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Australian inquiry slams greedy banks and regulator for rampant misconduct

Australia's big banks and wealth managers pursued profit ahead of their customers' interests and saw regulatory compliance as a cost rather than a guide to proper conduct, a scathing interim report from a commission of inquiry said on Friday. The sector has been rocked by months of revelations of wrongdoing stemming from the Royal Commission, driving down share prices and trashing the reputations of some of the country's biggest companies. Commissioner Kenneth Hayne's report was brutal in its assessment of the industry's ethical standards and governance while also criticizing efforts by the regulator to police behavior, although it did not immediately recommend any legal action or reform. A final report is due in February. In almost 60 days of public hearings, the inquiry has heard instances of bribery, fraud, fee-gouging and board-level deception across the industry. Some of the more shocking allegations included the charging of fees to dead people, persuading a legally blind pensioner to be a loan guarantor without warning her of the risks, and the aggressive selling of a complicated insurance product to a boy with Down Syndrome over the telephone. The three-volume report blamed a widespread culture of avarice. "Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?" it said. The banking lobby said the interim report marked a "day of shame" for the country's lenders. "There are no excuses for the behavior that has been exposed by the Royal Commission," said Anna Bligh, chief executive of the Australian Banking Association. In separate statements, the Commonwealth Bank of Australia (AX:CBA), Westpac Banking Corp (AX:WBC), Australia and New Zealand Banking Group (AX:ANZ) and National Australia Bank (AX:NAB) acknowledged the wrong-doing raised in the report. They pledged to provide a more comprehensive response in October. The four are due to face questioning over the report before a parliamentary committee next month. The lack of immediate recommendations helped lift Australia's financial index (AXFJ) 1.6 percent on Friday. The big four banks have lost some A$30 billion ($22 billion) in combined market value since the commission was announced in late November last year. The report said the inquiry would probe further into whether commission remuneration structures for mortgage brokers and financial advisers - a pillar of the sector's profitability - could actually serve customers properly. "Should financial product sellers be permitted to provide financial advice ... at all?" the report said. The final report could recommend major regulatory reform for banks, financial advisers, pension funds and insurers, as well as civil and criminal prosecutions. In addition to the banks, wealth manager AMP Ltd (AX:AMP) has taken a huge reputational hit due to the inquiry while the nation's insurers have also come under fire. REGULATORY WEAKNESS Treasurer Josh Frydenberg said the report demonstrated a need for the corporate regulator, the Australian Securities and Investment Commission (ASIC), to do more to tackle misconduct in the troubled sector. "They do need to pursue litigation, to impose the penalties that are available to them, rather than some of these negotiated settlements which have seen the perpetrators of these offences or misconduct get off too lightly," he said. Australia's centre-right government late last year proposed new laws to increase penalties and lengthen prison terms for financial crimes in a bid to strengthen the regulator's enforcement powers. In particular, the inquiry found ASIC was too quick to negotiate settlements with banks following breaches. "Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn-out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct," the report said. ASIC said in a statement on Friday that it would work towards building a system of tougher penalties.

Italy hikes deficit goal, defies EU and rattles markets

Italy's new government proposed a 2019 budget with a deficit three times bigger than the previous administration's target, setting up a clash with the European Commission and sparking a sell-off of state bonds. Italy has the heaviest debt burden among big European Union economies, at 130 percent of gross domestic product. It is under pressure from the EU to rein in spending amid fears it could sow the seeds of a debt crisis in the heart of the euro zone. The four-month-old government late on Thursday night offered a budget with a deficit of 2.4 percent of GDP for the next three years, to fund a major expansion of welfare spending, tax cuts and a boost to public infrastructure investment. It marked a victory for ruling-party chiefs over Economy Minister Giovanni Tria, an unaffiliated technocrat who had been seen by investors as a comparative fiscal conservative. Tria had initially wanted a deficit set as low as 1.6 percent next year, hoping to respect European Union demands that Italy progressively cut the fiscal gap to rein in its debt. The euro slumped on the news overnight before recovering ground. Italian bonds were set for their worst day in over three months, and banking shares also swooned, though fears of a savage selloff were avoided. "They seem to be on a collision course with Brussels," said ING rates strategist Martin van Vliet. European Economics Commissioner Pierre Moscovici said nothing would be gained from a clash with Italy but added: "We don't have any interest either that Italy does not respect the rules and does not reduce its debt, which remains explosive." The coalition government of the 5-Star Movement and the League, which took power in June, had been pushing for a deficit around 2.4 percent of GDP to fund costly campaign promises. Tria had been trying to hold out for something below 2.0 percent. "There is an accord within the whole government for 2.4 percent, we are satisfied, this is a budget for change," 5-Star leader Luigi Di Maio and League chief Matteo Salvini said in a joint statement after meetings with Tria. The statement appeared to refer only to the 2019 deficit target, but government officials and Justice Minister Alfonso Bonafede later said the same deficit level would be maintained for three straight years to 2021. The policy marks a striking shift from the previous centre-left administration, which had targeted a deficit of 0.8 percent of GDP in 2019 and a balanced budget in 2020. 'A HISTORIC DAY" Tria did not immediately comment, but Di Maio and other government officials said he had no intention of resigning. President Sergio Mattarella, the head of state, called Tria late on Thursday to ask him not to resign and stay on to avoid market uncertainty, several Italian newspapers said on Friday. A meeting of the full cabinet to sign off on the government's economic and financial targets for the next three years ended at around 11 p.m. (2100 GMT) with no news on targets for economic growth or the public debt. The coalition parties say the priority must be financing policies including a basic income for the poor and a reduction in the minimum retirement age, rather than meeting deficit goals previously agreed with Brussels. A 2.4 percent deficit target remains inside the 3.0 percent ceiling prescribed by EU rules, but Italy had promised Brussels it would cut the deficit decisively to curb its mammoth debt. "Today is a historic day, today Italy has changed," Di Maio posted on Facebook (NASDAQ:FB) after the deficit goals were announced. Di Maio said the 2019 budget, which must be presented by Oct. 20, will set aside 10 billion euros ($11.6 billion) for 5-Star's flagship policy of a "citizens' income" of up to 780 euros per month for 6.5 million poor Italians. Salvini said the budget would also allow people to retire earlier, freeing up about 400,000 jobs for the young, and cut tax rates for a million self-employed workers. And in a sign of rising tensions between Rome and Brussels over the budget, a League lawmaker close to Salvini said on Friday that the EU should not risk a battle with Italy while also struggling to deal with Britain's exit from the bloc. "If it wants to open a second front in Italy, then be my guest," said Alberto Bagnai. The European Commission said on Friday it would assess Italy's budget plan, along with those of other euro zone members, in the weeks after their formal presentation by Oct. 15.

Qatar boycott puts it at highest risk of downgrade globally: S&P

Qatar is the country at highest risk of being downgraded by S&P Global Ratings as it continues to feel the impact of a boycott by other Arab states, the rating agency said in a research note. Saudi Arabia, the United Arab Emirates, Bahrain and Egypt cut diplomatic and transport ties with Qatar last year, accusing it of backing terrorism, a charge which Doha denies. The move disrupted Qatar’s imports and led to the withdrawal of billions of dollars from Qatari banks by depositors from the four states, hurting the economy. But the world’s top exporter of liquefied natural gas developed new trade routes and used tens of billions of dollars from its sovereign wealth fund, estimated to have about $320 billion of assets, to protect its banks. Rated AA-(minus) by S&P – three notches higher than Saudi Arabia – Qatar in April demonstrated that it still had easy access to international capital markets, issuing a jumbo $12 billion bond which received orders estimated in excess of $52 billion. “Diplomatic tensions should continue to pressure Qatar's economic, fiscal, and external metrics, especially if the boycott is tightened or prolonged,” the agency said. It added that made Qatar the credit with the highest downgrade risk across all markets. ISLAMIC BONDS According to Mohamed Damak, global head of Islamic finance at S&P, the Qatar boycott and other geopolitical risks have also dampened investor appetite for sukuk, or Islamic bonds, in the whole Gulf Cooperation Council (GCC) region over the last year. “It started with the boycott of Qatar...which we think weakened investors’ view of the cohesiveness of the GCC countries as a block,” he said in a separate note. “The shifts in Saudi Arabia’s power structures and societal norms have also attracted a lot of attention from investors.” Despite Qatar's successful conventional bond issue, a look at the volume of sukuk issued by the state suggests its ability to fund itself through such instruments has been hampered by the rift. Sukuk sales in both local and foreign currency, amounted to $5.5 billion in 2017. Volumes have gone down by over 50 percent to $2.6 billion so far this year, according to S&P. The boycott means that Qatari issuers can no longer rely on demand from regional Islamic investors and banks, which has traditionally been boosted by institutions in need of high-grade sharia-compliant bonds to meet liquidity standards.

Dollar Gains Ground as Markets Digest Fed Rate Hike

The dollar gained ground against the other major currencies on Thursday as markets digested the Federal Reserve’s widely expected rate hike and indications that its remains on track to continue monetary tightening into next year. The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.31% to 94.16 by 04:03 AM ET (08:03 AM GMT). The Fed raised interest rates by a quarter point to 2.25% on Wednesday, its third rate hike this year and its eighth since 2015. In its statement, the Fed said it still foresees another rate hike in December followed by three more in 2019, and one additional increase in 2020. The central bank dropped the word "accommodative" to describe its monetary policy stance in its statement, saying the change does not signal any change in the bank's path toward normalizing monetary policy. Some traders took the change to mean that if the Fed no longer believes its policy is accommodative, it may be moving closer to the end of its monetary tightening cycle. While Fed Chairman Jerome Powell said he does not see inflation surprising to the upside, policymakers revised up their outlook for U.S. economic growth this year and next. The euro was lower against the dollar with EUR/USD down 0.32% at 1.1701. Sterling was also weaker, with GBP/USD down 0.42% to 1.3112 as investors remained pessimistic about prospects for Brexit negotiations between the UK and the European Union. The dollar edged lower against the yen, with USD/JPY dipping 0.11% to 112.60. Elsewhere, the Argentinian peso was lower against the dollar, with ARS/USD down 0.62% at 0.02596 after the country secured a $57 bn loan from the International Monetary Fund. The loan is aimed at supporting Argentina’s economy in the wake of a currency crisis which has seen a run on the peso, and spiraling inflation.

Dollar Ticks Higher Before Federal Reserve Decision

Investing.com - The U.S. dollar gained ground against a currency basket on Wednesday ahead of a widely anticipated rate hike by the Federal Reserve at the conclusion of its policy meeting later in the day. The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.25% to 93.97 by 08:34 AM ET (12:34 GMT). The U.S. central bank is widely expected to raise interest rates by a quarter of a percentage point to 2.25%, in what would be its third rate hike of the year. With the rate hike fully priced in and investors also expecting another rate hike in December attention will be turning to the Fed’s plans for the direction of monetary policy in 2019. Indications that the Fed is looking to remain hawkish next year would likely bolster the dollar, while suggestions that it may slow the pace of rate hikes or that it is coming to the end of its tightening cycle next year could send the greenback lower. Overall market sentiment remained somewhat subdued after U.S. President Donald Trump’s appearance at the United Nations General Assembly on Tuesday, where he reiterated his administrations tough stance on trade saying that his country would "no longer tolerate abuse" on that front. The dollar was steady against the yen, with USD/JPY last at 113.01, up from an intra-day low of 112.74. The euro moved lower, with EUR/USD sliding 0.29% to 1.1730. Sterling was also weaker, with GBP/USD off 0.15% at 1.3157 as investors remain pessimistic about prospects for Brexit negotiations between the UK and the European Union.

China to Cut Import Tariffs to Boost Consumption

China will cut import tariffs on goods including machinery, paper, textiles and construction materials from Nov. 1, in a move that would lower costs for consumers and companies as a trade war with the U.S. deepens. The decision will lower tariffs for 1,585 products, state radio reported, citing a meeting of the State Council. The combination of these and other tariff cuts this year will lower the tax burden on consumers and companies by about 60 billion yuan ($8.7 billion), the radio reported. The Chinese government has yet to detail how the general tariff cut will apply to U.S. goods affected by retaliatory tariffs in the trade war. In theory the same goods can receive a lower basic tariff and still have extra duties piled on by the response to President Donald Trump’s measures. Whether goods affected by the trade war receive this treatment will depend on precisely which items the government selects to cut duties on. The Chinese government hasn’t released that list of the specific goods yet. The average import tax for some machinery will be reduced to 8.8 percent from 12.2 percent, for textiles and construction materials to 8.4 percent from 11.5 percent, and for paper and some other products to 5.4 percent from 6.6 percent, the radio station reported. The decision follows on from similar moves earlier this year which were aimed at reducing prices of imports to stimulate consumption and is in line with China’s pledge to boost imports. Wednesday’s decision will lower the average most-favored nation tariff rate to 7.5 percent from 9.8 percent. China still has a higher average tariff rate than many developed economies. The U.S.’ average applied MFN rate was 3.4 percent in 2017, and in general the Trump administration has accused China of being a protectionist economy. Any reduction of tariffs usually must be offered to all countries equally under World Trade Organization rules, but U.S. goods would still be subject to China’s retaliatory tariffs.

Germany's Altmaier defends plan to protect some industries from foreign takeovers

German Economy Minister Peter Altmaier on Tuesday defended government efforts to shield some firms from foreign takeovers, arguing that the state had a responsibility to protect key technology and certain industrial sectors. The takeover of robotics firm Kuka (DE:KU2G) by China's Midea (SZ:000333) in 2016 spooked Germany, as did the surprise purchase earlier this year of a 9.7 percent stake in Daimler (DE:DAIGn) by Chinese carmaker Geely. In July, the state-controlled KfW bank bought a stake in high-voltage grid operator 50Hertz to prevent China's State Grid acquiring the shareholding, after Berlin failed to find an alternative private investor in Europe for the firm. Speaking to business leaders at an industrial conference in Berlin, Altmaier said: "Germany will remain the most open and most liberal country when it comes to mergers", but the government was considering stricter takeover rules. Berlin must be able to have a closer look at who wanted to buy parts of Germany's critical infrastructure, and senior officials are working on changes to foreign trade regulations to ensure that key technologies remain in German hands, he said. These would include government reviews of foreign acquisitions of stakes in companies below the current 25-percent threshold and expanding which types of purchases must be examined. A government source said last month that Berlin wants the power to investigate if an investor outside the European Union buys at least 15 percent of certain German defense-related or security-linked technology firms. In addition, the government is considering creating a billion-euro fund that could help such firms in financial trouble, another government source told Reuters last week. "We are currently working on an industrial strategy for the Federal Republic of Germany, where we want to clarify our interests," said Altmaier, a senior figure among Chancellor Angela Merkel's conservative cabinet members. In this new industrial strategy, the government would define areas from which the state would have to refrain while also identifying industrial sectors where the state could intervene. Altmaier pointed to efforts to support the European production of battery cells for electric cars, underlining his willingness to subsidize such a venture for a limited period of time until it was profitable on its own. Battery cells are a key battleground in the automotive industry as it shifts to electric motors. Currently the industry sources its requirements mainly from Asian manufacturers.

Oil Prices near 4-Year Highs on Looming Supply Crunch Fears

Oil prices were trading within reach of four year highs on Tuesday amid fears over a looming supply crunch after global producers decided against any increase in production despite calls from U.S. President Donald Trump for action to cool prices. Global benchmark Brent crude futures were up 0.72% at $81.08 a barrel by 08:44 AM ET (12:44 GMT). Prices hit a high of $81.48 on Monday, the most since November 2014. Crude Oil WTI Futures for November were up 0.46% at $72.42, near Monday’s high of $72.74, the strongest level since the week ended July 8. Oil has rallied amid worries over Trump’s plans to reduce Iranian crude shipments to zero through sanctions slated for Nov. 4. A meeting on Sunday of the Organization of the Petroleum Exporting Countries and non-OPEC members, including top producer Russia, ended with no formal recommendation for any additional supply boost to offset falling supply from Iran. Trump has also said he would sell supplies from the U.S. Strategic Petroleum Reserve, if necessary, to curb rising prices at the pump. Khalid al-Falih, energy minister of Saudi Arabia, the kingpin of OPEC, rebuffed Trump’s calls on Sunday, saying: “I do not influence prices.” “The real reason they refused to increase could be that they don’t have enough spare capacity to bring on line quickly,” Phil Flynn, energy analyst at Price Futures Group in Chicago, said, referring to the OPEC decision. Iran's OPEC governor Hossein Kazempour Ardebili was quoted by Reuters as saying that Saudi Arabia and Russia “got prices higher and they are going to get them higher still" and “cannot deliver the extra capacity that they claim”. In other energy trading, Gasoline RBOB Futures rose 0.17% to $2.0507 per gallon, while heating oil rose 0.64% to $2.30 a gallon. Natural gas futures were up 0.33% to $3.039.

Inflation recovery conditional on low rates through summer

The recovery in inflation expected by the European Central Bank is conditional on market interest rates staying low through the summer of next year, the ECB's President Mario Draghi said on Monday. "Steering expectations of the policy rate path was critical because the path of inflation that the Governing Council viewed as moving closer to the objective of a sustained adjustment was – and still is – conditional on a term structure of interest rates that embodies expectations of constant policy rates over an extended period of time after December 2018," he told the European Parliament.

Wall Street to open lower on trade woes; S&P sector reshuffle in focus

U.S. stock indexes were set to open lower on Monday as the latest round of U.S.-China tariffs took effect, with neither country showing signs of backing down from a protracted trade war. The markets could be volatile and trading volumes higher as the S&P 500 sector shuffle takes effect, with the telecoms sector reshaped into a "communications services" index to include heavy-hitting technology stocks such as Facebook Inc (O:FB), Twitter (N:TWTR) and Alphabet (O:GOOGL). Shares of the three companies were down between 0.7 and 1.2 percent in premarket trading, on renewed fears of higher regulation after a report that the White House has drafted a preliminary order to direct federal agencies to probe the business practices of social media and internet firms. U.S. tariffs on some $200 billion worth of Chinese goods took effect on Monday, along with Beijing's retaliatory duties on $60 billion worth of U.S. products, which pressured trade-sensitive stocks. "One of the bigger risks with these tariffs going into effect is that the United States may be pushed out of the Chinese market and it is a growing market," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida. "The markets were up pretty strong last week, keeping that in mind and also the news about trade is enough to contribute to the downward movement," Brown said. Boeing (N:BA), the biggest U.S. exporter to China, dropped 0.4 percent and Caterpillar (N:CAT) 0.5 percent, leading the losers on the Dow Jones Industrial Average (DJI) before the bell. The benchmark S&P 500 (SPX) and blue-chip Dow Industrials have fared better than the Nasdaq (IXIC) of late, as the latest list of Chinese goods subject to tariffs now includes many technology products. Network equipment makers Cisco (O:CSCO) and Netgear (O:NTGR) were down about 0.5 percent. At 8:52 a.m. ET, Dow e-minis (1YMc1) were down 27 points, or 0.1 percent. S&P 500 e-minis (ESc1) were down 4.75 points, or 0.16 percent and Nasdaq 100 e-minis (NQc1) were down 31.75 points, or 0.42 percent. Exxon Mobil (N:XOM) gained 0.5 percent, the most among the Dow components, as did other energy companies as oil prices jumped after OPEC rebuffed calls by President Donald Trump to raise supply. Comcast (O:CMCSA) fell 3.7 percent after it won an auction for Britain's Sky Plc (L:SKYB), ending a battle with Twenty-First Century Fox (O:FOXA) and Walt Disney (N:DIS). Fox and Disney were flat. Symantec (O:SYMC) rose 5 percent after the Norton anti-virus maker said it would not restate previous results, except for a $13 million transaction, after a four-month long probe into its accounting practices. Pandora Media (N:P) jumped 6.2 percent after satellite radio provider Sirius XM Holdings (O:SIRI) said it would buy the music streaming service in an all-stock deal valued at about $3.5 billion. Sirius fell 3.4 percent.