from MacroScope:
Central bank balance sheets: Battle of the bulge
Central banks across the industrialized world responded aggressively to the global financial crisis that began in mid-2007 and in many ways remains with us today. Now, faced with sluggish recoveries, policymakers are reticent to embark on further unconventional monetary easing, fearing both internal criticism and political blowback. They are being forced to rely more on verbal guidance than actual stimulus to prevent markets from pricing in higher rates.
How do the world’s most prominent central banks stack up against each other? The Federal Reserve was extremely aggressive, more than tripling the size of its balance sheet from around $700-$800 billion pre-crisis to nearly 3 trillion today. Still, the ECB’s total asset holdings are actually larger than the Fed’s – it started from a higher base.
The Bank of England, for its part, went even deeper into uncharted territory, with its assets as a percentage of GDP surpassing the Fed’s. By the same measure, the ECB has overtaken the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level.
Taken together, the expansion in reserves is impressive – and speaks to just how deep the global recession proved to be.
Japan… tide finally turning?
Until recently, when you mentioned ”Japan” in the investment context, you could almost hear a collective sigh of disappointment — it was all about recession, deflation and poor investment returns.
However, sentiment does seem to be finally changing, not least because Tokyo stocks have rallied almost 20 percent since the start of the year, outperforming benchmark world and emerging indexes.
The yen has also been on a (rare) declining trend since the start of February, with the selling momentum accelerating since the Bank of Japan set an inflation goal of 1 percent in a surprise move and boosted its asset buying programme by $130 billion on Feb 14.
A closely-watched survey by Bank of America Merrill Lynch showed record optimism on Japan’s growth among fund managers, with a net 91 percent of Japanese fund managers saying they expected the domestic economy to strengthen. That’s up from a net 47 percent two months ago.
Overall, survey partipants worldwide slashed their underweight positions on Japanese equities to a net 4 percent in March from 23 percent last month. This is the smallest underweight position on Japan since August. According to Gary Baker, head of European equity strategy at BofA Merrill:
There’s quite a change in sentiment towards Japan. If you have global growth then Japan… is a big cyclical region to benefit from that. While investment story is the same, what changed there is the yen weakness… it becomes easier to play the story.
Being chic and not saving
Japanese people are generally regarded as saving a lot and not spending much, but in olden times when Tokyo was called Edo (until the mid-19th century), it was considered iki (chic or sophisticated) not to keep one’s earnings overnight.
The latest survey from the Central Council for Financial Services Information (part of the Bank of Japan) may suggest that people are going back to that tradition — although perhaps not for style reasons.
The survey, only available in Japanese so far, showed more than one in four households (consisting of at least two people) said they have no savings, the highest level since the survey started in 1963.
The average level of savings was 11.5 mln yen ($143,232), down 190,000 yen from last year.
More than 40 percent of the respondents said their savings fell from a year ago, double those who said their savings increased.
As Goldman Sachs predicted last year, it may be a matter of time before Japan’s savings rate goes negative.
End of LTRO = end of equity rally 2012?
This year’s global equity rally is unlikely to survive the end of the ECB’s liquidity injections, warns HSBC.
World stocks have jumped 10 percent since the start of 2012, emerging markets are up 15 percent and the index of top European stocks has gained 8 percent. These gains, HSBC says, are almost entirely down to the European Central Bank’s end-December refinancing operation, or LTRO, that injected $500 billion to ease banks’ liquidity worries. The tentative improvement in the U.S. and global growth picture along with beaten-down stock valuations added only limited ammunition to the rally, the bank says.
The findings of HSBC’s analysis? First, past episodes of quantitative easing — Japan in 2001-2004 and the United States, Britain and the euro zone after 2008 – provided a significant fillip to equity markets. U.S. stocks rose an average 6 percent, UK stocks by 8 percent and euro zone markets by 15 percent in the three months following the post-Lehman QE rounds, though in Japan the gains have been short-lived. Second, unexpected changes in monetary policy produced a larger impact on stock prices than the continuation of a previous policy.
And when QE stopped, the effect on stocks was immediately negative. HSBC found:
The periods when the Fed halted QE and allowed its balance sheet to shrink (in August 2009, June to October 2010 and July to October 2011) were all periods of weakness for the stock market.
The ECB is gearing up for another LTRO round in two weeks time. But it will not come as a surprise to markets and there are no plans for more.
HSBC concludes:
Japan fires latest FX wars salvo; other Asians to follow
Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan’s massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies. The action is unlikely to sit well with other central banks struggling to boost economic growth and raises the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September’s selloff. The won for instance is up 6.9 percent in October against the dollar — its biggest monthly gain since April 2009. The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.
Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar, and most analysts reckon Japan’s latest intervention is by no means its last. That’s bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ’s next move. “Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions,” BNP Paribas analysts said.
But the race to the bottom has been underway for some time. After all central banks in the West have cut rates, as in the euro zone, and embarked on more quantitative easing, as in the UK. One bank, Switzerland’s, has gone as far as to effectively establish a ceiling for its currency. And in Asia, Indonesia surprised markets with an interest rate cut this month while Singapore eased monetary policy. Many expect South Korea’s next move also to be a rate cut even though inflation is running well above target. Analysts at Credit Agricole predicted this week’s G20 meeting to yield no fruitful discussion on what they termed “currency manipulation”. “This lack of co-ordinated policy could trigger an escalation in ongoing currency wars,” Credit Agricole analyst Adam Myers told clients. That would in turn lead to a renewed acceleration in central banks’ dollar reserves, he added.
The Big Five: themes for the week ahead
Five things to think about this week:
APPETITE TO CHASE? - Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally’s momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week — as much from China as from the major developed economies — will show how much appetite there is to keep chasing the rally higher.
TAKING CONSUMERS’ PULSE - A better picture of the health of the consumer will emerge this week as U.S. retailers’ earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers’ profit margins, are the only thing that will tempt them to shop — both key issues for the macroeconomic and corporate outlook.
CENTRAL BANK WATCH - After last week’s Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE’s expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 — and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead.
PRICE PROTECTION -This week’s inflation data (from Germany, France, Italy, euro zone, U.S.) is unlikely to contain any nasty surprises. But the U.S. Treasury’s willingness to consider bringing back the 30-year TIPS suggests that enough investors and reserve managers are looking beyond current subdued price data to future inflation risks from QE programmes, etc. That will ensure a close eye is kept on breakevens and whether the main issuers of inflation-linked products in the euro zone are inclined to increase issuance of such products.
TRADE - Official resistance to currency appreciation has been evident in some developed countries (Switzerland, RBA, RBNZ, among others) and there are suspicions that some Asian central banks may also be inclined to check such trends given the fierce competition among the world’s exporters to grab what orders there are. Trade data this week will show how trade flows are faringand the extent to which Chinese economic activity is driving them.
The Big Five: themes for the week ahead
Five things to think about this week
TUSSLE FOR DIRECTION - The tussle between bullish and bearish inclinations — with bears gaining a bit of ground so far this month — is being played out over both earnings and economic data. Alcoa got the U.S. earnings season off to a good start but a heavier results week lies ahead and could toss some banana skins into the market’s path. Key financials, technology bellwethers (IBM, Google, Intel), as well as big names like GE, Nokia, Johnson and Johnson will offer more food for thought for those looking past the simple defensive versus cyclical split to choices between early cylicals, such as consumer discretionaries, and late cyclicals, such as industrials, based on the short-term earnings momentum. Macroeconomic data will need to confirm the picture painted by last week’s unexpectedly German strong orders and production figures to give bulls the upper hand.
FINANCIAL FOCUS - The heavy financial results slate (Goldman, JP Morgan, Bank of America, Citi) will show the extent to which balance sheets are being cleansed of toxic assets and the health of, and outlook for margins, trading revenues, etc. The relative performance of the firms reporting could put the spotlight on the split between investment banking and retail exposure. In Europe, Swedbank’s results will be watched for Baltic exposure while clarity is still being sought on what banks plan to do with the large chunk of ECB one-year money which they continue to park back at the ECB in the form of overnight deposits.
JAPANESE DILEMMA - The BOJ’s policy meeting poses thorny questions on quantitative easing (QE), with the policy debate complicated by sharp gains in the yen. The yen has risen as much as 10.5 percent in three months against the dollar and is nearing the 90 threshold which is viewed by the foreign exchanges as the point at which the Japanese authorities start ratcheting up the rhetoric. Further sustained yen gains will fuel market debate about the fallout for carry trades and for exporters — and by extension economic activity.
HOOKED ON QE - The sharp jump in yields in gilts, euro zone debt, and Treasuries seen after the Bank of England deferred any decision on expanding its QE programme gave a good indication of how bond markets could react when central banks flag that the QE taps will finally be turned off for good. Implementation of exit strategies may be some way off and producer and consumer price data from both sides of the Atlantic this week are likely to be subdued. However, base effects from the oil price peaks of 2008 are expected to fade in the coming months, leaving a less supportive inflation backdrop.
CHINA - The FX reserve debate was aired by the highest-ranking Chinese politician to date at L’Aquila summit and U.S. TICs data this week should keep the reserve holdings issue on the boil. Attention is also on Chinese domestic/trade policy following violence in Xinjiang and strains in relations with Australia over Rio Tinto staff detention. Any escalation in either could prompt investors to review the potential for regional outperformance.
from Raw Japan:
Government stock rescue?
Japanese stocks are sinking towards levels unseen since 1982, sending alarmed government officials scurrying to come up with some way of propping them up.
Officials are looking at steps to support stocks after the plunge, which has taken the benchmark Nikkei to within sight of a 26-year low hit last October.
That slices into the value of huge share portfolios held by Japanese banks and erodes their capital just when the economy needs them to boost lending.
Among proposals being considered is setting up a stock-buying agency as Japan did in the mid-1960s, which follows another plan for the government to buy up to 20 trillion yen in shares from banks -- a plan currently stalled in parliament.
The latest suggestion, in a newspaper on Thursday, is for the Bank of Japan to be pushed into buying stock exchange-traded funds.
Though market players say stock buying by government agencies might help a little, most remain wary with the Japanese market slide part of a global criiss.
"These stock plans may buy a bit of time, but without enacting a decisive economic stimulus package simultaneously they won't be really effective," Takahiko Murai, general manager of equities at Nozomi Securities, told me.
In America they are investing in the banks and lending enormous amounts of money as well. In Japan they have already lent hundreds of billions of dollars to Japanese bands and now they are considering investing in stocks as well. I have been running a small business for the past 20 years in Japan. I have leased and finance numerous pieces of capital of equipment for my co. and paid all of them off. Today I finally decided to support the Japanese economy in a small way and I decided to lease a 700,000 yen office printer for business purposes. I was not only refused by several lease co.s that I have used in the past but I was refused by several others. The government would do better to set up a small business direct lending corporation and lend money directly to small entrepreneurs such as myself that have proven over the last 20 years that we are not only responsible but that we have field tested successful and sustainable business models. Investing in failed mega co.s and banks that reaped record profits in the good times and now step in line for a free gravy train ride is ridiculous. In good times large mega corps. take nothing but advantage and destroy the back bone of the economy which is the small businessman. They always claim that this is a natural course of events in a capitalist society. Then when it comes time to put capitalism to the test they want to be socialists. I say let the mega corps. fail and let their salaried ranks struggle in bread lines and hang out at soup kitchens. A little bit of insecurity is the foundation of ingenuity and innovation. Supporting these large institutions with public investment will lead to more long term stagnation and recession. It’s time for some of the giant trees in the forest to fall so that little energetic saplings can grow upon their provided nutrients. This is a natural course o capitalism. What is good for the goose is good for the gander, I say.
