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from Global Investing:

Strong dollar, weak oil and emerging markets growth

Many emerging economies have been banking on weaker currencies to revitalise economic growth.  Oil's 25 percent fall in dollar terms this year should also help. The problem however is the dollar's strength which is leading to a general tightening of monetary conditions worldwide, more so in countries where central banks are intervening to prevent their currencies from falling too much.

Michael Howell, managing director of the CrossBorder Capital consultancy estimates the negative effect of the stronger dollar on global liquidity (in simple terms, the amount of capital available for investment and spending) outweighs the positives from falling oil prices by a ratio of 10 to 1. Not only does it raise funding costs for non-U.S. banks and companies, it also usually forces other central banks to keep monetary policy tight, especially in countries with high inflation or external debt levels. Howell says:

If you get a strong dollar and intervention by EM cbanks what it means is monetary tightening...The big decision is: do they allow currencies to devalue or do they defend them? But when they use reserves to protect their currencies, there is an implicit policy tightening.

The tightening happens because central bank dollar sales tend to suck out supply of the local currency from markets, tightening liquidity.   That effectively drives up the cost of money, as banks and companies scramble for cash to meet their daily commitments.  Central banks can of course offset interventions via so-called sterilisations - for instance when they buy dollars to curb their currencies' strength, they can issue bonds to suck up the excess cash from the market. To ease the tight money supply problem they can in theory print more cash to supply banks.  But while many emerging central banks did sterilise interventions in the post-crisis years when their currencies were appreciating, they are less likely to do so when they are trying to stem depreciation, says UBS strategist Manik Narain.  So what is happening is that (according to Narain):

from The Great Debate:

Sanctions finally find Russia’s Achilles heel

Russia's President Vladimir Putin gestures as he chairs a government meeting at the Novo-Ogaryovo state residence outside Moscow

Russian President Vladimir Putin and President Barack Obama were reportedly engaged in a heated telephone conversation last Thursday when Putin noted in passing that an aircraft had gone down in Ukraine. The tragic crash of the Malaysian airliner in rebel-held eastern Ukraine continues to dominate the headlines, but it is important to remember what agitated Putin and prompted the phone call in the first place -- sanctions.

Sanctions against Russia have been the centerpiece of the U.S. response to Putin’s interference in Ukraine. While they primarily have been directed against prominent friends of Putin and their businesses, the underlying target has been a weak Russian economy.  The sanctions have definitely found Russia’s Achilles’ heel, and with harsher sanctions looming in the aftermath of flight MA17, Putin is finding it increasingly difficult to craft an effective reply.

from MacroScope:

New EU takes shape

juncker.jpg

The new EU aristocracy will be put in place this week with the European Parliament to confirm Jean-Claude Juncker as the next European Commission President today and then EU leaders gathering for a summit on Wednesday at which they will work out who gets the other top jobs in Brussels.

Although Juncker, who will make a statement to the parliament today which may shed some light on his policy priorities, is supposed to decide the 27 commissioner posts – one for each country – in reality this will be an almighty horse-trading operation.

from Breakingviews:

Russia harms the BRICs and adds to global risks

By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

BRICs? Perhaps it should be shortened to BICs. Russia’s intervention in Ukraine is a big blow to the Russian economy and also to other embattled emerging economies. It’s not good for the global picture either, as the redirection of funds makes developed markets more bubbly and vulnerable.

from Global Investing:

Emerging equities: out of the doghouse

Emerging stocks, in the doghouse for months and months, haven't done too badly of late. The main EM index,  has rallied more than 11 percent since its end-August troughs, outgunning the S&P 500's 3 percent rise in this period. Bank of America/Merrill Lynch strategist Michael Hartnett reminds us of the extreme underweight positioning in emerging stocks last month, as revealed by his bank's monthly investor survey.  Anyone putting on a long EM-short UK equities trade back then would have been in the money with returns of 540 basis points, he says.

Undoubtedly, the postponement of the Fed taper is the main reason for the rally.  Another big inducement is that valuations look very cheap (forward P/E is around 9.9 versus a 10-year average of 10.8) .

from Global Investing:

Bernanke Put for emerging markets? Not really

The Fed's unexpectedly dovish position last week has sparked a rally in emerging markets -- not only did the U.S. central bank's all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as "a triple whammy for EM." A positive triple whammy, presumably.

Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy -- the assumption, dating back to Alan Greenspan's days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money -- remember the cacophony at this month's G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan's June 12 article on the EM-Fed linkages)

from Global Investing:

Russian stocks: big overweight

Emerging stocks are not much in favour these days -- Bank of America/Merrill Lynch's survey of global fund managers finds that in August just a net 18 percent of investors were overweight emerging markets, among the lowest since 2001. Within the sector though, there are some outright winners and quite a few losers. Russian stocks are back in favour, the survey found, with a whopping 92 percent of fund managers overweight. Allocations to Russia doubled from last month (possibly at the expense of South African where underweight positions are now at 100 percent, making it the most unloved market of all) See below for graphic:

BofA points out its analyst Michael Harris recently turned bullish on Russian stocks advising clients to go for a "Big Overweight" on a market that he reckons is best positioned to benefit from the recovery in global growth.

from MacroScope:

Turning up?

Manufacturing PMI surveys for euro zone countries and Britain will be the latest litmus test of the durability of fledgling economic recoveries.

Even the readings from Spain and Italy have shown improvement over the summer so it may well be that they are the most interesting given we’ve already had flash readings for the euro zone, Germany and France which showed business activity across the currency bloc picked up faster than expected in August.

from Global Investing:

Tapping India’s diaspora to salvage rupee

What will save the Indian rupee? There's an election next year so forget about the stuff that's really needed -- structural reforms to labour and tax laws, easing business regulations and scrapping inefficient subsidies. The quickest and most effective short-term option may be a dollar bond issued to the Indian diaspora overseas which could boost central bank coffers about $20 billion.

The option was mooted a month ago when the rupee's slide started to get into panic territory but many Indian policymakers are not so keen on the idea

from Global Investing:

Turkey’s central bank — a little more action please

In the selloff gripping emerging markets, one currency is conspicuous by its absence -- the Turkish lira. But this will change unless the central bank adds significantly to its successful lira-defensive measures.

Hopefully at today's policy meeting.

Like India or Indonesia which have borne the brunt of the recent rout, Turkey has a large current account deficit, equating to over 5 percent of its economic output. But what has made the difference for the lira is the contrast between the Turkish central bank's decisive policy tightening moves and the ham-fisted tactics employed by India and Brazil.  (We wrote here about this).  See the following graphic (from Citi) that shows the central bank has effectively raised the effective cost of funding by 200 basis points to around 6.5 percent since its July 23 meeting.

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