Sunday, June 26, 2016

Central banks on emergency standby with Brexit fallout set to escalate

Central banks around the world are standing by to intervene amid fears that the global fallout from Britain's exit from European Union will escalate in the coming days.

The Bank for International Settlements - known as the central bank of central banks - is warning of a "period of uncertainty and adjustment" given Britain's status in the global economy and the impact of it withdrawing from the EU.

The bank's general manager Jaime Caruana says "extensive contingency plans" are in place by central banks and the private sector to limit market disturbances such as the shock Brexit decision.

"Central banks have already communicated that they are closely monitoring the situation and stand ready to take the necessary actions to ensure orderly market functioning," Mr Caruana said at the Bank's annual general meeting in Basel, Switzerland.

"Central banks have acted swiftly in the past. They stand ready to act again, and they have the tools."

The Australian sharemarket is set to open 0.1 percent higher tomorrow (Monday) after losing $50 billion in value as part of a global selloff.

The Bank of England moved swiftly after the Brexit outcome and announced it was ready to provide A$460 billion in liquidity to help calm currency and equity markets which went into free fall.

Bank of England governor Mark Carney - who had previously warned a "leave" vote would have serious economic consequences - declared he would take "all necessary steps" to ensure financial and monetary stability.

In Australia, the Reserve Bank provided a briefing to both the government and the opposition under caretaker conventions in the leadup to the Brexit referendum.

In its annual report released on Sunday evening Australian time - but written before the Brexit shock - the BIS pointed to "the declining impact of monetary policy" on domestic economies eight years after the Lehman Brothers collapse.

The BIS calls for "stability oriented monetary policy" and that policy makers should take financial stability into account at all times "during both booms and busts".

"We need policies that we will not once again regret when the future becomes today," the BIS warns.

The BIS message comes against the backdrop of slowing global growth, low inflation, falling commodity prices and concerns that traditional central bank tools like quantitative easing are not working.

In comments made with the release of the annual report, Jaime Caruana said despite deleveraging in the private sector problems were building elsewhere.

"Signs of unsustainable financial booms began to appear especially in emerging market economies," Mr Caruana said.

Mr Caruana urged a global rebalancing to deal with what he called a a pattern "similar to that of previous boom episodes".

Saturday, June 25, 2016

Brexit market turmoil but EU ambassador says little impact on Australia

Britain's shock decision to exit the European Union should have little impact on Australia's diplomatic and trade relationships, according to the EU's ambassador to Australia.

Speaking to the ABC's AM program, Sem Fabrizi said despite global financial fallout from the Brexit vote nothing would change immediately.

"Until the new agreement for the separation from the UK takes effect, rights and obligations under the treaties will continue so there will be no immediate change," Mr Fabrizi said.

"Certainly Australia is a stronger partner of the European Union and we will continue to work with Australia as we will continue to work with all our partners."

But Mr Fabrizi said the Brexit outcome was not a shock to the EU and that said "war gaming" had been under way to manage the unexpected.
"Certainly not. We were expecting a close call and the people of Britain have decided. A democratic decision has been taken," Mr Fabrizi said.

"So we're now in a period where clarity is needed more than ever. But there's a procedure in place and we would like to have this process started as soon as possible."

Analysts estimate US stocks lost US$700 billion contributing to global losses of around US$3 trillion.

The banking sector was hardest hit with Citigroup down eight percent and Goldman Sachs and JP Morgan Chase five percent weaker.

The losses on Wall Street follow plunges across Europe in the wake of the Brexit vote with Paris down 8.6 percent, Frankfurt 6.2 percent weak and Madrid plunging 12.3 percent.

The Chicago volatily index which measures market anxiety surged as much as 48 percent given the unknowns about the process for Britain's exit from the European Union.

But Sem Fabrizi told AM that while there was complexity ahead the EU would not seek payback with Britain.

"The spirit is always to find the best solution. I don't think we need to enter a conflict mode."

Thursday, June 23, 2016

Brexit "leave" vote to spark UK recession, economist warns

The polls might be tipping a tight outcome in the Brexit referendum, but behind the scenes experts have been war-gaming the potential impact of a possible "leave" vote.

Research by the London School of Economics in "Life After Brexit" is warning Britain would most likely fall into recession if it leaves the European Union as a myriad of agreements unravel over several years.

The report's co-author Professor Swati Dhingra is the latest to agree with warnings from the British Treasury that a "leave" vote would be a shock to the UK economy and rattle global financial markets.

Professor Dhingra speaks with the ABC's Peter Ryan

Tuesday, June 21, 2016

Low inflation, rising dollar, moderating jobs. August rate cut firming?

The outlook for low inflation and a rising Australian dollar could lay the foundations for another cut in official interest rates, the Reserve Bank has signalled.

In the minutes from its June meeting when the cash rate was kept on hold at 1.75 percent, the RBA says measures of both short term and long term inflation remain below average.

Low inflation and fears about deflation drove the RBA to deliver an interest rate cut in May, coinciding with the release of the Federal Budget.

Reflecting on a world of low inflation and the potential impact here, the RBA says "monetary policy was very accommodative in the major economies and was expected to remain so given that inflation was below most central bank targets."

Consumer inflation in Australia is running at 1.3 percent - well below the RBA's target range of 2 to 3 percent over time.

The RBA says while the Australia dollar had depreciated around four percent against the US dollar, a recent recovery "could complicate the adjustment of the economy to lower terms of trade."

The central bank is also watching the labour market and says despite strength seen at the end of 2015 there had been "some moderation" in employment growth this year.

While there has been recent evidence that the transition out of the mining investment boom is occurring, the RBA is seeing "a further sharp fall in mining investment and a decline in non-mining investment in 2016/17."

On housing, the RBA noted that while residential building approvals increased strongly in April, this could be balanced by a flood of apartments coming on to the market in the next two years.

The RBA says there continue "to be indications that the effects of supervisory measures" have strengthened lending standards by major banks.

The RBA also cited the coming "Brexit" referendum on Britain's membership of the European Union as a factor increasing market volatility.

On China, the RBA says measures by Chinese authorities to curb speculation in commodity prices had led to recent falls in spot iron ore prices.

While money markets are factoring in a small chance of a rate cut in July, expectations are growing that the RBA will cut again in August after fresh consumer inflation data is released in late July.

Follow Peter Ryan on Twitter @peter_f_ryan

Monday, June 20, 2016

Brexit fears to rattle markets this week; I go to lunch and find "uncertainty" on menu

Nerves are running high on global financial markets with this week's vote on whether Britain should stay in the European Union only days away.

Polls on the Brexit referendum are now pointing to a lineball outcome when the poll is declared on Friday afternoon Australian time.

But in an already edgy world of slow growth, financial institutions and fund managers are working overtime to brief investors on their potential exposure to Britain leaving the EU.

The ABC's Peter Ryan goes to lunch and finds plenty of uncertainty on the menu.