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Central Banks Pile Into Europe’s Common Debt; Fed’s Energy-Debt Buying Continues to Raise Questions
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Central banks were among the biggest buyers of European common debt last week, signaling growing trust that the euro will hold its own through the pandemic. Meanwhile, critics of the Fed's corporate bond buying say it has given a lifeline to the fossil-fuel industry. Oil-and-gas companies have issued roughly $129 billion in new debt this year, mostly since the Fed started buying corporate bonds, according to a report by nonprofit groups. Looking ahead, U.S. GDP figures and policy announcements from the Bank of Japan and the European Central Bank, all scheduled for Thursday, are the highlights of this week's slate of economic news.
Now on to today’s news and analysis.
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Central Banks Pile Into Europe’s Common Debt
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The European Central Bank has bought so many assets that there is a short supply, but change could result from a wave of EU bond issuance. PHOTO: ALEX KRAUS/BLOOMBERG NEWS
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The European Commission—the European Union’s executive arm—on Tuesday issued its first wave of common debt to finance its coronavirus-relief programs. It raised €17 billion, equivalent to $20 billion, from the sale of 10-year and 20-year bonds.
Close to 40% of the benchmark 10-year bond was snapped up by central banks’ reserve managers, which is about double the average for prior European bonds, according to research from Deutsche Bank. They also bought 13% of the 20-year bond.
“Demand signals a vote of confidence on the euro as a reserve asset,” said George Saravelos, global head of FX research at Deutsche Bank.
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Fed’s Purchase of Energy Debt Continues to Raise Questions
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The Federal Reserve’s purchase of bonds issued by energy companies continues to draw scrutiny, even as central bank officials say it is part of their broader efforts to support corporate borrowing and is intended to help the economy navigate the coronavirus pandemic.
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China Trade War Didn’t Boost U.S. Manufacturing Might
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President Trump’s trade war against China didn’t achieve the central objective of reversing a U.S. decline in manufacturing, economic data show, despite tariffs on hundreds of billions of dollars of Chinese goods to discourage imports. The tariffs did succeed in reducing the trade deficit with China in 2019, but the overall U.S. trade imbalance was bigger than ever that year and has continued climbing, soaring to a record $84 billion in August as U.S. importers shifted to cheaper sources of goods from Vietnam, Mexico and other countries.
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U.S. Government Bonds Yields Remain Near Highest Level Since June
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U.S. government bond yields posted their largest weekly gain since August, lifted by signs of economic recovery and the hopes for economic stimulus before or after the presidential election.
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Key Developments Around the World
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U.S. Economic Activity Picks Up While Europe’s Stalls
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Economic activity in the U.S. grew at the fastest pace in more than a year and a half as businesses anticipated greater demand. The optimism contrasts with Europe, where a resurgence of coronavirus cases and new business restrictions are threatening to halt the region’s recovery.
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A Global Rebound Could Be Shaped by How Freely Households Spend
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Households around the world responded to the coronavirus pandemic and its related effects by sharply boosting their savings. What they do with that cash could help shape the global economic recovery.
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Chileans Vote to Change Dictatorship-Era Constitution
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Financial Regulation Roundup
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Chinese Digital-Currency Stocks Rise as PBOC Signals Support
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Chinese digital-currency stocks rose sharply early Monday after the People's Bank of China signaled support for the digital yuan in its latest version of a proposed banking law. The People's Bank of China released a draft banking law over the weekend that recognizes the yuan in the digital form, which provides more legal ground for a wider adoption and regulation of the electronic currency. (Dow Jones Newswires)
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SEC Provides Fewer Warnings of Potential Civil Action
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Fewer companies are receiving warnings of potential civil-enforcement actions from the Securities and Exchange Commission as more businesses under investigation opt to defend themselves before receiving a “Wells notice.”
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Banks Navigate Hazy Regulations to Serve Cannabis Businesses
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Many financial institutions looking to offer banking services to the expanding number of legal cannabis growers and distributors in the U.S. are still limited by spotty regulations and expensive compliance efforts.
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ETF Clones Multiply in Industry Fee War
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The race to zero on Wall Street is so competitive that some of the biggest asset managers are creating cheaper knockoffs of their most popular exchange-traded funds.
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10:30: Swiss National Bank Chairman Thomas Jordan gives speech on financial conditions and the Swiss financial centre at Lugano Banking Day.
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03:30: Michele Bullock, Reserve Bank of Australia Assistant Governor gives speech to Ayr Chamber of Commerce.
08:45: Andrea Enria, Chair of the Supervisory Board of the European Central Bank, makes introductory statement at the ECON Committee of the European Parliament.
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Capital One Opens Wallet on Credit Performance
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Analysis of third-quarter credit performance at Capital One offers credence to the notion of a so-called “K-shaped” recovery, Telis Demos writes at Heard on the Street. "Some people are doing as well if not better than they were at the outset of Covid-19, with strong savings and restrained spending. But people who are struggling may simply be falling out of the mainstream lending realm—and thus out of the metrics for companies like Capital One."
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Fewer major U.S. companies are defaulting on their debt than investors feared just months ago, a boost to corporate bond prices and an encouraging sign for the U.S. economy.
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Services activity in the middle of the U.S. expanded in October, and expectations improved, according to a monthly survey by the Kansas City Fed. The Tenth District Services Survey's composite index came in at 12, up from minus 7 in September. (Dow Jones Newswires)
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Italian government bond yields fell sharply on Monday after S&P Global Ratings' affirmed the country's 'BBB' rating and improved its outlook to 'stable' from 'negative' in a surprise move. The 10-year Italian-German yield spread narrowed more than 7 basis points to 127 basis points, according to Tradeweb. (DJN)
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Brazil's inflation rate accelerated in the month through mid-October as the cost of food continued to rise. Consumer prices rose 0.94%, the biggest increase for the period since 1995, Brazil's Institute of Geography and Statistics said. (DJN)
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South Korea's economy likely grew 1.7% in the third quarter from the prior quarter, according to the median estimate of a WSJ poll of seven economists. (DJN)
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This newsletter is compiled by James Christie in San Francisco and Ed Ballard in London.
Send us your tips, suggestions and feedback. Write to:
Jon Hilsenrath, Michael Derby, Nell Henderson, Nick Timiraos, Jason Douglas, Paul Hannon, Harriet Torry, Kate Davidson, David Harrison, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Michael Maloney, Paul Kiernan, James Glynn
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