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May 20, 2019

FX | Currencies | Dollar stalled awaiting signals on trade and Fed policy

3-4 minutes

Reusable Australian Dollar AUD c 150223
John Phillips | Digital Editor | CNBC
The dollar was little changed on Monday morning but maintained last week’s gains as investors held off on big moves while awaiting developments in U.S-China trade negotiations and for insight into the Federal Reserve’s thinking on interest-rate policy.
China on Monday accused the United States of harboring “extravagant expectations” for a trade deal, underlining the gulf between the two sides as U.S. action against Chinese technology giant Huawei began hitting the global tech sector. The dollar index, which measures the greenback against a basket of six currencies, was down 0.06%, little moved by the bickering.
Against the euro, the dollar was slightly weaker, last down 0.07%.
The dollar was also on hold ahead of Jerome Powell’s speech later Monday, which should offer insight into the Fed chair’s thinking about interest rates and the effects trade tensions may have on the U.S. economy. On Wednesday, the Federal Open Market Committee will release minutes from its last meeting, which investors hope will show what prompted the policymakers to strike a broadly neutral stance this month.
Powell’s speech on Monday “will be something we’re watching very closely to see if there are any comments from the Federal Reserve as to if they feel there will be a change in their outlook ... because of the increased trade tensions,” and “what they will be doing going forward,” said Chuck Tomes, portfolio manager at Manulife Asset Management.
At its May 1 meeting, the Fed decided to keep interest rates steady and signaled little appetite to adjust them any time soon, taking note of strong job growth.
Since then, trade tensions between Washington and Beijing have escalated, casting a shadow on the outlook of global growth and fueling expectations the U.S. central bank will have to cut interest rates in the coming months.
Increased expectations of rate cuts so far have had little impact on the dollar, though it has found some strength from the escalating trade tensions as investors have turned to it as a safe haven. Still, positioning data suggested that strength may be temporary, as investors have trimmed some of their long positions in the U.S. currency against both its developed and emerging market rivals.
Market strategists note the implied yields on U.S. futures contracts are starting to price in a second rate cut this year as concerns have mounted.
“As such, these (Fed) minutes will take on added significance as markets try to figure out the Feds true message,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.

Source: CNBC

Bonds | Bond Yields Report | US Treasury yields stable ahead of big week for Fed comments

Thomas Franck

U.S. government debt yields rose  Monday as U.S.-China relations remained chilled after Washington cracked down on Chinese telecommunications giant Huawei and investors awaited minutes from the Federal Reserve’s latest meeting.

U.S. Markets Overview: Treasurys chart

US 3-MOU.S. 3 Month Treasury2.382-0.0110.00
US 1-YRU.S. 1 Year Treasury2.3450.0070.00
US 2-YRU.S. 2 Year Treasury2.2210.0190.00
US 5-YRU.S. 5 Year Treasury2.2050.0270.00
US 10-YRU.S. 10 Year Treasury2.4170.0240.00
US 30-YRU.S. 30 Year Treasury2.8380.0140.00
At around 3:19 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was higher at around 2.414%, while the yield on the 30-year Treasury bond was also higher at around 2.834%.
Market participants are likely to closely monitor a flurry of speeches from policymakers at the U.S. central bank. Fed Chair Jerome Powell, Philadelphia Fed President Patrick Harker and Vice Chair Richard Clarida are all set to comment on the world’s largest economy at separate events on Monday.
The Fed earlier this month said that it would keep interest rates unchanged, though Powell added that officials saw a decline in inflation in the first quarter as simply “transcient”
“We think our policy stance is appropriate at the moment and we don’t see a strong case for moving in either direction,” Powell said on May 1. “We say in our statement of longer-run goals and monetary policy strategy that the Committee would be concerned if inflation were running persistently above or below 2%.”
“And in this case, as we look at these readings in the first quarter for core, we do see good reasons to think that some were or all of the unexpected decrease may wind up being transient,” he added.

Source: CNBC

Energy | Oil Price Report | US crude rises 34 cents, settling at $63.10, as OPEC signals it will keep output caps

Tom DiChristopher

Reusable: Iraq Oil Daura oil refinery Bagdad 091105
An Iraqi worker gauges gas emissions from an oil pipe at the Daura oil refiner
Getty Images
Oil were mixed on Monday after hitting multi-week highs overnight, as OPEC indicated over the weekend that it was likely to maintain production cuts that have helped boost crude prices this year.
Escalating Middle East tensions provided further support.
U.S. West Texas Intermediate crude futures settled 34 cents higher at $63.10 a barrel. WTI reached $63.81 earlier, the highest since May 1.
Brent crude oil fell 24 cents to $71.97 a barrel, after the international benchmark for oil prices earlier touched $73.40, the highest since April 26.
Saudi Energy Minister Khalid al-Falih said on Sunday there was consensus among OPEC and allied oil producers to drive down crude inventories “gently” but he would remain responsive to the needs of what he called a fragile market.
The comments gave an early boost to oil prices on Monday, but futures pared gains throughout the session.
“Nothing substantial has gone out further, so the gain is leaking out of the market,” said Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut. “The market doesn’t want to get too far ahead of itself.
OPEC, Russia and other non-member producers, an alliance known as OPEC+, agreed to cut output by 1.2 million barrels per day (bpd) from Jan. 1 for six months to try to prevent inventories from increasing and weakening prices.
A gathering of the group’s Joint Ministerial Monitoring Committee in Saudi Arabia over the weekend did not make any solid recommendations.
OPEC and its allies are due to meet in Vienna on June 25-26 for their next oil policy meeting. However, the group is considering moving the date to July 3-4, two OPEC sources said on Monday. The date change has not been officially confirmed, the sources said.
United Arab Emirates Energy Minister Suhail al-Mazrouei earlier told reporters that producers were capable of filling any market gap and that relaxing supply cuts was not the right decision.
OPEC data indicated oil inventories in the developed world rose by 3.3 million barrels month-on-month in March, and were 22.8 million barrels above their five-year average.
Adding to the bullish sentiment is rising tensions in the Middle East.
U.S. President Donald Trump threatened Tehran on Sunday, tweeting that a conflict would be the “official end” of Iran, while Saudi Arabia said it was ready to respond with “all strength” and it was up to Iran to avoid war.
The rhetoric follows last week’s attacks on Saudi oil assets and the firing of a rocket on Sunday into Baghdad’s heavily fortified “Green Zone” that exploded near the U.S. embassy.
Britain told Iran on Monday not to underestimate the resolve of the United States, warning that if American interests were attacked then the Trump administration would retaliate.

Source: CNBC

Futures & Commodities | Gold | Gold steadies as equities dip; focus turns to Fed minutes

Tom DiChristopher

RT: Rare gold coins found beneath theater in Italy 180911
An amphora filled with ancient gold Roman coins found in the Cressoni theatre complex is seen in Como Italy, September 5, 2018.
Gold steadied on Monday after recovering slightly from a more than two-week low hit earlier in the session, as equity markets fell ahead of the U.S. Federal Reserve’s release of minutes from its last meeting.
Spot gold inched up 0.1% to $1,278.41 per ounc, having touched its lowest since May 3 at $1,273.22.
U.S. gold futures settled $1.50 higher at $1,282.90.
“With equities trading lower, gold is expected to trade a little higher going into the Fed minutes on expectations that there is no immediate rate increase coming for the rest of the year,” said Bob Haberkorn, senior market strategist at RJO Futures.
Investors shifted focus to the Fed minutes due on Wednesday, which is expected to provide insights into the May 1 central bank meeting in which policymakers decided to keep interest rates steady and signaled little appetite to adjust them any time soon.
Gold tends to appreciate on expectations of lower interest rates, which reduce the opportunity cost of holding non-yielding bullion.
Global stocks took a hit as concerns mounted about an escalating fallout from a U.S. crackdown on China’s Huawei Technologies Co Ltd, intensifying a prolonged trade war between the world’s two biggest economics.
The greenback limited bullion’s appeal as the dollar index held near a two-week high. Last week the index posted the biggest weekly rise since early March, supported by robust U.S. housing data and a report pointing to lower unemployment.
“We have equities trading lower with all the geo-political news out there, yet gold can’t sustain any rally. There seems to be a flight to safety into the dollar because of the better economic data coming out of the U.S.,” Haberkorn said.
While gold is a safe store of value during times of uncertainty, investors are preferring the dollar, as they did last year during the U.S.-China trade spat.
Iran was served a new warning by U.S. President Donald Trump, who tweeted that if the country wanted to fight, that would be Iran’s “official end.”
On the technical side, ”$1,265 is now a critical support that must hold. A daily close below that region implies a much deeper correction could be imminent,” OANDA analyst Jeffrey Halley said in a note.
Among other metals, silver was up 0.5% at $14.47 an ounce, having touched a more than five-month low at $14.33.
Platinum edged 0.1% lower at $812.40 per ounce, while palladium rose 1.5% to $1,329.90.

Source: CNBC

Markets | Wall Street Closing Report | Stocks slide as Huawei fallout drags down Qualcomm, other tech shares,

Fred Imbert 

Stocks fell on Monday as the intensifying fallout from a U.S. crackdown on Chinese telecom giant Huawei pressured the technology sector.
The Dow Jones Industrial Average declined by 84.1 points to 25,679.90 as Apple lagged. The 30-stock index dropped as much as 203 points earlier in the day. The S&P 500 pulled back 0.7% to 2,840.23, with the tech sector dropping 1.8%. The Nasdaq Composite lagged, dropping 1.46% to 7,702.38.
Alphabet’s Google has suspended business with Huawei that involves transferring hardware, software and other technical services. The U.S. search giant’s decision follows President Donald Trump’s administration adding Huawei to a list that required U.S. companies get a license to do business with the Chinese company. Bloomberg News also reported that companies like Intel, Qualcomm and Broadcom will not supply Huawei until further notice.
“If this remains enforced, it’s going to create some opportunity, but clearly companies are working with their compliance departments to get out of the way of this Huawei situation,” said Quincy Krosby, chief market strategist at Prudential Financial. That’s difficult because “Huawei has its tentacles in so many parts of technology sector. That’s why this is not a one-day event.”
Traders and financial professionals work during the opening bell on the floor of the New York Stock Exchange (NYSE), May 14, 2019 in New York City.
Drew Angerer | Getty Images
Chipmaker stocks fell broadly. Nvidia and Advanced Micro Devices both fell about 3% while Lam Research lost 5.4%. Micron Technology shares declined 4% and Qualcomm slid 6%. Telecom supplier Lumentum Holdings fell more than 4% after cutting its quarterly guidance.
Apple added to the market’s decline, sliding more than 3% after an HSBC analyst cut its price target on the tech giant. The analyst cited worries over the ongoing trade war for the target cut.
The moves by the U.S. government and tech companies come as China and the U.S. try to strike a deal that would end the countries’ ongoing trade war. The U.S. hiked tariffs on $200 billion worth of Chinese goods earlier this month, and China retaliated by raising levies on $60 billion worth of U.S. imports.
CNBC reported on Friday that U.S.-China trade talks have stalled. Sources told CNBC’s Kayla Tausche that scheduling discussions had not happened as the U.S. increases pressure on Chinese telecom companies. Meanwhile, the South China Morning Post said that China was in no rush to continue trade talks.
Trade fears have hit stocks hard this month. The S&P 500 is  down 3.6% for May while the Dow and Nasdaq have lost 3.4% and 4.95, respectively.
“A trade war would hammer U.S. and global growth, with obvious implications for asset allocation, equity sectors and the dollar,” said Chen Zhao, chief global strategist at Alpine Macro, in a note. “But that outcome is plastered all over the headlines. Forgotten is that there are also upside risks for the U.S. economy.”
—CNBC’s Sam Meredith contributed to this report.

Source: CNBC

IMF News | IMF Executive Board Discusses "2018 Review of Program Design and Conditionality"

11-14 minutes

May 20, 2019
On May 3, 2019, the Executive Board of the International Monetary Fund (IMF) discussed staff papers reviewing the design, conditionality, and performance of IMF-supported programs ongoing during the period September 2011 to end-2017.
The review documents consist of a main paper that presents the key findings and recommendations, a background supplement that provides additional information on the survey results, additional areas of analysis and methodological material, and a paper with in-depth case studies in the key analytical areas.
The 2018 Review of Program Design and Conditionality (hereinafter the “RoC”) is the latest periodic assessment of IMF-supported programs undertaken by the Executive Board and Fund staff. The RoC examines the performance of Fund-supported programs ongoing between September 2011 and end-2017. It is the first comprehensive stocktaking of Fund program performance since the global financial crisis, building on the 2011 RoC, the 2015 Crisis Program Review, and various Independent Evaluation Office (IEO) studies. Consistent with the Fund’s commitment to learning, the RoC draws lessons for the design of future programs to ensure that they adapt to the evolving needs of the membership.
The RoC assesses the extent to which programs met the overarching objectives of resolving members’ balance of payments problems and achieving medium-term external viability, while fostering sustainable economic growth and providing adequate safeguards for Fund resources. In doing so, the RoC considers the role of program design and the implementation of the Guidelines on Conditionality, as well as other factors affecting program outcomes, including external shocks and member ownership. Conditionality encompasses underlying macroeconomic and structural policies, as well as the specific methods used in Fund arrangements to ensure the achievement of program goals. The RoC findings and recommendations draw on quantitative and qualitative analysis, including stakeholder surveys and in-depth case studies.
The RoC complements other ongoing Fund policy reviews, including: the Review of Facilities for Low-Income Countries (LICs), the Debt Sustainability Framework (DSF) Review for Market Access Countries (MAC), the Review of the Fund’s Debt Limits Policy (DLP), the Strategy for IMF Engagement on Social Spending, and the workstream on Building Resilience in Developing Countries Vulnerable to Large Natural Disasters.
Executive Board Assessment [1]
Executive Directors welcomed the first comprehensive stocktaking of the Fund’s lending operations since the 2008 global financial crisis. They noted the finding that three‑quarters of Fund‑supported programs had achieved success or some success, despite the extremely challenging post‑crisis environment. Directors agreed that there is room for improvement, drawing lessons for future program design from success and failure and case studies. They broadly agreed with the findings and, with some caveats, supported the key recommendations, some of which would require further discussions in the upcoming reviews of relevant Fund policies.
Growth optimism
Directors shared the assessment that growth assumptions were often too optimistic, driven largely by global forecasting errors and the underestimation of the impact of policy adjustment and overestimation of structural reform payoffs. Directors thus welcomed the proposals to increase the scrutiny of baseline assumptions, deepen the discussion of risk scenarios, and improve contingency planning in program design. While inflation was not a major issue during the period, Directors supported exploring reforms to modernize the review‑based monetary policy conditionality framework.
Quality of fiscal adjustment
Most Directors saw room for more granular fiscal conditionality, particularly capital spending floors or revenue targets, to help improve the quality, composition, and growth orientation of fiscal adjustment. At the same time, they stressed the need to retain sufficient flexibility and take due account of member countries’ implementation capacity. Where relevant, Directors also supported focusing on the quality of social spending and prioritizing structural conditions on social issues. They favored taking a case‑by‑case approach and streamlining conditions to maintain parsimony. Directors emphasized the importance of close collaboration with other international financial institutions, as appropriate, and of early engagement with country authorities, which would also help strengthen ownership.
Public debt
Directors welcomed the comprehensive analysis of debt vulnerabilities, which were a key concern during the review period. In cases of high debt vulnerabilities, the review found that, based on a limited sample, programs that included debt operations tended to be more successful than those without such undertakings, but mainly in small and non‑systemic cases. While the positive impact of debt restructuring on program outcomes could not be generalized, Directors saw a need to mitigate bias in judgment on debt sustainability and to carefully evaluate, on a case‑by‑case basis, the costs and benefits of debt operations. Directors also noted various factors at play in programs that experienced a large overshooting of public debt, most of which went off track. They welcomed ongoing efforts to improve debt transparency, strengthen data reporting capacity, and sharpen debt sustainability analysis (DSA) tools. For PRGT‑supported programs, enhancing domestic resource mobilization and the quality of investment is also important, which could help strengthen the Fund’s catalytic role in mobilizing external concessional financing. Directors looked forward to further discussion of debt‑related issues in the context of the reviews of DSA for market access countries and of the Fund’s debt limits policy, including plans to update guidance on the treatment of collateralized debt in the program context.
Structural conditionality
Noting the marked increase in the volume of structural conditions, Directors called for further prioritization of reforms critical to specific program objectives to ensure both the parsimony and depth of structural conditionality. They agreed that the selection of conditions should be informed by structural gaps identified in surveillance and technical assistance, and involve collaboration with relevant institutions. A number of Directors called on the Fund to continue building expertise in shared areas of responsibility such as labor, product, and financial market reforms, which are key to competitiveness and private-sector‑led growth. Some Directors felt that the Fund should further strengthen cooperation with other international institutions, notably the World Bank, on emerging issues such as governance and anti‑corruption.
Given difficulties with implementation of structural conditions, Directors stressed the need for more realistic implementation timetables and estimates of reform payoffs Most Directors welcomed, or were open to considering, the proposed follow‑up paper to explore the case for longer‑duration arrangements in the General Resources Account (GRA) for members seeking to address large and persistent structural challenges, along with appropriate measures to safeguard Fund resources. Some Directors expressed concern that longer engagement could increase the risk of reform fatigue and undermine the revolving nature of Fund resources. Directors generally saw merit in greater use of successor Policy Coordination Instruments to support ongoing structural reforms.
Reflecting the lessons from case studies, Directors highlighted the benefits of anchoring Fund‑supported programs with integrated national reform plans and improving two‑way communication to support broad public buy‑in. They welcomed plans to strengthen the analysis of institutional and political capacity. Where programs have gone off track, Directors encouraged greater use of staff‑monitored programs (SMPs) to ensure monitoring of macroeconomic policies while authorities build support for delayed critical reforms. More broadly, Directors called on staff to consider ways to de‑stigmatize SMPs, promoting their use for building a policy track record, which would help facilitate access to Fund resources.
Tailoring and uniformity of treatment (evenhandedness)
Directors welcomed the finding that Fund‑supported programs were generally well‑tailored to country needs and perceived as being consistent with the principle of uniformity of treatment. However, they saw scope for better tailoring and streamlining program objectives and structural conditions, particularly for fragile and small states, in light of their economic circumstances and capacity constraints. Many Directors also encouraged staff to ensure the application of the 2017 Staff Guidance Note on the Fund’s Engagement with Small Developing States, and to integrate critical resilience‑building measures into the programs.
Directors noted the concerns among some stakeholders regarding the perceived lack of evenhandedness in program access, both within and between the GRA and PRGT. They acknowledged that differences in access are largely driven by underlying Fund policy frameworks. They were generally open to further discussion on the proposals to increase PRGT access norms and limits, and to promote more blending of GRA and PRGT resources, while maintaining PRGT self‑sustainability. They looked forward to further discussion in the context of the forthcoming review of facilities for low‑income countries
Directors welcomed ongoing efforts to improve the Monitoring of Fund Arrangements (MONA) database, and looked forward to periodic reports to the Board on program performance. These efforts will enhance transparency, support the monitoring and evaluation of programs on a timely basis, and improve Board oversight including with respect to evenhandedness—an area in which a number of Directors also saw a role for the Independent Evaluation Office. Directors also noted that the observed increase in off‑track programs warrants close scrutiny, including by the Board. Some Directors called for further consideration of ways to improve the Board’s monitoring of delays in program implementation.
Next steps
Directors recognized the multiple tradeoffs involved in program design and the potential benefits of a shift toward more realism, granularity, gradualism, and parsimony. They agreed that the Guidelines on Conditionality remain broadly appropriate, and that most of the recommendations could be implemented through a revised Operational Guidance Note and delivery of related workstreams. Directors considered that successful implementation of the recommendations would require a change in culture, and continued adaptation and learning.
[1] An explanation of any qualifiers used in summings up can be found here:
IMF Communications Department
Phone: +1 202 623-7100Email:

Source: IMF