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from Global Investing:
Three snapshots for Monday
The yield on 10-year U.S. Treasuries, fell to their lowest levels since early October today, breaking decisively below 1.80 percent. That compares to the dividend yield on the S&P 500 of 2.28%.
The European Central Bank kept its government bond-buy programme in hibernation for the ninth week in a row last week. The ECB may come under pressure to act as yields on Spanish 10-year government bonds rose further above 6% today.
Output at factories in the euro zone unexpectedly fell in March, the latest in a series of disappointing numbers signalling that the bloc's recession may not be as mild as policymakers hope. On an annual basis, factory output dived 2.2 percent in March, the fourth consecutive monthly slide, Eurostat said, and only Germany, Slovenia and Slovakia were able to post growth in the month.
from Global Investing:
Big Fish, Small Pond?
It's the scenario that Bank of England economist Andrew Haldane last year termed the Big Fish Small Pond problem -- the prospect of rising global investor allocations swamping the relatively small emerging markets asset class.
But as of now, the picture is better described as a Small Fish in a Big Pond, Morgan Stanley says in a recent study, because emerging markets still receive a tiny share of asset allocations from the giant investment funds in the developed world.
These currently stand at under 10% of diversified portfolios from G4 countries even though emerging markets make up almost a fifth of the market capitalisation of world equity and debt capital markets. In the case of Japan, just 4% of cross-border investments are in emerging markets, MS estimates.
But change is on its way. MS surveys show most classes of global institutional investors intend to boost allocations to emerging markets, including the more conservative investor groups -- Japan's $1.3 trillion government pension insurance fund, for instance, plans to start buying emerging equities later this year. MS analysts calculate allocations to emerging markets could rise 3.5% over the next five years.
That may not sound like much until one realises the true scale of the global pool of investable institutional assets and compares them with current market cap values in developing countries . These assets currently exceed $212 trillion, meaning a 3.5 % allocation increase will bring over $2 trillion into emerging markets. That's over half the capitalisation of EM equity market, more than 80% of bond markets and a third of the combined market cap of both sectors.
Take a look at some more numbers:
-- Based on current market values, a 1% increase in allocation to EM by pension and insurance funds represents a $524 billion flow to EM assets.
from Global Investing:
Three snapshots for Thursday
The European Central Bank kept interest rates on hold on Thursday. President Mario Draghi urged euro zone governments to agree a growth strategy to go hand in hand with fiscal discipline, but as thousands of Spaniards protested in the streets he gave no sign the bank would do more to address people's fears about the economy
The divergence between Euro zone countries is starting to impact analyst estimates for earnings. As this chart shows earnings forecasts for Spain and Portugal are seeing more downgrades than Germany or France.
The inflation rate in Turkey rose to 11.1% in April, putting pressure on the central bank to raise interest rates:
from Breakingviews:
Mervyn King’s mini mea culpa is missed opportunity
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
“Don’t blame me, blame the banks.” That, in a nutshell, is Mervyn King’s assessment of Britain’s most severe recession for seventy years. The Bank of England governor admitted in his radio lecture to not shouting loudly enough about financial risks. Yet his retrospective largely ignored the many criticisms of central bank policy, after as well as before the crisis. That’s a missed opportunity.
Anyone who tuned in expecting new insights about the financial crisis will have been disappointed. King offered a conventional - and partial - explanation of what went wrong: banks became risky, interconnected and too big to fail. When the financial system wobbled, taxpayers and central banks were able to avert a total collapse, but not a severe recession. Even King’s mea culpa came with an excuse: because the central bank was stripped of responsibility for regulating banks in 1997, it could not intervene directly.
King’s praise of pre-crisis monetary policy was especially baffling. The governor insisted that the central bank had got it about right, because there was “a bust without a boom”. That totally ignores the giant debt-fuelled property bubble that helped bring about Britain’s subsequent economic woes. And if the Bank of England was broadly correct before, why has it set up a Financial Policy Committee, chaired by the governor, which is seeking far-reaching powers to prevent future bubbles?
King may have felt that a radio broadcast, the first such peacetime address since 1939, was not the best forum in which to explore such contradictions. Besides, Federal Reserve Chairman Ben Bernanke and former European Central Bank President Jean-Claude Trichet have hardly been more apologetic. And lack of contrition has so far proved a successful strategy. The Bank of England has emerged from the crisis more powerful than ever, while the Financial Services Authority, which has completed several painful self-examinations, has been dismembered.
Such stubbornness may yet backfire. The Bank of England is under intense pressure for its expanded responsibilities to be combined with greater transparency and accountability. King’s self-congratulatory revisionism will only embolden his growing band of critics. The governor’s successor, who is due to take over in July 2013, may face greater restraints.
from Breakingviews:
Fed’s rising growth, falling inflation are wishful
By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Ben Bernanke seems to be just hoping for the best. Wednesday’s Federal Open Market Committee statement talks about a pick-up in growth even as inflation declines from the current run-rate above the Federal Reserve’s 2 percent target. These trends aren’t apparent from recent data, and the U.S. central bank needs contingency plans if things don’t pan out so conveniently.
The Fed’s expectation that growth, though now subdued, will gradually build seems inconsistent with the latest report on U.S. durable goods, which showed orders down 4.2 percent - and with relatively weak employment data for March. Furthermore, Fed Chairman Bernanke acknowledged the headwind facing the U.S. economy with the expiry of tax cuts enacted in 2001 and 2003 and the start of spending cuts mandated by the debt ceiling deal in Congress last August.
On the inflation side, inflation measured using personal consumption expenditures was 2.3 percent in the year to February and core PCE inflation, excluding food and energy, was 1.9 percent. The FOMC’s forecast, which ranges upwards to about 2 percent, appears optimistic particularly as quickening growth would normally lead to an acceleration in inflation.
Energy prices could provide a caveat. If oil gets cheaper in the United States, joining domestic gas whose price has been torpedoed by a glut, the U.S. economy could benefit beyond the energy sector, restoring manufacturing jobs and reducing costs in energy-intensive industries. But encouraging large-scale oil drilling isn’t Bernanke’s turf, even if it might help vindicate the Fed’s forecast.
That means the Fed needs contingency plans to deal with lower-than-anticipated growth or unexpectedly high inflation. It’s notable that 10 out of 17 FOMC participants (not all of whom vote each year on policy) expect the federal funds rate to be 1 percent or higher by December 2014 - suggesting that the Fed commitment to keeping rates below 0.25 percent until then is already fading, in reality if not yet on paper. That’s a welcome hint of needed policy flexibility at an uncertain time.
from Global Investing:
The “least worst” option?
Western governments saddled with mountainous debts will "repress" creditors and savers via banking regulation, capital controls, central bank bond buying and currency depreciation that effectively puts sovereign borrowers at the top of the credit queue while simultaneously wiping out real returns for their bond holders. So says HSBC chief economist Stephen King in his latest report this week called "From Depression to repression".
Building on the work of U.S. economist Carmen Reinhardt and others, King's focus on the history of heavily indebted governments applying "financial repression" to creditors arrives at several interesting conclusions. First, even though western governments appeared successful in using these tactics to reduce massive World War Two debts alongside brisk economic growth during the 1950s and 1960s, King argues that the debt was cut mainly by the impressive economic growth and tax revenues during that "Golden Age" - and this was mostly down to the once-in-a-century period of relative peace that involved unprecedented integration and cooperation among western governments also engaged in a Cold War with the Soviet Union. Compared to this boost, the financial repression was a "sideshow", he reckons. To show that, he applies
Instead, King says governments will adopt this repression tactic anyway just to stave off draconian austerity now and prevent a destabilising surge in economy-wide borrowing rates. This will effectively reduce the amount of credit to the rest of the private sector, or at least elevating its cost, while reducing the pressure on governments to cut the debt levels quickly. The net result, then will likely be "persistently lower growth", whatever your conclusion about the desirability of state or the market allocation of resources.
And, in the absence of an obvious alternative, repression may also be the "least worst" option, King argues.
from Breakingviews:
The Bank of England needs a home-grown governor
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Must the governor of the Bank of England be English? That’s the intriguing question raised by a report that Mark Carney, the governor of the Bank of Canada, has been sounded out as a possible replacement for Mervyn King, who is due to retire next year.
In most other developed countries, the question would not even arise. It’s inconceivable that, say, an American could be head of the European Central Bank, or that the Federal Reserve would choose a German or Chinese chairman.
The UK is different. It has long shown an admirable willingness to install foreigners into senior positions. Almost half the chief executives of the constituents of the FTSE 100 index aren’t British. Quintessentially English sporting events like Wimbledon and the Oxford-Cambridge boat race are dominated by foreign contestants. Even England’s national football team was, until recently, managed by an Italian.
But such internationalism has its limits. The governor of the Bank of England is no faceless technocrat; he is the most powerful non-elected official in the country. The job has become more powerful, and more political, since the financial crisis. The central bank has embarked on a controversial bond-buying spree and is set to receive sweeping new powers for regulating banks and pricking future financial bubbles.
The governor will be at the very heart of economic and social policy. King has been rightly criticised for the Bank of England’s lack of transparency and accountability. The last thing his successor will need is a row over nationality.
from Global Investing:
Three snapshots for Monday
Spanish 10-year bond yields hit 6%, around the levels seen in Ireland/Portugal and Italy/Spain at the start and resumption of ECB bond purchases.
U.S. retail sales rose more than expected in March as Americans shrugged off high gasoline prices.
Currency speculators boosted their bets against the euro in the latest week. Figures from the Commodity Futures Trading Commission released on Friday showed a jump in euro net shorts of 101,364 contracts this week from 79,480 previously.
from MacroScope:
What have a trillion euros done for the economic outlook? Not much yet
The trillion euro sugar rush that made Q1 the best start to the year for global stocks in more than a decade has already worn off, but what is most striking is not how quickly it ended. It’s how little the economic outlook has changed.
Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters, who generally are the most bullish of the lot with or without wads of cheap money.
An analysis of Reuters Polls over the past three months, starting just before the European Central Bank made the first of two gargantuan injections of cheap three-year money into the banking system, reveals what many have fretted might happen.
Derived from professional market forecasters and economists, they showed that the cash would probably do a lot to push up asset prices in the short term but do little to help a stalled euro zone economy with rising unemployment.
The consensus for Q1 euro zone GDP has stagnated at a quarterly contraction of 0.2 percent in the past three monthly Reuters polls, starting from the December poll, taken before the ECB’s first of two long-term refinancing operations (LTROs).
Over the same period, the outlook for 2012 growth as a whole deteriorated from none at all to a mild 0.3 percent contraction.
Frankfurt's DAX had its best Q1 since 1998, up a staggering 18 percent. European shares more broadly rose 7 percent - still, the kind of return an investor might hope to get during a good year, not three months.
from MacroScope:
Who’d be a central banker?
The focus is already on the euro zone finance ministers meeting in Copenhagen, starting on Friday, which is likely to agree to some form of extra funds for the currency bloc's future bailout fund. What they come up with will go a long way to determining whether markets scent any faltering commitment on the part of Europe's leaders.
In the meantime, top billing goes to Bundesbank chief Jens Weidmann speaking in London later. He is heading an increasingly vocal group within the European Central bank who are fretting about the future inflationary and other consequences of the creation of more than a trillion euros of three-year money. There is no chance of the ECB hitting the policy reverse button yet but the debate looks set to intensify. A combination of German inflation and euro zone money supply numbers today (which include a breakdown on bank lending) will give some guide to the pressures on the ECB.
Central bankers face a very mixed picture with U.S. recovery and high oil vying with the unresolved euro zone debt crisis and signs of slowdown in China.
Bank of England Governor Mervyn King was sitting firmly on the fence yesterday, saying he did not know whether more QE would be required in Britain or not. Tellingly, he also did not know whether euro zone policymakers will take advantage of the window of opportunity offered them by the ECB or not. King illuminated a common theme coming from central bankers, saying the onus was firmly on the politicians now, while his colleague Adam Posen noted that the reason Britain’s recovery has lagged America’s is because of the former’s tough austerity measures. That’s another debate that is echoing around the euro zone. In the States, Bernanke said it is too soon to declare victory in the U.S. economic recovery.
Back to the euro zone and Spanish media was alive with reports that the EU was pressing Madrid to take a bailout to recapitalize its wobbly banks. The denials from both centres were so emphatic that it seems not to be true. It seems EU Competition Commissioner Joaquin Almunia spelled out three options to clean up Spain's banking sector: using Spanish public funds, finding private investment or applying for European aid. Journalists present leapt on the latter. That may well become true in the end ... but not yet.
Spain faces a general strike on Thursday while Prime Minister Mariano Rajoy is promising Friday's 2012 budget will deliver eye-watering austerity for a country already sinking back into recession.
