ECB considers tiering, Chinese PMI delivers positive surprise and EM elections

Discussions resurfacing on tiering ECB’s negative deposit rate.

Last Wednesday, Reuters reported that the European Central Bank (ECB) was ”studying options to lower the charge that banks pay on some of their excess cash as a possible way to offset the side-effects of its ultra-easy policy”. Introducing a tiering system (whereby only part of the banks’ excess reserves are subject to the negative deposit rate) would be such an option. A similar approach has already been implemented in Japan and has previously been discussed by the governors of the ECB at the end of 2015 (and later abandoned without further comments in March 2016). We believe taking such an approach would not tackle the heart of the problem, as we previously highlighted (in “Waiting for Godot – Waiting for depo”, 1 March 2019). Indeed, tiering would merely seek to offset the cost of banks’ retail deposit rates by subsidising their excess reserves. It would not directly protect against a lower net interest margin due to banks’ inability to pass on lower deposit rates to households and non-financial corporates.

In the United Kingdom, Parliament has rejected the government’s negotiated Withdrawal Agreement by 286 to 344.

However, last week’s defeat was an improvement from the 230 MPs who voted against the government’s deal at the first attempt (in January). After the defeat on Friday, Prime Minister Theresa May stated that the 12 April deadline was closing in, but that government would continue to seek an “orderly Brexit” as voters have instructed. This suggests that she will now prepare to request a longer extension from the European Union (EU). Whether EU members will grant such an extension is unclear and also depends on what this might mean for the UK. With a “no deal Brexit” outcome having been voted down by the UK Parliament and indications from Ms May and the EU that they are keen to avoid it, we continue to think that this will be avoided, also because Parliament could revoke Article 50 and with this unilaterally stop the process. Still, for now, a “no deal” Brexit remains the default outcome.

China’s PMI delivers positive surprise, but more is needed to confirm the economic recovery.

A broad-based rebound in both the National Bureau of Statistics of China (NBS) and Caixin PMIs has lifted optimism of an imminent recovery in the Chinese economy and has improved sentiment in equity and FX markets today. The headline PMIs jumped to a six-month high to 50.5 on the NBS measure, and 50.8 – an eight-month high – on the Caixin gauge(China’s manufacturing PMI), both of which surprised the market by a large margin. The details of the data were strong too, with all major business indicators – including output, new orders, employment and inventory – reporting solid gains. The improvement appears to be spearheaded by small- and medium-sized enterprises (SMEs), suggesting that Beijing’s targeted supports for SMEs may be starting to pay off. While the broad-based rebound in the PMI makes it hard to fault, we caution that the size of the improvement may be exaggerated by seasonality, with the Lunar New Year depressing February’s data and flattering March numbers. Thus, we might likely see this strength unwound in April. Having said that, our China Economic Cycle Indicator (link) suggests that the economy is approaching the end of its current cyclical slowdown and should start stabilising in the coming months.

Elections time in Emerging Markets. Several elections took place last Sunday.

According to unofficial results of the elections which took place in Turkey, President Recep Tayyip Erdogan’s AKP-led alliance won nation-wide, although it appeared to have scored worse than in June 2018 Presidential elections. As expected, the AK Party maintained its lead in the cities in the Anatolian region, but increasingly lost ground in major cities. The opposition alliance led by Turkey’s Republican People’s Party (CHP) appears to have gained a majority in Ankara and Antalya, while the Istanbul ballot result was expected to be fiercely disputed by the two camps. With a nation count above 50%, Mr Erdogan maintains its power despite losing important cities. Given the economic momentum in Turkey, it will be key to decipher Mr Erdogan’s reaction to this change in the political landscape: despite losing ground, will he assume in-depth reforms during the next four years, or will he prefer to fight the opposition and revert to populist measures to beef up his popularity? Mr Erdogan’s early post-election comments appear rather reconciliatory and encouraging so far.

Exit polls for the first round of Ukrainian Presidential elections show a lead for the popular comedian anti-establishment candidate, Volodymyr Zelensky, ahead of incumbent President, pro-reformist Petro Poroshenko, and his long-term challenger Yulia Timoshenko. The odds of seeing Ms Timoshenko out of a run-off election could be perceived positively by financial markets given her campaign promises, which were posing serious threats to the continuity of Ukraine’s agreement with the IMF, which has allowed the country to access additional and much-needed international financing. The country’s sizeable financing needs over the next two years underline the critical need of maintaining reform momentum. Upon confirmation of a run-off between Mr Zelensky and Mr Poroshenko, we shall look for more details on Mr Zelensky’s economic reform agenda, which has so far been very vague. The focus will then turn to the parliamentary elections (27 October). As the country’s sole legislative body, the Ukrainian Parliament drives the domestic and foreign policies and appoints its Prime Minister, according to the majority coalition formed after the election.

Liberal anti-corruption candidate Zuzana Caputova was elected President of Slovakia at Sunday’s run-off with a clear lead ahead of contender Maros Sefcovic, the candidate of centrist party Smer-SD – the party previously in power. Ms Caputova’s victory makes her the first female President in Slovakia’s history. Her campaign promises focused on environmental protection, anti-corruption and judicial reform, which echoed strongly with the electorate, at a time when the country was shaken by the murder of a journalist investigating links between politicians and organised crime. While the position of head of state is rather ceremonial in Slovakia and the role in policy making is limited, the outcome of the election – having seen a liberal-progressive candidate running against the centrist incumbent, while keeping the far right out of the picture – could indicate a turning point in Slovakia’s politics ahead of next year’s parliamentary elections..