• Dec. 8, 2016, 9:53 pm

Market turmoil: Yellen warns global turbulence and China could hit growth – live

Powered by Guardian.co.ukThis article titled “Market turmoil: Yellen warns global turbulence and China could hit growth – live” was written by Graeme Wearden (until 2pm) and Nick Fletcher, for theguardian.com on Wednesday 10th February 2016 18.30 UTC

Snap Summary: Cautious Yellen doesn’t cause alarm

U.S. Federal Reserve Board Chair Yellen testifies in front of the U.S. National Debt amount at the House Financial Services Committee in WashingtonU.S. Federal Reserve Board Chair Janet Yellen (L) testifies at the House Financial Services Committee as the U.S. National Debt amount ticks away in Washington February 10, 2016. REUTERS/Gary Cameron

U.S. Federal Reserve Board Chair Yellen testifies in front of the U.S. National Debt amount today. Photograph: Gary Cameron/Reuters

Let’s recap the main points from today’s hearing at the Financial Services committee over the last three (long…) hours.

1) Janet Yellen has warned Congress that the global financial turbulence is threatening the US economic recovery.

She cited the weakening financial conditions in America, following recent turmoil in the financial markets.

“These developments, if they prove persistent, could weigh on the outlook for economic activity and the labour market, although declines in longer-term interest rates and oil prices provide some offset.”

One analyst saw that as an admission that the Fed perhaps shouldn’t have raised interest rates two months ago.

2) But despite this, the Fed chair did not suggest she will reverse course on interest rates.

She defended December’s rate hike, arguing that the economy was strong enough to support slightly higher borrowing costs.

And she also insisted that any future rises will be heavily dependent on economic performance — if things deteriorate, the Fed rate will stay exceptionally low for longer.

She doesn’t expect to actually cut rate, though, which suggests the Fed isn’t panicking about the situation.

3) But could the Fed go negative, following Japan and the eurozone? Crucially, Yellen indicated that this isn’t really on the agenda yet.

She pointed out that the Fed may not have the legal authority to impose negative rates; you’d think this would have been cleared up, if the Fed was really worried.

This was the key quote:

“I am not aware of anything that would prevent us from doing it but I am saying that we have not fully investigated the legal issues – that still needs to be done.”

4) Yellen have her clearest warning yet about China. She said the financial instability, and plunging commodity prices, caused by its slowing economy was a key threat to the US.
5) But she also tried to remain positive about economic conditions, saying she sees signs of wage growth increasing.

“There are some hopeful signs but I think if the labor market continues to progress we are very hopeful we will see faster progress on wages.”

6) The Committee raised several other important issues with Yellen; they fear that small challenger banks are being disadvantaged, and want the Fed to release the transcripts of its meetings.

And several Representatives challenged Yellen over the state of the domestic economy, pointing out that not enough well-paying ‘middle-class’ jobs are being created.

One was even moved to verse (yes, it was that kind of day….)

Congress chair Jeb Hensarling says members have five days to submit further questions for Yellen to respond to.

And with that the meeting is adjourned.

John Delaney of Maryland says when rates were raised in December, it was based on an improving economy. A lot has happened since then in the markets. When you look at the data now, does it change your view on economic activity and gowth

Yellen: The answer is maybe, but the jury is out. We continue to see progress in labour market. GDP growth clearly slowed a lot in the fourth quarter. My expectation is it will pick up in this quarter but financial conditions have tightened which could have implications.

Then, we said the risks to outlook were balanced. In January said we were assessing the implications. This is what we’re doing at this point.

Has there been a contraction in credit availability recently?

Yellen: We haven’t seen this really at this stage. Spreads on lower graded bonds have been widening… When we surveyed banks we’ve seen a tightening of.. loans. This is something that bears watching.

There will be additional data before we meet in March [The next Fed meeting}.

Andy Barr of Kentucky is asking about the Consumer Financial Protection Bureau and its funding.

Yellen seems unsure of the answers, and starts packing her bag.

Keith Ellison of Minnesota also brings up the subject of the high levels of black unemployment. He says this needs the attention of the Fed chair. Is there adequate discussion of Afro-American workers within Fed discussions and if not, what can be done.

Yellen: It is of course important we look at different groups, particularly those suffering most in the labour market. Our tools are not ones that can be targeted at particular groups in labour market.

Ellison wants Fed to realise not all US citizens are experiencing this upturn.

Yellen: We should pay adequate attention to different groups. Unemployment rate is only one measure of what’s happening, appropriate for us to do more detailed assessment.

Congressman Ed Perlmutter of Colorado ( a Democrat) praises Yellen (and the President) and asks how we can do better.

Yellen: Our objective is to try to make sure the picture shows continuing improvement. The signs of wage growth increasing are tentative but hopeful.. and we will try to keep that progress growing. Inflation [should] move up over time [towards our target].

Some of burden should also be on Congress. Job training, educational programmes… are Congress’s job to address.

Perlmutter: Soft spot in the economy is oil and gas. Saudis are pumping like crazy into an oversupplied market. Good for pump prices but causes job losses.

Yellen: We’re taking account of fact that energy sector is hard hit, we’re losing jobs there. But it is a pretty small sector of the workforces. It is rippling through to manufacturing. But average household is saving $1000 a year {so that is having a positive effect}

Updated

Robert Pittenger of North Carolina says the economic recovery is dismal despite all these accommodative policies. Is real unemployment not 10% not 4.9%?

Yellen barely gets a chance to begin answering before Pittenger steps in again and his time runs out.

Wiliam Clay of Missouri says the Fed is more focussed on inflation than unemployment.

Yellen: We have both targets and take issue with idea we are not focussed on the unemployment objective… We continue to have accommodative monetary policy.

Mia Love of Utah asks about implications of European financial instability, and ECB and Fed using different policies

Yellen: The ECB is dealing with inflation falling well beyond their goal…US has done better, is among the strongest economies. It’s put [upward] pressure on dollar, harming manufacturing and exports.

Maxine Waters is back and is back with the topic of big banks receiving support from the Fed.

Yellen: It’s an essential tool we need to adjust the rate of short term interest rates. We have 2.5trn dollars of reserves compared to 20 to 30 billion during the financial crisis.

If we have to use another technique, we will be likely forced to shrink our balance sheet and.. it would have adverse effects on the economy.

David Scott of Georgia disagrees when Yellen says Fed can’t target unemployment, pointing out the large unemployment rate among Afro-Americans. He says Fed has historically downplayed unemployment, nor has Fed ever had an Afro-American as head of one of the regional Fed banks.

Yellen: We recognise how serious the problems are and we take our employment mandate extremely seriously, we have been doing everything to promote a strong labour market which would benefit Afro-Americans.

She agrees there should be an Afro-American head and regrets there has not been.

Updated

Ed Royce from California: Are negative rates a tool in the tool box? (He says a recent bank stress test from the Fed suggests this might be being looked at).

Yellen: ECB and Japan have gone to negative rates. We have had periods of market stress where we see flight into US Treasury bonds as safe haven. We have set stress tests for banks to look at if Treasuries go negative, this may happen without Fed necessarily setting negative rates.

Ruben Hinojosa of Texas asks what else could we do to boost economy.

Yellen: Productivity growth has been disappointing since the financial crisis.

The debt situation facing the country needs to be addressed by Congress. As population ages debt to GDP ratio will be on an unsustainable course.

Hinojosa asks about addressing inequality.

Yellen: We don’t have policies that target specific groups, main thing we can do is make sure labour market is working well. There is further to go.

Sean Duffy of Wisconsin, as head of oversight committee is complaining Yellen does not always respond to requests from the committee on compliance issues (in particular documents on possible leaks) and says she has ignored subpoenas.

Yellen: We have some concern with providing transcripts since they relate to monetary policy. We will consider this and get back to you.

Duffy: This is about a leak, will you let me know why I am not entitled to these documents? I sent a letter a year ago. You knew I would ask. Why will you not provide documents. This is about the internal working of the Fed, not market moving documents.

Yellen: I think we have complied fully..

Duffy: What would you do if you wanted this from a bank [but were ignored]. I can imagine what Fed would do. I expect these documents to come over.

The discussion ends after a point of order is made about the subpoena and dismissed.

Updated

European markets are closing in positive territory but on Wall Street, the Dow Jones Industrial Average has now slipped back and is down around 12 points.

Gregory Meeks of New York asks if Yellen thinks the position is better now than in 2008.

Yellen: I believe it is. We’ve made a lot of progress although there are a lot of challenges, a lot of households are suffering.

US oil stockpiles unexpected rise

Elsewhere oil is on the rise – Brent is now up 2.7% at $31.15 a barrel – after US crude stockpiles fell unexpectedly last week. Crude inventories dropped 754,000 barrels compared to expectations of a 3.6m barrel rise.

Blaine Luetkemeyer from Missouri asks what Fed could do if there is another downturn.

Yellen says there are a number of tools including interest rates, but Luetkemeyer rightly points out that rates are almost as low as they can go (even with the recent hike).

Brad Sherman of California: Are you going to break up the too big to fail institutions? To make sure it’s not “too big to jail”?

Yellen: We are using our powers to make sure a systemically important institution could fail without having a systemic effect.

 

I don’t think it will be necessary to cut rates – Yellen

Maloney asks: Given the market turmoil and slowing US economy, some analysts are suggesting a possible recession. What would it take to cut rates again?

Yellen: Our commitment is to achieve goals of maximum employment and price stability. I do not expect the FOMC (Federal Open Market Committee) will soon be in a situation to cut rates. The Labour market continues to perform well. Many of the factors factors holding down inflation are transitory. There is always a risk of recession, global developments could produce a slowdown, but don’t want to jump to premature conclusions.

I don’t think it will be necessary to cut rates. But if it turned out to be necessary, the FOMC would do what was necessary.

We have not seen a sharp drop off it growth – Yellen

Carolyn Maloney of New York asks: Has the turmoil in global markets changed your view on the pace of interest rate rises?

Yellen: We are watching very carefully what is happening in global financial markets. The stresses we have seen since the turn of the year relate to uncertainties over Chinese exchange rate policy, the price of oil..

We have not seen shifts that seem significant enough to have driven the sharp move in markets. It seems to be increased fears of recession risk. We have not yet seen a sharp drop off in growth, globally or in the US.

Global market developments bear watching. We recognised these developments may have implications for the outlook, which we are currently assessing.

Monetary policy is not on a preset course.

Fed hasn’t fully investigated legality of negative rates

Patrick McHenry of North Carolina: Does Fed have legal authority to move into negative rates.

Yellen: The FOMC considered this around 2010, we were exploring our options. We decided not to lower interest rates into negative territory. Didn’t fully look at legal issues. We would stilll need to investigate more thoroughly.

Don’t know any restriction that would prevent us doing it. But we have not fully investigated legal issues.

Moore says is there moral hazard in not a single person involved in 2008 crash going to jail.

Yellen: I do not think individuals guilty of wrongdoing should escape appropriate penalties. We cannot put in place criminal penalties. We can make sure they are not allowed to work at banking organisations where they committed misdeeds, and in many cases they can be banned from working. We always co-operated with Department of Justice.

Gwen Moore from Wisconsin is concerned about small banks. She asks how the rules should have been tailored for small banks, saying “stress tests, capital constraints are killing our small banks.”

Yellen says: Community banks and their vitality are exceptionally important. The burden on community banks is intense. We are focussed on doing everything we can to reduce that.

What will the world have to look like for a rule based system, asks Mulvaney.

Yellen says guidelines from rules are looked at but we should not mechanically follow rules, we need to take into account a large set of indicators.

Following on from that, Mick Mulvaney asks if the economy is now normal.

Yellen says: The economy in many ways is close to normal… inflation is below 2% but there is a good reason to think it will move up over time.

But the neutral level of federal funds rate is by no means normal. We have needed for 7 years to hold the federal funds rate at exceptionally low levels to achieve growth of 2% and in that sense it is not normal.

Updated

Maxine Waters asks what alternative processes could there be to the Fed paying billions to banks on excess reserves when it raises interest rates. The Fed uses IOER (interest on excess reserves) and Yellen defends the use of this system even though it pays commercial banks above market interest rates.

Updated

Now for the questions.

Chair Jeb Hensarling brings up a recent bill that would require the Fed to follow a rules-based monetary policy, which Yellen opposes but a number of economists have backed in a letter. Yellen is against it because it could jeopardise its independence from political pressure.

The two sides are basically just repeated their existing stance on the issue.

Markets are moving much higher now even though Yellen has just so far repeated her statement. The Dow Jones Industrial Average is currently up 151 points or 0.9%.

(Unsurprisingly it’s taking longer than five minutes – the statement is here if you want to follow along).

Yellen now gets five minutes to present her testimony, and is reading her statement.

Yellen in Congress

Yellen in Congress Photograph: Financial Services Committee

Updated

The session is underway, and can be viewed live here.

Opening remarks come from chairman Jeb Hensarling – who says he will not use the session to criticise the Fed’s decision to raise rates – followed by a number of members of Congress including Maxine Waters and Soth Carolina’s Mick Mulvaney.

Updated

Congress, waiting for Yellen.

Ahead of Yellen’s testimony

Ahead of Yellen’s testimony Photograph: C-Span

The US economy is strong enough to see through this period of turbulence, says economist Harm Bandholz at UniCredit after Yellen’s testimony:

In a nutshell: Chair Yellen has, correctly in our view, highlighted the solid fundamentals of the US economy. Accordingly, her baseline outlook for both the economy and monetary policy have not changed. That said, recent developments in financial markets as well as in the global economy have clouded the picture. In this environment, Fed officials prefer to take a step back and wait. Once the clouds have lifted, the gradual normalization of interest rates will continue.

Yes, there are risks out there – and the longer the financial market rout lasts, the bigger the risk that it will become self-fulfilling –, but we believe that fundamentals are solid enough to carry the economy through this period. And this also seems to be the Fed’s view. Accordingly, the fact that financial markets do not expect the next rate hike before the second quarter of 2017 seems well overdone.


Wall Street edges higher

Well, it’s not a ringing endorsement of Janet Yellen’s comments but US markets have opened in positive territory.

The Dow Jones Industrial Average is currently up 59 points or 0.39%, while at the open the S&P 500 added 0.5%. But the tech-heavy Nasdaq has outperformed, up 1.1%.

The dollar has reacted to Yellen’s comments as if more rate rises this year – perhaps even in March – could indeed be on the cards despite the worries about global growth.

The US currency has risen 0.25% against a basket of currencies, up from a near four month low on Tuesday.

The euro fell 0.5% after the release of the testimony, while sterling has dropped from $1.4560 to $1.4484.

Janet Yellen’s testimony might appear to leave the door open for further rate rises, but she is likely to be quizzed sharply about the last one, says Rob Carnell at ING Bank. In his initial thoughts he says:

In summary – Yellen retains an open mind on the need for further tightening, though with a heavy skew of risks to the downside, and was defensive about the December rate hike:

The mercifully short prepared statement of Fed Chair Yellen to the House Committee on Financial Services did not contain much that was new from earlier speeches, statements or minutes.

To the extent that any new material was used, this was mainly an expansion of the risks from softer overseas demand, with China explicitly mentioned, and also from financial market tightening (stronger USD, higher yields on riskier assets and lower equity prices, offset to some extent by lower bond yields and oil prices).

The testimony retained the text about the possibility that rates might have to be increased at a faster than anticipated rate if growth and inflation were stronger than expected. However, that is sounding rather hollow right now. We see the continued inclusion of this text as an attempt to portray an open mind about the recent activity slowdown, and not to present a self-fulfilling picture of gloom at the Fed. Financial markets may see this as dovish speech overall, though probably not out of line with expectations.

There was also a somewhat defensive paragraph justifying the December rate hike – we expect that once the questioning starts, Chair Yellen will come in for some stick from disgruntled members of Congress, some of whom may be facing a hostile electorate later this year.

Updated

One interpretation of Yellen’s remarks on rates is that she is admitting they were raised too soon, says Augustin Eden at Accendo Markets.

A not unusually muted reaction to Fed Chair Janet Yellen’s testimony this afternoon, given that she’s come out and said ‘financial conditions in the US have recently become less supportive of growth.’ It doesn’t take a 1st class physicist to recognise that this is essentially another way of saying ‘we raised interest rates before we should have.’

Nothing had fundamentally changed in December, but the Fed decided to ignore the fundamentals and move US monetary policy to a place that’s less supportive of growth. It now appears the markets chose to ignore the Fed in January, preferring the fundamentals, and what do you know? The markets were right – they’ve been reacting to this testimony for the past four weeks.

An economist’s view on Yellen’s comments:

Yellen also, as indeed she has to, defended the December decision to raise interest rates. Many have judged that to be a mistake, especially in the wake of the market turbulence and fears about global growth and stresses on the banks which have dominated the headlines so far this year.

Yellen suggested that if a pre-emptive rate rise was not implemented, a sharper increase may well have been necessary in the future which could have pushed the economy into recession:

The decision in December to raise the federal funds rate reflected the Committee’s assessment that, even after a modest reduction in policy accommodation, economic activity would continue to expand at a moderate pace and labor market indicators would continue to strengthen.

Although inflation was running below the Committee’s longer-run objective, the FOMC judged that much of the softness in inflation was attributable to transitory factors that are likely to abate over time, and that diminishing slack in labor and product markets would help move inflation toward 2 percent. In addition, the Committee recognized that it takes time for monetary policy actions to affect economic conditions.

If the FOMC delayed the start of policy normalization for too long, it might have to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting its objective. Such an abrupt tightening could increase the risk of pushing the economy into recession.

It is important to note that even after this increase, the stance of monetary policy remains accommodative

Janet Yellen has also said that the Fed would slow the pace of interest rate hikes, if the threats to the US economy materialise.

She tells the Committee on Financial Services that:

In particular, stronger growth or a more rapid increase in inflation than the Committee currently anticipates would suggest that the neutral federal funds rate was rising more quickly than expected, making it appropriate to raise the federal funds rate more quickly as well.

Conversely, if the economy were to disappoint, a lower path of the Federal funds rate would be appropriate.

Updated

The full testimony is here.

Yellen: We’ll probably only raise rates gradually

Janet Yellen has also touched on the big issue dominating the markets – how quickly will interest rates rise?

She sounds cautious, but neither rules anything in or out (classic central banker)

“The FOMC anticipates that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

In addition, the Committee expects that the federal funds rate is likely to remain, for some time, below the levels that are expected to prevail in the longer run.”

(the FOMC, or Federal Open Market Committee, meets eight times a year to set US monetary policy)

Yellen: China slowdown could hurt America

Janet Yellen has also warned that “foreign economic developments” could harm the US economy.

In her testimony to Congress, the Fed chair singles out concerns about the slowdown in China.

That has already caused “increased volatility in global financial markets”, and “exacerbated concerns about the outlook for global growth”, says Yellen.

She adds:

These growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. In turn, low commodity prices could trigger financial stresses in commodity-exporting economies, particularly in vulnerable emerging market economies, and for commodity-producing firms in many countries.

Should any of these downside risks materialize, foreign activity and demand for U.S. exports could weaken and financial market conditions could tighten further.”

Updated

Janet Yellen warns financial conditions have weakened

File photo of Yellen during a news conference to announce raised interest rates in WashingtonU.S. Federal Reserve Chairman Janet Yellen collects her papers during a news conference to announce raised interest rates in Washington in this December 16, 2015 file photo. Federal Reserve Chair Janet Yellen will defend the U.S. central bank’s first rate hike in a decade and likely insist that further rises this year remain on track, albeit at a slower pace, when she addresses Congress on February 10, 2016. REUTERS/Jonathan Ernst/Files

Newsflash: The Federal Reserve has just released Janet Yellen’s prepared testimony, ahead of this afternoon’s grilling from Congress in 90 minute time.

The Fed chief is striking a cautious note about economic prospects, warning that:

“Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.

These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset.

But Yellen also points to “ongoing employment gains and faster wage growth”, which should push real incomes higher.

She also suggests that global economic growth should “pick up over time”, helped by “highly accommodative monetary policies abroad” [such as Japan and the eurozone].

And the Fed chief remains confident about medium-term growth prospects, saying:

Against this backdrop, the Committee expects that with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen.”

Updated

S&P: QE is driving inequality between the generations

Inequality is one of the issues of our age.

Bernie Sanders is building a presidential bid by fighting it, and charities like Oxfam regularly warn that the rich are taking more and more of the cake.

Now, credit ratings agency S&P has warned that quantitative easing (QE), a key weapon used in the financial crisis, is widening inequality and the wealth gap between young and old.

Under QE, central banks buy assets such as government bonds with new money, driving up the cost of safe assets and encouraging investors into riskier ones (this is the theor, anyway)

But it’s also hurting those who don’t own assets, as S&P explains:

  • Quantitative easing (QE) stabilized the economy but also exacerbated wealth disparity between rich and poor, mainly by boosting financial asset prices and house prices.
  • During the U.K.’s recent “jobs-rich, pay-poor” economic recovery, strong employment gains were accompanied by a further rise of already high wage dispersion and an ever-growing share of part-time employment in lower income groups.
  • Between 2006 and 2008 (before QE) and 2010-2012 (after QE started), average wealth held directly in stocks increased by 55% for the wealthiest 10% and by 130% for wealthiest 1% of U.K. households.
  • In the context of the tight housing market, low interest rates and QE are among the drivers behind the widening wealth and income gap between younger and older generations and between those on the housing ladder and those not on it.

Updated

European markets are sailing higher, up over 2% on average, reversing six days of steady losses which dragged them to a two year low.

European stock markets at noon today

European stock markets at noon today Photograph: Thomson Reuters

But the rally looks could unravel, depending on how the chair of the Federal Reserve, Janet Yellen, performs at Congress in a couple of hours time.

Jasper Lawler of CMC Markets explains:

Talk of Deutsche Bank doing an emergency bond-buyback to shore up its finances and relieve worried creditors has seen the German bank’s shares rally by over 10%, lifting the rest of the banking sector.

In a way it’s a bit of deju vu from yesterday when markets initially rose thanks to news from Deutsche Bank before financial and commodity sectors led to a spectacular roll-over. There is plenty of scope for another sharp twist in the direction of markets today around 3pm GMT when fed Chair Janet Yellen gives her testimony to the House Financial Services Committee.

Updated

Deutsche Bank leads the rally

Investors can’t get enough of Deutsche Bank today.

Its shares jumped 17% at one stage this morning, fuelled by reports that it will launch a debt buy-back offer soon.

That move would show Deutsche’s financial muscle and calm fears over its ability to meet debt repayments and dividends.

Supportive words from Berlin’s finance ministry today may also have helped, along with Deutsche management’s insistence yesterday that the bank is “rock solid”.

But Deutsche’s problems are not suddenly solved.

  • There are still fears over the quality of the bank’s assets (it is trading at around half its book value). An economic downturn would inflict further losses.
  • Deutsche made a €6.8bn loss last year, showing the struggles in the banking sector.
  • Newish CEO John Cryan is trying to clean the bank up, following fines for various scandals. But it could face further provisions in the future.
  • There are fears that banks will suffer if eurozone interest rates are cut deeper into negative territory. That would eat into profits, penalising them for leaving cash at the ECB. It would also force prices of government bonds even higher, meaning banks would get an even lower rate of return (if anything).

James May: Save Hornby!

Hornby warns over mounting lossesFile photo dated 23/02/2014 of a Hornby Class 29 model train. The model rail firm - whose brands also include Scalextric, Airfix and Corgi - said UK trading was far worse than expected in January. New year promotions failed to boost a flagging sales warning over mounting losses after a “disappointing” start to the new year hit recovery hopes. PRESS ASSOCIATION Photo. Issue date: Wednesday February 10, 2016. See PA story CITY Hornby. Photo credit should read: Danny Lawson/PA Wire

It’s been a bad morning for UK modelmaker Hornby.

The miniature train firm, which also owns racing car outfit Scalextric and aeroplane kitmaker Airfix, hit investors with another profit warning today. It also admitted it could breach its loan agreements with its banks – never a good sign.

And there was nothing small about the market reaction – Hornby shares have tanked by over 40%.

TV presenter James May (who loves toys of a certain generation), has urged the British people to act now, while there’s still time.

Lagarde: Ukraine must reform, or we walk

File photo of International Monetary Fund (IMF) Managing Director Lagarde speaking during a news conference during the 2015 IMF/World Bank Annual Meetings in LimaInternational Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a news conference during the 2015 IMF/World Bank Annual Meetings in Lima, Peru in this October 8, 2015 file photo. Lagarde said on January 22, 2016 she will run for a second term. REUTERS/Mariana Bazo/Files

This might dampen the mood in the markets.

The head of the International Monetary Fund has warned that Ukraine could lose financial support unless its government gets serious about cleaning up and reforming its economy.

IMF chief Christine Lagarde declared:

“I am concerned about Ukraine’s slow progress in improving governance and fighting corruption, and reducing the influence of vested interests in policymaking.

Without a substantial new effort to invigorate governance reforms and fight corruption, it is hard to see how the IMF-supported program can continue and be successful. Ukraine risks a return to the pattern of failed economic policies that has plagued its recent history.

It is vital that Ukraine’s leadership acts now to put the country back on a promising path of reform.”

The IMF agreed to a $17.5bn bailout program for cash-strapped Ukraine last year, but has held back a $1.7bn payment since last autumn due to concerns over corruption.

Those fears were inflamed when economy minister Aivaras Abromavicius resigned last week, saying it was impossible to implement reforms.

He claimed he was under pressure to appoint government cronies to key positions, continuing Ukraine’s well-known problems with graft and vested interests.

Ukrainian government bonds have already tumbled in value recently, to levels suggesting a high risk of default or restructuring.

Context is everything….

There are encouraging signs from New York.

Wall Street is expected to rally when trading begins, just over three hours time. The Dow Jones and S&P 500 are tipped to rise by 1%, while the Nasdaq is being called 1.6% higher.

The German government has reiterated that it is not worried about Deutsche Bank.

A finance ministry spokeswoman told reporters in Berlin that:

“You heard the short sentence that the minister [finance minister Wolfgang Schuable] said yesterday in Paris that he is not concerned, I don’t have anything to add to that.”

Bank shares race higher

European banking shares are surging, lead by Deutsche Bank which has jumped by 15%.

feb10banksupup

European bank shares today Photograph: Thomson Reuters

Investors seem to be regaining their nerve, having been gripped with worries over the financial sector. Rumours that Deutsche is planning to strengthen its financial position by buying back some debt have also helped the mood.

Economic jitters are also being eased, with the oil price up 1.5% today.

Alastair McCaig, market analyst at IG, explains:

Despite another poor session overnight, markets in the UK and Europe have rallied impressively. Banks are surging higher, with Deutsche shrugging off the woes of yesterday as investors take the opportunity to buy on weakness once again.

A better performance from the oil price and heavily oversold conditions in a number of markets, plus expectations regarding Janet Yellen’s appearance later in the day have provided bulls with the chance to reverse some of the heavy losses seen so far in February.

The main European banking index has gained 5% today. A decent rally – but it still leaves shares down 23% so far this year.

Thomson Reuters

The Stoxx 600 banks index Photograph: Thomson Reuters

And although we’ve heard supportive words from Deutsche CEO John Cryan and German finance minister Wolfgang Schauble yesterday, nothing has really changed.

Updated

Credit Suisse CEO: Don’t panic!

Swiss bank Credit Suisseepa05142487 Tidjane Thiam, CEO of Swiss bank Credit Suisse, speaks during a press conference in Zurich, Switzerland, 04 February 2016. EPA/ENNIO LEANZA

The head of Swiss bank Credit Suisse has launched a full-throated defence of the banking sector, in an attempt to calm fears of a new crisis.

Tidjane Thiam told the Financial Times that:

“The banking system in general is much stronger than in 2008, 2009 [but] there are a lot of memories of that period.

“Some of the scenes we are seeing today are not justified . . . Banks are smaller, they are deleveraged, they are less risky, they are better capitalised.”

Thiam was speaking after Credit Suisse shares slumped to their lowest in more than two decades yesterday. He told the FT that Credit Suisse has “no liquidity issues”, and a “strong balance sheet”.

And investors may have heeded his words. Credit Suisse shares have jumped by 5%, as part of a wider rally in bank shares….

The slump in UK industrial production may show that Britain’s economy is weaker than we thought.

Economist Howard Archer of IHS Global Insight explains:

December’s sharp drop in industrial production will fuel concerns about the UK economic outlook as well as the unbalanced nature of growth.

It will also likely harden views that the Bank of England will not be raising interest rates during 2016. However, we believe it remains highly unlikely that the Bank of England will cut interest rates.

The ONS estimated last month that the UK grew by 0.5% in the last quarter of 2015. Sky News’s Ed Conway reckons this could be cut:

Updated

UK industrial production takes a tumble

The Grangemouth oil refinery and petrochemical plant

Ouch. Britain has suffered its biggest fall in industrial output since September 2012.

It’s another sign of weakening economic demand – one of the main triggers for the recent market turmoil.

UK industrial production shrank by 1.1% month-on-month in December, according to new figures from the Office for National Statistics.

That was primarily caused by a 4.6% plunge in oil and gas extraction, and a 4% drop in mining.

But British manufacturing also suffered, with output down by 0.2% month-on-month and 1.7% lower than in December 2014.

Alarmingly, the UK isn’t alone either. France and Italy have also reported sharp falls in factory output this morning, and Germany did the same yesterday.

It fuels fears that the global economy ended 2015 with a whimper, not a bang.

European shares rebound from two-year lows

Shares across Europe are picking up pace, as investors shake off some of their gloom.

The FTSE 100 is now up 43 points, or 0.8%, and there are bigger gains over the channel. Germany’s DAX has leapt by 1.8%, as worries over Deutsche Bank recede this morning.

Francois Savary, chief investment officer at Geneva-based Prime Partners, says:

“The rebound in Deutsche Bank is helping to reassure some investors who had been concerned about possible contagion in the banking sector.”

The slump in profits at shipping magnate A.P. Moller–Maersk [details] hasn’t caused much alarm.

It’s quite a different picture than we saw in the Asia-Pacific markets a few hours ago:

European and Asia-Pacific markets today

European and Asia-Pacific markets today Photograph: Thomson Reuters

But there is still a lot of anxiety around, as investors prepare to hear from the head of the Federal Reserve when she testifies to Congress this afternoon.

Janet Yellen may concede that the Fed is unlikely to raise borrowing costs four times this year, as it originally expected. But if she sounds too worried, that could spark another bout of market mayhem.

It’s a tricky balancing act, says Ilya Spivak, currency strategist at DailyFX. He reckons Yellen will try to avoid saying too much.

it ought to be kept in mind that the markets want to be reassured. This injects a degree of wishful thinking into the equation. F

or her part, the Fed Chair will almost certainly refrain from plain-spoken commitment on the direction of policy.

Updated

Here’s the worst-performing companies in Australia today, who helped to drag its stock market more than 20% below its recent peak.

Top fallers on the Australian stock market

Mesoblast, the biggest faller, is an adult stem cell research firm.

Many of the other fallers are natural resource and energy companies (including Liquified Natural Gas, Western Areas, Karoon Gas and Whitehaven Coal)

Deutsche Bank is climbing higher!

Sydney Harbour Bridge and the central business district.

Sydney Harbour Bridge and the central business district. Photograph: David Gray/Reuters

The Wall Street Journal has a good take on how Australia’s banks helped drag the country’s stocks into a bear market today.

“This is the first sustained bear market I have seen since the GFC [global financial crisis],” said Evan Lucas, a market strategist at brokerage IG in Melbourne, noting the S&P/ASX 200 briefly was in bear territory in 2011.

Australia’s major banks, which are some of the biggest stocks on the S&P/ASX 200 and have a large index weighting, have been caught in a global bank-share selloff this week, despite their having less exposure to liquidity risks compared with peers in the U.S. and Europe and substantially less reliance on the long end of the bond curve and wholesale funding, Mr. Lucas said.

Still, worries about banks globally have only exacerbated a decline for local lenders. The financials subindex has lost 14% this year as brokers have flagged concerns about the sustainability of the industry’s attractive dividends as Australia’s economy remains subdued and signs emerge that the property market is beginning to cool.

More here: Australia Shares Fall Into Bear Market

It’s not all the fault of the banks, though.

Mining stocks have also tumbled, in response to waning demand for commodities from China. BHP Billiton, for example, has fallen 12% since the start of January.

Resource companies are now cutting thousands of jobs, in response to falling prices for coal, iron ore, zinc, nickel, copper and bauxite.

Updated

Australia’s fall into bear market territory today has sent another cloud of gloom over the City of London.

Conner Campbell of SpreadEx sums up the mood:

Once again the European indices are enduring the aftermath of a rocky Asian session, the Nikkei plunging to a 16 month low following a 2nd day of heavy losses, with the added concern of a bear market-entering night for the Australian markets thrown in for good measure.

A red-washed commodity sector is dragging the index down at the moment, though if Brent Crude can see a sustained climb above $31 per barrel (with the US crude inventories arriving this afternoon) sentiment may be able to shift as the day goes on.

Large container ship Maersk Kiel seen from the front Rotterdam port Zuid Holland the NetherlandsBBGAPJ Large container ship Maersk Kiel seen from the front Rotterdam port Zuid Holland the Netherlands

Danish shipping and oil conglomerate A.P. Moller–Maersk is getting a kicking.

Shares in the group have slumped by 7.5%, making it the worst stock in Europe today, after it reported a fourth-quarter net loss due to impairments of $2.6 billion on its oil assets.

The global slowdown is hurting the firm. Demand for shipping goods overseas has fallen, just as new ships ordered years ago come into service.

Shares in Deutsche Bank have jumped by over 4% at the start of trading, amid rumours that it is planning new steps to reassure investors about its financial health.

The Financial Times set the hare running last night, reporting that:

Deutsche Bank is considering buying back several billion euros of its debt, as Germany’s biggest bank steps up efforts to shore up the tumbling value of its securities against the backdrop of a broader rout of financial stocks.

After European banks suffered a second consecutive day of sharp falls, Deutsche Bank is expected to focus its emergency buyback plan on senior bonds, of which it has about €50bn in issue, according to the bank.

The move was unlikely to involve so-called contingent convertible bonds [cocos] which, along with the bank’s shares, have been the butt of a brutal investor sell-off in recent days, people briefed on the plan said.

Banks can generate capital gains by buying back bonds at a discount to their face value.

More here: Deutsche Bank considers multibillion bond buyback

European markets open higher

To match Feature BRITAIN-LONDON/Silhouetted workers walk in front of office towers in the Canary Wharf financial district in London February 16, 2011.

European stock markets are crawling higher in early trading, after two days of hefty falls.

The FTSE 100 index of major blue-chip London shares is 26 points higher (+0.3%), led by mining group Anglo American (up 3%).

The other European markets are also gaining a little ground, with Spain’s IBEX up 1.1% and the French CAC up 0.7%.

So, not exactly a big rally. Traders will be hoping it lasts, after seeing fears over the global economy take hold on Tuesday. I suspect they’ll try to sit tight until Fed chair Janet Yellen testifies to Congress in 7 hours time.

Tony Cross, market analyst at Trustnet Direct, says:

Once again the FTSE-100 has kicked off the session with a modest bounce, recovering some of yesterday’s gains in the process, but the underlying situation appears little changed.

Crude oil prices may be ticking higher but they are still in what could be termed ‘distressed’ territory below $30/barrel, although despite all this there’s a definite air of risk-on returning to markets.

A man scratches his head as he looks at an electronic stock board showing Japan’s Nikkei 225 in Yokohama, near Tokyo, Wednesday, Feb. 10, 2016. Asian stock markets fell for a third consecutive day Wednesday, beset by nerves about shaky global growth, falling oil prices and possible capital shortfalls at major European banks. (AP Photo/Eugene Hoshiko)

An electronic stock board in Yokohama, near Tokyo, today Photograph: Eugene Hoshiko/AP

Japan’s stock market also had a rough day, losing another 2.3% and sending the Nikkei to a fresh 16-month low.

The selloff was partly fuelled by fears that central bankers are losing the battle to keep economies afloat.

My colleague Martin Farrer explains:

One analyst said markets could be seeing the start of the “final capitulation” as the attempt by central banks to stimulate growth with cheap money since the global financial crisis in 2008 had run its course.

“The artificial support from central banks is at a crossroads,” said Evan Lucas, of IG in Melbourne. “Central bank intervention will no longer create the holding pattern of the past year; markets now believe banks are out of ammunition.”

Here’s Martin’s news story on the Asian selloff:

The heavy falls on the Australian stock market has triggered fears that we’re entering another GFC, or Global Financial Crisis.

ABC News explains:

Stockbroker and author of Marcus Today, Marcus Padley, holds the view that this week’s Australian bank sell-off is more about fear than reality.

“There is fundamentals and there is sentiment, and people are very fearful of another GFC-style event,” he told ABC News Online.

This chart shows how the Australian market has now shed more than 20% since last April.

The Australian stock market

The Australian stock market since January 2015. Photograph: Thomson Reuters

Australia enters bear market

Australia’s stock market has been dragged into bear market territory as the the global market rout hit Asia again.

The country’s benchmark index, the S&P/ASX 200, endured a rough day and finished down 1.2% at 4775.7 points.

That’s more than 20% below last April’s peak, that calm time before fears over the global economy (particularly China) began to hit shares worldwide.

It means Australia joins Japan’s Nikkei, China’s Shanghai Composite, and Britain’s FTSE 100 in bear market territory.

Financial shares were hit, with Bank of Queensland tumbling by almost 7%, and energy companies also led the selloff.

Australian investors are getting spooked by events across the globe, says Reuters:

Persistent fears about slowing global growth and the Chinese economy, the health of Europe’s banking sector and concerns that Beijing and major central banks might not be able to turn things around have combined to rattle investors.

“What’s the scary part about this is we can see things get pretty ugly, pretty quickly,” said Evan Lucas, market strategist at IG in Melbourne.

Updated

The Agenda: Oil, Deutsche Bank and Yellen

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Hold onto your hats, because it’s going to be another stressful day in the financial world.

With concerns over the banking sector mounting, investors have three items on the agenda today.

1) Deutsche Bank. Germany’s biggest lender is fighting back against concerns over its financial strength, which drove its shares to a record low last night. There are reports that Deutsche is considering buying some of its debt back, to reassure investors.

2) Janet Yellen. The head of the Federal Reserve testifies to Congress today (3pm GMT, or 10am local time).

She’ll be quizzed about the state of the world economy, the banking sector, and whether she’s considering imposing negative interest rates in America (just two months after raising borrowing costs)

3) Oil. The canary in the global economic coalmine had a bad Tuesday, plunging by around 9% to around $30 per barrel. That’s putting more stress on the energy industry, and also the banks, who could suffer heavy losses if producers default on their loans.

London’s stock market hit a three-year low yesterday, but traders are suggesting it could be a calmer morning.

Economic-wise, the latest UK industrial production data is released at 9.30am. That will show if British factories suffered from the global slowdown in December.

And on the corporate front, we get results from (among others) UK chipmaker ARM this morning, and social media network Twitter late tonight.

We’ll be tracking all the main events through the day….

Updated

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