Early Headlines: China Yuan Gains IMF Backing, Chinese Markets Bubble, Bond Market is Saying 2016, Controversial EU Migrant Quota System and More

Early Bird Headlines 27 May 2015

Econintersect: Here are some of the headlines we found to help you start your day. For more headlines see our afternoon feature for GEI members, What We Read Today, which has many more headlines and a number of article discussions to keep you abreast of what we have found interesting.

U.S.

• Bond Traders Uncover Secret to Rates That Fed Doesn’t Get (Bloomberg Business) For years, the $12.6 trillion U.S. Treasury market has signaled — correctly — that the Federal Reserve was too optimistic in its outlook for the economy and interest rates. And now the bond market is saying: Forget 2015, 2016 is the earliest for a rate hike.

EU

• EU to announce migrant quota plan details (BBC News) It is being reported that 40,000 asylum seekers would be spread across the EU countries through a quota system. The British government says that it will opt out of the relocation plans. France, Spain, Hungary, Slovakia and Estonia have all voiced concerns.

UK

• London sets up catastrophe bond task force (The Business Times) Britain has created an expert group to put forward proposals on how the country can become a center for catastrophe bonds, used by insurers as a hedge against disasters and other costly events from hurricanes to lottery jackpots.
  

Switzerland

• Authorities Arrest Top FIFA Officials During Early Morning Raid (Time) Swiss officials rounded up six leading soccer officials in Zurich on Wednesday morning as a part of an operation that will likely see the suspects extradited to the U.S. on corruption charges. Graft charges relate to World Cup bids and broadcast rights.

India

• 10 factors that could influence markets in Modi’s second year (Business Standard) Economists say a range of external and internal factors will determine the direction of India’s economy in the second year of Prime Minister Narendra Modi’s government. And global events may overwhelm the domestic ones.
• Scope for one more rate cut (Business Standard) Under its new monetary policy framework, the Reserve Bank of India (RBI) is committed to ensure that the economy disinflates gradually to 6% Consumer Price Index (CPI)-based inflation by January 2016, before it reaches the final target of 4% by 2017-18.
  

South Korea

• S. Korea’s terms of trade rise for 8th month in April (Yonhap News) South Korea is making good use of lower oil prices.

China

• IMF says yuan is no longer undervalued amid reserve currency bid (The Business Times) The International Monetary Fund officially dropped its long-held view that the yuan is undervalued, strengthening China’s case for the currency to win reserve status at the lender.
  
• China releases guidelines for economic reform priorities in 2015 (Reuters) Chinese policymakers on Monday announced guidelines for reform priorities in 2015, ranging from streamlining administrative procedures to boosting the yuan’s global role, as Beijing steps up efforts to open up the country’s capital markets. With the ultimate goal of restructuring the economy to boost consumption at the expense of exports and investment, Beijing has remained focused on a range of reforms, including freeing up the workforce to liberalizing China’s nascent financial market. Specific areas targeted for reform included state enterprises, taxation, the Shenzhen Hong Kong stock connect (see next article), deposit rates, the initial public offering system, and boosting the global status of the yuan among others.
• When Predicting China Stocks There’s Only Wrong and Very Wrong (Bloomberg) A flood of money into Chinese stocks is thwarting analysts’ efforts to get a handle on the market. The difficulty lies in assessing fundamentals unmoored by the influx. See both preceding article and the next article.
  
• These Nine Charts Show the Shenzhen Stock Market Is Like No Other Market in the World (Bloomberg Business) This is a bubble? Or is it a new permanently high level? The Shanghai market, which is open to global investors, is up 140% over the last 12 months (and 100% 2015 YTD). The Shenzhen market, which is not open to global investors, is up 180% over the past 12 months (and 140% 2015 YTD). See first chart below. Why is the Shenzen outperforming? The Shenzhen market will become accessible to investors outside of China with the Shenzen-Hong Kong stock connect expected to be established sometime this year. Chinese investors are trying to “front-run” the surge expected when foreign money starts pouring in. Once the new “connect” is established, joining the Shanghai-Hong Kong connect operating since last year, the Hong Kong-Shanghai-Shenzhen complex will be the largest stock market in the world outside of the U.S. But is the Chinese enthusiasm sustainable? Well, median PE (price-earnings ratio) on the Shenzhen exchange is 108 and the dividend yield is 0.26%. That is nose-bleed territory, far above the highest PE ratio for the NASDAQ Composite (72) in the dot.com bubble. Also, the climb of the Shanghai market is closely paralleling the build-up to the2008 bubble top, see second chart below.

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