effect that climate change could have on the economy.

When purchasing bonds, the bank said it could take into consideration whether the companies issuing those bonds were compliant with EU legislation implementing the 2015 Paris climate change accords. Buying corporate and government bonds is a tool the bank uses to drive down borrowing costs for businesses, households and government budgets.

The bank’s mandate established in the basic European Union treaty is to pursue price stability. Once that is achieved, it can pursue other goals consistent with the EU’s economic policies.

The bank said it would apply the new strategy starting with its next meeting on July 22.

England sheds agonizing history by knocking out Germany

As the Wembley Stadium announcer roared the final score – “England 2, Germany 0” – Gareth Southgate‘s vision was momentarily perted from his victorious players to the big screen. Shown beaming from the

VIP

seats, reveling in England’s passage to the European Championship quarterfinals on Tuesday, were David Beckham and Ed Sheeran.

Prince William, wife Kate and 7-year-old Prince George were also there celebrating, as fans just like their subjects rather than royalty.

But it was the sight of David Seaman that caught Southgate’s eyes and made him pause, to think back – in one of his greatest moments as England coach – to the pain of 25 years ago.

It was Southgate’s penalty miss at the old Wembley that denied an England side with Seaman in goal the chance to reach the Euro ’96 final.

“For the teammates who played with me, I can’t change that – so that’s always going to hurt,” Southgate said.

“But what this group of players has been able to do is give a new generation a lot of happy memories and another afternoon where they have made a bit of history.”

England is finally unburdened by the weight of its agonizing history against the Germans.

This was a day more reminiscent, albeit with a long way to go in Euro 2020, of the 1966 World Cup final win over them on the same site.

Not that it came easily. Just like in England’s two group wins, Raheem Sterling was on the scoresheet, breaking the tense deadlock in the 75th minute. But this time Harry Kane finally scored his first goal at Euro 2020, easing the pressure on the 2018 World Cup Golden Boot winner’s shoulders.

“With all the expectation and pressure, we delivered,” Kane said. “It’s a moment none of us will ever forget. The perfect afternoon.”

It was England’s second-ever win in the knockout stage of the European Championship. The last such triumph came on penalties against Spain at Euro ’96 before the hosts were denied a place in the final by Germany in that shootout.

It was on penalties that Germany also beat England in the 1990 World Cup semifinals. Then there was the English goal wrongfully disallowed as Germany knocked the English out of the 2010 World Cup.

Now England will play Ukraine in the Euro 2020 quarterfinals on Saturday in Rome, eying a return to Wembley for the semifinals and the final.

It marked the end of the 15-year reign of Joachim Low as the 2014 World Cup-winning coach takes time out to consider his next steps.

“We were not clinical enough,” he said. “The team needs to mature to be more successful.”

There will still be questions about Southgate’s team selection and persistence with Kane when he managed only one touch in the opposition penalty area in the first half. And it was a bad one, taking a ball too far past Manuel Neuer while trying to go around the goalkeeper.

But while Sterling’s goals are spearheading England’s progress at this largely-home tournament, the saves of Jordan Pickford are proving vital, too, including using one hand to push over Kai Havertz’s shot at the start of the second half.

The clamor to introduce Jack Grealish was growing in the second half. It’s what got fans chanting inside Wembley, with a crowd of about 40,000 the biggest in Britain since the pandemic began in March 2020.

The winger finally entered with about 20 minutes to go and played a role in the opening goal.

Sterling first took on the defenders, going past Antonio Rudiger before passing to Kane, whose layoff to Grealish then went to Luke Shaw. And it was the left back’s cross that Sterling connected with, shooting past Neuer with his right boot.

“We knew the intensity we can play at,” Sterling said, “and not many teams can deal with it.”

For all the experience in Germany’s side compared to the youth of England, it was World Cup winner Thomas Muller who squandered a chance to equalize in the 81st minute. Clean through with only Pickford to beat, Muller put the ball wide.

Kane showed him how it’s done, heading in a cross from Grealish in the 86th minute to get the 35th England goal that eluded him in the group stage.

“When you’re a center forward it doesn’t matter what else you’re doing in the game,” Southgate said. “You need those goals.”

England has yet to concede in its four games. Just like at the 1966 World Cup – and that ended well.

“This,” Kane said, “will give us more self-belief going forward.”

In Video: Euro 2020: England beat Germany 2-0 to move into last eight

To home or Rome? England and Italy meet in the Euro 2020 final at Wembley tonight

To hear the England players giddily singing along with the Wembley Stadium crowd to “Sweet Caroline” — “so good, so good” — encapsulates the youthful exuberance and carefree spirit of a group unburdened by trying to end the team’s 55-year trophy drought on Sunday.

To hear Italy defender Giorgio Chiellini talk about going all the way shows how pressure to win a trophy for your country can be an enduring motivation for yourself and the squad, especially in the twilight of a career. “Maybe at 36 you feel it more,” Chiellini said, “because you understand more how hard it is and the work that goes into it.”

The European Championship final on Sunday pits England, which hasn’t even reached a final since winning the 1966 World Cup, against one of the continent’s most decorated teams.

The last of Italy’s four World Cup victories came in 2006, when Chiellini had already made his international debut but didn’t play at the tournament. But the team is a comparative underachiever in the European Championship with its only title in 1968.

Italy, however, has already reached the final twice in recent years — in 2000 and 2012 — whereas England hasn’t got close until now.

With the pandemic restricting travel to London, the permitted crowd of 66,000 at Wembley Stadium will be largely packed with England fans for the national team’s greatest soccer moment since 1966, when coach Gareth Southgate wasn’t even born.

Winning Euro 2020 would be a form or redemption for Southgate, whose penalty miss against Germany at Euro ‘96 denied England a chance of making the final. “I know it won’t be enough for me and for the rest of the staff and for the players if we don’t win it now,” Southgate said. “You get lovely messages that say ‘whatever happens now,’ but that won’t be how it will be on Monday. We’ve got to get it right.”

Italy didn’t even qualify for the 2018 World Cup but has excelled with a 33-match unbeaten run since then under coach Roberto Mancini. “At the beginning, when he told us to have in our minds the idea of winning the Euro, we thought he was crazy,” Chiellini said. “Instead, during these years he has created a team which is now on the brink of doing that. And as he has repeated to us after every match, `One centimeter at a time,’ and now there is only the last centimeter left.” They have to find a way past an opponent that has conceded only one goal in its six games at Euro 2020 and coped with Harry Kane not even scoring in the group stage.

Tournaments can define, reshape perceptions and elevate players.

Just look at Federico Chiesa, who wasn’t even starting for Italy initially at Euro 2020 but went on to score key goals in the knockout phase.

Take Raheem Sterling, whose place in the England lineup was questioned because of his failure to score at any previous tournament and his struggles with Manchester City. He responded by netting the team’s only goals in the group stage, the opener in the win over Germany in the round of 16, and his attacking threat won the penalty that led to England’s semifinal winner against Denmark.

Guarding against a presumption of glory might be the hardest thing for England fans energised by the “football’s coming home” lyrics in its team anthem.

To home or Rome? We’ll know on Sunday night

No Brexit bonfire for City of London, but it won’t be a ‘rule taker’

LONDON: London has no desire for a bonfire of regulations to retain its position as a top international finance centre after Brexit but it is ready to act if the European Union blocks access, the City of London’s political leader said.

While it is still the only global centre to rival New York, London has seen some business and job losses since the shock 2016 Brexit vote and financial services were largely forgotten by British leaders during EU porce negotiations, cutting the City off from its biggest single customer.

“It’s disappointing to lose business but it’s not at all catastrophic,” Catherine McGuinness, who leads the ancient financial district’s ruling body, the City of London Corporation, told Reuters.

The City, McGuinness said, neither wanted nor expected Prime Minister Boris Johnson’s government to light “a bonfire of regulations”. Still, a financial capital the size of London could not be a “rule taker”, she said.

“We’re not looking for a bonfire of regulation, we’re not looking for a move away from international standards – absolutely not,” McGuinness said. “We’re not expecting any major deregulation at all.”

Asked if it was worth Britain seeking so-called equivalence, essentially agreeing to stay aligned with EU financial rules in return for market access, McGuinness said: “I would hope that equivalence decisions could be made because they ought to be pragmatic and we are completely aligned in terms of rules.”

It would be irrational of the EU to refuse, she said.

“Its clear that we can’t be rule takers – we must be rule makers. We need to look at what our strengths are and what we need to do to build on them effectively – and hopefully that’s against the framework of international regulations that we will help to shape.”

The EU says it wants to examine planned UK pergence from EU rules before deciding on any UK access.

Fish bear finance
London’s Brexit job losses so far to the EU were around 7,500, McGuinness said, still at the low end of the range predicted by investment consultant Oliver Wyman which said in 2016 that the British capital could shed 65,000 to 75,000 jobs in a sector that employs a million people.

London dominates the world’s $6.6 trillion-a-day foreign exchange market, it is the biggest centre for international banking and the second largest fintech hub in the world after the United States.

New York retained the top spot in a survey of global financial centres published in September by Global Financial Centres Index, with London strengthening its position in second.

While trading in euro shares and some derivatives has left for other European centres – with some to New York – after Brexit, no one European competitor has dominated and so London views New York, Shanghai, Tokyo, Hong Kong and Singapore as its true rivals.

Some elements of the bond, derivatives and capital markets had moved after Brexit, McGuinness said, though London retained by far the deepest capital markets in its time zone.

The finance sector pays more than 10% of Britain’s tax bill, but McGuinness said in 2019 that British leaders were throwing it under a bus during Brexit negotiations by focusing on the goods trade and largely ignoring finance.

Britain’s trade deal with the EU, clinched last month, does not cover financial market access.

“It was disappointing, it was very surprising. I’ve speculated it’s because fish is more picturesque than finance, it may be that we don’t tell our own story well enough or perhaps they felt the sector was big enough it make its own way,” she said.

McGuinness said she hoped Johnson’s government would now focus on the future of the City, helping green finance, fintech, Environmental, Social, and Corporate Governance (ESG) and new types of companies generate capital.

“I think we’ll stay the FX capital of the world – that would be my prediction,” McGuinness said when asked about the long-term future of the City. “We are very confident in London’s basic strengths and that we will make up business elsewhere.”

debt markets | European bond markets seek post-Fed direction; focus on ECB, sales

Euro zone bond markets sought direction on Tuesday, as focus turned to supply, with Dutch and Spanish debt sales, amid comments from European Central Bank policymakers in the aftermath of last week’s Fed policy shift.

The US Federal Reserve projected an accelerated timetable for interest rate hikes as they brought forward their first projected increase to 2023 from 2024.

That pushed up shorter-dated US Treasury yields, which are sensitive to interest rate changes, while longer-dated yields fell as the move indicated the Fed won’t let inflation surge as high as feared, flattening the yield curve.

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In the euro area, shorter-dated German bond yields have risen much less, but longer-dated yields have not fallen, leading to a steeper curve between two and 10-year yields than prior to the Fed.

On Tuesday, 10-year yields across the bloc rose as much as 3 bps before falling back again, and Germany’s 10-year yield, the regional benchmark, was unchanged at -0.17 per cent by 1003 GMT.

Italian 10-year yields were down 2 basis points, pushing the closely watched gap between Italian and German 10-year yields down to 103 bps.

“I think bond markets are trying to establish new ranges while they are digesting the FOMC message last week,” said Piet Christiansen, chief analyst at Danske Bank, referring to the Fed.

A key market gauge of long-term euro zone inflation expectations rose above 1.53 per cent after falling to a three-month low on Monday.

“That we see inflation expectations coming slightly higher today is part of this narrative of bond markets finding their footing. This could take a couple more days,” Christiansen added.

In issuance, Spain will raise 8 billion euros from a new 10-year bond, which received over 74 billion euros of demand, according to two lead managers.

The Netherlands raised 1.96 billion euros from the re-opening of a 15-year bond via auction.

A second area of focus was comments from the ECB.

Loose policy is still required to aid the euro zone’s recovery from the pandemic-induced recession, Slovak central bank chief Peter Kazimir said, following dovish commentary from president Christine Lagarde on Monday.

ECB chief economist Philip Lane due to speak at 1400 GMT, followed by board member Isabel Schnabel at 1730 GMT.

Rishi

Mishra, rates strategist at Futures First, said shorter-dated euro area government bond yields were anchored by the ECB, which “has not even hinted at tightening policy”.

ECB policymakers are still some way apart on their new inflation strategy, but hope to reach an agreement before debating the future of their pandemic emergency bond purchases in September, Reuters reported.

Following the European markets close, focus will be on Fed chairman Jerome Powell’s testimony at a congressional hearing at 1800 GMT.

Gold | Gold on rebound? Look what is giving the metal the strength

By Aasif Hirani

Gold has seen some rough weeks. For the past five months, it has been trading in sideways consolidation and then, the expected sell-off happened.

Short covering in gold proved very short-lived and now, it’s near its support zone of $1,345. There are some points that work in favour of gold.

First is inflation, which has started to gather momentum. Inflation is crucial to gold prices, after of course the dollar. Inflation has started to gather momentum after crude oil prices started spiking upwards. Until now, inflation was kept artificially low by advanced economies by monetary manipulation and staggering deficits.

US CPI (consumer price index) is at 2.8 per cent. As seen from this chart, the main contributor is oil prices, but the prices of crude started accelerating from start of this year. US inflation has started rising from last year.

Gold-1

Gold-2

Let us exclude volatile items such as food and crude prices. If we take out crude prices, which expanded maximum after food, US CPI should be steady. However, despite excluding food and energy, the core CPI is increasing. This means that inflation indeed is increasing and crude prices are not to be blamed entirely. This is a good sign for gold, which is used as a hedge against rising inflation.

Gold-3

Second point is the interest rate, which is still low if we take into account rising inflation. US 2-year Treasury yield is at 2.57 per cent, 5-year at 2.74 per cent and 10-year at 2.84 per cent. The 30-year US Treasury yield is at 2.97 per cent.

Yield curves are extremely flat right now and the 30-year yield is just delivering 24 basis points more over 5-year yield. This is remarkable that if one holds 30-year US government bond, they are getting just more 0.24 per cent per year than holding 5-year debt.

Also, if the inflation rate is over 2 per cent, what incentive investors will get in a return of 2.97 per cent for 30 years? This phenomenon could reduce demand for long-term US debt and the funds will eventually flow into other asset class like equity or gold.

Gold-4

The short-term 2-year US Treasury yield is at 2.57 per cent and US CPI at 2.8 per cent, which means bonds that are considered safe havens are giving negative real rate of return.

Third reason is there is less room for the US Fed to hike interest rate. Gold investors are forward looking. The Fed has so far hiked seven times interest rate since December 2015. It is now deep into tightening cycle.

Now, the US central bank has limited room as Fed funds rate now stands at 1.75-2 per cent. And the general consensus is that rate increase should be topped out around 2.9 per cent levels. This means there will be room for just four more hikes.

The ECB will start winding down its bond buying programme from December and may start to lift its interest rate from summer 2019. So, ECB will be starting to hike rates when the Fed will be running out of steam. This will be bullish for the euro and gold as well.

Despite numerous attempts, gold could not break out to new highs in April. Moreover, prices were further suppressed following the Fed’s rate hike in June. However, recently gold became significantly oversold, and is now trading slightly above its critical support.

In addition, the backdrop is still very constructive for gold, considering elevated inflation, low interest rates, a very high gold to silver ratio, an overextended dollar, and several other factors. Ultimately, it seems likely that gold is near a significant bottom here, should stabilise, rebound, and possibly move substantially higher into year-end and beyond.

(The author is Director, Tradebulls Securities.)

( Originally published on Jul 19, 2018 )

Euro Stays Soft Ahead Of German IFO

Euro weakness and the comparative strength of sterling remained the main theme in the forex markets as the weekly close is approaching. The main focus today is German IFO business climate, which is expected to show deterioration from 111.2 to 110.9 in May. The current assessment gauge is expected to improve slightly to 115.4 while expectations gauge is expected to drop to 106.5. There is some risk for downside surprises today but overall, even some stronger than expected readings won’t be able to give sustainable lift to the common currency. Markets are fully pricing in easing actions from the ECB in June. And the euro will remain weak until we’re clear on what actions ECB would actually take. The majority expects the central bank to cut all of the three interests rates, pushing the deposit rate into negative territory, plus measures to boost lending to SMEs.

Another main focus today is Canadian inflation. CPI is expected to jump sharply to 2.0% yoy in April, back to BoC’s target after 23 consecutive months of sub- target readings. Core CPI is expected to rise slightly to 1.4% yoy. Aussie and Kiwi are even weaker than the euro this week. But the Canadian dollar has been rather resilient despite yesterday’s retail sales miss. Following up from yesterday’s report, the fall from 1.0349 short term top accelerates this week and breached 1.0047 already. The development suggests that rebound from 0.9169 has completed with three waves up to 1.0349 after hitting channel resistance. This is also supported by bearish pergence condition in daily MACD. We’d likely see a test on the channel support (now at 0.9643) next.

AUD/USD Daily Chart

Meanwhile, another pair to watch is GBP/AUD. The cross breached 1.8296 resistance this week, which suggests that the rebound from 1.7735 is resuming. Current developments indicate that the fall from 1.9185 has completed with three waves down to 1.7735. Based on current momentum, the rebound from 1.7735 is possibly the second leg of the consolidation pattern from 1.9185. Further rises would be seen to the 61.8% retracement of 1.9185 to 1.7735 at 1.8631. We’d expect strong resistance above there to bring a reversal for the third leg.

GBP/AUD Daily Chart

Euro May Face Selling Added Pressure On Soft Eurozone Inflation

Talking Points:

  • Euro May Face Added Selling Pressure on Soft Eurozone Inflation
  • US Factory Orders Data May Surprise Higher, Boosting US Dollar
  • Aussie Dollar Edges Upward on Chinese PMI as RBA Holds Rates

The preliminary set of May’s Eurozone CPI figures headlines the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to register at 0.6 percent, down from 0.7 percent recorded in the prior month. News-flow from the currency bloc has proven increasingly disappointing relative to economists’ forecasts in recent months. Indeed, one such release was May’s German CPI print released yesterday. That seems to opening the door for downside surprise, an outcome that may amplify ECB stimulus speculation and weigh on the Euro. We remain short EUR/USD.

Later in the day, the April’s US Factory Orders report. Forecasts point to a 0.5 percent increase, marking a slight slowdown from the 0.9 percent gain recorded in the prior month. US economic data has increasingly outperformed relative to expectations since early April however, hinting analysts are underestimating the recovery’s vigor and opening the door for an upside surprise. Such a result may help scatter any lingering doubts about the approaching end of Fed QE asset purchases and subsequent tightening. Needless to say, such a turn of events is likely to bode well for the US Dollar.

The Australian Dollar edged higher following a policy announcement from the Reserve Bank of Australia. Governor Glenn Stevens and company offered nothing to upset status-quo policy expectations, signaling once again that they believe a period of stability in the benchmark lending rate is warranted. With that in mind, the Aussie’s gains seem to have less to do with the rate decision’s substance and more a function of its conclusion. Having put the day’s critical event risk behind them, traders may have felt free to respond to an upbeat Chinese Non-manufacturing PMI print earlier published earlier in the day. The report showed the pace of service-sector activity growth hit a six-month high in May.

Asia – European Session and Critical Levels Chart

Original post

Euro Dips As IMF Urges QE

While Euro recovered against other major currencies, it extended recent decline agains Swiss Franc, with EUR/CHF breaching a near term support level of 1.2162. The IMF urged ECB to consider buying assets including soveriegn bonds on a large scale to counter the stubbornly low inflation. IMF cheif Lagarde said that “inflation is worryingly low across the euro-area countries.” She welcomed recent stimulus measures announced by ECB, but she emphasized that “we are not at the end of the road.”In a report, IMF note that new asset purcahses would “boost confidence, improve corporate and household balance sheets, and stimulate bank lending.”

In UK, BoE MPC member McCafferty said yesterday that the central bank shouldn’t “hold back” interst rates for too long. And, “it will be critically important that rises in bank rate are delivered, as far as we are able, at only a modest, gradual pace.” Also, “faced with such uncertainties about the likely pace of absorption of slack, a prudent policy maker, in my view, would want to start to remove some of the current extraordinary level of monetary stimulus a little before the output gap is fully closed.” But, whether the central bank will raise rates earlier ” will depend on how the economy performs over the summer and autumn”.And, he said “it would have been damaging if it was portrayed as a surprise”.

On the data front, German PPI dropped -0.2% mom, -0.7% yoy in May. Eurozone current account and UK public sector net borrowing will be released later in European session. But main focus will be on Canadian CPI and retail sales to be released later in US session.

EUR/USD Looking Bid

The euro held below 1.3645, however currently we look bid and again this morning we should aim to enter a long position in the 1.3580/70 area. If we can get down here we should once more be able to hold support and trade higher. The 200 day M/A has moved to 1.3668 and this would then be our target zone on the topside.This resistance also intersects with a nice trendline, so we are going to come under pressure at these higher levels which is why we are looking to cover any longs just prior to this point. Attempt small shorts but keep stops tight because the medium term charts are bullish now and we only look for a correction lower giving us another chance to go long.On the downside, any longs to 1.3580/70 should be reversed if we lose 1.3550. If we do lose this support we look for weakness to follow down to the 1.3520/10 area.Once more we look to set up longs on any pullbacks to these lower levels.

EUR/USD Technicals