Reuters blog archive
from Global Investing:
Emerging stocks have rallied 3 percent today after the Fed's startling decision to leave its $85 billion-a month money-printing in place, and some markets such as Turkey are up more than 7 percent. With the first Fed hike now expected to come in 2015 and tapering starting only from December, emerging markets have effectively received a three month breather. So will the buyers return?
A lot of folks have been banging the drum about how cheap emerging markets are these days. But imminent Fed tapering has been scaring away any who might have been tempted. Plus there is the economic growth slowdown that could knock profit margins at emerging market companies. Bank of America/Merrill Lynch which runs a closely watched monthly survey of fund managers shows just in the following graphic how unloved the sector is relative to history:
So should people be buying? BofA/ML certainly thinks so: its strategist Ajay Kapur suggests emerging stocks are 20 percent undervalued. He acknowledges all the risks out there but reckons they are all in the price by now:
In sum, we think emerging equity markets are likely to surprise the negative consensus and do rather well in the coming months. Valuations discount a lot of the financial vulnerability, investors appear to have fallen out of favor with the asset class, China/global economic data are improving, and Asia’s terms of trade are getting better. While longer-term issues about over-investment, lending booms and deteriorating current accounts remain a concern, especially in an environment of rising U.S. bond yields, a rising dollar, a falling U.S. current account deficit and rising oil prices, we think these are well discounted and understood.
Not to mix too many animal metaphors but, generally speaking, monetary policy hawks also tend to bulls on the economy. That is, they are leery of keeping interest rates too low for too long because they believe growth prospects are stronger than economists foresee, and therefore could lead to higher inflation.
That is not the case, however, for Richmond Fed President Jeffrey Lacker, a vocal opponent of the central bank’s unconventional bond-buying stimulus program, particular the part of it that focuses on mortgages. He reiterated his concerns last week, saying the Fed should begin tapering in September by cutting out its mortgage bond buying altogether.
If there was ever a time to be worried about whether the Federal Reserve's bond-buying stimulus is having a positive effect on the economy, the last few months were probably not it. Everyone expected government spending cuts and tax increases to push the economic recovery off the proverbial cliff, while the outlook for overseas economies has very quickly gone from rosy to flashing red. But the American expansion has remained the fastest-moving among industrialized laggards, with second quarter gross domestic product revised up sharply to 2.5 percent.
Yet for some reason, at the highest levels of the U.S. central bank and in its most dovish nooks, the notion that asset purchases might not be having as great an impact as previously thought has become pervasive.
By Swaha Pattanaik
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
When there is turmoil in global markets, safe havens, such as U.S. government bonds, typically benefit. But right now, the pattern may be different. In Brazil, India and Indonesia, central banks have intervened to slow their currencies’ slide in the past two weeks. Traders say that other countries are doing the same. These raids on foreign exchange reserves will add to the tailwinds that are driving U.S. Treasury yields higher.
But while volatility is on the rise - surely partly a result of thinned trading volumes during the peak summer vacation season - the consensus around when the Fed will start cutting back hasn't budged.
from Lipper Columns:
Steve Sachs, head of capital markets at alternative ETF provider ProShares, says that, with rising interest rates, funds that short treasuries have gained popularity this year.
The complexity of non-traditional monetary policy is hard enough to explain to other economists and policymakers. Market participants prefer sound bites, opines Steven Ricchiuto, chief economist at Mizuho Securities USA in a note. As such, the more the Federal Reserve Chairman Ben Bernanke tries to explain the Federal Open Market Committee's position on tapering and policy accommodation the more he confuses the message, Ricchiuto says.
The problem is fundamental to the nature of monetary policy. According to the Chairman, monetary policy accommodation is adjusted through the Fed Funds rate. Quantitative Easing (QE) is a separate policy. Yet he has also said that tapering is simply reducing accommodation, not tightening. These pronouncements work at cross purposes and ignore how the markets read policy. For the markets, QE is an extension of policy into non-traditional tools. Therefore, tapering is tightening. There is no such thing as reducing accommodation for market participants.
By Martin Hutchinson and Antony Currie
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
America’s onetime oldest lender might provide the beat for a new generation. First Pennsylvania needed a bailout from the Federal Deposit Insurance Corp in 1980 after rising rates whacked its portfolio of U.S. Treasuries. It’s easier to hedge such risks now, though not perfectly. And financial institutions these days mark securities they own to market prices. Complacency could cause bank history to rhyme.
Credit to Barclays economists for coining the term ‘Septaper’
A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September. Average employment growth for the last six months is now officially above 200,000 per month.
Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.
Federal Reserve Chairman Ben Bernanke has a problem: how to wean markets from dependence on central bank stimulus. On Wednesday Bernanke did what some of his most dovish colleagues have urged for months. He laid out a clear path for how and when the Fed will bring its third round of bond-buying to a close.
It doesn’t take a master detective to figure out his solution – 7 percent.
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said in a press conference following the Fed’s two-day policy-setting meeting.