China Bond Investors Are Betting on More Stimulus After Brexit

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Source: Bloomberg Markets

Brexit may be bad news for China, but it’s improving a poor year for the country’s bond investors.

The 10-year government bond yield fell 14 basis points in June, the biggest decline this year, after Britain’s vote to leave the European Union spurred demand for haven assets. Before the shock decision added fuel to a rally in bond markets worldwide, Chinese yields had seen the only increase among similar-maturity sovereign debt in the world’s 15 biggest economies.

Expectations a plunging euro and rising political uncertainty in Europe will hurt demand for Chinese products is boosting speculation the People’s Bank of China will take steps to ease monetary policy. Australia & New Zealand Banking Group Ltd., Standard Chartered Plc and Commerzbank AG all say the nation will probably lower banks’ reserve requirements as soon as July, while one-year interest-rate swaps, a gauge of rate expectations, fell the most last month since April 2015.

“People have digested all the bad news and are now realizing they have been too pessimistic” about the bond market, said David Qu, an economist at ANZ in Shanghai. “After Brexit, there’s concern slower growth in the EU and U.K. will hit Chinese exports. As economic growth is still a key orientation for the central bank, it will take action.”

Additional monetary easing would mark a departure from recent central bank policy, which has mostly relied on open-market operations to adjust funding conditions this year. China last cut its benchmark lending rate in October, while the reserve requirement ratio has been unchanged since February. A high-profile warning by the People’s Daily about the nation’s high levels of debt in May had damped hopes for more easing after credit surged by a record in the first quarter.

Qu predicts the yield will fall below 2.7 percent this year from 2.84 percent on Thursday, which would put it near a record low reached in 2009. Its gap with similar U.S. Treasuries widened to 1.39 percentage point this week, the most since August, as expectations the Federal Reserve will raise rates this year faded.

Some 15.6 percent of China’s exports are destined for the EU, while 2.6 percent go to the U.K., according to Bloomberg Intelligence. Based on historical relations, a one percentage point drop in the EU’s gross domestic product growth could take 0.2 percentage points off China’s GDP growth.

Fourteen of 22 respondents in a Bloomberg survey of investors and analysts said they are most interested in buying securities issued by the government and policy banks in the third quarter, compared with just four of 19 in a similar poll three months ago.

Bets on interest-rate cuts may be misguided because the central bank prefers using open-market operations to control the pace of loosening, said Hu Yifan, Hong Kong-based chief China economist at UBS Wealth Management. Easier borrowing conditions since late 2014 fueled rallies in stocks, bonds and property, creating potential bubbles, Hu said.

Still, Brexit has intensified other concerns. The yuan weakened 1 percent in its third straight month of declines as the U.K. vote drove funds into haven assets, fueling concern capital outflows would quicken again. An estimated $1 trillion left China last year as firms repaid their overseas debt and mainland investors bought foreign assets.

To replenish cash supply, the PBOC has lowered the amount major banks are required to hold as reserves to 17 percent from 20 percent at end-2014.

“Capital outflows are a structural phenomenon; it’s not a month or seasonal pattern,” said Ding Shuang, head of greater China economic research at Standard Chartered in Hong Kong. “So there is reason to believe this is a kind of new normal and the liquidity lost will not come back any time soon. It’s better to provide long-term liquidity through RRR cuts.”

Source: Bloomberg Markets

U.S. Seeks to Cut Investor Dominance in Buying Soured Mortgages

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Source: Bloomberg Markets

U.S. officials want to triple sales of delinquent mortgages to nonprofits and local governments and put new restrictions on foreclosures, following a wave of criticism that purchases by private equity firms and hedge funds have led to borrowers getting kicked out of their homes.

The effort announced Thursday by the U.S. Department of Housing and Urban Development concerns the sale of delinquent loans insured by the Federal Housing Administration. The department in 2013 stepped up the sale of such loans to investors, a practice that officials say helped taxpayers avoid foreclosure-related losses while giving borrowers a chance to receive loan modifications disallowed by the FHA.

But some lawmakers and progressive groups have attacked the effort, claiming that private firms move swiftly to foreclose on borrowers, sell homes or turn properties into rentals. Companies that have bought FHA-insured loans include Lone Star Funds and Bayview Asset Management.

The government is now revising its program to allow nonprofits the chance to bid on a portion of delinquent loan pools before those pools are opened up to offers by for-profit investors. Nonprofits will be able to choose up to five percent of loans in the pool that they want to buy and, as long as they meet the reserve price, can win the loans without competing with other investors.

The goal is to have nonprofits or local governments buy about ten percent of future delinquent loans put up for sale, Edward Golding, who heads the FHA, said in an interview. That would be roughly triple the amount such groups buy now, he said.

Other changes include requiring loan buyers to first consider reducing a borrower’s mortgage principal balance before moving on to other methods of modifying a loan. Investors also will be restricted from modifying mortgages in a way that causes a borrower’s interest rate to rise dramatically after a certain number of years, a situation known as “payment shock” that some borrower advocates say triggers many foreclosures. If a home is foreclosed upon, the new rules prohibit investors from abandoning the property.

U.S. Senator Elizabeth Warren, a Massachusetts Democrat, joined progressive groups last fall to hold a rally aimed at pushing the FHA and mortgage-finance giants Fannie Mae and Freddie Mac to sell more loans to nonprofits. Republican lawmakers, including Texas Representative Jeb Hensarling and Alabama Senator Richard Shelby, counter that some of the changes Warren has sought could harm taxpayers by reducing the amount of money that the FHA recovers.

As of Jan. 22, HUD had sold about 105,500 mortgages through the program. Of the approximately 89,000 loans for which HUD reported data, about 30,500 had been foreclosed upon and 9,600 had borrowers who were paying again. The rest of the loans were still delinquent or had been resolved by some other means.

Golding said the FHA expects to hold its first sale under the new rules in September.

It remains to be seen whether Thursday’s changes will result in fewer purchases by private investors. Some nonprofit officials have said that they lack the capital and speed needed to compete in previous auctions. And some investment firms argue that additional restrictions aren’t necessary because they already help borrowers stay in their homes.

“The notion that nonprofits will fix the non-performing loan market is erroneous,” said Gary McCarthy, managing partner at HMC Assets LLC, whose Corona Asset Management has been buying soured mortgages in HUD auctions since 2012.

Source: Bloomberg Markets

Spanish Police Search Google Offices in Latest Investigation

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Source: Bloomberg Markets

Spanish police searched Google’s offices in Madrid on Thursday as the company faces scrutiny over its tax dealings in Europe.

Spain’s tax agency sought permission for access to Google’s offices in the Spanish capital, the high court in Madrid said in an e-mailed statement Thursday. Google, a unit of Alphabet Inc., complies with Spanish tax law and is cooperating with the investigation, the company said in an e-mailed statement.

The search of the Madrid offices comes comes after French police and prosecutors swooped on Google’s Paris offices on May 24, intensifying a tax probe amid accusations across Europe that the Internet giant doesn’t pay as much as it should. A spokesperson for the Spanish tax agency declined to comment on the investigation.

Source: Bloomberg Markets

Serbia ‘Shocked’ After EU Keeps Rule-of-Law Entry Talks Closed

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Source: Bloomberg Markets

Serbia expressed anger after the European Union refused to open accession negotiations on rule-of-law issues, even as the bloc advanced talks with fellow membership candidates Montenegro and Turkey.

Foreign Minister Ivica Dacic lambasted the decision as “shameful, incomprehensible and humiliating” and said it was “a result of the political intention to halt or slow down Serbia’s European path,” according to an e-mailed statement. Dacic said he’ll advise Premier Aleksandar Vucic to “hold urgent consultations” before the prime minister visits Paris for a meeting of Balkan leaders on July 4. Vucic will hold a press conference at 4 p.m. on Friday, his office said.

After winning April 24 snap elections, he has dragged his feet on forming a new cabinet and is facing discontent over policies, including street protests over backsliding on media freedoms and demolitions in Belgrade to make way for a 3 billion-euro ($3.4 billion) development with U.A.E. investors. Vucic has pledged to reduce the Balkan state’s public deficit and debt by cutting the size of the state administration and closing or selling state companies that drain more than $1 billion from the budget each year.

Labor Minister Aleksandar Vulin, an ally of Vucic, called for Serbia to rethink its approach toward EU entry, Tanjug news service reported. Serbia has long split allegiances between western Europe and Russia, and Vucic’s Progressive Party signed a cooperation agreement with Russian President Vladimir Putin this week agreeing to consult about their international relations.

“I think this is a good occasion to perhaps reconsider our foreign policy orientation and to perhaps again reassess our policy toward the EU,” Vulin was quoted as saying. 

Source: Bloomberg Markets

Oi’s CEO Working on Several Proposals, Will Resume Debt Talks

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Source: Bloomberg Markets

Oi SA , the bankrupt Brazilian phone company, is resuming negotiations with creditors and is working toward bringing a restructuring plan for more than $20 billion in debt to the courts in 60 business days, Chief Executive Officer Marco Schroeder said.

“Discussion will involve new types of debt, debt conversion into equity, bonds with longer and shorter maturity,” Schroeder said in a phone interview from Rio de Janeiro. “Now we are going back to the table and we won’t have a single proposal. We will have several so that investors can choose the ones that are more adequate to their profile.”

The judge for the seventh corporate jurisdiction of Rio de Janeiro on Wednesday evening accepted Oi’s request for all of the company units to be part of the debt restructuring, including the Dutch ones that were being targeted by Aurelius Capital Management LP, a creditor. That started a 60-day clock ticking for Oi, which filed for the biggest bankruptcy protection request in Brazil’s history.

“We are pleased that the judge included our foreign units in the decision,” Schroeder said. “It is much easier to have a single process for all our units, as Oi has a single cash flow.”

Syzygy Capital Management, a unit of Aurelius, filed for an insolvency proceeding in a Netherlands court against Oi Brasil Holdings Cooperatief UA, one of Oi’s financial vehicles in the country, based on default of $800,000 in bonds, according to a Oi filing on June 28. The ruling also protects Portugal Telecom International Finance BV, another Oi unit.

Brazil telecommunications agency Anatel now has five days to present as many as five suggestions of companies to act as judicial administrator for the process. After the judge chooses the administrator — which will probably be a big international consulting company — the administrator has 15 days to present a list of creditors and they have 15 other days to question the amount.

Oi’s timetable to present a recovery plan may be extended because of the Olympic games, scheduled for August in Rio. If the state courts decide not to work during the games, the period can go to as far as October.

Source: Bloomberg Markets

Americans With More Education Have Taken Almost Every Job Created in the Recovery

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Source: Bloomberg Markets

As the U.S. recovery lumbers into its eighth year, Americans with at least some higher education have fared especially well in the labor market. The less-schooled, however, have found a much grimmer reality. 

Of the 11.6 million jobs added since the rebound took hold in 2010,  about 99 percent — or 11.5 million jobs — were filled by people with either at least some college education, a bachelor’s degree or better, according to a study by Georgetown University’s Center on Education and the Workforce. Only 80,000 spots went to workers with a high school diploma or less, according to the report authored by Anthony Carnevale, Tamara Jayasundera and Artem Gulish.

“It’s not just a factor of a more educated population, it’s how the labor market is changing,” said Jayasundera in an interview. “The labor market is demanding a more skilled workforce.”

The disparity points to a longer-term change in occupational patterns. Industries increasingly require higher-skilled workers, the authors wrote. In the manufacturing sector, a majority of jobs regained have gone to workers with more than a high school diploma. Technological advancements and automation have eliminated the need for clerical and administrative roles as well as hands-on jobs in sectors like construction, as those areas had some of the weakest job recoveries.

The growing supply of college-educated Americans has also contributed to the stark differences in labor-market outcomes. This year, for the first time ever, the share of people in the workforce with a bachelor’s degree or higher education overtook the share of those with a high school diploma or less, according to the study.

The resulting divide between the “college haves” and “college have-nots” will have an impact on the socioeconomic makeup of America. In the past, men and women without a college education were able to work their way up to mid-level jobs with benefits and build out a middle-class lifestyle for their families, the authors said. Those opportunities are now harder to come by.

“The post-Great Recession economy has divided the country along a fault line demarcated by college education,” according to the report. “For those with at least some college education, the job market is robust…By contrast, workers with a high school diploma or less hear about an economic recovery and wonder what people are talking about.”

Source: Bloomberg Markets

VW, EPA to Continue Work on Fix for Remaining Diesel Cheats

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Source: Bloomberg Markets

Volkswagen AG and U.S. regulators told a federal judge considering this week’s milestone deal covering a half-million diesel emissions-cheating cars that they will need months to review a possible fix for 85,000 more vehicles with larger engines.

U.S. District Judge Charles Breyer in San Francisco told lawyers for the company and the U.S. Environmental Protection Agency to return to court on Aug. 25 to report again on efforts to devise a fix for the 3.0-liter engines not covered by this week’s agreement. Those cars include the 2014 Volkswagen Toureg, 2015 Porsche Cayenne and 2016 Audi Q5.

Finding an acceptable fix for the 3.0-liter models or getting them off the road is one more obstacle in VW’s path to recovery after admitting in September to rigging 11 million vehicles worldwide from 2009 to 2016 to cheat on emissions tests. On Tuesday, lawyers for car owners in the U.S., along with the company and federal and state officials, announced a $15.3 billion plan to buy back or fix 480,000 vehicles with 2.0-liter diesel engines.

Car owners will have the option of selling their vehicles back to VW or accepting a fix if one is approved by the EPA. In either case, owners will get $5,100 to $10,000 each in additional compensation. Some leaseholders will receive about half those amounts.

The settlement with the U.S. government requires VW to get 85 percent of the cars recalled by June 30, 2019. If it fails to meet that target, it will have to pay more into the environmental mitigation trust.

Breyer reminded lawyers Thursday that he hasn’t approved that settlement yet.

VW still faces lawsuits by at least six states plus investors and dealerships in the U.S., as well as parallel lawsuits, including consumer complaints, in Germany, all of which could raise the scandal’s price tag for the automaker. Future expenses may also include hundreds of millions of dollars in fees for the lawyers who secured Tuesday’s deal for car owners. More penalties, along with further damage to VW’s reputation, may yet spring from criminal probes in the U.S., Germany and South Korea.

With additional fees and penalties likely, VW may need to devote more than the 16.2 billion euros ($18 billion) it has set aside to cover the cost of repairs, fines and legal fees. On Tuesday, the company said the settlement was within the scope of the provisions it has already made and repeated that its assessment of financial risk might be revised.

The case is In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices and Products Liability Litigation, MDL 2672, U.S. District Court, Northern District of California (San Francisco).

Source: Bloomberg Markets

Google Calendar Goes Down and Netizens Declare End of the World

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Source: Bloomberg Markets

Google’s calendar is temporarily unavailable to users around the world, an event that lit up social media as people addicted to the service bemoaned the impact on their work and personal lives. Some even called it a harbinger of the apocalypse.

The service interruption Thursday morning means that some Google Calendar users have lost access to their daily schedules, many of whom use the service to store information about where they should be and what they should be doing at every hour of the day. Users are instead redirected to a page indicating that there’s a server error. Alphabet Inc.’s Google is looking into the issue and will provide an update on when the service will be restored by 11:30 a.m. Thursday in New York, according to the publicly available status website. It’s not clear how many users have been impacted.

Source: Bloomberg Markets

Carney Signals Rate Cuts as Brexit Chaos Engulfs Political Class

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Source: Bloomberg Markets

Mark Carney signaled the Bank of England could cut interest rates within months as the central bank tries to shield an economy rattled by the shock of Brexit and the chaos engulfing Britain’s political classes. 

In his second televised address since the country voted to leave the European Union, the governor said on Thursday that officials won’t hesitate to act when it comes to safeguarding the economy or the resilience of the financial system. The BOE will also continue its liquidity auctions for banks on a weekly, rather than monthly, basis and consider a “host of other measures.” The pound slumped as investors increased bets on a rate cut by August.

“It now seems plausible that uncertainty could remain elevated for some time,” Carney said. “The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer.”

The comments capped a day full of political shocks. Boris Johnson pulled out of the race to be the next British prime minister after a savage attack from former Brexit ally Michael Gove, who will now compete for the job with Home Secretary Theresa May. That creates more uncertainty at a time when the opposition Labour party is already in disarray and the U.K. remains in limbo regarding its trading relationship with its biggest market.

“Carney’s trying to offer a policy backstop that’s not coming from elsewhere,” said Chris Hare, an economist at Investec in London and a former BOE official. “When there’s a lot of political uncertainty and a lack of a clear steer on what’s likely to happen in a post-Brexit world, you can see why the governor feels particularly keen to soothe markets.”

Hare said action could come as soon as the Financial Policy Committee’s next policy announcement on July 5, while monetary stimulus would probably be teed up at the next decision on July 14, in time to be announced at the following meeting on Aug. 4.

WATCH LIVE: Markets coverage and the latest Brexit news on Bloomberg TV

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Any loosening by the BOE would be its first since 2012, when it last expanded its asset purchase program. Its key interest rate has been at a record-low 0.5 percent since March 2009. Having previously said that was the lower bound, the BOE has since signaled it can go closer to zero, though Carney said officials will keep a close eye on any impact on lenders.

“Over the horizon, in the near horizon, there’s the FPC decisions next week, there are two Monetary Policy Committee meetings this summer, July and August, and I would look at those as a bit of a package, as meetings,” Carney said. “And there’s a value to setting expectations, providing a bit of a short-term road map around that, and a framing.”

The pound dropped 1.4 percent, weakening to $1.3247 at 5:43 p.m. London time. U.K. gilts advanced, with the 10-year yield touching a record-low 0.861 percent. The FTSE-100 Index closed at the highest since August.

Sterling has fallen about 11 percent since the EU vote. Asked about the initial drop after the referendum result, Carney said big moves were to be expected and there had been a need for the pound to “find a new level.”

“While the currency was moving, it wasn’t moving because of market technicals, it was moving because of opinions,” he said. “And when the market is functioning, you don’t want to get in the way of it.”

Carney said the U.K. needs a “comprehensive strategy for engaging with EU and the rest of the world,” highlighting trade, migration, capital flows and regulations as key areas. “Plan beats no plan,” he said, citing former U.S. Treasury Secretary Tim Geithner.

That sentiment followed hours of political drama as Johnson, the former favorite to lead the Conservative Party, bowed out of the context to succeed David Cameron as premier. Gove made a stunning entry in to the race, competing with May and three other contenders.

While flagging that stimulus may be needed for the U.K., which could mean actions such as interest-rate cuts or quantitative easing, Carney said this was his view and not that of the nine-member MPC.

The panel will publish an initial estimate after its regular meeting in July and a fuller review in August, when it releases new forecasts. That suggests August is the more likely month for any action. He also said the “material slowing” identified in May as a risk in a Brexit scenario is now likely to be the MPC’s central forecast.

“We expect lower rates will be sanctioned at the early August meeting,” said George Buckley, an economist at Deutsche Bank in London. “Carney also suggested against using negative rates, which supports our view of rates falling to 0.10 percent then QE. A preemptive loosening at the July meeting cannot be ruled out.”

Traders are pricing in a 75 percent probability of a rate cut by the August meeting. That’s up from 15 percent on the day of the referendum.

The Canadian-born governor, who celebrates his third year in charge this week, said he won’t shy away from “ruthless truth telling” and issued a thinly veiled warning to the government that it has the ultimate responsibility to ensure the wellbeing of the nation.

Echoing the regular refrain from central bankers frustrated with the efforts of governments to help support their economies, Carney said that there are limits to monetary policy.

It “cannot fully offset the economic implications of a large negative shock,” he said. “The future potential of this economy and its implication for jobs, wages and wealth are not the gifts of monetary policy makers. These will be driven by much bigger decisions; by bigger plans that are being formulated by others.”

Source: Bloomberg Markets