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Daily Agenda: Carney Enters the Brexit Debate

Tory MP charges central banker with playing politics; Japanese GDP data confirm contraction; China trade data disappoints.

Bank of England Governor Mark Carney stepped into the line of fire today during a parliamentary hearing over the central bank’s views of a possible U.K. departure from the European Union. Conservative MP Jacob Rees-Mogg, a so-called Eurosceptic, aggressively attacked Carney for statements the central banker made that argued that a U.K. exit from the EU would have negative economic repercussions. According to Rees-Mogg, Carney exceeded the mandate of the Bank of England by wading into a political debate. Carney responded that the Bank of England was solely commenting on economic factors and had made no recommendations of a political nature. During the session, the pound sterling declined versus major currencies as traders assessed potential political motivations for a Brexit, despite short-term damage that most experts agree would ensue. For European Central Bank president Mario Draghi, who testified before the European Parliament that it was his view that concessions made to the U.K. were insufficient to guarantee that it would vote to remain within the EU, this comes as a further complication before his bank’s monetary policy announcement this Thursday. Struggling with slow growth that has exacerbated deflationary pressures, Draghi is loath to lose critical intra-EU trade with Britain.

Japanese GDP revision better than forecast, if still negative. Today the Japanese cabinet office released revised data in which GDP contracted 0.3 percent versus the prior quarter or an annualized –1.1 percent. Despite the contraction, the figures marked an improvement over initial estimates and outperformed consensus forecasts. Still, the reading confirms the enormity of the issues facing Bank of Japan governor Haruhiko Kuroda and Prime Minister Shinzo Abe as their efforts to combat deflation have been thwarted by global volatility that has driven the yen higher despite easing efforts. Current consensus estimates among economists project another contraction for the first quarter to confirm a recession, with the yen rising more than 5 percent versus the U.S. dollar year-to-date.

Chinese trade data disappoints. Both import and export data for February issued by China’s General Administration of Customs today fell well short of consensus expectations with a 25.4 percent year-over-year decline in shipments abroad. The data marked the sharpest contraction on record in local currency terms. While sobering, the data is subject to seasonal distortions caused by the timing of the Lunar New Year celebration that effectively shut down commerce for more than a week.

SCOTUS refuses to hear firms’ tax appeal. Yesterday the U.S. Supreme Court rejected appeals from three financial services companies seeking to overturn unfavorable tax rulings. Two banks, Bank of New York Mellon Corp. and BB&T Corp., and insurer American International Group executed structured transactions designed by Barclays to generate foreign tax credits that lower courts deemed to be abusive since they were solely motivated to offset taxes. More than $1.5 billion in deductions were denied to the three financial firms.

SEC sues over failed Curt Schilling video game. The Securities and Exchange Commission unveiled yesterday a suit against Wells Fargo & Co. as well as the Rhode Island Economic Development Corp., a state agency, alleging that the two misled investors during a bond offering by a video game company run by Hall-of-Fame Boston Red Sox pitcher Curt Schilling. The suit alleges that Schilling’s firm informed both the bank and agency that it required $75 million to launch its initial product but that this was not disclosed to investors who placed a total of $50 million with the firm. Schillings company, 38 Studios, subsequently defaulted after failing to find the additional capital.

Portfolio Perspective: Is Demand Rising in China? — Robert Savage, CCTrack Solutions

The biggest story overnight is in the China trade report — with imports minus 13.8 percent year over year — weaker than the minus 10 percent year over year expected. But these imports are better than the minus 18.8 percent from January and the minus 20.5 percent in February 2015. The timing of the Chinese Lunar New Year makes demand comparisons difficult and taints much of the report, however. Digging down into the details, the breakdown from the customs administration shows that imports of commodities in February were significantly higher in volume terms, even though their value is still falling due to the drop in global commodity prices. The volume of crude-oil imports jumped 24 percent year over year in February and iron-ore imports were up 8.3 percent year over year, suggesting companies are taking advantage of low global prices to start restocking on the expectation of a pickup in domestic economies. Data from Port Hedland, Australia’s largest iron-ore shipping hub, showed iron-ore exports rose to 36.6 million tons in February, up from 33.7 million tons in January. February’s iron-ore imports, after adjusted for the number of working days, came to a new record of 4.6 million tons a day. Last December when iron-ore imports were at a monthly record, average daily imports were only 4.18 million tons. The same factors were at work for crude-oil imports, which also rose to a new daily record of eight million barrels in February after adjusting for working days.

Robert Savage is the chief executive officer of CCTrack Solutions, a hedge fund firm, in New York.

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