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from Breakingviews:

Global sell-off could echo summer of 2011

By Ian Campbell The author is a Reuters Breakingviews columnist. The opinions expressed are his own.Global investors have been sucking money out of risk assets. Credible reassurance that Greece will stay in the euro would see risky bets poured back on. But for now Greece looks headed for the exit door and markets’ trajectory is downwards. The global sell-off in stocks, commodities and many currencies is likely to get worse as the dollar advances.

It might seem Greece is not a big enough to warrant global concern. But a Greek default would impose losses on the rest of Europe . And Greece will be seen as the first domino. Spanish and Italian bonds will be among those selling off, exacerbating financing pressures in southern Europe’s two big economies. A huge European effort would be required to calm fears that they and Portugal will not ultimately go the way of Greece.

A further concern is growth. The euro zone has stalled, China has slowed, the United States is improving, but slowly. There are strong echoes of August 2011 - a global economic “soft patch”. But this time it is coupled with far more intense fears of a meltdown in the world’s second most important currency.

The implications are likely to continue to be felt across asset classes. As the euro and many emerging economy currencies retreat, the safe-haven U.S. dollar is appreciating. That in turn unwinds the previous dollar carry trade, on which commodities, gold and many global assets had prospered.

An important difference from last summer is that the U.S Federal Reserve is not currently embarked on a programme of fresh money printing. For many assets, gold especially, that is a big negative. Gold has thrived on dollar weakness, trading speculatively rather than as a genuine haven. It now looks very vulnerable to further falls.

Unless and until European fears are calmed, the outlook for global stocks seems poor too. The lows of August of 2011 give a guide to the potential downside. They would imply a fall in the U.S. S&P 500 to 1,150, a decline of more than 11 percent on its May 15 close.

Of course, if the Greek omens change, so too will markets. But neither Greece nor investors can keep relying on bailouts. At some point and in some way the euro zone’s fundamental solvency and competitiveness problems must be resolved. Until they are, global risks will be high and markets vulnerable.

from Global Investing:

Research Radar: Greek gloom

Greek gloom dominates the start of the week as new elections there look inevitable and talk of Greek euro exit, or a Grexit" as common market parlance now has it, mounts. All risk assets and securities hinged on global growth have been hit, with China's weekend reserve ratio easing doing little to offset gloomy data from world's second biggest economy at the end of last week. World stocks are down heavily and emerging markets are underperforming; the euro has fallen to near 4-month lows below $1.29; safe haven core government debt is bid as euro peripheral debt yields in Italy and Spain push higher; and global growth bellwethers such as crude oil and the Australian dollar are down - the latter below parity against the US dollar for the first time in 5 months.

Financial research reports on Monday and over the weekend were just as gloomy, but plenty of interesting takes:

Bank of New York Mellon's Simon Derrick's view of the Greek political impasse concluded "there is at least an evens chance that the latter part of this summer will see what had officially been seen up until last November as an impossibility: a nation leaving the EUR."

RBS's Sanjay Mathur reckons that if there is another hung parliament after new Greek elections, implying no significant voter return to the pro-bailout parties, then euro risk soars.  "This means, on another hung parliament, that Greek government IOUs could trade as proxy currency as early as July." If that does not galvanize sufficient parties into accepting Trioka bailout demands at that point, he said that then exit looms. "Opening up the Pandora's box of exit means deposit risk across the periphery. The future of the euro would then be dictated by the subsequent policy response."

Barclays Sree Kochugovindan talks of a three phase possible deterioration of the euro crisis -- one, where solvency concerns and asset market fright are contained to Europe and mostly the fixed income markets of the periphery countries concerned; two, solvency concerns hit the core such as France and Belgium with asset market contagion widening before a series of major policy responses; and three, no major policy response or ECB SMP/LTRO, which leads to Greek default and even exit and global market shock akin to September 2008. "Given the immense cost of a crisis triggered by a Greek exit, we are not expecting the current situation to deteriorate into Phase 2. However, the risks are elevated and with the prospect of second round Greek elections in a few weeks, market jitters are likely to continue."

Deutsche Bank's global markets note also focuses on rising risks from Greece and also on the May 31 Irish referendum on the EU fiscal pact. Apart from outlining obvious risks to the Greek financing from a political vacuum, one conclusion Deutsche comes to is that a new EU growth pact may happen sooner than many had figured. "The new situation in Athens forces EU leaders to find common ground faster than we thought." Another conclusion was that Ireland may consider postponing its referendum, given the risk that a "no" vote may disastrously cut off its access to new EU funds and also given a possible delay in German parliamentary votes on the fiscal deal to June. "Ireland might do well to think about postponing the 31 May referendum." It called Spain's sweeping banking reform plan "making progress" but a 15 bln euro government recapitalisaation of the banks "too timid".

HSBC's Karen Ward and Simon Wells warn about the long-term impact of continuous quantitative easing by central banks, saying the political relationship between central banks and governments rather than inflationary consequences may be the biggest concern. "The heyday of independent central banking could be drawing to a close."

from Global Investing:

Play the mini-cycles, not the euro crisis

For all the headline attention on euro zone political heat over the next six weeks or so  (Spain is already in the spotlight, Sunday is the first round of the French presidential elections, Greece goes to the polls on May 6, Ireland votes on the EU fiscal pact on May 31 etc etc),  global investors may be better rewarded if they follow the more mundane runes of the world's manufacturing cycle for tips on market direction.

As showcased by the IMF this week, the big picture global growth story remains one of a relatively modest slowdown this year to 3.5% before a substantial rebound in 2013 to well above trend at 4.1%. Of course, there are some who think that's hopelessly optimistic and others who may quibble about the absolute numbers but agree with the basic ebb and flow.

Yet within even these headline numbers, many mini-cycles are  playing out -- especially within manfacturing, which accounts for about 20% of global GDP.  But problems in deciphering these twists and turns have been compounded over the past year or so by the impact from natural disasters and supply chain disruptions such as Japan's devastating earthquake and Thailand's floods.

Crunching the numbers  for Q1, however, JPMorgan's global economists reckon global maufacturing output hit an annualised quarterly clip of some 5.6%. Even though that's still off the pace of one year ago, it's back near levels seen in Q3 of last year before the late-year slump. Breaking that down, the United States accounted for more than a half the Q1 rebound while emerging Asian economies, benefitting most from the bounceback after Thailand's floods, zoomed at a 20% annualised rate.

However, this impressive manufacturing bounce is already ebbing again in the second quarter. The Thai bounceback looks spent and an acceleration in US inventory accumulation is now slowing output there.

Although only one part of a more complex GDP picture (we will see Q1 GDP readouts from the United States and Britain next week as well as flash April business sentiment gauges for Europe and China),  world equity markets appear to be taking a lead from the manufacturing pulse -- surging in Q1 and now cooling into April. If so, what can be said about the rest of the year?   JPMorgan at least reckons we're in for another reacceleration around mid-year, for a variety of the seasonal, inventory and disaster-related reasons already affecting the mini-cycle and with a rebound in utilities output as weather normalises stateside and in Europe.

So while Europe's ongoing sovereign debt and banking crisis continues to pose risks to the global economy, its impact ont he wider world may be getting weaker. And it's curious that a possible re-acceleration of manufacturing this Summer could come in tandem with important junctures in the euro saga itself -- namely the European Banking Authority's June recapitalisation deadline for euro area banks and also the introduction of the permanent European Stability Mechanism to shore up the rest.  Deadline-driven deleveraging and global asset sales by euro zone banks,  mercifully  slowed by the ECB's cheap 3-year LTRO in December and February,  was easily been the biggest external transmission mechanism of the euro crisis last year. Once that has passed, it's possible there may even be some financial sector relief to add a fillip to any manufacturing resurgence.

from Global Investing:

Time for a slice of vol?

As the global markets consensus shifts toward a "basically bullish, but enough for now" stance -- at least before Fed chief Bernanke on Monday was read as rekindling Fed easing hopes -- more than a few investment strategists are examining the cost and wisdom of hedging against it all going pear-shaped again. At least two of the main equity hedges, core government bonds and volatility indices, have certainly got cheaper during the first quarter. But volatility (where Wall St's Vix index has hit its lowest since before the credit crisis blew up in 2007!) looks to many to be the most attractive option. Triple-A bond yields, on the other hand, are also higher but have already backed off recent highs and bond prices remain in the stratosphere historically.  And so if Bernanke was slightly "overinterpreted" on Monday -- and even optimistic houses such as Barclays reckon the U.S. economy, inflation and risk appetite would have to weaken markedly from here to trigger "QE3" while further monetary stimuli in the run-up to November's U.S. election will be politically controversial at least -- then there are plenty of investors who may seek some market protection.

Societe Generale's asset allocation team, for one, highlights the equity volatility hedge instead of bonds for those fearful of a correction to the 20% Wall St equity gains since November.

A remarkable string of positive economic surprises has boosted risky assets and driven macro expectations higher but has also created material scope for disappointment from now on. We recommend hedging risky asset exposure (Equity, Credit and Commodities) by adding Equity Volatility to portfolios.

from Global Investing:

January in the rearview mirror

As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures - thanks to Scott Barber and our graphics team.

The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world's central banks.

The ECB's near half trillion euros of 3-year loans  has stabilised Europe's ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it's also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It's also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..

But to the extent that the ECB move was aimed primarily at preventing a seizure of the banks, then one measure of  success can be seen in the degree to which it steepened government yield curves in Spain and Italy. A positive yield curve, which measures the gap between short-term  and long-term interest rates,  is effectively commercial banks' ATM -- they  make money by simply borrowing short-term and lending long. This chart then shows some normality returning to the benchmark interest structure.

from Reuters Money:

How to focus in a manic market

While the market was doing another backward swan dive, one email came to me that reflected the mass anxiety: "Some are saying it may be time to panic, and I am resisting. What do you think? And what does panic mean: Jump? Sell off?"

After I offered some brief words of staid resolve, it occurred to me that the luncheon speaker at the Morningstar ETF conference I was attending at the time had the right idea, even though he didn't utter a word about finance or markets.

Words of fortitude came from Jeffrey Zaslow, who co-authored books with Chesley Sullenberger, the pilot who safely landed a disabled jet in the Hudson River (saving all 155 aboard); and Randy Pausch, the Carnegie-Mellon Professor who offered a moving "last lecture" on life and love before he died of cancer.

Both men faced life-threatening panics and had to make tough decisions. Sullenberger had minutes to decide the best course of action when bird strikes took out his jet's engines after he left LaGuardia airport. Pausch had a few months to deliver his key life lessons to his students, colleagues and family.

What did they both have in common? Focus and an ability to discern what was important. To distill the essentials of life and articulate them. A lifetime of training, experience and thoughtful examination had prepared them for the moment of truth. As Zaslow noted, they -- along with most of us -- would be remembered for what they did in critical moments. Yet another such global moment is upon us.

I'm not going to pretend that the markets will suddenly see tomorrow that all will be okay with European banking, or that the U.S. government or American megabanks will fix their tattered balance sheets anytime soon. Or that we're not all headed for a global recession or more bank failures.

All of that is possible and that's why the markets are so utterly spooked. Volatility will not ease soon and if you can't afford the risk, you shouldn't be invested in stocks.

from Money on the markets:

LIVE BLOG: Sensex, global markets tumble

from The Great Debate UK:

The U.S.’s big, fat political debt problem

By Kathleen Brooks

The U.S. has practically zero chance of solving its debt problem in the foreseeable future while politicians line up to contest the 2012 Presidential elections.

We have already heard President Obama lay out his partisan cards. He called for Congress to come up with a plan to trim $4 trillion from the U.S. deficit in the next 12 years. His favoured way to do this: end tax cuts for the rich – a well versed refrain from Democrats throughout the ages.

Ironically it was Obama who extended these tax cuts – for everyone – at the end of 2010, which arguably has contributed to the U.S. becoming the only G10 nation to have a rising budget deficit this year, according to the IMF.

The tax question obviously goaded the Republicans and the Speaker of the House of Representatives John Boehner immediately responded by saying that tax hikes were a non-starter. He argued that the U.S.’s fiscal problems were not down to a lack of revenue, but due to unbridled spending coming out of Washington. So there we have it: deadlock before we have even got started.

The wrangle over funding the 2011 budget that nearly closed the U.S. government earlier this month came down to an ideological fight between left and right, with those on the far right demanding cuts to programmes that didn’t support their ideology such as abortion programmes.

This highlights the level of detail and depth of discussion that will be held over the coming weeks and months to make even more radical cuts than those proposed for this year’s budget. Middle ground is virtually non-existent in Washington right now so a failure to come up with a credible deficit reduction plan in time for President Obama’s June deadline is looking increasingly more likely.

from Reuters Money:

Currency trading: 5 ways to hedge your bets

Investors, be forewarned: tread lightly when it comes to currency trading.

Whereas professional investors have more resources at their disposal to hedge, the average investor could be left in the dust — especially during a time where political unrest and crises are cause for big market swings in futures and currencies.

Individual retail investors "are the minnow in the shark tank; they might get some crumbs, but they’re playing with some really big, really aggressive players,” says Rick Brooks, vice-president of investment management at Blankinship & Foster. Brooks notes that while retail investors may trade anywhere from a few thousand to maybe a million dollars, professional traders are trading hundreds of millions of dollars a day, if not a minute, and are therefore privy to critical information.

“The retail investor cannot stand up against that kind of trading volume,” he continued. “If they’re lucky, they’ll fly under the radar and they might make some profitable trades, but generally speaking these guys are moving very large amounts of money and the retail investor is just going to be along for the ride.”

For investors who travel often or who get paid for work in another currency, dual exposure could actually be a good hedging mechanism since it provides insulation from day-to-day currency fluctuations. Great ways to do this include foreign property investments and buying ETFs or mutual funds in that currency.

George Middleton, financial adviser for Limoges Investment Management, says it’s easier for larger firms to better hedge and make riskier bets based on economic conditions because of their stake in multiple currencies. He says trading currencies can be beneficial to a retail investor if you’re looking for a longer-term investment.

“I own multiple currencies, but I buy them with the intent of holding on to them and it’s because of my concern for the U.S. dollar,” Middleton says. “If I thought the dollar was going to go up, I wouldn’t be holding other currencies.”

from Reuters Money:

4 ways to play Japan’s rebound

If you're an investor, how should you regard the Japanese crisis? Should you be shorting Japanese stocks? Should you bet heavily on Korean companies to pick up the slack? What about American-based companies like Apple and Hewlett-Packard that are dependent upon the Japanese supply chain?

There are no clear-cut answers as supply chains are often as complex as the products whose parts depend on them. You need to look beyond Japan and the current headlines to explore a number of scenarios.

Japan will be hurt in the short-term. Although eventually Japanese engineers and crisis planners will get things moving again, in the interim the island nation is short of electricity. Unlike oil and other commodities, they can't easily pipe in more electrons from a ship or plane. A weakened grid means lower or no productivity in factories and brownouts in office buildings. Parts are not being shipped out for everything from cellphones to autos.

Other than the radiation problem from the damaged reactors, lack of power is the most immediate threat to the industrial sector. If you're really bearish on Japanese industry rebounding quickly, you can bet against their stocks by buying an inverse exchange-traded fund (ETF) like the ProShares Ultrashort MSCI Japan fund. The fund promises up to a 200-percent daily return on an index of Japanese stocks -- if the benchmark drops. This is a high-risk way of "shorting" Japan and is only for disciplined traders.

Japan will rebound. I'd lean more toward this scenario, although the exact timing is anyone's guess. Some companies will be impacted more than others. Unless you know how their supply chains work, it would be difficult to sort out the winners and losers. If you're generally optimistic about the country, you can go "long" and buy an ETF such as the iShares MSCI Japan Index. Just keep in mind it will be tough going. As BMO Capital Markets notes: "Power disruptions could create shortages of technology and machinery, creating isolate pricing pressures."

Asia is still a good bet. As it rebuilds, Japan will lean heavily on its neighbors China, South Korea, the Philippines, Vietnam and India. Will the Japanese do significant offshoring of manufacturing? They will certainly need to buy parts and commodities in their recovery phase. Overall, Asia is a good growth investment, anyway. The Vanguard MSCI Pacific ETF invests in nearly 500 stocks in Asia plus Australia and New Zealand. If you still want Asian stocks, but want to leave out Japan, consider the iShares Asia ex-Japan fund.

Invest in the whole world. If you just want to stop worrying about which country or countries will do well, expand your holdings to most of the world's stock markets. It makes sense for any buy-and-hold portfolio and eliminates much of the guesswork. One of my favorite choices is the Vanguard Total World Stock ETF, which tracks almost 3,000 stocks  in the FTSE All-World Index.