Risk? No Thanks.

Risk? No Thanks.

Wednesday’s rally proved short-lived as global stocks lurched lower in choppy risk-off trading. Gains in healthcare were outweighed by the fall in the banking sector, amid talk of more layoffs and cutbacks planned by Europe's major lenders as they struggle with zero rates. JP Morgan Chase CEO Jamie Dimon also warned of increased volatility and low liquidity as significant risks for the global economy. In sum, good news was in short supply.

The safe haven bid prevailed with 10-year US Treasury yields falling to a 6-week low and German bund yields touching a one-year low (negative yields here we come). The decline in overall yields push the US 30-year mortgage rate to 3.59%, their lowest in almost a year. The yen strengthened to 18-month levels against the US dollar, spurred by the lack of commitment by the Bank of Japan to intervene to weaken the currency. Gold also rose, topping $1,240 per ounce.

The big losers in Europe were Daimler, Pearson and Skanska as shares went ex-dividend. The stock fell as much as 5%, with Skanska falling the most at 7%. Shares which trade ex-dividend do not confer rights to the next dividend payout, making them less attractive for investors. The top performer in the STOXX Europe 600 was ST Microelectronics, which rose 4% on the back of strong earnings updates by one of its major clients Samsung.

More Negative Rates?

The much-awaited minutes of the latest European Central Bank meeting were released on Thursday, and investors poured over them to try and glean something they might have missed on the 10th of March. The ECB announced a major new stimulus at that meeting, including cuts to all its main interest rates, an acceleration of bond purchases to €80 billion a month and a new set of longer-term refinancing operations loans – aka cheap loans – for banks.

But ECB President Mario Draghi sent financial markets tumbling after saying at the ensuing news conference that he didn’t anticipate further rate cuts, and that the ECB’s focus would shift to other policy tools. He also added that the Governing Council had deciding against a system of tiered interest rates, deeming it too complex to implement.

What is interesting is that many council members, although clearly not the majority – have expressed concern that the loan package offered terms which were maybe too generous, and that more bond-buying would have a limited impact on the ECB’s inflation goal. Couple this with Draghi’s speech on Thursday where he was presenting the ECB’s annual report and you get the idea that the next step if things go south would be deeper negative rates.

Model 3 Keeps Shining

Reservations for Tesla’s latest offering, and their first mid-range electric car, reached an impressive 325,000 on Thursday. And while this is good news – if all the booking translate into actual deliveries the company is looking at revenues of almost $12 billion – some questions have been raised about whether or not Tesla can keep up with the orders after delivering just over 50,000 vehicles in 2015, and plans to deliver around 85,000 vehicles this year.

Still, production starts in late 2017, giving Tesla enough time to expand its manufacturing abilities. Judging by the share price investors are comfortable the California-based company will achieve its goals as, despite giving back some gains on Thursday, the stock has rallied 13% since the launch of the Model 3.

VAT Reform on the Way?

One of the few EU taxes that is significantly centralized, Value Added Tax, might be handed back to national governments as the European Commission proposed an overhaul of the system prompted by the continuous legal and political squabbles over the infamous tax. The current system sets out a minimum rate of 15% and a list of items which are eligible for reduced or zero rates. Existing rules have been heavily criticized by national governments for being inflexible and outdated. The current list has seen very minor changes since its introduction in the mid-1970s.

One proposal calls for more frequent updating of the list, while scrapping the list completely and giving national governments the final say – with basic EU guidelines – is at the other end of the spectrum. The latter could mean abolishing the 15% minimum altogether. The commission will be presenting new legislation in 2017, and has invited governments to come forward with their preferred options. Pierre Moscovici, the European commissioner for tax, has already stated that he prefers the more radical step of removing the list entirely. The rethink of VAT law also encompasses proposals for tackling chronic problems of VAT fraud and VAT collection, estimated to cost the Eurozone about €50 billion each year.