May 18, 2018
Fed’s Mester Warns Against Dismantling Post-Crisis Bank Reforms
Federal Reserve Bank of Cleveland President Loretta Mester warned against dismantling core reforms that have made U.S. banks better able to withstand a financial crisis. “It would be a mistake to unwind the steps taken since the financial crisis that have led to a more resilient financial system,” Mester said in the text of a speech she’ll deliver Friday at a European Central Bank conference in Frankfurt. “I would like to see how the new settings perform throughout the cycle before making major changes.” Her remarks come as the Fed’s new leadership, under Chairman Jerome Powell, is working on adjustments to financial rules aimed, they say, at tailoring them to the risks of specific institutions and making them more efficient. That has provoked protest from some Democrats in Congress worried the Fed and other regulators are forgetting the lessons of the crisis in their desire to ease the regulatory burden on banks. Mester said the best way to prevent or contain the next financial crisis is to make sure financial institutions are strong, which regulators have done by raising capital and liquidity requirements, subjecting banks to stress tests and requiring them to create plans for their own unwinding. “Given some of the limitations on macroprudential tools and the complexity of financial system regulation, ensuring the structural resilience of the financial system throughout the cycle is the first line of defense in promoting financial stability,” Mester said. Macroprudential tools — which aim to limit system-wide risks — are limited in the U.S. and of questionable effectiveness, Mester said. For that reason, the Fed must keep open the option of using interest rates to stifle financial instability, while developing a playbook for such an scenario.
Europe Stock Rally Stumbles; Treasury Yield Steady: Markets Wrap
Stocks in Europe slipped, failing to follow Asian peers higher amid conflicting reports over progress on trade talks between the world’s largest economies. U.S. futures and the dollar both gained while Treasury yields edged lower after reaching the highest level since 2011. The euro retreated and Italian 10-year bond yields jumped to the highest since October amid uncertainty over the Five Star Movement-League coalition’s policy platform as they attempt to form a government. Risk sentiment was dampened earlier after Chinese state media described reports that it would attempt to slash its trade surplus as “nonexistent.” Brent crude edged higher, heading toward the $80 a barrel it reached on Thursday amid Middle East tensions and signs that global stockpiles continue to decrease. Gold extended a retreat after breaking below $1,300 an ounce earlier this week. Investors are closely watching progress on the latest China-U.S. trade talks for signs of a breakthrough that could reignite a recent rally in global equities, while factoring in oil prices at a four-year high and a 10-year Treasury yield now firmly above 3 percent. Politics in peripheral Europe are also back in the spotlight after Italy’s populist leaders sealed a coalition agreement and a plan for reforms seen as a challenge to the European Union establishment. The Turkish lira weakened to a fresh record as emerging market currencies headed for their biggest weekly slump since November 2016.
A Warning Signal for Global Stock Markets Is Flashing in Japan
Morgan Stanley calls it “the end of easy,” that witching hour in global stock markets when economic growth is slowing, the Federal Reserve is tightening, and inflation is ticking up. After a long bull run, strategists the world over are getting nervous — and watching for the top. And over in Tokyo, a warning is starting to flash. A feared rotation is taking hold, as investors dump the shares that propelled the good times, such as industrials and technology companies, in favor of an entirely different class of firms: those needed no matter how bad the economy gets. When investors become less optimistic about the future, the theory goes, that’s where they turn. Yoshinori Shigemi, a global market strategist at JPMorgan Asset Management Japan Ltd., has been to this rodeo before. And he’s alert to the danger. “No one can really tell whether global stocks will go into a bear market,” Shigemi said. “But when Japanese defensives outperform, it can be a leading indicator.” Utilities, health-care, consumer staples and real estate stocks — all so-called defensive shares — are the top performers of the 11 industry groups in the MSCI Japan Index this year, beating information technology and industrial companies, so-called cyclical shares seen as benefiting the most from economic expansion. It’s a change that hasn’t happened in the U.S. and Europe, where cyclicals are still mostly in the ascendancy as defensives generally lag behind. But Shigemi of JPMorgan Asset has a theory about that. Essentially, he says, Japan’s market can respond more to U.S. developments than the U.S. itself.
China Casts Doubt on Report of $200 Billion Trade Deficit Offer
China cast doubt on reports that it had offered to reduce its annual trade surplus with the U.S. by $200 billion through increased imports of American products. The offer was made during talks in Washington this week as Vice Premier Liu He visited to try to resolve a trade dispute, according to a Trump administration official who spoke on condition of anonymity. On Friday, two posts on Chinese state social media disputed the report, and a foreign ministry official said no such offer had been made, to his knowledge. In a sign that the Chinese government is seeking a conciliatory stance, on Friday it announced that it would end its anti-dumping and anti-subsidy investigation into imports of U.S. sorghum, citing “public interest.” That move comes days after the restarting of a review of Qualcomm Inc’s application to acquire NXP Semiconductors NV. “If Trump can cut a deal with China for a $200 billion reduction in the bilateral trade deficit, then he’ll have won the trade deal of the century,” said Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore. “The devil will be in the details, with key factors being the timeframe over which China is offering to achieve this reduction.”