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ECB Stimulus Will Include Corporate Bonds Starting Next Week

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The European Central Bank will start buying corporate bonds next week as officials’ stimulus program announced in March broadens to a new asset class in their struggle against deflation.

The Governing Council, meeting in Vienna, left the main refinancing rate at zero, the deposit rate at minus 0.4 percent. As a component of its asset purchases of 80 billion euros ($89 billion) a month, the ECB will begin buying corporate bonds on June 8, according to a statement. President Mario Draghi will hold a press conference at 2:30 p.m. local time, when he’ll also release updated economic projections for the euro area.

Two months after announcing fresh stimulus measures, policy makers are putting them into action while at the same time warning that all monetary policy can do is to buy time. Officials have been increasingly vocal in their criticism of governments for failing to use fiscal room or implement the structural reforms that are critical to lifting the currency bloc’s growth potential.

“We had all the big policy announcements couple of months ago and now is the time for implementation,” Sarah Hewin, chief European economist at Standard Chartered Bank in London, said on Bloomberg Television. “Draghi will reiterate that governments need to do more. We know that the European Central Bank, the Governing Council feel it most strongly that they’ve done all the heavily lifting so far and governments need to take action.”

The ECB’s new economic forecasts may highlight the central bank’s struggle to return inflation to its price-stability goal of just under 2 percent. The rate was at minus 0.1 percent in May.

One euro-area official, who spoke on condition of anonymity because the forecasting process is private, said that the inflation and economic-growth outlook will probably be upgraded mildly for this year and then stay unchanged over the rest of the horizon.

Such an outcome would leave the estimate for average inflation in 2018 at 1.6 percent. An ECB spokesman declined to comment on the projections.

While that would at least be the first time in a year the central bank has been able to avoid downgrading its outlook, a failure to lift the forecasts significantly would still be worrisome. The previous projections in March didn’t incorporate the effect of an enlarged stimulus program, and Vice President Vitor Constancio said only last week that he personally believed consumer-price growth in two years would exceed estimates.

More to Come

Policy makers still have stimulus to come. Corporate-bond purchases are scheduled to start next Wednesday and a new program of long-term loans to banks will begin on June 22, the ECB said on Thursday. It will release further details of the loan measures after Draghi’s press conference.

Most economists surveyed by Bloomberg said the ECB will probably announce new measures before the end of the year, most likely extending QE past the current end-date of March 2017.

Still, Draghi said at his previous press conference in April that the Governing Council was putting a “renewed emphasis” on the need for structural reforms. He may well reiterate that when he briefs reporters. He’ll also speak at 4:15 p.m. at an event to mark the 200th anniversary of the Austrian central bank.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market.

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Investment

Barclays Tell High Net Worth Investors to Shun Africa and Other Emerging Economies

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Barclays to High Net Worth Clients, Stay Off Africa and Other Emerging Economies

Barclays, one of the world’s largest investment banks, has started advising high net worth clients to stay off Africa and other emerging economies.

According to Barclays, despite the recent recovery noticed in emerging-market stocks, investors are better off avoiding the risks that still abound in emerging nations. Barclays Plc, however, advised high net worth clients to focus on U.S equities despite the S&P’s breakneck rally.

The investment bank said emerging economies do not have enough fiscal buffers to spend their way out of the COVID-19 pandemic and will likely continue to struggle in the near-time compared to the US with 12 percent of gross domestic product fiscal-support.

It said the huge US stimulus may halt rebound in emerging-markets stocks as more money is expected to flow into the world’s largest economy and its European counterparts.

“Compared to the U.S., emerging-market economies appear more vulnerable,” said Haider, the London-based managing director and head of global growth markets. “Their central banks have less room to maneuver, their governments may not be able to provide unlimited support and equity markets, given their sector mix, can be more challenged by an economic slowdown.”

Barclays added that even after 33 percent rebound in stocks of emerging markets since the panic selloff subsided in March, stocks are still down by 9 percent from year-to-date while the US S&P 500 stocks are up by 45 percent. Presently, their stocks trading at a 36 percent discount to US stocks, up from 25 percent three months ago.

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Economy

Crude Oil Rises to $43.1 Per Barrel on Production Cuts Extension

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  • Crude Oil Hits $43.1 Per Barrel Following OPEC’s Production Cuts Extension

Brent crude oil, against which Nigerian oil price is measured, rose by 1.25 percent on Monday during the Asian trading session following OPEC and allies’ agreement to extend crude oil cuts to the end of July.

OPEC and allies, known as OPEC plus, agreed to extend production cuts of 9.7 million barrels per day reached in April to July on Saturday.

In the virtual conference, delegates agreed that members, including Nigeria and Iraq presently struggling to attain a 100 percent compliance level must keep to the agreement or be forced to do so in subsequent months.

Nigeria, Iraq and others failed to keep to the cartel’s agreement in May after reports show that Nigeria only managed to attain a 19 percent compliance level during the month while Iraq struggled to attain just 38 percent in the same month.

Russia and Saudi Arabia, the two largest producers of the group, warned members to stick to the agreed quota if they want to rebalance the global oil market.

While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

The potential return of Libyan output could also cause considerable challenges for the OPEC leadership.

Earlier on Monday, Brent crude oil hits $43.1 per barrel, more than a month record-high, before pulling back slightly to $42.83 per barrel.

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Gold Dips by 2 Percent on Better Than Expected Job Report

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  • Gold Dips by 2 Percent on Better Than Expected Job Report

Gold prices declined by 2 percent on Friday following a better than expected US non-farm payroll report.

The report showed an increase of 2.5 million payroll numbers against a decline of 7.5 million predicted by many experts.

The surprise number boosted investors’ confidence in US recovery as many dumped their haven investment (gold) for the stock market.

“We had significantly stronger-than-expected U.S. payroll numbers – an increase of 2.5 million versus an expectation of a decline of 7.5 million – that 10-million swing has brought forward expectations of the economic recovery in the United States,” said Bart Melek, head of commodity strategies at TD Securities.

Spot gold immediately declined by 1.9 percent per ounce to $1,678.81 while the U.S. gold futures slid 2.6 percent to settle at $1,683.

Gold was also being pressured by stronger yields and a slightly firmer dollar, “meaning the opportunity cost to hold gold in the portfolio has gone up,” Melek added.

The surprise didn’t stop there, US Dow Jones was up 614 points despite the protest going on the US and US-China tension.

Also, NASDAQ rose by 29 points while the S&P index added 50 points increase.

Note: Investors generally increase their investments in gold and other haven assets during a crisis to avert risk exposure and do the opposite once they sense a better economy.

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