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from Global Investing:
Dollar drags emerging local debt into red
Victims of the dollar's strength are piling up.
Total returns on emerging market local currency bonds dipped into the red for the first time this year, according to data from JPMorgan which compiles the flagship GBI-EM global diversified index of domestic emerging debt. While the EMBI Global index of sovereign dollar debt has already taken a hit the rise in U.S. yields, local bonds' problems are down to how EM currencies are performing against the dollar.
JPMorgan points out that while bond returns in local currency terms, from carry and duration, are a decent 1 percent, that has been negated by the 1.3 percent loss on the currency side. With the dollar on the rampage of late (it's up almost 4 percent in 2013 against a grouping of major world currencies) that's unsurprising. But a closer look at the data reveals that much of the loss is down to three underperforming markets -- South Africa, Hungary and Poland. These have dragged down overall returns even though Asian and Latin American currencies have done quite well.
The graphic below shows South African local debt bringing up the bottom of the table, with the FX component of returns at around minus 9 percent In rand terms however the return is still in positive territory, but only just. Hungary and Poland fare only slightly better.
Many bond positions are of course hedged. But as we wrote here yesterday in an article on South Africa, escalating currency weakness can trigger exits from local bond markets. And worryingly, JPMorgan notes that returns in local currency terms have plateaued at 1 percent over the past 10 days.
from MacroScope:
Fears of 1994 bond market flashback
The 1994 bond market massacre is remembered with horror by those who lived through it. Yields on 30-year Treasuries jumped some 200 basis points in the first nine months of the year, hammering investors and financial firms, not to mention thrusting Mexico into crisis and bankrupting Orange County.
The accepted story is that an over-eager Federal Reserve set off the carnage by raising interest rates too soon - the sort of premature move that current Fed Chairman Ben Bernanke has suggested, again and again, that he is not going to make.
from Global Investing:
Treasuries threat to emerging markets
Emerging market issuers have been busy this year, but investors aren't getting much of a return, as rising Treasury yields steal their lunch.
Joyce Chang, head of emerging markets research at JP Morgan, told the Emerging Market Traders' Association yesterday that:
from MacroScope:
Goldman hones in on Fed statement watchword: “Initially”
It's that time again: Fed watchers are already parsing possible changes to the January policy statement, even before it is released. Goldman Sachs economists in particular have identified one passage ripe for some type of tweak -- one that could signal the appetite for continued bond buys:
With Treasury purchases under the new regime already underway, the statement that Treasury purchases would 'initially' occur at a pace of $45 billion per month will have to be adjusted. If 'initially' is replaced with another modifier such as 'at the present time' rather than deleted, it would suggest downside risks to the size of the Treasury program later this year.
from Breakingviews:
Markets’ new-year euphoria looks overdone
By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The new-year euphoria in financial markets looks overdone. The S&P 500 is up 5 percent, investors are throwing record sums into equities and Treasuries are flirting with 2 percent yields. But fiscal cliff diving can still hurt the economy and at least one incentive to put money to work may wear off.
from MacroScope:
Would you recognize Fed ‘easing’ if you saw it?
By almost all accounts, the Federal Reserve is expected to "stay the course" on its massive bond-buying program after next week's policy-setting meeting. That would mean a continuation of the $85 billion/month in total purchases of longer-term securities, probably consisting of $40 billion in mortgage bonds and another $45 billion in Treasuries. Laurence Meyer of Macroeconomic Advisers is one of countless forecasters predicting this, calling it the "status quo."
Problem is, the U.S. central bank's current policy is not simply to buy $85 billion in bonds -- and if it does announce such a program on Wednesday, it should probably be interpreted as policy easing, not a continuation of current policy.
from Global Investing:
Weekly Radar: Leadership change in DC and Beijing?
Any hope of figuring out a new market trend before next week’s U.S. election were well and truly parked by the onset of Hurricane Sandy. Friday’s payrolls may add some impetus, but Tuesday’s Presidential poll is now front and centre of everyone’s minds. With the protracted process of Chinese leadership change starting next Thursday as well, then there are some significant long-term political issues at stake in the world's two biggest economies. Not only is the political horizon as clear as mud then, but Sandy will only add to the macro data fog for next few months as U.S. east coast demand will take an inevitable if temporary hit -- something oil prices are already building in.
Across the Atlantic, the EU Commission’s autumn forecasts next week for 2012-14 GDP and deficits will likely make for uncomfortable reading, as will a fractious EU debate on fixing the blocs overall budget next year. But the euro zone crisis at least seems to have been smothered for now. Spain seems in no rush seek a formal bailout, will only likely seek a precautionary credit line rather than new monies anyway and needs neither right now in any case given a still robust level of market access at historically reasonable rates and with 95% of its 2012 funding done. According to our latest poll, more than 60% of global fund managers think Spanish yields have peaked for the crisis. Greece's deep and painful debt problems, shaky political consensus and EU negotiations are all as nervy as usual. But tyhe assumption is all will avoid another major make-and-break standoff for now. More than three quarters of funds now expect Greece to remain in the euro right through next year at least.
from Global Investing:
Weekly Radar: Earnings wobble as payrolls, BOJ, G20 eyed
Easy come, easy go. A choppy October prepares to exit on a downer – just like it arrived. World equities lost about 3 percent over the past seven, mostly on Tuesday, and reversed the previous week’s surge to slither back to early September levels. Just for the record, Tuesday was a poor imitation of the lunge this week 25 years ago – it only the worst single-day percentage loss since July and only the 10th biggest drop of the past year alone. But it was a reminder how fragile sentiment remains despite an unusually bullish, if policy-driven year.
Why the wobble? t’s hard to square the still fairly rum, or at best equivocal, incoming macro data and earnings numbers alongside year-to-date western stock market gains of 10-25%. There’s more than enough room to pare back some more of that and still leave a fairly decent year given the macro activity backdrop and we now only have about 6 full trading weeks left of 2012. So it will likely remain bumpy – not least with U.S. and Chinese leadership changes into the mix as mood music. The sheer weight of a gloomy Q3 earnings season seems to have hit home this week, with revenue declines or downgraded outlooks – particularly in "real economy" firms such as Caterpillar, Dupont, Intel and IBM etc – worrying many despite more decent bottom line earnings. As some investors pointed out, earnings can’t continue to beat expectations if revenues continue to wither and there are still precious few signs of an convincing economic turnaround worldwide to draw a line under the latter.
from MacroScope:
Housing neutral for Fed doves; Operation Twist running on empty
A slightly bigger than forecast 5.7 percent rise in sales of new homes in September reported by the National Association of Realtors on Wednesday lends credibility to September's jump in housing starts, but appears neutral for Federal Reserve monetary policy discussions.
The jump in new home sales seems to have largely justified the 11 percent jump in September housing starts, says Decision Economics senior economist Pierre Ellis. The inventory of houses for sale at the end of September rose just 1.4 percent, from the end of August and the months' supply fell to 4.5 months from 4.7 months, he added.
from Global Investing:
Norwegians piling into Korean bonds
One of the stories of this year has been the stupendous rally on emerging local currency debt, fuelled in part by inflows from institutional investors tired of their zero or negative-return investments in Western debt. Norway's sovereign wealth fund said last week for instance that it was dumping some European bonds and spending more of its $600 billion war chest in emerging markets.
Quite a bit of that cash is going to South Korea. Regulators in Seoul recently reported a hefty rise in foreigners' bond holdings (see here for the Reuters story) and Societe Generale has a note out dissecting the data, which shows that total foreign holdings of Korean bonds are now worth around $79 billion -- back at levels seen last July. Norwegians emerged as the biggest buyers last month, picking up bonds worth 1.5 trillion won ($1.3 billion) , almost double what they purchased in the entire first half of 2012. Norway's holdings of Korean Treasuries now total 2.29 trillion won, up from just 190 billion won at the end of 2011.
