NEWS,19.11.2012

Global shadow banking hits $67 trillion

The system of so-called shadow banking blamed for aggravating the global financial crisis grew to $67 trillion globally last year, a new high, amid calls from the world's top policymakers for greater control of the sector.A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policy makers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and their activities.Officials at the European Commission in Brussels see closer control of the sector as important in preventing a repeat of the financial crisis that toppled banks over the past five years and rocked the euro zone.The study by the FSB, set up by the world's top economies (G20) to police global finance, said shadow banking around the world more than doubled to £62 trillion in the five years to 2007 before the crisis struck.But the size of the total system had risen to $67 trillion in 2011, more than the total economic output of all the countries in the study.The multi-trillion dollar activities of hedge funds and private equity companies are often cited as examples of shadow banking.But the term also covers investment funds, money-market funds and even cash-rich firms that lend government bonds to banks, and which in turn use them as security when taking credit from the European Central Bank Even the man credited with coining the term, former investment executive Paul McCulley, gave a catch-all definition.McCulley said he understood shadow banking to mean "the whole alphabet soup of levered up non-bank investment conduits, vehicles and structures", such as the special investment vehicles that many blamed for the financial crisis.The United States had the largest shadow banking system, said the FSB, with assets of $23 trillion in 2011, followed by the euro area with $22 trillion and the United Kingdom at $9 trillion.The US share of the global shadow banking system has declined in recent years, the FSB said, while the shares of the United Kingdom and the euro area have increased.The FSB warned that tighter rules that force banks to hoard more capital reserves to cover losses could bolster shadow banking.It advocates better controls, although cautions that shadow banking reforms should be dealt with carefully because the sector can also be a source of credit for business and consumers.Forms of shadow banking can include securitisation, which can transform bank loans into a tradeable instrument that can then be used to refinance credit, making it easier to lend.In the run-up to the crisis, however, banks such as Germany's IKB stored billions of euros of such instruments in off-balance sheet vehicles, which later unravelled. Another example is a repurchasing agreement, or repo, where a player such as a hedge fund could sell government bonds it owns to a bank, agreeing to repurchase them later.The bank may then lend those bonds onto another hedge fund, taking a position on the government debt. Such agreements are used by banks to lend and borrow. A risk could arise if one of the parties in the chain collapses.The European Commission is expected to propose EU-wide rules for shadow banking next year.

 

Stocks, commodities rise on fiscal cliff hopes

World share markets and commodities surged yesterday as traders focused on politicians' indications that they are ready to compromise to avoid the US "fiscal cliff".Wall Street stocks climbed more than 1%, extending a rally that began on Friday, while crude oil was up more than 2%.US lawmakers indicated compromises were possible in negotiations to avert US$600 billion in tax increases and spending cuts due to start in January - the "fiscal cliff" that threatens to send the US economy back into recession.Democratic Senator Dick Durbin said on CNN: "What I hear is a perceptible change in rhetoric from the other side."Also appearing on CNN, Republican Representative Tom Price said: "Every member of our caucus appreciates that this fiscal crisis, this challenge that we have, is ever closer."Opinion polls show that Republicans would shoulder more of the blame if the country goes over the fiscal cliff.MSCI's world equity index jumped 1.8%, in one session erasing the 1.8% drop it posted last week. Monday was the best day for the index since September 14."Stocks could rise substantially if US policymakers can negotiate a 'grand bargain' that credibly addresses long-term tax, spending, and entitlement reforms," said Jonathan Golub, strategist at UBS in New York.The Dow Jones industrial average was up 160.54 points, or 1.28% , at 12,748.85. The Standard and Poor's 500 Index was up 21.22 points, or 1.56%, at 1,381.10. The Nasdaq Composite Index was up 46.39 points, or 1.63%, at 2,899.52.Optimism in Europe over the prospects of a deal this week to release much-needed aid for Greece also lent support.European officials are expected to discuss a two-year funding plan for Athens at a meeting on Tuesday, which would postpone any longer-term solution until after a September 2013 German general election.European Central Bank policymaker Joerg Asmussen said last weekend that the ministers were likely to agree to the deal and leave resolution of a longer-term debt stabilisation plan for Greece, at the heart of a disagreement with the IMF, until later.The euro rose 0.56% to $1.281, well above the two-month low of $1.2661 hit last week and near the top end of its recent range, suggesting the foreign exchange market expects an agreement on Greece."This message from the ECB would tell me that, yes, what we are heading to this week is an agreement that would keep Greece out of trouble for the next year or so," said Gilles Moec, senior European economist at Deutsche Bank.European share markets rebounded from last week's lows, mainly on the growing optimism over the US political negotiations.The FTSE Eurofirst 300 index of top European shares closed 2.3% higher, led by sectors tied to the pace of economic growth. Banks climbed 3.6% , with US shares of Barclays up 5.6% to $15.82.In the region's main centres, London's FTSE 100, was up 2.4%, while Frankfurt's DAX and Paris' CAC-40 rose more than 2%.Safe-haven bond markets reflected the stronger risk appetite, with the 10-year US Treasury down 10/32 to yield 1.6165%.The 10-year German government bond fell and its yield rose to 1.362% from 1.326% on Friday. Traders said there was room for yields to rise if euro zone policymakers reached an agreement at their meeting on Tuesday.In the currency markets, the dollar briefly extended its gains against the yen on expectations a new Japanese government will push the central bank to taking aggressive monetary stimulus measures to boost growth after next month's elections.The greenback was slightly lower against the yen at 81.24. Earlier, it rose to its highest level since April 25.The Bank of Japan began a two-day meeting on Monday but was not expected to take any new policy steps before the December 16 vote.The rising hopes of a deal on closing the US budget gap, which has clouded the outlook for global growth, spread through commodity markets, lifting oil, copper and gold.Copper rallied 2.6% to $7,803.5 a ton on the London Metal Exchange, and gold rose $19.52 to $1,733.2 an ounce.A 0.5% drop in the dollar index, which had eased from a two-month high hit on Friday, added to demand by making commodities priced in the greenback more affordable for buyers holding other currencies.Brent crude rose above $110 a barrel as the escalating violence between Israel and the Palestinians fuelled concern about supplies from the Middle East.Investors fear the conflict may draw in other countries and possibly disrupt energy exports from the region, which supplies more than a third of the world's crude.Brent crude for January delivery was up 2.5% and U.S. crude futures added 2.8%.

 

European stocks make biggest rebound in 10 weeks

European equities have rebounded from multi-month lows to post their biggest daily gain in 10 weeks, thanks to signs of progress in US talks to avoid a budget crisis.Leading Democratic and Republican lawmakers voiced confidence over the weekend that a deal would be reached to avoid the so-called "fiscal cliff" of some US$600 billion of tax hikes and spending cuts which threatens to plunge the United States into recession in 2013.An unexpected rise in US existing home sales for October added to the brighter sentiment towards the world's biggest economy on Monday, which has become a significant source of growth for European companies as their domestic region stagnates."The news about the fiscal cliff over the past few days has been much more positive," said Donald Huber, portfolio manager at Franklin Templeton Investments, which has about US$750 billion in assets under management.The FTSEurofirst 300 index provisionally closed up 2.3% to 1,091.50 points, while the EuroSTOXX 50 rose 2.8% to 2,495.19 points -- both posting their biggest one-day gain since early September and rebounding from multi-month lows.The rebound comes after EuroSTOXX 50 dipped into technically oversold territory on the seven-day relative strength index (RSI) on Friday for the first time in nearly two months.Then, a big rally followed but ran out of steam after two sessions, and this time too analysts were doubtful about the sustainability of the gains unless the fiscal cliff problem is actually resolved rather than just postponed."We had the lows and the market is oversold... so it is just short-covering," said Vincent Guenzi, chief strategist at Cholet Dupont."That [progress in negotiations] was the catalyst for the short-term gain of the market. That could help the market maybe gain 1% or 2% more, but to really have the end of the downtrend of the last weeks we need something real."Monday's broad-based rally took all the STOXX 600 sector indexes into positive territory, led by economically sensitive ones like autos, banks, construction, technology and basic resources.Healthcare, which is less dependent on economic cycles for demand, lagged with a rise of 1%.Nokia was a top gainer among individual stocks, with reports of its Lumia 920 selling out in Germany fuelling hopes of strong demand for the new smartphone.Shares in the Finnish cellphone maker added 9% on Monday, but are still down 39% since the start of 2012.Nokia is the most shorted company in EuroSTOXX 50, with 19.7% of outstanding shares on loan according to data from Markit, potentially making it vulnerable to sharp short-covering rallies on any sentiment improvement or positive news.That gives Nokia a utilisation rate - shares borrowed versus the total number available for loan - of 93.5%, against just 6.2% for EuroSTOXX 50 as a whole.