While Europe is still at the center of the financial news as Grexit slowly becomes more probable, many strong positive signals are coming from the third biggest world economy, Japan. Following the great crisis, Japanese economy did face a period of deflation due to steady prices and shortage of investments.
In order to improve the economic outlook, Shinzo Abe, Japan’s Prime Minister, elaborated an economic plan to face deflation. The so-called “Abenomics” is based upon three arrows: fiscal stimulus, monetary easing and structural reforms. An increase in taxation along with a massive monetary QE followed by important reforms are the way in which Japan is trying to comes out from the internal economic crisis. While there is a consensus for the modus operandi chosen for the first two “arrows”, very few information are known about how Abe would like to proceed with the structural reforms.
This piece of information ought to be important for investors who focus on the long term, including but not limited to pension funds. In fact, worldwide analysts from the major banks believes that the recent GDP growth has to be accounted mainly to the monetary policy instead than to a new economics cursus. In fact, at the moment, QE amounts to nearly 60% of Japan GDP and this situation seems not to be sustainable in the long term.
The NIKKEI, last week, touched its 15 years peak as the stock market is absorbing the huge amount of liquidity, but are we in front of a new financial bubble? What are the risks of such a spread use of monetary QE among the major economies? Nobody knows.
In recent days, Europe has been a very dramatic battlefield. Talks between Greece and European officials are still going on, with Greek Ministers firmly stuck on their requests and European Officials unhappy and unsatisfied with Greece’s request. Tsipras does not want to change the pension system,contribution-based, still plenty of “baby retired”. Yesterday, Angela Merkel appeared as a Deus Ex Machina willing of peacefully solving the Greek Crisis. The main goal in Europe by now is to avoid the Euro Area break up, who can lead us into periods of unprecedented uncertainty and volatility, and can wreak havoc the entire Europe. Standard and Poor’s downgraded Greece Debt to triple CCC, following the postponement of the repayment to the IMF and the higher risk of default. Jeroen Dijsselbloem, the President of the Eurogroup, warned against the running out of time, and urged Athens and Europe to a peaceful resolution.
Many venerable European banks have been downgraded too because of the uncertainty over Europe’s financial health. Barclays Bank has been downgraded to A-, Deutsche Bank to BBB+ and RBS to A-, Commerzbank to BBB+ and Unicredit to BBB.
The bond market has been under severe attacks. 10-YR German Bund reached high yield of 1% yesterday. From the bottom in May at 0.05%, this means a 2000% increase. Bond traders are adjusting bond prices to looming spikes in inflation in the Eurozone.
The Annual General Meeting of Deutsche Bank AG, which took place on the 20th May 2015, shook up the top Management. Angry shareholders have appointed the CO-CEOs Anshu Jain and Jürgen Fitschen as the main responsible of the Bank’s underperformance. In the past years, the bank has suffered plunges in profitability largely due to the vast amount of money expensed in fines and litigation after the mortgage crisis, and linked to Libor and Forex manipulations. During the meeting, Anshu Jain, a former trader and investment banker, emerged as the man who was going to be in charge of the new restructuring plan. The main driver of the plan was a strong cost-cutting campaign, which could boost profitability in all areas of business. In the last three years, Deutsche Bank’s stock has been one of the worst performing in the Banking sector. The plan, indeed, which is supposed to add billions to the bottom line, is very ambitious.
Few weeks later, yesterday, probably pushed by the board and the unhappy shareholders, the two CO-CEOs handed in their resignation note. Anshu Jain will be replaced by John Cryan, member from the supervisory board and former CFO of UBS, most likely at the end of June, while Jürgen Fitschen will probably step down after the next general meeting. The dual Management system is poised to end in one year. After the news, Deutsche Bank’s shares are rallying up, showing how investors are more confident on the classic single CEO management, and more reliant on the figure of the new CEO John Cryan. He will have a heavy burden to carry forward. Will he be able to implement the new restructuring plan and lead one of the most important European Bank to profitability again? Time will tell us.
On the 26th of May, news reported that Time Warner Cable will be bought by Charter Communications for $55bn or $195 a share. After the drop out of Comcast from the acquisition, Time Warner Cable have been approached by Charter Communications, which is the third largest cable television provider. The deal shows how consolidation is becoming increasingly important in the Media Industry. The new giant will have to pass by the difficult waters of regulators, which have previously led the Comcast-TWC deal to a stalemate, and further to the drop out of Comcast. TWC’s share soared after the news considering the premium Charter is willing to pay to seal the deal. In Merger Arbitrage, normally the target company’s shares soar following the news, and adjust to the price proposed by the acquiror, while the acquiror’s shares tend to decline.
Today, Greece was supposed to pay back $335m to IMF. Unfortunately, due to apparent impasses in the discussions between Greece and creditors, the repayment had to be postponed to the end of the month. Only Zambia in the 80s postponed an IMF payment. Tsipras said that it will be attached to other three tranches, totaling approximately €1.6bn. The stalemate is caused by disagreement on the reforms to be backed to the financing line. Alexis Tsipras cannot disrupt his political line to seal the deal. Syriza, his political party, is looking grudgingly at its leader, scared that he could accept unfavorable conditions to secure the loan, which would undermine the party’s coherence with electorate. Markets are nervous in this moment, with tornados taking place in the bond market. ECB’s President, Mario Draghi warned about volatility yet to come.
Today, another important data will be the job report in USA. Job Market is a very important metrics for the definition of Monetary policies in US. The data will be published in early afternoon.
The ESCP Europe Finance Society is the largest and most active student association of the London Campus of the ESCP Europe Business School, it has been founded in 2012 and is composed by students interested in the Finance Industry. All the founders and the managing members have had internship experiences in the field.