Mnuchin backs proposal to double IMF’s crisis fund

© Reuters. Treasury Secretary Steve Mnuchin speaks at a news briefing © Reuters. Treasury Secretary Steve Mnuchin speaks at a news briefing

WASHINGTON (Reuters) – U.S. Treasury Secretary Steven Mnuchin on Friday said he welcomes a proposal to double the size of the International Monetary Fund’s $ 250 billion crisis lending fund as part of a deal to maintain overall IMF resources.

Mnuchin, in a statement to the IMF’s steering committee, said he backed the funding increase to ensure the global lender remained adequately resourced to respond to potential crises over the medium term.

He also called for various reforms to streamline the fund’s costs, modernize salaries and benefits, and adopt a more independent, centralized risk management system.

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Narrow majority of Fed banks wanted to keep discount rate unchanged: minutes

WASHINGTON (Reuters) – Seven out of the 12 regional Federal Reserve banks wanted to leave unchanged the rate commercial banks are charged for emergency loans ahead of the U.S. central bank’s last policy meeting, minutes from the discussion of the discount rate showed on Tuesday.

Despite that, the Fed decided to lower the discount rate to 2.50% from 2.75% at its Sept. 17-18 meeting at the same time that it cut its benchmark overnight lending rate by a quarter of a percentage point to a target range of between 1.75% and 2.00%.

Directors of the Fed banks of Boston, New York, Philadelphia, Richmond, Cleveland, Atlanta and Kansas City all wished to maintain the existing discount rate, citing a “strong labor market and inflation near its symmetric 2% objective.”

The directors of the Fed banks of Minneapolis, Chicago, Dallas and San Francisco pushed for the quarter-percentage-point cut in the discount rate that was ultimately implemented.

The discord echoes the debate among U.S. central bank policymakers about how much slowing global growth and the fallout from the Trump administration’s trade wars are harming the U.S. economy.

Policymakers are split into those who think the Fed’s two interest rate cuts this year suffice for now to keep the longest economic expansion on record going, others who think the Fed should lower borrowing costs more, and some who see a rate rise by the end of the year, according to projections released last month.

St. Louis Fed President James Bullard called for a half-percentage-point cut at the Fed’s September policy meeting. Directors of the St. Louis Fed likewise wanted the discount rate cut to 2.25% ahead of the meeting, the minutes showed.

Investors currently expect another reduction in borrowing costs when the Fed’s rate-setting committee next meets at the end of this month.

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Malaysia optimistic of winning investor, ratings agencies’ confidence in budget plans

KUALA LUMPUR (Reuters) – Malaysia is “cautiously optimistic” it would win the confidence of investors and ratings agencies for its 2020 budget, its finance minister said on Saturday, as the government prioritized boosting growth over reducing the deficit in the short term.

Lim Guan Eng told reporters that given the global economic uncertainties, the country needed to “not only convince but reassure investors” that the Southeast Asian nation will be back on track for fiscal consolidation in 2021.

Malaysia’s government unveiled on Friday a smaller budget than expected for next year but flagged a wider budget deficit than earlier estimated, and said it would step in with stimulus measures should global demand worsen.

The government projected a fiscal deficit of 3.2% of gross domestic product (GDP), larger than an initial target of 3% but lower than this year’s 3.4%.

“So far the response by both the World Bank and even Moody’s have been positive so we are cautiously optimistic that we will be able to convince not just foreign investors and fund managers but also ratings agencies that this is necessary in order to ensure sustainable economic growth,” Lim said.

World Bank lead economist for Malaysia, Richard Record said in a note overnight that the budget was “a prudent balance between the competing needs for Malaysia to preserve fiscal sustainability, while also responding to the realities of a slowing economic environment”.

Record also said proposals to reform the country’s investment incentives framework was a step in the right direction.

Sovereign risk senior analyst at Moody’s Investors Service, Anushka Shah said in a note late Friday that Malaysia’s fiscal strength will continue to constrain its credit profile but the budget’s emphasis on backing higher-value added industries and on infrastructure development will support growth against a challenging global environment.

Esther Lai, head of sovereign ratings at RAM Ratings, a Malaysian ratings agency said the 3.2% deficit target was within expectations. “It is a pragmatic target as the government is striking a balance between supporting growth and keeping its promise for fiscal consolidation.”

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Euro-Area Finance Chiefs Brace for Fresh Fight Over Budget

(Bloomberg) — Euro-area finance ministers will debate the final key elements of a small budget for their currency bloc, as the region seeks to cap two years of difficult negotiations over a tool that falls far short of the original sweeping vision of French President Emmanuel Macron.

The discussion on the budget, whose broad outlines were already agreed in June, will seek to bring to a conclusion difficult talks that pitted the fiscal restraint of the EU’s hawkish North against the South’s calls for spending to stimulate the economy. But entrenched differences over aspects of how this pot of money will be financed may mean an accord remains elusive.

The agreed budget would create a pot of about 20 billion euros ($ 22 billion) to facilitate investments and reforms and help give a boost to poorer nations, rather than help support economies in a downturn, as was initially intended. These funds, which would be part of the EU’s broader budget and distributed over seven years, will be used to help countries see through investments and reforms and help poorer nations catch up.

Proponents argue that the pared-down budget could still be a foot in the door that could evolve into something more powerful in times of crisis. Skeptics of the plan say it’s a toothless tool that could nonetheless help incentivize laggards to reform.

Stumbling Blocks

A key issue ministers will debate is whether the instrument can be financed entirely from the EU’s broader budget, paid in by all the bloc’s 28 governments, or whether it could be topped up by other funding sources in the future.

Countries led by France have been pushing for a deal that would allow funds to be added through further contributions. The Dutch and other fiscal hawks have pushed for it to be funded exclusively from the EU’s budget, a restriction that would limit its total size.

A compromise could include a so-called “enabling clause”, which would pave the way for countries that wish to top up the budget to do so in the future. But the Dutch have insisted that this would only be on a voluntary basis, a red flag for other members.

The other main issue to be discussed involves the details of the so-called co-financing rate, which determines how much money governments will receive from this budget for a project and how much they have to put up themselves. This contribution could vary depending on the member’s economic situation, being reduced during a downturn.

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Investors retreat from U.S. stock funds amid impeachment inquiry

By David Randall

NEW YORK (Reuters) – Investors pulled nearly $ 14 billion out of mutual fund and exchange-traded funds that hold U.S. stocks last week, ending what had been the largest surge into domestic stock funds since December 2016, according to data released Wednesday by the Investment Company Institute.

The retreat from U.S. stocks came during a week in which Democratic lawmakers moved to launch formal impeachment proceedings that could end with a vote to remove President Donald Trump from office and the White House released a summary of a telephone call between Trump and Ukraine’s president that is at the center of the inquiry.

Last week’s losses sent the year to date outflows from U.S. stock funds to $ 91.1 billion as investors have shied away from domestic stocks despite a more than 15% rally in the benchmark S&P 500 index.

Investors continued to seek the perceived safety of bonds by sending slightly more than $ 6.9 billion into taxable and municipal debt funds. For the year-to-date, the category has garnered more than $ 319 billion in new inflows.

World stock funds, meanwhile, posted a three-week losing streak by dropping another $ 1.8 billion in outflows. That sent the year to date loss for the category to $ 37.9 billion.

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Brexit: Deutsche Bank still sees 50% chance of no-deal by year-end

LONDON (Reuters) – Deutsche Bank (DE:) said on Wednesday it still sees a 50% chance that Britain will leave the European Union without a deal by the end of the year following a general election, but said there’s a 20% chance of a “surprise” agreement later this month.

It gave a 40% chance of a caretaker government being formed and a general election taking place.

Out of the two possible scenarios following that, the bank has a 25% probability of either an orderly Brexit, a second referendum or scrapping of Brexit altogether.

The alternative scenario, with a 15% chance, would be a no-deal Brexit resulting from the general election.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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Italy expects budget deficit to rise next year, debt to fall: source

© Reuters. FILE PHOTO: French President Emmanuel Macron and Italian Prime Minister Giuseppe Conte meet in Rome © Reuters. FILE PHOTO: French President Emmanuel Macron and Italian Prime Minister Giuseppe Conte meet in Rome

By Gavin Jones

ROME (Reuters) – Italy will target its budget deficit at around 2.2% of gross domestic product next year, falling to 1.8% in 2021 and 1.4% in 2022, a political source said on Saturday.

Economic growth is seen around 0.6% next year, and rising to 1.0% in each of the following two years, according to a draft of the targets seen by the source.

The Cabinet is due to sign off on the new targets contained in the Treasury’s Economic and Financial Document (DEF) at a meeting on Monday.

The targets are still subject to possible marginal revisions ahead of Monday’s meeting, the source said. In particular the 2020 deficit goal could be lowered to 2.1% depending on ongoing negotiations with the European Commission.

This year’s deficit is seen at around 2.0% of GDP, Deputy Economy Minister Antonio Misiani said this week.

The new government of the anti-establishment 5-Star Movement and the center-left Democratic Party intends to avoid an increase in sales tax worth some 23 billion euros ($ 25 billion)scheduled for January, which was promised to the European Union as a backstop to ensure Rome respected the bloc’s fiscal rules.

However Prime Minister Giuseppe Conte, in comments on Friday, did not rule out possible adjustments to value added tax (VAT) rates.

Under an unchanged policy scenario, which includes the full VAT tax hike, next year’s deficit would fall to around 1.5% of GDP, two sources told Reuters earlier this week.

Italy has proportionally the second highest public debt in the EU after that of bailed-out Greece, and has made little progress in reducing its deficit toward a balanced budget in recent years as EU rules prescribe.

The debt is forecast to rise this year from last year’s 134.8% of GDP, the political source said, before declining in 2020, 2021 and 2022.

Italy has urged the EU to ease what it calls the “excessive rigidity” of EU fiscal rules to head off the risk of recession in the 19-nation euro currency bloc.

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Emerging market specialist Ashmore sticks with Argentine debt even as default fears simmer

By Tom Arnold

LONDON (Reuters) – British emerging markets investor Ashmore Group (L:) is betting that Argentina’s current crisis, that has seen the country veer toward default, is not as bad as it looks.

The investment manager is buying Argentina’s dollar bonds in the belief the clear favorite to win next month’s general election, Alberto Fernandez, will be less radical in overhauling the government’s debt than markets now expect, one of its executives said on Wednesday.

Argentina’s bonds and currency plummeted to record lows last month as investors fled after left-leaning Peronist Fernandez heavily defeated President Mauricio Macri in a primary election, prompting the market-friendly incumbent to unveil plans to delay debt payments and impose currency controls.

Ashmore was one of several foreign fund managers holding Argentina debt heading into the market meltdown and had 10.5% of its $ 1.4 billion short-duration emerging-markets fund invested in Argentina at the end of June, Morningstar data show.

It still has exposure to both international and local bonds, said Jan Dehn, head of research at Ashmore.

“Yes, the fundamental outlook is worse as there’s more uncertainty about what Fernandez will do when he becomes president, but the bonds are now pricing in an extreme version of what Fernandez may do,” he said.

“My view is that we will see a more moderate Peronist party emerge under Fernandez than what the market is currently pricing in, that’s why there’s value in the (international) bonds.”

Alberto Fernandez, seen as a pragmatic figure within the broad Peronist political flank, is running with ex-President Cristina Fernandez de Kirchner, a divisive figure who pushed interventionist policies during her two terms from 2007 to 2015.

Ashmore’s buying activity contrasts with some other fund managers who have been seeking to pare back exposure.

“We have been reducing risk all year in Argentina and have no active risk in local currency and zero underweight in sovereign dollar bonds,” said Brett Diment, head of global emerging market debt at Aberdeen Standard Investments. “We think pretty big challenges remain in Argentina and some sort of a debt extension is inevitable. Whether we also get principal haircut or reduction coupons is probably too early to say.”

Ashmore’s Dehn thinks the Fernandez administration might take inspiration from the performance of the first two years of former President Nestor Kirchner’s government in the early 2000s. Then, Argentina’s economy grew 8.8% in real GDP growth per year and Kirchner stuck with the government’s then IMF program, he said.

Alberto Fernandez was chief of staff for Nestor Kirchner, the predecessor and late husband of Cristina Fernandez.

Argentina is now waiting for a key $ 5 billion tranche of its latest IMF program.

Dehn is also buoyed by Fernandez’s choice of Guillermo Nielsen as economic adviser, even though some creditors are wary after his role as the country’s chief debt negotiator following a default in 2002.

“The fact that Nielsen is part of the economic team and talking for Fernandez suggests to me that Fernandez will pursue a more market-friendly line than currently expected,” he said.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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India says no plans to revise fiscal deficit target or cut spending now

By Manoj Kumar

NEW DELHI (Reuters) – India will not revise its fiscal deficit target immediately and is not planning any spending cuts at this stage, the country’s finance minister said on Sunday, after slashing corporate tax rates to boost a flagging economy.

India cut corporate tax rates on Friday in a surprise move designed to woo manufacturers, revive private investment and lift growth from a six-year low that has led to major job losses and fueled discontent in the countryside.

Though equity markets welcomed the move, bond yields spiked to a near three-month high on speculation the government may have to borrow more to meet its spending needs.

The measures will cut revenue by 1.45 trillion rupees ($ 20.4 billion) in the current fiscal year, according to government estimates.

But Finance Minister Nirmala Sitharaman said the government would only review the fiscal deficit target closer to the 2020/21 budget.

“At this point of time we are not revising any target. The decision will be taken later,” she told reporters at her residence in New Delhi on Sunday, adding that there was no plan to cut spending currently.

Sitharaman also said the government would decide on additional market borrowings for the second half of 2019/20 later.

Ratings firm S&P Global said on Friday India’s move to cut corporate tax rates was a “credit negative development” despite potentially boosting the economy as it will widen its fiscal deficit.

Government sources told Reuters this month that India is likely to miss its fiscal deficit target for the current financial year and, toward the end of 2019, be forced to raise it to 3.5% of GDP from 3.3% after economic growth fell to a six-year low of 5% in the April-June quarter.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

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U.S., Chinese trade deputies face off in Washington amid deep differences

By David Lawder

WASHINGTON (Reuters) – U.S. and Chinese deputy trade negotiators were set to resume face-to-face talks on Thursday for the first time in nearly two months as the world’s two largest economies try to bridge deep policy differences and find a way out of a bitter and protracted trade war.

The negotiations on Thursday and Friday are aimed at laying the groundwork for high-level talks in early October that will determine whether the two countries are working towards a solution or are headed for new and higher tariffs on each other’s goods.

A delegation of about 30 Chinese officials, led by Vice Finance Minister Liao Min, were set to launch talks on Thursday morning at the U.S. Trade Representative’s (USTR) office near the White House. The U.S. side is expected to be led by Deputy USTR Jeffrey Gerrish.

The discussions are likely to focus heavily on agriculture, including U.S. demands that China substantially increase purchases of American soybeans and other farm commodities, a person with knowledge of the planned discussions told Reuters.

Two negotiating sessions over the two days will cover agricultural issues, while just one will be devoted to texts covering core changes to strengthen China’s intellectual property protections and end the forced transfer of U.S. technology to Chinese firms.

“Sessions on agriculture will get a disproportionate amount of air time,” the source said, adding that one of these sessions also will include a focus on U.S. President Donald Trump’s demand that China cut off shipments of the synthetic opioid fentanyl to the United States

Trump is eager to provide export opportunities for U.S. farmers, one of his key political constituencies who have been battered by China’s retaliatory tariffs on U.S. soybeans and other agricultural commodities.

CURRENCY ON TABLE

U.S. Treasury Secretary Steven Mnuchin, who will participate in the October talks along with USTR Robert Lighthizer and Chinese Vice Premier Liu He, has said that currency issues will be a focus of the new rounds of talks.

Mnuchin formally declared China a currency manipulator last month after the yuan slipped below 7 to the dollar, accusing Beijing of pushing its currency lower to gain a trade advantage.

Trump has said that China failed to follow through on agricultural purchase commitments made by its president, Xi Jinping, at a G20 leaders summit in Osaka, Japan as a goodwill gesture to get stalled talks back on track. China has denied that such commitments were made.

When such purchases failed to materialize during U.S.-China trade talks in late July, Trump quickly moved to impose 10% tariffs on virtually all remaining Chinese imports untouched by previous rounds of tariffs.

But in an easing of tensions last week, Trump delayed a scheduled Oct. 1 tariff increase on $ 250 billion worth of Chinese imports until mid-month, as China postponed tariffs on some U.S. cancer drugs, animal feed ingredients and lubricants.

Beijing also is seeking an easing of U.S. national security sanctions against telecom equipment maker Huawei Technologies [HWT.UL], which has been largely cut off from buying sensitive U.S. technology products.

The trade war, which has dragged on for 14 months, has rattled financial markets as policymakers and investors worry about the broadening global economic fallout of the dispute.

The spectre of a global recession has prompted central banks around the world to loosen policy in recent months. The Federal Reserve on Wednesday cut rates for the second time this year, saying the reduction provided “insurance against ongoing risks” including weak world growth and resurgent trade tensions.

IDEOLOGICAL DIVIDE

Trade experts, executives and government officials in both countries say that even if the September and October talks produce an interim deal that includes purchases and a reprieve for Huawei, the U.S.-China trade war has hardened into a political and ideological battle that runs far deeper than tariffs and could take years to resolve.

Jon Lieber, a principal in PwC’s national tax services practice, said a possible “very narrow agreement” in October would do little to solve fundamental differences between the two countries.

To keep markets steady, the two sides could well “string along the talks for a longer period of time,” he added.

Representative Kevin Brady, the top Republican on the House Ways and Means Committee, told reporters on Wednesday that he was cautiously optimistic about the talks.

While he is no fan of tariffs, Brady said Trump was right to challenge China’s trade actions.

“Zero is always best, but there is a necessity to change the whole trading relationship with China.”

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