MORNING BID – The Beautiful Game, and Less Beautiful Markets

Jun 10, 2014 12:53 UTC

In two days the World Cup will open in Brazil, with the home country generally believed to be the favorite once again. There are others better placed to look at the odds for every country, though at least this year will avoid the spectacle of seeing thousands of Brazilians hang around after their team has been vanquished (the Brazilians tend to book hotels through the end, assuming they’ll be there in the final – hence lots of them out all night in Berlin in 2006 when it was Italy and France going for the cup). For the short-term investing crowd, there’s some reason to bet on the winner too – Goldman Sachs, in a report so detailed it makes us wonder about their obsessiveness with the game – points out that the winners tend to outperform in the stock market after the final.

“On average, the victor outperforms the global market by 3.5% in the first month – a meaningful amount, although the outperformance fades significantly after three months,” they wrote in a 67-page bit on the World Cup and economics. “But sentiment can only take you so far, in markets at least – the winning nation doesn’t tend to hold on to its gains and, on average, sees its stock market underperform by around 4% on average over the year following the final.” Host nations also tend to see outperformance too – about 2.7 percent for the month following, though, again, the glow of hosting a whole load of 1-0 matches tends to fade over time, leaving investors with other things on their minds, like fundamentals, and maybe all the debt the host took on to build a truckload of stadiums.

A man walks near the construction site for the light-rail that was planned to be ready in time for the 2014 World Cup, in Fortaleza. REUTERS/Davi Pinheiro/Files

A man walks near the construction site for the light-rail that was planned to be ready in time for the 2014 World Cup, in Fortaleza. REUTERS/Davi Pinheiro/Files

The problem for the Brazilians at this time is the country’s weak growth: between 2011-2014 the country’s average real annual growth is about 2 percent, with inflation of about 6 percent. Brazil has elections coming, so that positive glow may fade shortly after the cup ends and investors look to the possible re-election of President Dilma Rousseff in October. Her polling figures have been fading, which has helped the equity market, but Goldman notes that the country has challenges that would stymie the best goalkeeper: the need to disinflate the economy, improve domestic investment sentiment and do a lot of structural reforms. The country has not gotten the infrastructure that it was promised in time for the World Cup while building a whole load of stadiums for the FIFA tournament. Brazil’s best efforts will be watched, especially as Rio de Janeiro hosts the Summer Olympics in 2016.

As for the United States, this nation is once again trapped in the so-called Group of Death in its first bracket, along with powerful opponents Portugal, Germany, and Ghana, not a patsy among them. Reuters Americas markets chief Dan Burns crunched a bit of numbers just to show that all three have had better performing bond markets of late when compared with the U.S. Yields in Germany have been sharply falling, and currently yield about 1.25 percentage points less than Treasuries. Portugal, meanwhile, sports the smallest differential between its 10-year note than the U.S. 10-year in four years, and they’re up more than 4.4 percent this year, compared with a 3.3 percent move by the United States. Lastly, the West African nation of Ghana has a spread of about 540 basis points, according to JP Morgan data – tightest it’s been to developed sovereign nations since January.

So think about that while you’re waiting for somebody to score a goal, at some point.

MORNING BID-All the metal in China

Feb 26, 2014 13:59 UTC

Without a lot of fanfare, the U.S. equity market has worked its way back to a few points of all-time highs, as concerns over emerging markets (largely related to Ukraine) have magnified, as have worries over China’s struggling growth.

That’s once again produced the “best house in a bad neighborhood” effect for the U.S. stock market; bond yields remain range-bound in the 2.70 to 2.75 percent area, the 10-year still reflects a value that doesn’t suggest economic acceleration or worries over massive slowing either.

One of the better indicators of the effect of China’s slowdown comes out of Brazil, where Vale SA, the world’s largest iron ore producer and exporter, will issue its fourth-quarter results.

The company was expected to exceed expectations due to cost cutting and higher iron ore prices, but sluggish demand in China is a long-run effect that cannot be shunted aside. Starmine sees the stock as heavily undervalued, as it has been in a persistent downward trend since early 2011, when it peaked at about $35 a share (US); it now marks time around $13 to $14. The company did surprise the last time, so it’s got that going for it.

It comes at a confusing time for those following China. Authorities there have been allowing or guiding the yuan lower, weakening it at a time when exporters have been less competitive due to China’s real effective exchange rate (measured by the IMF and BIS) hitting all-time highs, according to a Brown Brothers Harriman note on Tuesday. “We believe that officials would like to contain further appreciation by moving the nominal exchange rate weaker,” they wrote.

Part of Chinese officials’ motivation seems to be to inject a bit of two-way volatility into the currency market, lest it become a constant one-way bet, but making the environment more competitive for their exporters is also a necessity.

As Bank of America/Merrill Lynch pointed out this week, the U.S. only exports about 0.6 percent of GDP to China (one reason the slowing there isn’t as big a deal for the USA) but China’s exports to the US and Europe are about 7 percent of its GDP – and that’s an issue.

MORNING BID – The prime directive

Jan 30, 2014 14:08 UTC

So, it’s been a few days. Which means the markets have hit that point in the Star Trek episodes when the Klingons were temporarily short of torpedoes, which gave the Enterprise crew time to suss out what was going on.

Some of the missiles were fired. Big rate hikes from Turkey and South Africa, that followed a rate hike from India, and a few conclusions are inescapable:

  1. The selling hasn’t run its course yet
  2. Rate hikes aren’t enough to turn the tide in favor of a struggling currency because people extrapolate that higher rates are going to pinch growth
  3. People may have been holding out hope that the Federal Reserve would have nodded in some way to the emerging markets and got no quarter from Ben Bernanke as he dropped the mic and disappeared in a puff of smoke at his last-ever Fed meeting.

Add in the latest – a decline in China’s manufacturing – and the pullback certainly has not run its course. Overnight volumes and trading during the NY cash session showed once again that the better volumes have been on the selling, rather than the buying.

The question now is how far this can go? And that depends on what kind of developments we’re looking at. If there’s a massive flight of capital, the selling will remain indiscriminate, and long-running. It’s not too encouraging that the Turkish lira’s rally was good for a few hours and not much more, and nobody even tried to take the South African rand that much higher at all.

But let’s hold fast on the ‘contagion’ notion for a bit here, because ‘contagion’ does not simply mean ‘a whole load of people selling stocks.’ So we’ve seen actions from central banks in India, Turkey, South Africa and earlier Indonesia, and Citigroup suggests Russia could take surprise action in a couple of weeks as well. Having central banks take the initiative to force adjustments in policy is preferred on some levels to the damage markets can dish out (though markets can keep dishing it out also).

But the true measure of contagion relates to how quickly short-term funds leave a country, how much of a country is dependent on foreign funding of longer-term obligations (do foreigners own all the short term debt? If so, not good – Turkey’s short-term external debt is equal to 116 percent of its FX reserves, leaving it unable to defend against capital flight, according to Morgan Stanley,) current account balances, and a few other factors. In a note late Wednesday, Morgan Stanley threw in China exposure to the mix as well, noting that those exporting lots of commodities – be it fuel, metal or ore – are in a more precarious position.

The more troubled nations when it comes to debt issues – like Brazil, Turkey or South Africa – are a bit less exposed to China than Malaysia or South Korea, but they’re plenty exposed, and the latter two don’t have problems with current account deficits and as much in the way of short-term funding. Closer to home, Goldman Sachs notes that just 5 percent of S&P 500 sales derive from emerging markets, and that during EM selloffs, the S&P tends to fall about half as much – with the most exposed naturally being materials and energy sectors.

So there’s some comfort on the U.S. side of things. Still, with US growth not helping emerging markets and China’s slowing and adjustment to the debt it has in its economy weighing heavily, the contagion problem is a very real one that may rear its head in a bigger way. If a slew of rate hikes can head off massive capital flight, the slow growth that comes from higher rates may be something individual economies can deal with. However, that’s only if this is enough of a confidence-inducing measure to keep investors somewhat invested. That’s a big ‘IF.’

MORNING BID – Only a dream in Rio

Jan 15, 2014 17:35 UTC

Among the BRIC nations, Brazil’s the one that’s been repeatedly whacked with a brick in the last couple of years, seeing its currency depreciate and its stock market trashed as it steadily ratchets up interest rates to an expected 10.25 percent this evening (or perhaps even 10.50 percent).

Most emerging nations were hit hard in the last year as the Federal Reserve announced it would start changing its strategy toward reduced bond buying, which will reduce some liquidity among dealers and result in less cash sloshing around in the vast ocean of world markets.

The last year was a rough one for Latin America overall, with most major averages sinking anywhere from 25 to 35 percent, but Brazil was in the unlucky position of already being kicked when it was down.

The MSCI Brazil Index now posts just a 4.1 percent return (annualized) over the past five years, which compares unfavorably with the other BRIC giants of China, India or Russia, to say nothing of Indonesia, Korea, Mexico or Peru.

So like Joe Btfsplk of the Li’l Abner comic, always walking with a dark cloud following him around (nobody got that reference to a Depression-era comic strip? Ok, never mind), Brazil has been faced with the poor choices of letting inflation get out of hand or continuing to try to pull a Volcker-style situation out of one’s hat, breaking inflation’s back in a way that somehow still results in things getting better later.

The IPCA consumer price index rose nearly 6 percent in 2013, as price increases have outpaced expectations for four years running (economic predictions in Brazil being about as accurate as they are in the United States).

Optimism in Brazil has dimmed of late, falling for the first time since the 2009 global financial crisis, according to public polling firms there.

The inflation problem is likely to get worse, according to Brown Brothers Harriman researchers, who said controlled prices were up just 1.5 percent in 2013 – meaning all other prices rose at more than a 7 percent clip in that year – adding “it’s likely that the pass-through impact from the weaker currency has not yet shown up fully in the numbers.” So, they’re forecasting a bump in the Selic rate to 10.5 percent from 10 percent, rather than the half-measure implied by a quarter-point hike.

Whether that brings back investors is another story: Latin American flows have been weak all year, according to Lipper data. The region hasn’t seen steady inflows since 2009, and that didn’t change in 2013, with more outflows.

The weakening real and slipping equity market would seem to provide an opportunity – this is, after all, the world’s seventh largest economy, as the World Bank says.

Years of rapid growth, though, have given way to the more recent 2 to 2.5 percent rate of growth, fine for a fully developed economy like the US (ok, it’s not, but work with me), but not so much for a faster-growing nation, and 2013 saw more than $12 billion in net forex outflows, the worst in a decade.

With Brazil’s current account deficit large and growing ($54 billion at the end of 2012, ranking it seventh worldwide), if sentiment turns even further from emerging markets, it’s Brazil, already getting hit this year, that could get it worse.