Currency war?
https://www.cnn.com/2019/06/18/business/ecb-mario-draghi-interest-rates/index.html
2019-06-18 14:27:00Z
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An executive behind Facebook's venture into cryptocurrency told CNBC on Tuesday that consumers shouldn't be worried about the social media network gaining access to their financial data.
"To earn people's trust, we are going to have to make strong commitments on privacy," said David Marcus, the head of Facebook's Calibra division, a newly announced subsidiary to host a digital wallet by the same name for storing and exchanging the digital coin called Libra.
"If people don't want to trust us, they can use any of the other wallets that will be available," Marcus said in a "Squawk Box " interview. "There will be plenty of competition."
At a time when it is trying to rebuild user trust after data privacy and security scandals, Facebook announced Tuesday an ambitious endeavor to create Libra and launch it in the first half of 2020.
The goal — using blockchain, the technology underlying bitcoin on other cryptocurrencies — is to make it as easy to send money across the world as it is to send a photo. But unlike bitcoin and others, Libra will be backed by more stable government-backed money.
The Libra currency will not be run by Facebook, but rather by a nonprofit association supported by a range of companies and organizations.
"We painstakingly removed ourselves from governing this network," said Marcus, the former PayPal president whom Facebook hired in 2014 to lead its Messenger app.
The Calibra digital wallet will be the way Facebook eventually makes money through financial services such as loans. However, Marcus said those add-ons won't happen anytime soon.
Marcus said the latest venture is "very close" to Facebook's mission of connecting people across the world. People in the U.S. are privileged when it comes to having a stable currency and trusted institutions, he said. "But that's not the case for many people across the world."
He said the new currency would lower the barrier for cross-border payments.
"We felt it was time to try something new, and this is the beginning of a long journey in launching this new network," Marcus said. Other cryptocurrencies are "investment vehicles or investment assets rather than being a great medium of exchange. [Libra] is really designed from the ground up to be a great medium of exchange, a very high quality form of digital money that you can use for everyday payments."
Shares of Facebook opened Tuesday's trading up 2.3%, after soaring more than 4% to $189 per share on Monday ahead of the announcement. The stock has gained 44% this year.
Libra is backed by other payment companies, including Visa and PayPal and tech giants eBay, Lyft, Spotify and Uber. The 27 companies in total each will be expected to invest a minimum of $10 million to fund the project, according to The New York Times.
Reports speculating about the Facebook news over the past few weeks helped boost the price of bitcoin. The world's biggest digital coin jumped across the $9,000 level on Sunday, on the thought that Facebook's entry in crypto would add legitimacy to the industry. Bitcoin gained ground Monday as well, but slipped some in Tuesday trading.
Will the Federal Reserve message that it is no longer “patient” at the conclusion of its Federal Open Market Committee meeting on Wednesday?
The semantics behind the word “patient” have been dissected since Fed Chairman Jerome Powell first deployed the word in the Fed’s January 31 meeting, when policymakers flipped dovish and softened their stance on wanting to raise interest rates to the economy’s “neutral” level.
Powell’s “pause” hinted that the Fed was still leaving rate hikes on the table.
But building trade tensions and lackluster economic data has pushed some Fed officials to publicly acknowledge the case for a rate cut. And expectations for the Fed to drop its “patient” language, in addition to one or two dissenting votes, could make the June meeting the tipping point for the “pause” to turn into a full stop.
Wall Street is expecting the FOMC to keep rates steady at the current target range of 2.25% to 2.5%, but Powell’s commentary — in addition to the dot plots scheduled for release — will be increasingly in view as markets try to decipher the degree of dovishness as the Fed flips more neutral.
Goldman Sachs wrote June 14 that the Fed is likely to drop the word “patient,” and Barclays predicted that the Fed will replace the word “patient” in the FOMC statement with “flexible.”
“[W]e think the word ‘patient’ in the FOMC statement has served its useful life,” Barclays wrote June 13. “In our view, retention of ‘patient’ would likely sound too hawkish to markets that are already pricing easing in July and around 100 [basis points] of easing over the next four quarters.”
Key Fed officials have already hinted at the possibility of easing policy. On June 4, Powell sent markets higher after he delivered prepared remarks promising to “act as appropriate to sustain the expansion,” referring to the downside risks of the trade spat between the U.S. and China. In May, trade discussions broke down and the U.S. increased tariffs on about $200 billion worth of Chinese imports from 10% to 25%. The administration has threatened another round of tariffs, on an additional $300 billion worth of goods.
Fed Governor Lael Brainard echoed Powell’s comments in an interview with Yahoo Finance the day after.
“Trade policy is definitely a downside risk to the economy, and our job is to sustain the expansion,” Brainard said on June 5. “And we’ll need to see going forward what that means for policy.”
[See Also: Transcript of Fed Governor Lael Brainard’s appearance on Yahoo Finance]
Although neither Powell nor Brainard committed to explicitly lowering rates, their stated commitment to extending the U.S. expansion reflects the acknowledgement of downside risks to the economy.
The Fed’s softer tone also comes amid weaker economic data since the Fed’s last meeting on May 1. The jobs report for May missed estimates on payroll gains, and tepid wage growth pointed to a labor market that may be running below full employment. Inflation, which has consistently run below the Fed’s 2% target, also remains a conundrum for policymakers worried about slowing economic activity.
Abandoning the “patient” language may open the door to future rate hikes, but the June meeting may also see explicit calls from some voting members to cut rates.
St. Louis Fed President James Bullard and Chicago Fed President Charles Evans, both voting members of this year’s FOMC, could dissent if the majority of the committee decides to keep rates steady. If that happens, those would be the first dissents since Jerome Powell took over as chairman in February 2018.
Goldman Sachs and UBS wrote that they would expect Bullard to dissent if the Fed opts to hold rates steady, instead preferring that the central bank move to lower rates.
Earlier in the month, Bullard had said a rate cut would be warranted “soon” due to “too low” inflation expectations. Bullard has pointed to the rate cuts of 1995 and 1996 to illustrate the Fed’s ability to provide some “insurance” ahead of a possible slowdown.
“The Fed has done this correctly once,” Bullard said June 3.
Chicago Fed President Charles Evans, also a voting member, is a possible dissenter as well. On June 5, Evans told Bloomberg that low inflation could be a “reason for a little more accommodation.”
Although not uncommon (Yellen faced 15 dissents in her four years as chair), a dissent or two on Wednesday would signal the beginnings of an explicit tilt toward easing policy.
Most of Wall Street expects the Fed to point to a rate cut in July, but markets are pricing in a non-zero chance of a rate hike this Wednesday. As of Monday afternoon, Fed funds futures contracts were pricing in a 19.2% chance of a rate cut this week.
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Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.
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SINTRA, Portugal—European Central Bank President Mario Draghi signaled Tuesday that the bank could roll out fresh stimulus as soon as its next policy meeting in July, sending the euro lower against the dollar and prompting an unusual rebuke from President Trump.
The comments, delivered at the ECB’s annual research conference outside Portugal’s capital, represent a clear statement of intent from Mr. Draghi, who is wrestling with the fallout from international trade tensions on Europe’s critical manufacturing sector and stubbornly low inflation.
Fresh ECB stimulus could support the region’s export-focused companies by weakening the euro against the dollar and other currencies, while binding the hands of Mr. Draghi’s successor for years.
Investors responded favorably, sending the euro down by more than half a cent against the dollar, to $1.1187. Yields on 10-year German government bonds fell to a fresh all-time low of minus 0.307% as investors digested the prospect of fresh bond purchases by the ECB.
But the move triggered an attack from Mr. Trump, who complained on Twitter that Mr. Draghi’s words would create an unfair advantage for European businesses.
“Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA,” Mr. Trump tweeted.
Mr. Trump is known for his criticisms about Federal Reserve policy but has until now largely kept out of the monetary policy decisions of other economies.
The European Union has long sold more goods to the U.S. than it has bought. But that trade surplus reached a record high of €139 billion in 2018, up from €119 billion in 2017. Figures released Tuesday showed the bloc’s surplus has continued to widen in 2019, although at a slower pace, amounting to €48.2 billion in the first four months of the year.
Advisers to President Trump have complained for years that the euro is grossly undervalued. The U.S. administration has threatened to impose tariffs on Europe’s auto exports unless the bloc strikes a trade deal with the U.S.
“European Markets rose on comments (unfair to U.S.) made today by Mario D!,” Mr. Trump tweeted. “They have been getting away with this for years, along with China and others.”
His comments raise the prospect of a “nightmare scenario” in which the ECB and Federal Reserve engage in a race to the bottom on exchange rates, creating economic damage that could aggravated by trade tariffs, said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.
The ECB isn’t alone in considering fresh stimulus. The world’s major central banks have rapidly shifted gear in recent months, shelving plans to increase short-term interest rates and seeking instead to ease policy amid signs that the global economy is softening.
Many central banks in the Asia-Pacific region, including New Zealand and Australia, have already reduced interests in recent weeks. The Federal Reserve could signal on Wednesday that it is preparing to cut short-term interest rates, with bond markets pricing in two rate cuts this year.
The ECB is in a trickier position, though, because its key interest rate is minus 0.4%, almost 3 percentage points lower than the Fed’s.
In a sign of the headwinds Europe faces, exports from the eurozone to the rest of the world fell 2.5% in April compared with March, according to the European Union’s statistics agency Tuesday. Meanwhile, Germany’s ZEW index, a gauge of sentiment in the financial markets, fell by 19 points to minus 21.1 in June.
Mr. Draghi said ECB policy makers would consider “in the coming weeks” how to adapt its policy tools “commensurate to the severity of the risk” to the economic outlook.
In particular, the ECB could tweak the parameters of its €2.6 trillion bond-purchase program, known as quantitative easing or QE, to create room for fresh purchases, Mr. Draghi said. The bank could also cut interest rates further and introduce tools to mitigate the side effects, he said.
“The rate cutting genie is out of the bottle,” said Bart Hordijk, FX Market Analyst at Monex Europe. “This opens the trapdoor to lower levels” of the euro against the dollar.
That compares with a lackluster market reaction to the ECB’s latest policy move two weeks ago. Then, the ECB signaled it wouldn’t raise short-term interest rates through the middle of 2020, but investors were underwhelmed, sending the euro higher against the dollar.
Any move to restart QE would represent a sharp switch of course by the ECB, which only phased out the program in December and had until recently been guiding investors to expect interest-rate increases.
The ECB currently buys no more than 33% of the bonds of any individual government through its QE program. Increasing that limit could trigger fresh controversy and legal challenges in Germany, Europe’s largest economy, where officials have long been deeply skeptical of the ECB’s bond purchases.
Mr. Draghi warned Tuesday of “lingering softness” in forward-looking economic indicators, and said the risk of protectionism and vulnerabilities in emerging markets was weighing on Europe’s large manufacturing sector.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Mr. Draghi said.
The speech is Mr. Draghi’s last at the ECB’s Sintra research conference, Europe’s answer to the Fed’s Jackson Hole meeting, before his eight-year term ends in October. It indicates that the Italian’s impact could be felt for some time after he steps down, regardless of who European leaders name as his successor.
The horse-trading among European leaders over who will succeed the Italian could reach a climax at a summit meeting in Brussels on Thursday and Friday.
“Even a more hawkish new ECB president will have to take some time to untangle her/himself before further tightening can even be put on the agenda again,” said Mr. Hordijk.
—Paul Hannon in London contributed to this article
Write to Tom Fairless at tom.fairless@wsj.com
In this photo illustration, packages of Beyond Meat "The Beyond Burger" sit on a table, June 13, 2019 in the Brooklyn borough of New York City.
Drew Angerer | Getty Images
Shares of Beyond Meat soared as much as 18% in premarket trading Tuesday, briefly surpassing $200 per share.
At the beginning of May, the maker of plant-based meats priced its initial public offering at $25 per share. Excluding Tuesday's premarket surge, the company's stock is up 579% since its IPO, a market value of $9.9 billion.
Beyond's stock price remains well above the price targets of analysts, the highest of which is $123. No one on Wall Street recommends buying the stock anymore because of its hot streak. The stock has been gyrating as analysts have raised concern about its monster run and short sellers have taken an interest.
While the market for meat alternatives is growing more crowded as Tyson Foods and Nestle prepare to launch their own plant-based meat imitations, Beyond has been expanding and improving its own products.
Shares of Beyond closed up 12% Monday after the company said that it will start offering its Beyond Beef — plant-based ground beef — in grocery stores. The announcement followed the company's launch of a new, "meatier" version of its Beyond Burger in stores last week.
The market has been anticipating more dovishness from the Federal Reserve when it issues its interest rate decision and policy statement on Wednesday afternoon, but it is European Central Bank (ECB) President Mario Draghi who is driving the market higher here on Tuesday morning. Draghi stated that if the European economy slows and the inflation target is not met then "additional stimulus will be required." He went on to state that there still is considerable headroom to expand the ECB's asset purchase program.
When that clear message is coupled with the growing belief in the U.S. that the Fed is about to engage in a series of rate cuts, the buying pressure is automatic.
Over the past decade the single best market advice can be summed up in a very simple statement-"Don't fight the Fed."
Quite often it seems that central bankers are in competition with each other to cut rates, which weakens their currencies against other currencies. President Trump is addressing that issue in a tweet here on Tuesday morning:
"Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others."
The thing that is most important for us to know is that the central bankers are once again in a race to provide lower rates. There is no force more powerful than that. While many will question the wisdom of more stimulus 10 years after it first began, it probably is not a good idea to fight the price action.
The statements by Draghi are pushing the market to price in the Fed dovishness it is already expecting. The question we will need to confront is whether future rate cuts are being fully discounted. Many bears are convinced that this time the Fed is running out of ammunition and that rate cuts will not have the same positive impact they have had in the past. If that is so there will be some "sell the news" action as the Fed moves forward, but as I've written many times the market loves to love the Fed.
We have a positive open on the way but the focus remains on the Fed decision on Wednesday. Expectations for a dovish Fed are very high and we must wonder if the potential for disappointment is building.