Global Investing

A big week for central bank meetings looms and the doves are likely to be in full flight.

Take the Reserve Bank of India, the arch-hawk of emerging markets. It meets on Tuesday and some, such as Goldman Sachs, are predicting a rate cut as a nod to the government’s reform efforts. That call is a rare one, yet it may have gained some traction after data last week showed inflation at a 10-month low, while growth languishes at the lowest in a decade. Goldman’s Tushar Poddar tells clients:

With both growth and inflation surprising on the downside relative to the RBI’s forecast, there is a reason for the central bank to move earlier than its previous guidance.

Most other analysts however reckon the RBI will judge it too soon to cut rates. It could opt instead for a cut in banks’ cash reserve ratio in order to prod them into loosening lending rates. A Reuters poll of analysts predicts a half point rate cut in the Jan-March 2013 period.

Over to Turkey where the central bank has been making dovish noises and actions (it has trimmed its overnight lending rate three times this year) . On Tuesday, it is expected to cut its main policy rate for the first time in over a year, thanks to falling inflation and last week’s data that showed the Turkish economy grew just 1.6 percent in the third quarter, compared to forecasts of 2.6 percent.

Adversity is a great leveller. Just look at the way sovereign credit ratings in the developed and emerging world have been converging ever since the credit crisis erupted five years ago. JPMorgan  has crunched a few numbers.

Few were surprised last week by S&P’s decision to cut the outlook on Britain’s AAA rating to negative. That gold-plated rating is becoming increasingly rare — according to JP Morgan, just 15 percent of global GDP now rates AAA with a stable outlook — a whopping comedown from 50 percent in 2007. Only 13 developed economies are now rated AAA, compared to 21 before the crisis. And only one, Australia, now has a higher rating (AAA) than in 2007 — 16 of its peers have suffered a total of 129 downgrades in this period.  With 20 rich countries on negative outlook, more downgrades are likely.

Emerging sovereigns, on the other hand, have enjoyed 189 upgrades (43 percent of these were moves into investment grade). That has caused what JPM dubs “a traffic jam”  in the triple B ratings area, with 20 percent of world GDP now rated at this level, compared to 8 percent in 2009.

So an extra dose of medicine from the Fed on Wednesday helps smother global market volatility further into the yearend — even though naming an explicit 6.5% unemployment rate could well send Treasury bond volatility soaring as the current 7.7% rate likely approaches that level in 2014 just as the Fed low-rate pledge expires. Not a story for early next year maybe, but…

More nose-against-the-windshield, the busy end to this week – with the EU Summit today and December’s flash PMIs tomorrow – makes it difficult to clear the decks yet for yearend — at least not as much as market pricing and volumes would suggest. Moves to some form of EU banking union are already in the mix from Brussels, however, so another plus at the margins perhaps.

And looking back over the past week — who’d have thought we could still be surprised by an upset in Italian politics? It was the only real significant pre-Fed news of the past week and maybe packed more of a initial punch that it warranted as a result. But for all the interest in Monti stepping aside and Silvio’s attempt to return, there was no really big shift in picture already in front of investors. Ok, so the election is now likely in February not March/April and no one wants to write off Berlusconi completely. But he’s still more than 10 points adrift in polls and Monti himself may well stand for PM in the election too. In short, it adds some political risk at the edges, but if you were happy to hold or buy more Italian bonds before this (still a big ‘if’), then all that really changed for investors is they got a better yield at this week’s relatively successful auction.

(By Alice Baghdjian)

Ravaged by the financial crisis and struggling with new capital regulations, European banks have scaled back overseas assets and slimmed loan books. Cordiant Capital, a fund focused on private loans to emerging markets, cites data this week from the Bank for International Settlements (BIS), which shows that syndicated loans to emerging economies fell by 30 percent to $245.3 billion in the year to end-September.
That’s down from $353 billion in the comparable 2011 period.

New loans to Asia, normally the largest recipient of developed market bank lending, fell by 27 percent over the last 12 months compared with the same period in 2010-2011.

But it was lending to emerging eastern European economies that fell most markedly, cut by more than a third.

The  apparent turnaround in Africa’s fortunes over the past decade has been attributed to the rise of China and its insatiable appetite for African commodities. So African policymakers, like those everywhere, will have been relieved by the recent uptick in Chinese economic data.

But is Africa’s dependence on China exaggerated?  A hard landing in the Asian giant will be an undoubted setback for African finances but according to Fitch Ratings.  it may not be a disaster.

Fitch analyst Kit Ling Leung estimates that if China’s economy grows at below-forecast rates of 5 percent in 2013 and 6.5 percent in 2014, African real GDP growth will slow by 90 basis points.  So a 3 percentage point drop in Chinese growth will lead to less than a 1 percentage point hit to Africa. Countries such as Angola will take a harder hit due to oil price falls but others such as Uganda, which import most of their energy, may even benefit, Yeung’s exercise shows.

London’s offshore yuan bond market, launched to much fanfare last October,  is still struggling to get many deals off the ground. Banks and authorities from Britain, China and Hong Kong met last week in London at their twice-yearly forum to discuss reasons. Liquidity, or lack of it, was deemed to be the main hurdle.

China Construction Bank last month became the first Chinese borrower to launch a London-listed bond. But there have only been a handful of London bonds this year, as the nascent offshore market continues to lag far behind Hong Kong.

Spencer Lake, co-head of global markets at HSBC, told a briefing last week:

We have not yet seen the competitive pricing such that you can only issue in London.  There are probably 50 entities around the world that would love to come to the market tomorrow, but we still need to see more trading, more liquidity build up.

By Alice Baghdjian

Uzbekistan, Bangladesh and Vietnam found themselves cheered and chided this week.

The Corruption Perceptions Index, compiled by Berlin-based watchdog Transparency International, measured the perceived levels of public sector corruption in 176 countries and all three found their way into the bottom half of the study.

Uzbekistan shared 170th place with Turkmenistan (a higher ranking denotes higher perceived corruption levels) . Vietnam was ranked 123th, tied with countries like Sierra Leone and Belarus, while Bangladesh was 144th.

Even though US cliff talks remain unresolved, many of the edges have been taken off seasonal yearend jitters elsewhere. Euro pressures have been kept under wraps since the Greek deal,  the possibility of yet another Fed QE manoeuvre next Wednesday is back in play and a significant pulse has been recorded in the global economy via the latest PMIs – thanks in large part to China and the US service sector.US payrolls loom again tomorrow, but the picture is one of stabilisation if not full-scale recovery.

All this has kept markets pretty calm with a positive tilt as investors parse 2013. The Greek deal has proved to be a very important juncture for the euro zone, with Italian 10-year yields down yet another 14bp Wednesday-to-Wednesday. The parallel recentr lunge in Spanish yields backed up a few notches after this week’s auction disappointed some traders. Yet even here the relative ease with which a supposedly-cornered Madrid raised more than 4 billion euros for next year’s coffers keeps the financial side of their crisis, if not the economic one, in context for now at least.

Elsewhere, the past seven days saw the euro surging again – partly a result of a mega euro/Swiss jump after Credit Suisse’s decision to charge for franc deposits – negative interest rates in the cold light of day. What that also shows again this year is the danger of betting against central banks. Even though the world and it’s mother were betting against the euro against the Swiss franc all year, the SNB remains successful so far in capping the franc at 1.20. Like the ECB and the Fed – it means business. Once committed, the central banks will not change tack without a dramatic shift in thinking. Perhaps in tandem, gold has continued to drift lower.

This year has been all about interest rate cuts. As Western central banks took their policy-easing efforts to ever new levels, emerging markets had little recourse but to cut rates as well. Interest rates in many countries from Brazil to the Czech Republic are at record lows.

Some countries such as Poland and Hungary are expected to continue lowering rates. Rate cuts may also come in India if a reluctant central bank finds its hand forced by the slumping economy. But in many markets, interest rate swaps are now pricing rate rises in 2013.

Are they correct in doing so? Emerging central banks will raise interest rates by an average 8 basis points next year, JP Morgan analysts predict.  UBS, in a recent note, reckons more EM central banks will raise rates than cut them. Analysts there offer the following graphic detailing their expectations:

Global Investing has discussed in the past what a golden opportunity the Iranian crisis has proved for Turkey. Between January and July 2012 it ratcheted up gold exports to Iran ten-fold compared to 2011 as inflation-hit Iranians clamoured for the precious metal. Since August exports appear to have been routed via the UAE, possibly to circumvent U.S. sanctions on trade with Teheran.

The trade has been a handy little earner. Evidence of that has shown up in Turkey’s data all year as its massive current account deficit has steadily shrunk. On Friday, official data showed the Turkish trade gap falling by a third in October from year-ago levels. And yes, precious metal exports (read gold) came in at $1.5 billion compared to $322.4 million last October. In short, a jump of 370 percent.

But the days of the lucrative trade may be numbered, according to Morgan Stanley analyst Tevfik Aksoy. Aksoy notes that the gold exports can at least partly be accounted for by the considerable amounts of lira deposits that Iran held in Turkish banks as payment for oil exports. (Yes, there’s an oil link to all this. Turkey buys oil from Iran but pays lira due to Western sanctions against paying Teheran hard currency. Iranian firms use liras to shop for Turkish gold. See here for detailed Reuters article). These deposits are being steadily converted into gold and repatriated, Aksoy says.