Global Investing

Weekly Radar: Second-guessing Japan flows as global growth slows

Figuring out what was driving pretty violent market moves this week was trickier than usual – and that says something about how much the herd has scattered this year, with ‘risk on-risk off’ correlations having weakened sharply. Just as everyone puzzled over a potential “wall of money” from Japan after the BOJ’s aggressive reflation efforts, the bottom seemed to fall out of gold, energy and broader commodity markets – dragging both equity markets and, unusually, peripheral euro zone bond yields lower in the process.  As dangerous as it may be to seek an overriding narrative these days, you could possibly tie all up these moves under the BOJ banner – something along these lines: the threat of a further yen losses pushes an already pumped-up US dollar ever higher across the board and undermines dollar-denominated  commodities, which have already been hampered by what looks like yet another lull in global demand. Developed market equities, whose Q1 surge had been reined in by several weeks of disappointing economic data and an iffy start to the Q1 earnings season, were then hit further by a lunge in heavy cap mining and energy stocks. The commodities hit may also help explain the persistent underperformance of emerging markets this year. What’s more the lift to Italian and Spanish government bonds comes partly from an assumption any Japanese money exit will seek U.S. and European government bonds and relatively higher-yielding euro government paper may be favoured by some over the paltry returns in the core ‘safe havens’ of Treasuries or bunds. The confidence to reach for yield has clearly risen over the past six months as wider systemic fears have receded – something underlined in dramatic style this week by a huge lunge in gold,  now lost almost 20 percent in the year to date.

While all that logic may be plausible, there have been dozens of other reasons floating around for the seemingly erratic twists and turns of the week.

The only truth so far is that everyone is still just guessing about the likely extent of a Japanese outflow and confidence about global growth has received another setback.

It’s possible the BOJ focus may be a distraction from what looks likes the yet another Spring slowdown in the world economy – a worrying portent for Europe in particular where much of the continent is still in recession or semi-recession since late last year. Most forecasters and asset managers seem to retaining faith in the gradual recovery thesis, but they are nervous as economic surprises turn negative everywhere. Next week’s flash readings for April business surveys, or PMIs, may well be the number of the week as a result – with Q1 GDP from the US and UK also topping list of data releases too. Any fallout from this Friday’s G20 meeting in Washington could also set the tone early next week as yen moves may be discussed alongside growing doubts about the wisdom of austerity in recessions. Otherwise, it’s a big week for Q1 earnings on both sides of the pond.

Final day of IMF Spring Meeting Sun

Israel rate decision Mon

EZ April consumer confidence Mon

US March existing home sales Mon

Europe Q1 earnings Mon: Suez, STMicro

US Q1 earnings Mon: Halliburton, Texas

OECD Japan survey Tues

Global April flash PMIs Tues

Italy April consumer confidence Tues

UK March govt borrowing data Tues

US March new home sales Tues

Hungary rate decision Tues

US Treasury 2-yr auction Tues

Europe Q1 earnings Tues: Scania, SEB, Swedbank, Stora Enso

US Q1 earnings Tues: Amgen, DuPont, Xerox

NZ rate decision Weds

German April Ifo Weds

German 30-yr bond auction Weds

US March durable goods orders Weds

US Treasury 7-yr bond auction Weds

Europe Q1 earnings Weds: ABB, Credit Suisse, Barclays, Daimler, Ericsson, France Tel, GSK, Iberdrola, Nordea, Peugeot, Standard Life, Svenska Handelsbanken

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.

But are markets getting ahead of themselves?  Jahangiz Aziz and Sajjid Chinoy, India analysts at JP Morgan think so.

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.

Analysts polled by Reuters see more drops ahead for the yen which they predict will trade around 102 per dollar by year-end (it was at 77.4 last September). Some banks such as Societe Generale expect a 110 exchange rate and therefore recommend being short on Chinese, Korean and Taiwanese equities.

No one-way bet on yen, HSBC says

Will the yen continue to weaken?

Most people think so — analysts polled by Reuters this month predict that the Japanese currency will fall 18 percent against the dollar this year. That will bring the currency to around 102 per dollar from current levels of 98. And all sorts of trades, from emerging debt to euro zone periphery stocks, are banking on a world of weak yen.

Now here is a contrary view. David Bloom, HSBC’s head of global FX strategy, thinks one-way bets on the yen could prove dangerous. Here are some of the points he makes in his note today:

–  Bloom says the link between currencies and QE (quantitative easing) is not straightforward. Note that after three rounds of QE the dollar is flexing its muscles. The ECB’s LTRO too ultimately benefited the euro.

Cheaper oil and gold: a game changer for India?

Someone’s loss is someone’s gain and as Russian and South African markets reel from the recent oil and gold price rout, investors are getting ready to move more cash into commodity importer India.

Stubbornly high inflation and a big current account deficit are India’s twin headaches. Lower oil and gold prices will help with both. India’s headline inflation index is likely to head lower, potentially opening room for more interest rate cuts.  That in turn could reduce gold demand from Indians who have stepped up purchases of the yellow metal in recent years as a hedge against inflation.

If prices stay at current levels, India’s current account gap could narrow by almost one percent of GDP in this fiscal year, analysts at Barclays reckon.  They calculate that $100 oil and gold at $1,400 per ounce would cut India’s net import bill by around $20 billion, bringing the deficit to around 3.2 percent of GDP.

Chart fun

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.

Although the main pro-Kurdish party has recently poured doubt on the veracity of Ocalan’s statement, the prospect of greater stability in the troubled border region with Iraq could pave the way for greater trade security and pay dividends for investors.

‘Ivanovs’ keen on new cars despite high inflation – Sberbank

Sberbank’s hypothetical Russian middle-class family metric – the ‘Ivanovs’- shows the average Russian family is concerned about high inflation, though that is still barely denting some peoples’ aspirations of getting behind the steering wheel of a new car.

April’s Ivanov index, a survey of more than 2,300 adults across 164 cities in Russia with a population of more than 100,000, notes people are still concerned about persistently high inflation, which in Russia is at around 7 percent.

Household budgets are most concerned by this factor (70 percent), up 1 percent from two months ago, as the average family spends around 40 percent on food. To put that in context, consumers in western Europe spend on average between 15 and 20 percent of income on food, according to the research. But more than 40 percent of respondents still plan to spend on one big-ticket item – to replace their car within the next two years. That is slightly down from 42 percent in the previous survey in February. Car markers have invested heavily in Russia, with sales growing more than 10 percent in 2012 according to AEB, the Association of European Business, as a relatively low level of car ownership and large numbers of older vehicles need replacing.

Dim sum looks tasty for Africa

The rising yuan, which hit its highest last week since China’s FX market was set up in 1994,  should boost demand for China’s offshore “dim sum” bond market, and Africa may join in the action.

Trade between China and Africa totaled $200 billion last year, and Standard Chartered expects that to hit $325 billion by 2015, so it makes sense for African governments and companies to hold assets denominated in the renminbi, or yuan as the currency is also known.

Nigeria for instance said in 2011 it would start to hold yuan in its central bank reserves, and Standard Chartered analysts said in a note that Nigeria and Tanzania’s central banks each bought 500 million yuan of a 3.5 billion yuan dim sum bond launched by China Development Bank last July. Standard Chartered says:

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.

There is no denying there is a problem. Around 11.2 billion tonnes of solid waste are produced by the world’s six billion people every day and 70 percent of this goes to landfill. In some emerging economies, over 90 percent is landfilled.  And the waste mountain is growing. By 2050, the earth’s population will reach 9 billion, while global per capita GDP is projected to quadruple. So waste production will double by 2025 and again from 2025 to 2050, United Nations agencies estimate.