Overseas Headlines – October 3, 2018

Date: October 3, 2018

United States:

Fed’s Evans Says He’s Comfortable With Prospect of December Hike

Chicago Fed President Charles Evans says he’s “quite comfortable” with the prospect of another interest-rate hike in December. In a Bloomberg Television interview in London on Wednesday, Evans, who has been among the more dovish Fed officials over the last decade, said that inflation data has improved significantly, and that he’s fine with the expected path for rates implied by markets and the latest projections from the Federal Open Market Committee Investors are currently pricing in a more than 70 percent chance of a hike to 2.5 percent in December, which would be the Federal Reserve’s fourth this year. “Getting policy up to a slightly restrictive setting — 3, 3.25 percent — would be consistent with the strong economy and good inflation that we are looking at,” Evans said. “We just submitted a summary of economic projections for the last FOMC and I believe the median dot was four rate hikes this year so that would indicate a high likelihood for one more this year. I’m quite comfortable with the expected path.” Evans also said that U.S.’s economic fundamentals are strong, and that “strikingly large” gains in jobs had pushed the unemployment rate only a little below a sustainable level. Permanent changes in tariffs as a result of the U.S. government’s trade negotiations would hurt growth, he said, although the impact on inflation would be modest. He spoke before giving a talk in which he said policy makers are discussing future frameworks and moving away from the effective lower bound.



Italian Markets Find Relief After Budget-Deficit Concessions

Italian markets got some respite after a report that the government bowed to pressure from the European Union to trim its budget-deficit target. Government bonds snapped four days of declines and the FTSE MIB Index of shares headed for the biggest gain in more than a week after the Corriere della Sera reported that the government will seek to contain the shortfall at 2 percent in 2021, down from 2.4 percent. The target for 2020 will be trimmed to 2.2 percent, while next year’s goal of 2.4 percent will remain, the newspaper said. Markets have struggled to find an equilibrium for Italian debt following the original plan outlined last week, with 10-year yields touching the highest level in more than four years on Tuesday. The Five Star Movement-League coalition still needs to release its economic-growth projections before presenting a draft budget proposal to the European Union Commission by Oct. 15. A number of officials from the bloc have warned that the populists’ plans could be in breach of their rules. “The re-profiling of the deficit path is a constructive response and suggests some reduction in tail risks,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “For the sake of the Italian economy, we hope this signals that a lesson has been learned.” While details of the new proposal haven’t been announced, the euro advanced as much as 0.4 percent against the dollar. Italy’s 10-year yields dropped eight basis points to 3.37 percent as of 11:34 a.m. in London, narrowing the yield premium on the nation’s bonds over those of German bunds to 292 basis points, from 303 basis points on Tuesday. The FTSEMIB climbed as much as 1.5 percent. Italy conducted a bond swap Wednesday, exchanging notes maturing in 2019 and 2020 for 2.1 billion euros ($2.4 billion) of securities due in 2028. The EU’s response to the revised targets will still be a key hurdle for investors. The original plan from Rome for a deficit target of 2.4 percent over three years had prompted a push-back, with the European Commission Vice President Valdis Dombrovskis saying that it went “substantially beyond” what is allowed. Moody’s Investors Service and S&P Global Ratings have Italy just two notches above junk and are due to review the sovereign rating later this month.



Asia Embraces Dual-Class Shares, and Investor Activists Smolder

In the battle between Asia and the U.S. for the next wave of technology listings, the shareholder advocates lost out. After years of debate, Hong Kong and Singapore’s stock exchanges this year allowed companies to list shares with different voting rights. The fear that the next Alibaba Group Holding Ltd. or Baidu Inc. would opt for New York finally won out over concerns that dual-class shares would erode the long-term integrity of markets by allowing corporate founders to run roughshod over other investors. Xiaomi Corp. illustrates why. The Chinese smartphone maker raised $5.4 billion in an initial public offering in Hong Kong in July, shortly after the new rules took effect. It is now one of the most actively traded stocks on the exchange and its second-largest tech company by market value. And a raft of other tech issuers are waiting in the wings, including restaurant review and delivery giant Meituan Dianping. It’s “the dawn of an exciting new era,” Hong Kong Exchanges & Clearing Ltd. Chief Executive Officer Charles Li said in April when announcing the adoption of dual-class shares. While opponents to dual-class shares like Aberdeen Standard Investments are sticking to their guns, the rising clout of tech companies — whether they use such structures or not — underscores why there’s no turning back for Asian exchanges. Apple Inc. is now the world’s only $1 trillion market value company, and tech companies occupy the top five spots by that measure. Alibaba and Tencent Holdings Ltd., China’s most famed internet success stories, are also its most valuable companies.  “It looks like dual-class shares are here for now,” said David Smith, Asia head of corporate governance at Aberdeen. “We need to be careful, though, that investor protection is balanced with this commercial desire to attract listings.” Dual-class shares are nothing new, and they’ve long been a favored option among tech founders who say the setup allows them to make strategic decisions that may be unpopular among investors focused on the vagaries of quarterly earnings. As Google parent Alphabet Inc. and Facebook Inc. rose to global dominance, Chinese founders took note. Hong Kong changed its rules in April to allow dual-class listings, while Singapore approved them in June. China is finalizing rules for so-called Chinese depository receipts, a new type of security that will allow dual-class structures, to keep up in the race for tech listings.