Global Investing

Weekly Radar: Q4 earnings, China GDP and German elections

The first wave of Q4 US earnings, Chinese Q4 GDP  and European inflation dominate next week, while regional polls in Germany’s Lower Saxony the following Sunday give everyone a early peek at ideas surrounding probably the biggest general election of 2013 later in the year.

With a bullish start to the year already confirmed by the so-called “5 day rule” on Wall St, we now come to the first real test – the Q4 earnings season. There was nothing to rock the boat from Alcoa but we will only start to get a glimpse of the overall picture next week after the big financials like JPM, Citi and Goldman report as well as real sector bellwethers Intel and GE. Yet again the questions centre on how the slow-growth macro world is sapping top lines, how this can continue to be offset by cost cutting to flatter profits and – perhaps most importantly for investors right now – what’s already in the price.

For the worriers, there’s already been plenty of gloom from lousy guidance  and memories of Q3 where less than half the 500 beat revenue forecasts. But the picture is not uniformly negative from a market perspective. For a start, both top and bottom line growth estimates have already been slashed to about a third of what they were three months ago but should still outstrip Q3 if they come in on target. Average S&P500 earnings growth for Q4 is expected to be almost 3 percent compared to near zero in Q3 and revenue growth is expected at about 2 percent after a near one percent drop the previous quarter. What’s more, the market has been well prepared for trouble already — negative-to-positive guidance by S&P 500 companies for Q4 was 3.6 to 1, the second worst since the third quarter of 2001. So, wait and see – but there will have to be some pretty scary headlines for a selloff at this juncture.  It may be just as tricky to build any bullish momentum ahead of renewed infighting in DC over the debt ceiling next month, but the latter issue has been treated to date this year as a frustration rather than a game-changer.

The other major market event of the week is the big Chinese macro data dump on Friday – Q4 GDP and December retail sales, production and house prices. Is there a risk here? Well, as sceptics regularly say, the fact China reports GDP two weeks after the end of the quarter suggests a certain amount of “data by decree” and the numbers tend to fit the official line. But to the extent that the global market bullishness of the past month or so has been largely hooked on a cyclical Chinese upswing (one that some assume saw a trough in growth in Q3) then these numbers wlll be as important as ever for global risk markets. The forecast is that GDP growth accelerated to 7.8% in Q4 from 7.4% the prior quarter and today’s news of a 14.1% surge in Chinese exports in December underpins that.

Here are some key data releases and events of next week:

EZ Nov production Mon

UK Dec inflation/house prices Tues

US Dec retail sales/PPI Tues

Central/Eastern Europe finance conference in Vienna, Tues

EZ Dec inflation Weds

US Q4 earnings Weds: Goldman, JPM, BNYMellon

US Dec inflation/industrial output Weds

Brazil rate decisions Weds

US Q4 earnings Thurs: Intel, Citi, Blackrock, Amex, BoA,  

US Dec housing starts/permits, Jan Philly Fed Thurs

China Q4 GDO, Dec Industrial/retail/house prices Fri

UK Dec retails sales Fri

US Q4 earnings Fri: GE, State St

Germany’s Lower Saxony holds regional elections Sun

 

 

After bumper 2012, more gains for emerging Europe debt?

By Alice Baghdjian

Interest rate cuts in emerging markets, credit ratings upgrades and above all the tidal wave of liquidity from Western central banks have sent almost $90 billion into emerging bond markets this year (estimate from JP Morgan). Much of this cash has flowed to locally-traded emerging currency debt, pushing yields in many markets to record lows again and again. Local currency bonds are among this year’s star asset classes, returning over 15 percent, Thomson Reuters data shows.

But the pick up in global growth widely expected in 2013 may put the brakes on the bond rally in many countries – for instance rate hikes are expected in Brazil, Mexico and Chile. One area where rate rises are firmly off the agenda however is emerging Europe and South Africa, where economic growth remains weak. That is leading to some expectations that these markets could outperform in 2013.

There have already been big rallies. Since the start of the year, Turkey’s 10 year bond has rallied by 300 basis points; Hungary’s by almost 400 bps; and Poland’s by 200 bps. So is there room for more.

Emerging Policy-The inflation problem has not gone away

This week’s interest rate meetings in the developing world are highlighting that despite slower economic growth, inflation remains a problem for many countries. In some cases it could constrain  policymakers from cutting interest rates, or least from cutting as much as they would like.

Take Turkey. Its central bank surprised some on Tuesday by only cutting the upper end of its overnight interest rate corridor: many had interpreted recent comments by Governor Erdem Basci as a sign the lower end, the overnight borrowing rate, would also be cut. That’s because the central bank is increasingly concerned about the lira, which has appreciated more than 7 percent this year in real terms. But the bank contented itself by warning markets that more cuts could be made to different policy rates if needed (read: if the lira rises much more).

But inflation, while easing, remains problematic.  On the same day as the policy meeting, the International Monetary Fund recommended Turkey raise interest rates to deal with inflation, which was an annualised 9.2 percent in September. The central bank’s prediction is for a year-end 7 percent rate but that is 2 percentage points higher than its 5 percent target. So the central bank probably was sensible in exercising restraint.

Weekly Radar: Global PMIs; US/UK GDP; FOMC; Heavy earnings, inc Apple

Whoosh! The gloomy start to the final quarter seems to have been swept away again by the beginnings of a half decent earnings season stateside – at least against the backdrop of dire expectations – and a steady drip feed of economic data surprises from the United States and elsewhere. Moody’s not downgrading Spain to junk has helped enormously and the betting is now that the latter will now seek and get a precautionary credit line, which would not require any bailout monies up front but still unleash the ECB on its bonds should they ever even need to – and,  given Thursday’s successful sale of 4.6 billion euros of 3-, 5- and 10-year Spanish government bonds,  they clearly don’t at the moment (almost 90% of Spain’s  original 2012 borrowing target has now been raised). What’s more, Greek euro exit forecasts have been put back or reduced meantime by big euro zone debt bears such as Citi and others, again helping ease tensions and defuse perceived near-term euro tail risks. Obama’s bounceback in the presidential polls after the latest debate may be helping too by rolling back speculation that a clean sweep rather than a more likely gridlock was a possible outcome from Nov 6 polls. China Q3 GDP came in as expected with a marginal slowdown to 7.4% and signs of growth troughing — all adding to the picture of relative calm.

So, in the absence of the world ending in a puff of smoke – and the latest week of data, earnings and reports suggests not – we’re left with a view of a hobbled but stabilising world economy aided by hyper-easy monetary policy that is bolting core interest rates to zero. Tactical investors then, at least,  are being drawn into the considerable pricing anomalies/temptations across bond and credit markets as well as the giant equity risk premia and regional price skews.

The upshot has been a sharp bounceback of some 2.5% in world equities since last Wednesday, falling sovereign bond spreads in euroland and in credit and emerging markets, a higher euro and financial volatility gauges still rock bottom. Dax vol, for example, is at its lowest in well over a year. Year to date, developed market equities are now scaling 15-20%! Germany stands out with gains of some 25%, but the US too is homing in on 20%. These are extremely punchy numbers in any year, but are doubly remarkable in year of so much handringing about the future. So much so, you have to wonder if the remainder of the year will be remain so clement. That doesn’t mean another shock or run for the hills, but shaving off the extremes of that perhaps?

A happy future for the “doomed continent”?

The International Monetary Fund this week painted yet another gloomy picture, cutting its 2012 forecast for Africa along with most other countries around the world. In its latest World Economic Outlook, the IMF shaved its 2012 projections for Africa to 5 percent from 5.4 percent.

But it’s not all gloomy for Africa, once called  ”the doomed continent” by the Economist. With its eyes set on next year, the IMF revised up its 2013 outlook to 5.7 percent from 5.3 percent.

Sharing this optimistic outlook for Africa’s future is Africa-focused Russian bank Renaissance Capital:

Weekly Radar: Q3 earnings; China GDP; EU summit; US debate

Markets have turned glum again as October gets underway and the northern winter looms, weighed down by a relentless grind of negative commentary even if there’s been little really new information to digest. The net loss on MSCI’s world stock market index over the past seven days is a fairly restrained 1.5%, though we are now back down to early September levels. Debt markets have been better behaved. The likes of Spain’s 10-year yields are virtually unchanged over the past week amid all the rolling huff and puff from euroland. The official argument that Spain doesn’t need a bailout at these yield levels is backed up by analysis that shows even at the peak of the latest crisis in July average Spanish sovereign borrowing costs were still lower than pre-crisis days of 2006.  But with ratings downgrades still in the mix, it looks like a bit of a cat-and-mouse game for some time yet. Ten-year US Treasury yields, meantime, have nudged back higher again after the strong September US employment report and are hardly a sign of suddenly cratering world growth. What’s more, oil’s back up above $115 per barrel, with the broader CRB commodities index actually up over the past week. This contains no good news for the world, but if there are genuinely new worries about aggregate world demand, then not everyone in the commodity world has been let in on the ‘secret’ yet.

So why are we all shivering in our boots again? Perennial euro fears aside for a sec, the latest narratives go four ways at the moment. 1) The IMF’s World Economic Outlook (WEO) downgraded world growth and its Financial Stability report issued stern warnings on the extent of European bank deleveraging 2) a pretty lousy earnings season is just kicking off stateside, 3)  U.S. presidential election polls are neck and neck again and unnerving some people fearful of a clean sweep by Republicans and possible threats to the Federal Reserve’s independence and its hyper-active monetary policy 4) it’s a new quarter after a punchy Q3 and there’s not much new juice left to add to fairly hefty year-to-date gains. Maybe it’s a bit of all of the above.

But like so much of the year, whether the up moments or the downers, there’s pretty good reason to be wary of prevailing narratives.

Fears of collateral drought questioned

Have fears of global shortage of high-grade collateral been exaggerated?

As the world braces for several more years of painful deleveraging from the pre-2007 credit excesses, one big fear has been that a shrinking pool of top-rated or AAA assets — due varioulsy to sovereign credit rating downgrades, deteriorating mortgage quality, Basel III banking regulations, central bank reserve accumulation and central clearing of OTC derivatives — has exaggerated the ongoing credit crunch. Along with interbank mistrust, the resulting shortage of high-quality collateral available to be pledged and re-pledged between banks and asset managers,  it has been argued, meant the overall amount of credit being generating in the system has been shrinking,  pushing up the cost and lowering the availability of borrowing in the real economy. Quantitative easing and bond buying by the world’s major central banks, some economists warned, was only exaggerating that shortage by removing the highest quality collateral from the banking system.

But economists at JPMorgan cast doubt on this. The bank claims that the universe of AAA/AA bonds is actually growing by around $1trillion per year.  While central bank reserve managers absorb the lion’s share of this in banking hard currency reserves,  JPM reckon they still take less than half of the total created and, even then, some of that top-rated debt does re-enter the system as some central bank reserve managers engage in securities lending.

Citing a recent speech by ECB Executive Board member Benoit Coere dismissing ideas of a collateral shortage in the euro zone, JPM said ECB action in primary covered bond markets and in accepting lower-rated and foreign currency collateral had helped. It added that the average amount of eligible collateral available for Eurosystem liquidity operations was 14.3 trillion euros in the second quarter of 2012 — with 2.5 trillion euros of that put forward as collateral by euro zone banks to be used in the ECB’s repo operations of 1.3 trillion.  Critically, the majority of that 2.5 trillion posted at the ECB was either illiquid collateral such as bank loans or collateral associated with peripheral issuers and thus unlikely eligible for use in private repo markets anyway, they added. This process of absorbing low quality collateral in order to free up higher-quality assets for private use has been an approach of both the ECB and Bank of England.

Risks loom for South Africa’s bond rally

Investors are wondering how much longer the rally in South Africa’s local bond markets will last.

The market has received inflows of over $7.5 billion year-to-date, having benefited hugely from Citi’s April announcement that it would include South Africa in its elite World Government Bond Index (WGBI).  But like many other emerging markets, South Africa has also gained from international investors’ hunger for higher-yielding bonds. And the central bank’s surprise rate cut last week was the icing on the cake, sending 5-year yields plunging another 30 basis points.

There are some headwinds however. First positioning. Around a third of government bonds are already estimated to be in foreigners’ hands. Second, markets may be pricing in too much policy easing (Forward rate agreements are assigning a 77  percent probability of another 50 bps rate cut within the next six months).  That’s especially so given local wheat and maize prices have been hitting record highs in recent weeks.

Yield-hungry funds lend $2bln to Ukraine

Investors just cannot get enough of emerging market bonds. Ukraine, possibly one of the weakest of the big economies in the developing world, this week returned to global capital markets for the first time in a year , selling $2 billion in 5-year dollar bonds.  Investors placed orders for seven times that amount, lured doubtless by the 9.25 percent yield on offer.

Ukraine’s problems are well known, with fears even that the country could default on debt this year.  The $2 billion will therefore come as a relief. But the dangers are not over yet, which might make its success on bond markets look all the more surprising.

Perhaps not. Emerging dollar debt is this year’s hot-ticket item, generating returns of over 10 percent so far in 2012. Yields in the so-called safe markets such as Germany and United States are negligible; short-term yields are even negative.  So a 9.25 percent yield may look too good to resist.

Picking your moment

Watching how the mildly positive market reaction to this weekend’s 100 billion euro Spanish bank bailout evaporated within a morning’s trading, it’s curious to look at the timing of the move and what policymakers thought might happen. On one hand, it showed they’d learned something from the previous three sovereign rescues in Greece, Ireland and Portugal by pre-emptively seeking backstop funds for Spain’s banks rather than waiting for the sovereign to be pushed completely out of bond markets before grudgingly seeking help.

But getting a positive market reaction to any euro bailout just six days before the Greek election of June 17 was always going to be nigh-on impossible. If the problem for private creditors is certainty and visibility, then how on earth was that supposed to happen in a week like this? In view of that, it was surprising there was even 6 hours of upside in the first place. In the end, Spanish and broad market prices remain broadly where they were before the bailout was mooted last Thursday — and that probably makes sense given what’s in the diary for the remainder of the month.

So, ok, there was likely a precautionary element to the timing in that the proposed funds for Spanish bank recapitalisation are made available before any threat of post-election chaos in Greece forces their hand anyhow. It may also be that there were oblique political signals being sent by Berlin and Brussels to the Greek electorate that the rest of Europe is prepared for any outcome from Sunday’s vote and won’t be forced into concessions on its existing bailout programme. On the other hand, Greeks may well read the novel structure of the bailout – in that it explicitly targets the banking sector without broader budgetary conditions on the government – as a sign that everything euro is flexible and negotiable.