Reuters blog archive
To paraphrase Kevin Costner in Bull Durham, we’re dealing with a lot of stuff here. The U.S. economy did end up rebounding in the second quarter, with a 4 percent rate of growth that’s much better than anyone anticipated – and the first-quarter decline was revised to something less horrible, so investors worried about the economy are a bit less freaked out at this particular moment.
Of course, that still means that the economy only grew 0.9 percent in the first half of the year, and that’s not all that amazing, but the economy in the second quarter grew in areas that matter the most – business spending, consumer spending and to a lesser extent government, which was such a drag on GDP for a good long time that can’t be just ignored. In tandem with the GDP figure, the ADP report said 218,000 jobs were added for private payrolls for July, another strong month that portends a good showing out of the Labor Department figures on Friday. That’s all at a time when the housing indicators continue to weaken, which is still a concern, and some even believe that auto sales have probably hit their apex as well for this cycle, given so much of the buying was based on incentives, but we’ll get better clarity on that on Friday.
The good data overall has given the dollar a jolt, continuing a strong run for the U.S. currency that strategists believe will be maintained for some time now. The euro hit a low of $1.3369 overnight and is at levels not seen since November, and the dollar is at one-month highs against the yen.
The dollar in coming days and months clearly will hinge on data and how the Federal Reserve and bond yields react to it, particularly when you see the differential between U.S. and European rates. Spain’s 10-year note yield dropped through the U.S. rate as of yesterday, and Germany’s annual inflation slowed to a 0.8 percent rate of growth, which should keep the lid on the euro. Net short positions in the euro have been increasing, with nearly 89,000 in short positions among speculators as of last week, according to CFTC data, while dollar/yen short positions are slowly being liquidated, dropping to 53,000 last week from about 82,000 in mid-June.
Red letter day for Argentina comes tomorrow, with the holdout investors and the South American nation coming down to the wire on a potential deal that would offer the holdouts something better than what everyone else agreed to in 2005 and 2010. Without getting into issues of vultures vs. violating debt agreements, the situation probably comes down to three scenarios.
First, Argentina defaults. One cannot underestimate this too much – Argentina has already defaulted before, and the stakes are nowhere near as high for the country as they were the first time. But it is still pretty darned damaging – it puts the country into another level of pariah with international capital markets (double secret probation, and here’s where we once again note that had John Vernon lived, he would have solved this whole mess), it causes even more capital flight from the country and worsens the outlook for the currency, which is already trading at a level much lousier than the going real rate.
By Fiona Maharg-Bravo and Christopher Swann
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
The show will go on. Portugal Telecom and Brazil’s Oi are forging ahead with their planned merger after an Espirito Santo group company failed to repay a $1.1 billion loan to PT. The Portuguese telco is paying the price for its weak controls over its own cash management. Its shareholders will now hold a smaller stake in the group it planned to form with Brazil’s Oi.
The market's recent chatter has revolved specifically around whether the strength in the jobs figure from last week moves forward the expected timing of the first interest-rate hike from the Federal Reserve.
The answer: yes, but probably by not that much. Jobs growth of 288,000 for June was better than expected, and that 6.1 percent unemployment rate looms large for those who figured the Fed would be ready to start raising rates after at least 6.5 percent was surpassed. So we're there on that, but as Kristina Hooper of Allianz points out, the wage growth seen hasn't been terribly strong, and the types of jobs being created – a lot of which are in lower-paying industries like retail – don't portend the same kind of economic strength that might have been manifest by now in other iterations of U.S. recoveries.
from Edward Hadas:
By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The fast increase in loans to pay for higher education is a trend that is moving in the wrong direction. The idea that borrowing should play an important role in financing higher education, now standard thinking in the United States and the United Kingdom, is financially dangerous and economically wrongheaded.
from Global Investing:
A colleague of mine, Marius Zaharia (@MZaharia) interviewed Moritz Kraemer, Standard and Poor's head of sovereign ratings for Europe, Middle East and Africa. (you can read the interview here) Kraemer offered this piece of advice to the African governments who are busily tapping bond markets these days:
What I want to tell all those governments in africa is that you are not a successful market participant when you've issued your first eurobond. You are a successful participant when you've paid it back for the first time.
Eventually, lack of volatility, rock-bottom rates and this accommodating monetary policy will realize the build-up of excesses that causes some kind of market crack that devastates people - particularly in areas where many do not expect it. But it won't be today, and investors should continue to ride that so-called Wall of Worry through the 2,000 mark on the S&P 500 before long.
Goldman Sachs strategists note in a piece overnight that volatility is likely to remain lower for longer, but the slowness of the economic expansion and the additional regulations as a result of the financial market crisis of 2008 mean that the buildup of those speculative excesses is happening at a much slower rate. That's not to say they aren't out there - Brian Reynolds of Rosenblatt Securities is adamant that we are now in a "runaway bull market," which of course usually ends in tears for someone, but again, not today.
Wednesday's version of reading tea leaves involves Argentina's economy minister Axel Kicillof, who will be in New York to speak to the United Nations about Argentina's debt situation. In case the U.N. missed it, Argentina defaulted a while back - 12 years ago - and they've been fighting with a group of investors on paying some of their debt since. Which is a roundabout way of saying Kicillof may not just be in New York to talk to the U.N., not when NML, Aurelius and the other holders are all also in New York too, and the judge in question, and any special envoy he introduces to try to wring some kind of compromise out of this situation. There's a big coupon payment due June 30, and the country has been prohibited from doing so unless it pays the holdouts, which it has pledged not to do, giving it a 30-day grace period before being declared in default.
So the thing to watch for is something like a clandestine meeting between all parties to find a way to reach an accord, even if it's the kind of thing that comes down to the July 30 wire - when Argentina would be considered in default again (double-secret default, as Dean Wormer would have it, and really, if John Vernon were alive, he'd have solved this mess a long time ago).
from Hugo Dixon:
By Hugo Dixon
Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
Is Greece losing its reform drive? Prime Minister Antonis Samaras has stuck to a harsh fitness programme for two years. But just as it is bearing fruit, he has sidelined some reformers in a reshuffle. There is only one viable path to redemption for Athens: stick to the straight and narrow.
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Faith in metal-backed lending in China is corroding – and so is confidence in the country’s giant credit system. Authorities and banks including Standard Chartered and CITIC are investigating whether traders at Qingdao port used the same lot of copper and aluminium to back multiple loans. Vanishing collateral isn’t a new problem, but could prove to be China’s weakest link.