While negative rates in Europe may help boost lending and exports, they could also have some adverse consequences for financial stability. They may erode bank profitability and may make it harder for pension and life insurance companies to meet their long-term liabilities. Investors may be encouraged to take excessive risk. Finally, if negative rates were to prevail for long, they may lead to operational innovations whose costs may offset the benefits of negative rates.
There has been a sell-off in global commodities today as Brent is down over 150 basis points to $55.42/bbl. Metals and agricultural products generally followed this trend and were also softer today.
The European Central Bank (ECB) raised the limit on Emergency Liquidity Assistance (ELA) to Greek banks by €900 million to almost €91 billion, easing the pressure on Greek lenders that re-opened on Monday for the first time in three weeks. The ECB’s policy-setting Governing Council had previously set ELA at €89.5 billion. The move came two days after the Greek government made a €4.2 billion payment to the ECB.
Reflecting negative policy rates in several central banks in Europe, nominal yields on some bonds of highly-rated European governments have also dropped below zero. Explanations for the phenomenon of negative yields include very low inflation, further “flight to safety” toward fixed income assets in Europe’s core, and—perhaps the main proximate cause—the increased scarcity of highly-rated sovereign bonds eligible for the European Central Bank’s asset purchase program.
Gold prices fell for a six consecutive day on Monday as the U.S. dollar hit a 3-month high against a basket of major currencies amid prospect for higher U.S. interest rates. The price of the bullion dropped as much as 5.5 percent to a 5-year low of $1,072.35 an ounce in early trading, but is currently trading at $1,105 an ounce, down 2.5 percent.
Oil prices remained under pressure on Wednesday as U.S. data showed total supplies of crude and petroleum products hit a record high. Brent, the global benchmark, fell $1.08 (or 1.9 percent) to $57.43 a barrel, while West Texas Intermediate (WTI), the U.S. benchmark, dropped $1.28 (or 2.4 percent) to $51.76 a barrel. Oil’s rebound from a 6-year low in March has faltered amid the volatility created by the Greek crisis and the collapse of the Chinese equities and speculation that a global supply glut will persist.
U.S. equities and Treasuries advanced while the dollar fell after weak U.S. retail sales damped optimism about the strength of the rebound in consumer spending. The S&P 500 index gained 0.4 percent in early trading, after jumping 1.1 percent on Monday, while the yield on 10-uyear Treasury notes fell 5 basis points to 2.41 percent. The dollar index, which tracks the greenback against its major counterparts, slipped 0.2 percent.
Eurozone leaders reached a conditional deal for Greece on Monday. The three-year bailout deal provides about €85 billion of new funding in loans for cash-strapped Greece. But details on how to bridge a funding gap until an actual disbursement of aids are still being discussed. In return, Greek government agreed to deep economic reforms under close supervisions by its creditors. The rescue, Greece’s third since 2010, should keep Greece afloat and secure the country’s place in the Eurozone for now.
Chinese equities advanced again on Friday, capping the biggest two-day gain since 2008, as unprecedented government support measures helped curtail a stock-market rout that wiped out about $3.9 trillion in market valuation in less than a month. The benchmark Shanghai Composite index rose 4.5 percent, adding to Thursday’s 5.8 percent gain. The rally helped the gauge rise 5.2 percent this week after tumbling to a 3-month low on Wednesday.
Facing a midnight deadline from European creditors, Greek government was racing to finalize a plan of reforms for its third bailout. Details of Greece’s reform proposals are to be submitted Thursday to give creditors time to review them ahead of a summit of Eurozone and European Union leaders on Sunday. EU leaders said they will make a final decision Sunday on Greece’s future in the euro.