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from Breakingviews:
Buoyant markets too sanguine on end-of-QE threat
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The Fed’s hand is hovering over the wide open tap. The U.S. central bank may cautiously begin to ease its $85 billion monthly dose of quantitative easing. The gold bubble has burst in anticipation. The line of other losers could be long. With less liquidity from the Fed, bonds, commodities and stocks are likely to be hit - probably in that order.
The dollar is the agent of change. Money printing devalued the greenback and beefed up many markets, above all gold. Now the index of the dollar against major trading partners is close to its highest since July 2010. The yen, the euro and the previously rampant Australian dollar are weakening as U.S. bond yields offer new buyers a fraction more.
The yield on 10-year U.S. Treasuries is just short of 2 percent and close to its highest for two months. The Fed’s monthly purchases of Treasury bonds has kept it down but the chances that the Fed will trim its ambitions are growing. The timing and scale of the tightening remain uncertain but the strengthening recovery suggests that bond yields could rise further. Bond investors might avoid a crash, but a long bear market may already be beginning.
from Global Investing:
Weekly Radar: Draghi returns to London
ECB chief Mario Draghi returns to London next week almost 10 months on from his seminal “whatever it takes” speech to the global financial community in The City – a speech that not only drew a line under the euro financial crisis by flagging the ECB’s sovereign debt backstop OMT but one that framed the determination of the G4 central banks at large to reflate their economies via extraordinary monetary easing. Since then we’ve seen the Fed effectively commit to buying an addition trillion dollars of bonds this year to get the U.S. jobless rate down toward 6.5%, followed by the ‘shock-and-awe’ tactics of the new Japanese government and Bank of Japan to end decades.
And as Draghi returns 10 months on, there's little doubt that he and his U.S. and Japanese peers have succeeded in convincing financial investors of central bank doggedness at least. Don't fight the Fed and all that - or more pertinently, Don't fight the Fed/BoJ/ECB/BoE/SNB etc... G4 stock markets are surging ever higher through the Spring of 2013 even as global economic data bumbles along disappointingly through its by now annual ‘soft patch’. Looking at the number tallies, total returns for Spanish and Greek equities and euro zone bank stocks are up between 40 and 50% since Draghi's showstopper last July . Italian, French and German equities and Spanish and Irish 10-year government bonds have all returned about 30% or more. And you can add 7% on to all that if you happened to be a Boston-based investor due to a windfall from the net jump in the euro/dollar exchange rate. What’s more all of those have outperformed the 25% gains in Wall St’s S&P 500 since then, even though the latter is powering to uncharted record highs. And of course all pale in comparison with the eye-popping 75% rise in Japan’s Nikkei 225 in just six months!! Gold, metals and oil are all net losers and this is significant in a money-printing story where no one seems to see higher inflation anymore.
from Global Investing:
Weekly Radar: Watch the thought bubbles…
Far from the rules of the dusty old investment almanac, it’s up, up and away in May after all. And judging by the latest batch of economic data, markets may well have had good reason to look beyond the global economic ‘soft patch’ – with US employment, Chinese trade and even German and British industry data all coming in with positive surprises since last Friday. Is QE gaining traction at last?
Well, it's still hard to tell yet in the real economy that continues to disappont overall. But what's certain is that monetary easing is contagious and not about to stop in the foreseeable future - whether there's signs of a growth stabilisation or not. With the Fed, BoJ and BoE still on full throttle and the ECB cutting interest rates again last week, monetary easing is fanning out across the emerging markets too. South Korea was the latest to surprise with a rate cut on Thursday, in part to keep a lid on its won currency after Japan's effective maxi devaluation over the past six months. But Poland too cut rates on Wednesday. And emerging markets, which slipped into the red for the year in February, have at last moved back into the black - even if still far behind year-to-date gains in developed market equities of about 16%!
from Global Investing:
Weekly Radar: May days or Pay days?
So, it's May and time for the annual if temporary equity market selloff, right? Well, maybe - but only maybe. A fresh weakening of the global economic pulse would certainly suggest so, but central banks have shown again they are not going to throw in the towel in the battle to reflate. The ECB's interest rate cut today and last night's insistence from the Fed that it's as likely to step up money printing this year as wind it down are two cases in point. And we're still awaiting the private investment flows from Japan following the BOJ's latest aggressive easing there.
So where does that all leave us? A third of the way through 2013 and it’s been a good year so far for nearly all bulls – both western equity bulls and increasingly bond bulls too! Not only have developed world equities clocked up some 13 percent year-to-date (the S&P500 set yet another record high this week while Europe's bluechips recorded a staggering 12th consecutive monthly gain in April) , but virtually all bond markets from junk bonds to Treasuries, euro peripherals to emerging markets are now back in the black for the year as a whole. For the most eyebrow-raising evidence, look no further than last week’s debut sovereign bond from Rwanda at less than 7 percent for 10 years or even newly-junked Slovenia’s ability this week to plough ahead with a syndicated bond sale reported to already be in the region of four times oversubscribed. For many people, that parallel rise in equity and bonds smells of a bubble somewhere. But before you cry “QEEEEE!” , take a look at commodities -- the bulls there have been taken a bath all year as data on final global demand hits yet another ‘soft patch’ over the past couple of months.
from Global Investing:
Deutsche’s emerging markets bear sticking to his guns
Emerging markets bear John-Paul Smith first made his call to underweight emerging equities at the end of 2010. In a note released late on Monday he points out that such a position would have paid off handsomely -- since end-2010 emerging equities have underperformed MSCI's World index by 27.5 percent and U.S. MSCI by 37.6 percent.
Smith, who is head of emerging equity strategy at Deutsche Bank, sees no reason to change his call. Reckoning that the cyclical heyday of emerging markets is past, he is advising clients to hold on to developed and U.S. equities at the expense of emerging markets. The reason? China, pivotal for the rest of the EM world for commodities, trade.
from Expert Zone:
Gold not a good investment for now
(Any opinions expressed here are those of the author and not of Thomson Reuters)
Since November, the price of gold has been unstable but in April, its decline was precipitated. What is surprising is not the fall itself but its speed. In just two sessions, gold prices dropped 13 percent in the steepest fall in 33 years. It wasn't gold alone that got caught in the bear grip. Prices of other commodities such as silver, crude oil, copper and so on also declined, but not as sharply.
from Global Investing:
Weekly Radar: Second-guessing Japan flows as global growth slows
Figuring out what was driving pretty violent market moves this week was trickier than usual – and that says something about how much the herd has scattered this year, with ‘risk on-risk off’ correlations having weakened sharply. Just as everyone puzzled over a potential "wall of money" from Japan after the BOJ’s aggressive reflation efforts, the bottom seemed to fall out of gold, energy and broader commodity markets – dragging both equity markets and, unusually, peripheral euro zone bond yields lower in the process. As dangerous as it may be to seek an overriding narrative these days, you could possibly tie all up these moves under the BOJ banner – something along these lines: the threat of a further yen losses pushes an already pumped-up US dollar ever higher across the board and undermines dollar-denominated commodities, which have already been hampered by what looks like yet another lull in global demand. Developed market equities, whose Q1 surge had been reined in by several weeks of disappointing economic data and an iffy start to the Q1 earnings season, were then hit further by a lunge in heavy cap mining and energy stocks. The commodities hit may also help explain the persistent underperformance of emerging markets this year. What's more the lift to Italian and Spanish government bonds comes partly from an assumption any Japanese money exit will seek U.S. and European government bonds and relatively higher-yielding euro government paper may be favoured by some over the paltry returns in the core ‘safe havens’ of Treasuries or bunds. The confidence to reach for yield has clearly risen over the past six months as wider systemic fears have receded – something underlined in dramatic style this week by a huge lunge in gold, now lost almost 20 percent in the year to date.
While all that logic may be plausible, there have been dozens of other reasons floating around for the seemingly erratic twists and turns of the week.
from Global Investing:
India’s deficit — not just about oil and gold
India's finance minister P Chidambaram can be forgiven for feeling cheerful. After all, prices for oil and gold, the two biggest constituents of his country's import bill, have tumbled sharply this week. If sustained, these developments might significantly ease India's current account deficit headache -- possibly to the tune of $20 billion a year.
Chidambaram said yesterday he expects the deficit to halve in a year or two from last year's 5 percent level. Markets are celebrating too -- the Indian rupee, stocks and bonds have all rallied this week.
from Global Investing:
Weekly Radar: Q1 earnings test as the herd scatters
US Q1 EARNINGS START/DUBLIN EURO GROUP MEETING/US T-SECRETARY LEW IN BERLIN-PARIS/US-FRANCE-ITALY GOVT BOND AUCTIONS/FRANCE NATL ASSEMBLY VOTES ON LABOUR REFORM/VENEZUELA ELECTIONS
World markets have started the second quarter in an oddly indecisive mood given that Q1 turned out to be yet another bumper start to the year, looking to extend record stock market highs on Wall St but lacking the juice of new information to make a decisive break while Europe splutters and emerging markets and commodities head south. Two important pieces of the U.S. jigsaw will likely emerge over the coming week with this Friday’s US employment report and the start of the Q1 corporate earnings season next week.
from Global Investing:
Rich investors betting on emerging equities
By Philip Baillie
Emerging equities may have significantly underperformed their richer peers so far this year (they are about 4 percent in the red compared with gains of more than 6 percent for their MSCI's index of developed stocks) , but almost a third of high net-worth individuals are betting on a rebound in coming months.
A survey of more than 1,000 high net-worth investors by J.P. Morgan Private Bank reveals that 28 percent of respondents expect emerging market equities to perform best in the next 12 months, outstripping the 24 per cent that bet their money on U.S. stocks.
