Global Investing

Weekly Radar: Dollar building steam?

FOMC/FRANCO-GERMAN SUMMIT/GERMAN-FRENCH-SPAIN AUCTIONS/GLOBAL FLASH PMIS FOR MARCH/UK BUDGET-JOBS-CPI-BOE MINS/ICC HEARING ON KENYATTA/SAFRICA RATES

       The revved-up U.S. dollar – whose trade-weighted index is now up almost 5 percent in just six weeks – could well develop into one of the financial market stories of the year as the cyclical jump the United States has over the rest of G10 combines with growing attention being paid to the country’s potential “re-industrialisation”. As with all things FX, there’s a zillion ‘ifs’ and ‘buts’ to the argument. Chief among them is many people’s assumption the Fed will be printing greenbacks well after this expansion takes hold as it targets a much lower jobless rate. Others doubt the much-vaunted return of the US Inc. back down the value chain into metal-bashing and manufacturing, while some feel the cheaper energy from the shale revolution and the lower structural trade deficits that promises will be short-lived as others catch up. However, with the dollar already super competitive (it’s down 30-40 percent on the Fed’s inflation-adjusted index over the past 10 years) the first set of arguments are more tempting. Even if you see the merits in both sides, the bull case clearly has not yet been discounted and may have further to go just to match the balance of risks.  With Fed printing presses still on full throttle, this has been a slow burner to date and it may be a while yet before it gets up a head of steam — many feel it’s still more of a 2nd half of 2013 story and the dollar index needs to get above last year’s highs to get people excited. But if it does keep motoring, it has a potentially dramatic impact on the investment landscape and not necessarily a benign one, even if shifting correlations and the broader macro landscape show this is not the ‘stress trade’ of the short-lived dollar bounces of the past five years.

Commodities priced in dollars could well feel the heat from a steady dollar uptrend. And if gold’s spiral higher over the past six years has been in part due to the “dollar debasement” trade, then its recent sharp retreat may be less puzzling . Emerging market currencies pegged to the dollar will also feel the pressure as well as countries and companies who’ve borrowed heavily in greenbacks. The prospect of a higher dollar also has a major impact on domestic US investors willingness to go overseas, casting questions on countries with big current account gaps. As the dominant world reserve currency, a rising dollar effectively tightens financial conditions for everyone else and we’ve been used to a weakening one for a very long time.

Back to moment, stock markets around the world have continued to nudge new highs over the past week, with the upbeat US employment data underlining a still broadly positive global growth tilt even if Chinese data was more equivocal and Europe still looks dour. That said, at least the euro FX rate is going in the right direction for a change to help address the regional funk.

To keep a tally, global stocks are up almost 6 percent as the first quarter enters its final fortnight.

Abenomics rally: bubble or trend?

“Abenomics” is the buzzword in Japan these days — it refers to Prime Minister Shinzo Abe’s aggressive reflationary fiscal and monetary policies that triggered the yen’s 10 percent decline against the dollar and 17 percent rally in Tokyo stocks this year.

So it’s no wonder that the Japanese mutual fund market, the second largest in Asia-Pacific, enjoyed the largest monthly inflows in almost six years last month, raking in as much as $11 billion.

With all that new money coming in, will you be late to the game if you haven’t gone in already?

Turning water into gold in China

By Stephen Eisenhammer

Rivers of gold? Maybe not, but there can be money to be made in Chinese water systems.

With the world’s largest population rapidly moving from the countryside to the city, Chinese water supplies are becoming horribly polluted and the companies wading in to clean and purify them are set to benefit.

Investors are taking an interest in water cleaning companies which are supported by the Chinese government as the country attempts to avoid a dawning crisis.

Here comes the real

Inflation is finally biting Brazilian policymakers. The real strengthened around 1.5 percent last week without triggering the usual shrill outcries from government ministers. Nor did the central bank intervene in the currency market even though the real is the best performing emerging currency this year. The bank in fact shifted towards a more hawkish policy stance during its March meeting, a move that seems to have had the blessing of the government.

Friday’s data showed the benchmark consumer price index, IPCA,   up 0.6 percent for a year-on-year inflation rate of 6.31 percent. President Dilma Rousseff, who faces elections next year, took to the airwaves soon after to reassure voters about her commitment to taming inflation, announcing a series of tax cuts. That effectively is a signal that there is now no political constraint on raising interest rates. According to the political risk consultancy, Eurasia:

If the government doesn’t enact measures during the first half of this year to anchor inflationary expectations, Rousseff would run one of two risks. She would either run the risk of inflation starting to eat into the disposable income of families in a manner that could hurt her politically, or relatedly, put the central bank in a position of having to raise interest rates more aggressively later in the year to control inflation with more negative repercussions to growth.

Emerging Policy-”Full stop” in Poland but a start in Mexico?

An action-packed week for emerging monetary policy.

First we had Poland stunning markets with a half-point rate cut when only 25 bps was priced. Governor Marek Belka said the double-cut marked a “full stop”  after several cuts.  Then came Brazil which kept rates on hold at 7.25 but turned hawkish after spending over 18 months in dovish mode. (Rates stayed on hold in Indonesia and Malaysia).

In Brazil, it was high time. Inflation and inflation expectations have been rising for a while, the yield curve has been steepening and anxiety has grown, not only about the central bank”s commitment to controlling inflation but also about its independence.  Whether the central bank will actually start a hiking cycle anytime soon is another matter. Barclays reckon it will, predicting three consecutive 50 bps rate hikes starting from April. But analysts at Societe Generale are among those who are betting on flat rates for now. They point out that since the meeting, the Brazilian yield curve has moved to its flattest in a year and the 2017 inflation breakevens (the difference between the yields on fixed-rate and inflation-linked bonds of similar maturity) have fallen more than 50bps:

This implies that simply by showing a small amount of vigilance, a great deal of structural inflation concerns seem to have dissipated.

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:

Returns are lacklustre, barely breaking positive territory.

This despite the fact that there has been $62 billion in emerging market issuance in the first two months of the year, compared with last year’s record totals of $333 billion.

Making an Impact may be new good

If the pure pursuit of greed is no longer good in the post-crisis world, what defines the new “good”?

That’s when you start to consider “Impact Investing”, a type of investment that pursues measurable social and environmental impacts alongside a financial return.  According to a report prepared for the Rockefeller Foundation, approximately 2,200 impact investments worth $4.4 billion were made in 2011.

But those who may be ideally placed to pursue Impact Investing are still largely absent from the exercise — sovereign wealth funds from the Persian Gulf, according to a recent paper published by academics at the Fletcher School at Tufts University.

Ratings more than a piece of paper for Africa

By Stephen Eisenhammer

Does a sovereign credit rating from a glass tower in London or New York impact life in the country being rated? Apparently in Africa it does.

According to research by the rating agency Fitch, sovereign credit ratings significantly boost foreign direct investment (FDI) to Africa.

Credit ratings added 2 percent to Gross Domestic Product in sub-Saharan Africa each year from 1995 to 2011 through increased  FDI when compared to countries in the region which do not have a rating, Fitch said in a note.

Argentina back in court

Argentina squares off today in a U.S. Appeals court with the so-called holdout creditors who are demanding $1.3 billion in payments on defaulted bonds. A decision will probably take a few days but supporters of both sides have been mustering.

Emails have been pouring into journalists’ inboxes thick and fast from the Argentine Task Force, a lobby group that wants Argentina to settle with bondholders and identifies its goal as “pursuing a fair reconciliation of of the Argentine debt default”.  And yesterday, a noisy pots-and-pans protest was held outside the London offices of Elliot Associates (the parent company of one of the two hedge fund litigants)  by groups supporting Argentina in its battle against those it terms “vulture funds”.  Nick Dearden, director of the Jubilee Debt Campaign, a group that calls for cancelling poor countries’ debts, says:

If the vulture funds are allowed to extract their pound of flesh from Argentina today, we will see a proliferation of vulture funds in Europe tomorrow.

Time running out for Hungarian bonds?

Could Hungary’s run of good luck be about to end?

Despite controversial policies, things have gone the country’s way in recent months — the easing euro crisis and abundant global liquidity saw investors flock to high-yield emerging markets such as Hungary and also allowed it to tap international capital for a $3.25 billion bond. It has slashed interest rates seven times straight, cutting them this week to a record low 5.25 percent. The result is an increased reliance on international bond investors. Foreigners’ share of the Budapest bond market  is almost 50 percent, among the highest percentages in emerging markets.

But analysts at Unicredit write that both markets and economic data had validated rate cuts in 2012, which may not be the case any more. Annual headline inflation fell from 6.6% in September 2012 to 3.7% in January 2013 while the economy contracted 1.7% last year. As a result, net foreign buying of Hungarian bonds rose  in the second half of 2012 to 837 billion forints (an average daily rate of almost 6 billion forints), they note.  Markets are pricing at least 3 more cuts, that will take the rate to 4.5 percent.

But support from foreigners is ebbing. Since the beginning of the year, Unicredit points out, foreign investors have cut holdings of government bonds by 236.8 billion forints (average daily outflow of 6.1 billion forints). Moreover, the most recent rate cuts have failed to fully translate into bond yield corrections, they say.  While the short-dated 2-5 year segment of the curve dropped 23-40 basis points, the belly (the middle) of the curve dipped by only 9-24 bps and longer-dated yields over 10 years have risen by around 18 bps. And the fall in inflation too could be a thing of the past if the government resorts to tax hikes in order to meet the deficit target of 2.7% of GDP  — that would persuade the European Union to lift the excessive deficit procedure it has triggered against Hungary for repeated budget deficit overshoots.