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Sell-Off Marks Quarter-End
A sharp selloff in the last trading day of the quarter took the shine off a good month in most markets after a turbulent January and an even rougher February. Most US markets have closed the quarter around the yearly highs (that would be January 1 in case you were wondering), But European and Asian equities have not performed as well, despite recouping some losses in March. Indeed, China has been hit with a downgraded credit outlook by Standard & Poor’s. The rating agency said the country's economic rebalancing is likely to progress more slowly than expected. The sour sentiment seems to have spilled over into today’s session, with Asian and European stock indices well in the red.
Quarter-end adjustments in currency hedges (aka rebalancing flows) pushed the US dollar to its lowest level in five months against the Euro, putting the number one reserve currency on track for its worst quarterly performance in five years. Federal Chair Janet Yellen certainly didn’t help with her comments about rethinking the pace of future rate hikes, but it has to be said that monetary policy in Europe is about as loose as can be. Side-note – Euro-area inflation was negative for a second-time in a row in March, just 1 day before an expanded asset purchase programme becomes operative in the Eurozone.
One instrument which had a great quarter is gold. The precious metal posted its biggest quarterly gain in 25 years and the first quarterly gain in nearly two years. Helped in part by the weaker US dollar, the yellow metal flourished as turbulence and growing concerns about the global economy gripped the financial markets in the first quarter. Other precious metals like silver and platinum also rose significantly – 10% and 8.5% respectively – in the first three months of the year.
Most sovereign bonds also posted gains for the quarter. The highly uncertain environment and the promise of more accommodative policy – or the lack of a restrictive one – pushed yields down especially in Eurozone sovereigns. German 10-year yields for example are close to the lows seen in February at 0.16%, after starting the year at over 60 basis points. US 10-year Treasuries closed at around 1.80%, down some 45 basis points from the beginning of the year.
Too Big To Fail? Not Any More.
Insurer MetLife Inc has been ‘relieved’ of the systemically important financial institution label (aka SIFI, or too-big-to-fail) after fighting the decision for almost a year. The ruling, which could be appealed by the government, gives the insurance company a reprieve from stricter oversight and regulation stemming from the 2010 Dodd-Frank law.
After the financial crisis, the US government gave the systemically important designation to a number of banks and other financial institutions that it said could pose a threat to the stability of the US in case they failed. The only other non-bank to receive that title beyond insurers was General Electric (GE).
MetLife argues that the very fact that is was designated as a SIFI – a ruling which it found arbitrary and unjust – would in itself put undue pressure on the company, even though the rules governing non-bank companies have yet to be written. MetLife now plans to forge ahead with its strategic – and regulatory – divestment of its US life insurance unit announced in January.
This ruling now paves the way for others to follow suit. Prudential and AIG are also said to be considering a challenge to their SIFI status, but perhaps one of the most active in this regard is GE. The formerly heavy-duty machinery company had built up a huge banking business unit which, at the height of the crises, accounted for almost half of GE’s sales and profit.
After selling the bulk of its lending business – GE Capital’s contribution to the company’s sales now stands at 9% – GE said it filed an application Thursday with the Financial Stability Oversight Council to escape classification as a SIFI. The company has expressed hope that regulators would rule on the request by late this year.
Fast Food, Fast Cars, Fast Books
Mc Donald’s is adding more than 1,000 restaurants in China and is also looking for an investment partner in Asia in a bid to help it speed up its expansion in the region. The company wants to build out its franchise in China, Hong Kong and South Korea over the next five years. McDonald’s uses franchisees and licensees in its more mature markets like the US, but it operates its own restaurants elsewhere to strictly oversee their quality and growth.
2 things which may be selling as fast as Big Macs are Tesla’s new Model 3 and Harry Potter audiobooks. Yesterday evening Tesla CEO Elon Musk unveiled the Model 3, a more-affordable addition to the company’s high-end electric car line-up targeted for the midrange market. The car goes into production in late 2017, but some 150,000 customers have already paid the $1,000 booking fee. Demand was running so high that the company had to limit per-customer orders to two cars.
And since launching on Audible.com, Harry Potter books have sold more than one million copies in just four months, which boils down to almost 6 downloads a minute. That’s a remarkable feat, giving the ‘latest’ book was released almost ten years ago. Magic, some would say…
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