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from Global Investing:
No more currency war. Mantega dumps the IOF
Brazil's finance minister Guido Mantega, one of the most shrill critics of Western money-printing, has decided to repeal the so-called IOF tax, he imposed almost three years ago as a measure to fend off hot money flows.
Well, circumstances alter cases, Mantega might say. And the world is a very different place today compared to 2010. Back then, the Fed was cranking up its printing presses and the currency war (in Mantega's words) was raging; today the U.S. central bank is indicating it may start tapering off the stimulus it has been delivering. Nor is investors enthusiasm for emerging markets what it used to be. Brazil's currency, the real, is plumbing four-year lows against the dollar and local bond yields have risen 30 basis points since the start of May. Brazil's balance of payments situation meanwhile, is deteriorating, which means it needs all the foreign capital it can get, hot money or otherwise. And currency weakness spells inflation -- bad news for Brazil's government which faces voters next year.
The IOF did work -- Brazil's local debt markets received just over $10 billion last year, Bank of America/Merrill Lynch calculates -- a third of 2010 levels, and much of the cash that was already invested, preferred to stay put (given the IOF is paid upon exiting the country).
So will Mantega's latest gambit work? So far, the real's reaction has been muted and some analysts even reckon on short-term losses as funds that were staying in to avoid paying the 6 percent levy, are now free to leave.
from Global Investing:
Emerging local debt: hedges needed
The fierce sell-off that hit emerging market local currency debt last month was possibly down to low levels of currency hedging by investors, JPMorgan says.
Analysts at the bank compare the rout with the one May 2012, caused by exactly the same reason -- higher U.S. yields. There was a difference though -- back then EM currencies dropped more than 8% on the month but EM local bonds, unlike last month, were little changed.
from Global Investing:
South Africa’s perfect storm
Of all the emerging currency and bond markets that are feeling the heat from the dollar's rise, none is suffering more than South Africa. A series of horrific economic data prints at home, the prospect of more labour unrest and the slump in metals prices are making this a perfect storm for the country's financial markets.
Some worrying data from the Johannesburg Stock Exchange this morning shows that foreigners sold almost 5 billion rand (more than $500 million) worth of bonds during yesterday's session alone. Over the past 10 days, non-resident selling amounted to 10.7 billion rand. They have also yanked out 1.2 billion rand from South African equities in this time. And at the root of this exodus lies the rand, which has fallen almost 15 percent against the dollar this year. Now apparently headed for the 10-per-dollar mark, the rand's weakness has eaten into investors' total return, tipping it into negative return for the year.
from Global Investing:
Turkey: investment grade, peace and FDI?
Turkey's elevation to investment grade last week may or may not be a game changer for its stock and bond markets, but the country is really hoping for a boost to FDI - bricks-and-mortar foreign direct investment into manufacturing or power generation. Its peace process with Kurdish separatists should help.
Speaking last week at Mitsubishi-UFJ's annual Turkey conference, Finance Minister Mehmet Simsek cited data showing an average 2 percentage-point pick-up in FDI in the two years immediately after a country moves into investment grade.
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:
Weekly Radar: Question mark for the ‘austerians’
One of the more startling moves of the week was the fresh rally in euro government debt – with 10-year Italian and Spanish borrowing rates falling to their lowest since late 2010 when the euro crisis was just erupting and 2-year Italian yields even falling to 1999 euro launch levels. The trigger? There's been a slow build up for weeks on the prospect of new Japanese investor flows seeking liquid overseas government bonds - but it was signs of a sharp slowdown in Germany’s economy that seems to have had a perversely positive effect on the region’s asset markets as a whole. The logic is that German objections to another ECB rate cut will ebb, as will its refusal to ease up on front-loaded fiscal austerity across Europe. If its own economic engine is now suffering along with the rest, significantly just five months ahead of German Federal elections, then a tilt toward growth in the regional policy mix may not seem so bad for Berlin after all. And if euro economies are more in synch, albeit in recession rather than growth, then perhaps it will lead to a more effective regional policy response.
All that plays into the intensifying "growth vs austerity" debate, which had already shifted at the Washington IMF meetings last week and was sharpened this week by by EU Commission chief Barroso’s claim that the high watermark of EU’s austerity push had passed. On top of the Reinhart/Rogoff research farrago, it's been a bad couple of weeks for the “austerians”, with only a UK Q1 GDP bounceback of any support for case of ever deeper fiscal cuts, and investors smell a change of tack. Their reaction? Not only have euro government borrowing costs fallen further, but euro equities too rallied for 4 straight days through Wednesday. Those arguing that investors would run screaming at the sight of a more growth-tilted policy mix in Europe may have some explaining to do.
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:
Amid yen weakness, some Asian winners
Asian equity markets tend to be casualties of weak yen. That has generally been the case this time too, especially for South Korea.
Data from our cousins at Lipper offers some evidence to ponder, with net outflows from Korean equity funds at close to $700 million in the first three months of the year. That's the equivalent of about 4 percent of the total assets held by those funds. The picture was more stark for Taiwan funds, for whom a similar net outflow equated to almost 10 percent of total AuM. Look more broadly though and the picture blurs; Asia ex-Japan equity funds have seen net inflows of more than $3 billion in the first three months of the year, according to Lipper data.
from Global Investing:
Turkey: ceasefire with PKK may bring economic gains
Turkey's ceasefire last month with the Kurdish militant group PKK could boost its trade partnerships multilaterally, as increasing prospects for stability in the region bring economic opportunities in the Middle East and Africa.
The halt in the decades-long armed campaign came on March 21 after the leader of the Kurdistan Workers' Party, Abdullah Ocalan, sent a letter with the announcement from the island prison cell where he has been held since 1999 when he was arrested for treason.
from Global Investing:
There’s cash in that trash
There's cash in that trash.
Analysts at Bank of America/Merrill Lynch are expounding opportunities to profit from the burgeoning waste disposal industry, which it estimates at $1 trillion at present but says could double within the next decade. They have compiled a list of more than 80 companies which may benefit most from the push for recycling waste, generating energy from biomass and building facilities to process or reduce waste. It's an industry that is likely to grow exponentially as incomes rise, especially in emerging economies, BofA/ML says in a note:
We believe that the global dynamics of waste volumes mean that waste management offers numerous opportunities for those with exposure to the value chain. We see opportunities across waste management, industrial treatment, waste-to-energy, wastewater & sewage,...recycling, and sustainable packaging among other areas.
