Are interest rates finally on the rise?
The Daily Telegraph this morning has an article noting that three-month Libor rates – a critical benchmark for global borrowing – have tripled this year. Some analysts say that’s a sign that the Federal Reserve has fallen behind the curve, and may be forced to raise rates uncomfortably fast in the months ahead. Analysts had been writing off the Libor spike as a byproduct of a change in U.S. rules for prime money market funds, which caused the commercial paper market to contract. But the deadline for that reform has passed, and rates are still rising. “Something more fundamental is going on,” says Steen Jakobsen of Saxo Bank. “The cost of global capital is going up, full stop.”
Even so, don’t expect the Fed to raise rates at its meetings this week. While recent economic indicators look strong and some market signals of inflation are rising, the central bank is likely to stand pat in order to stay out of the crossfire before the November 8 election.
That concern, of course, didn’t stop FBI director Comey, who is now taking flak from all sides. We will leave dissection of his unusual action to others.
More news below.
• Markets in Cautious Mood After FBI Furor
Global markets are starting the week in a bad mood, after the FBI’s reopening of its investigation into Hillary Clinton’s e-mails forced them to reprice the likelihood of a Donald Trump victory next week. On balance, the rest of the world sees Trump’s anti-trade stance as a greater evil than Clinton’s security-related issues. The latest worries came on top of an October jobs report that kept the case for a U.S. interest rate rise in December intact. Crude oil prices have also fallen over the weekend after reports suggesting that both Iran and Iraq will resist Saudi attempts to arrange a cut in crude output by OPEC countries later this month. U.S. crude futures hit a four-week low overnight and are back below $48.50 a barrel.
• GE Picks up Baker Hughes on the Rebound
General Electric announced a $32 billion deal combining its oil and gas operations with oilfield services company Baker Hughes (whose planned merger with Halliburton failed due to antitrust concerns). The new company will be 62.5% owned by GE, according to a joint statement, and GE executives will take the two top jobs, Jeff Immelt becoming chairman and GE Oil & Gas head Lorenzo Simonelli becoming CEO. GE’s business is a fraction larger in terms of revenue but it has been a drag on group earnings due to the oil bust. If the new company makes a success of it (and GE said Monday it has passed the low point of the cycle), it may beg questions as to which of GE’s other businesses could do better outside the conglomerate structure.
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• MGM Plots $10 Billion Japan Casino Bet
MGM Resorts International could plow almost $10 billion into a Japanese casino via a publicly traded real estate investment trust, CEO James Murren said. Murren said MGM would spend between 500 billion yen and one trillion yen ($4.8 billion-$9.5 billion) on an “integrated resort” – a large-scale project combining casinos with hotels, shopping and conference space – in Tokyo, Yokohama or Osaka by 2022-23. Casinos are currently banned in Japan, but the odds of their legalization have improved sharply thanks to political shifts that could open the world’s next great frontier for high-roller gambling. The Japanese gaming market could be worth $40 billion annually, according to some estimates.
• Toyota Comes Around to Lithium
Toyota said it would start using lithium-ion batteries in its popular Prius hybrids. A broader adoption across the group could, in due course, make it easier for the company to make all-electric cars. Toyota has plowed something of a lone furrow in recent years with its focus on hydrogen fuel cells, a focus that is due in part to its mistrust of Li-ion batteries due to safety concerns. The fact that it is changing its mind publicly so soon after the Samsung Galaxy S7 Note fiasco is eye-catching, not least since Toyota now faces the kind of catch-up process that often leads to the kind of deadline pressure and corner-cutting that caused Samsung’s troubles.
Around the Water Cooler
• Carney Won’t Abandon the Pound Yet
The British government looks set to stagger over another post-Brexit hurdle. According to the Financial Times, Bank of England Governor Mark Carney should announce later this week that he will see out a full eight-year term, rejecting an option in his contract to stand down in 2018 after only five years. That should guarantee continuity during what is likely to be a turbulent time for the U.K., which should be approaching the business end of its Brexit-settlement negotiations with the EU by then. Carney has come under fire from leading supporters of Brexit for his lack of enthusiasm for it. Prime Minister Theresa May had hinted at pressuring the BoE to get with the program in a recent speech, but is reported to have backed down privately since then.
• CenturyLink Ties up Level 3 Deal
CenturyLink is to buy Level 3 Communications for some $25 billion in a cash-and-stock deal that will go some way to addressing the competitive pressures on two second-tier players in the telecoms sector. Tellingly, both companies’ share prices have risen sharply since Wednesday evening, when the first hints of a deal emerged. Analysts suggest the deal will allow the companies to strip out $1 billion a year in costs. Level 3 shareholders will get $26.50 in cash and 1.4286 CenturyLink shares for each share in Level 3. That’s about 50% above what the shares were trading at on Wednesday.
• EU, Canada Rescue TTIP-Prototype Trade Deal
Canada and the EU signed their ‘Comprehensive Economic and Trade Agreement’ after a last-minute fudge that persuaded the Belgian region of Wallonia to holster its veto. The EU Parliament will now probably vote the treaty into force by year-end. CETA is important for U.S. businesses because it proves that Brussels can still–just–force through deals that cut tariffs and increase mutual market access. But it will still be a tough task to rescue TTIP: governments in both France and Germany are calling for a fresh start (i.e., one without the hated independent tribunals that appear to bolster corporate rights against government)–and neither Presidential candidate appears committed to it.
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• Who’s Afraid of the Big Bad Bear?
Russia unveiled a new three-year budget draft that will make big cuts to health, education and investment spending over the next three years in order to finance the war in Syria and other ‘classified’ projects (classification being a way of masking the true level of defense spending). Over one-sixth of federal spending is now ‘classified’, while Moscow’s Higher School of Economics now puts the proportion of spending on health and education at its lowest since 2006. Meanwhile, the Economy Ministry said GDP probably contracted again in the third quarter, keeping it on course for its third full year of contraction in a row. Vladimir Putin’s apparent determination to replay the Cold War in the hope of a better ending looks more like running into the same economic wall as his Soviet forebears, although with $400 billion of foreign reserves, that wall is still some way away.
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