Research Radar: Very 20th century
Wednesday’s market commentaries are loaded with the buzz around another technical UK recession in Q1 (the first time Britain has suffered what many see as a ‘double-dip’ since the 1970s); guessing about Wednesday’s FOMC outcome; and the European Commission letting Hungary off the hook about its controversial constitutional changes. In aggregate, and probably due to the looming FOMC, markets are fairly stable – world equities, including euro stocks, emerging markets and even Britain’s FTSE are all higher. The US dollar, Treasuries, volatility gauges, gold and even peripheral euro government bond yields are all down a bit.
Following is a selection of some of Wednesday’s interesting research ideas:
- Barclays’ Barry Knapp reckons US and world equities face a dilemma from the endless distortion to multiples and risk premia from monetary intervention and QE that is artifically lowering the risk-free rate akin to the “financial repression” of the 1950s — no one is sure now if equity is cheap or bonds just very expensive. He concludes that best thing for equities in the medium to long term is to avoid further QE but the problem is that stocks will almost certainly suffer in the short run if the Fed takes QE3 off the table. What’s more, Wednesday’s FOMC could be problem for markets initally if the Fed frets about the growth outlook, but a worsening of the economy might bring QE3 sooner than similar bouts in 2010 and 2011.
- ING’s James Knightley says UK GDP numbers mask business survey improvements and better March data and expects the economy to return to growth in Q2 as well as upward revisions to Q1. Flagging up improving business sentiment in the April CBI survey, he says the Bank of England is unlikely to do more QE and reckons any post-GDP rally in gilts or fall in sterling should be short-lived.
- However, Citi’s Michael Saunders is far gloomier in flagging ” the worst recession/recovery cycle opf the last 100 years” and dismisses suggestions that the persistent weakness of the economy since 2008 can be blamed on things like quarterly construction swings. “We expect the economy will continue to underperform, given the headwinds from fiscal drag, high household debts, the EMU crisis and poor credit availability. A less-tight fiscal policy probably would not help significantly, given the likelihood that fiscal slippage would trigger market pressure. A lower pound would help, but the key policy lever is QE and we continue to expect extra QE.”
- Standard Chartered reckons it’s time to book profits on a short EUR/GBP position, as the market looks primed for a correction. “An unexpectedly weak UK GDP report for Q1 has tempered expectations the economy will outperform”
- Societe Generale’s cross-asset team says it remains bullish on crude oil prices due to supply and capacity worries and geopolitical concerns and it targets $135 per barrel for Q3 — a price they say is not priced into futures markets. They say portfolios should be hedged for the possibility that 20-year-high oil/equity correlations will drop sharply and there several ways to gain exposure to rising crude — Brent Sept call option spreads, US 5-year inflation-protected TIPS, long global oil services stocks, long Russia’s rouble and Mexico’s peso and short Thailand’s baht and Korea’s won. Seperately, SG’s Dylan Grice worries about Australia — “What do you call a credit bubble built on a commodity bull market built on a much bigger Chinese credit bubble? Leveraged leverage? A CDO squared? No, it’s Australia.”
from Anooja Debnath:
When it comes to recessions, 40 is the new 50
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.
As the data get nastier and euro zone politicians wrangle over the sovereign debt mess, the probability goes higher. Just not high enough or fast enough.
The probability that Britain slides back into recession hit 40 percent in the Reuters poll this week, up from one in three last month.
The last time that happened was in July 2008, a few months before U.S. investment bank Lehman Brothers collapsed. The British economy contracted by 2 percent that quarter, its second contraction of 2008. And we all know what happened next. If 40 is the new 50, we're in it.
"It is a very big thing to say we are going into recession ... it is one of those things people are cautious sticking their necks out about," said Alan Clarke, who said there’s a 75 percent chance of that happening.
from MacroScope:
Scams from Abuja to Reykjavik
It suffered the collapse of its currency, economy and banking system so being invoked in a version of the notorious Nigerian email scam is one of the smaller humiliations endured by Iceland.
The confidence trick, which has roots in the 18th century, usually involves an email from someone claiming to be either a deposed African dictator or a Nigerian lawyer, promising a sum of money in return for help to access a substantial fortune.
But the latest spam email making its rounds purports to be from Iceland, one of the highest profile sovereign casualties of the global financial crisis. This version of the email is supposedly from a "devoted christian (sic)" from Iceland", a widow seeking help to access $6 million in a Canadian bank left to her by her husband who worked for an oil giant for 19 years.
Besides the grammatical errors, the email stretches credulity with the notion that the widow's husband would have chosen to park his savings at a Canadian bank rather than the Icelandic ones that would have -- at least until their collapse late 2008 -- offered interest rates in excess of over six percent.
These high-flying banks, which once took in so-called Icesave retail deposits in London and Amsterdam, are now at the centre of a dispute that pits the North Atlantic island nation of 320,000 people against Britain and the Netherlands.
Iceland's failed to agree with the Dutch and British on new terms to repay the more than $5 billion lost by their savers when its banks went to the wall, with the stumbling block over whether the repayment should be based on floating or fixed interest rates
A referendum on the present deal, set to go ahead this weekend, is expected to result in an overwhelming 'no' vote and lead to a further delay in the resumption of overseas fund inflows.
It’s the exit, stupid
Anyone wondering what ghoul is most haunting investors at the moment could see it clearly on Tuesday — it is the exit strategy from the past few years’ central bank liquidity-fest.
Germany came out with a quite positive business sentiment indicator, relief was still there that Greece had managed to sell some debt a day before, and Britain formally left recession – albeit in a limp kind of way.
But what was the main global market mover? It was China implementing a previously announced clampdown on lending.
Doesn’t bode well for when the euro zone stops lending banks low-interest money, Britain stops buyng gilts and the Federal Reserve raises interest rates.
from MacroScope:
Britain heading for rude awakening?
There is a divisive election ahead for Britain, the threat of a ratings downgrade on its sovereign debt and a deficit that has ballooned into the largest by percentage of any major economy. UK stocks, bonds and sterling, however, are trundling along as if all were well. What gives?
For a fuller discussion on the issue click here, but the gist is that all three asset classes are being support by factors that may be masking the danger of a broad reversal. UK equities have been driven higher by the improving global economy, bonds held up by the Bank of England's huge buying programme and sterling by valuation and the distress of others.
But with the Bank of England's buying spree due to end soon and the possibility that UK voters won't give a clear victory to either the Conservatives or Labour, meaning political stalemate, is this set to change?
Royal Bank of Canada does not go as far as saying it will. But it says it is clear that not enough attention is being paid the prospect of politics grinding to a halt and failing to solve the fiscal problem
Many sacred cows will have to be sacrificed in the years ahead, and this will require effective leadership, imagination, and courage. But the danger is that because of the political situation, the country is instead left with weak government, temporary expedients, and initiatives that are the lowest common denominator of long and exhausting negotiation.
Britain is not yet headed back to the 1970s, in our view, but such economic and political recidivism cannot be ruled out. Policy makers and money managers would do well to consult their history books and be alert to the errors and failings of 35 years ago
Global FTSE 100 shrugs off parochial UK GDP data
Britain’s FTSE 100 seems to be almost impervious to any bad data that can be thrown at it. GDP data shocked the market showing the UK unexpectedly contracted in the third quarter.
Sterling tumbled more than a cent against the greenbackand gilts jumped while the FTSEurofirst 300 pan-European equity index trimmed gains considerably.
But Britain’s FTSE shrugged it off, hugging its 1 percent gains in the face of data which shows the UK economy is still ailing badly.
It is the cosmopolitan nature of the FTSE which is keeping it buoyant. Miners and energy firms make up over 32 percent of the index, while miners banks, also very much global institutions make up a further 16 percent.
Howard Wheeldon on BGC Partners says:
“The FTSE is a function of globalalisation and trading conditions and growth elsewhere in the world have more of an impact than domestic growth. If the global recession is over and demand is picking up internationally, it’s all the more reason to close your eyes to what’s going on in the tiny island that it happens to be registered in.”
I think there has to be a reality check now otherwise we are in for a very slow 2009. I’m not sure that FTSE investors will hold on for much longer, rather we are in for a selling spree as seen by some of the Middle East profit takers. Bankers have not changed their behaviour and we have tried to regulate the markets too quickly, restricting credit lines to SME’s. The FTSE is clearly not bullet proof and I’m not sure that unrealistic or over optimistic views based on global theory or mathematics help anyone at this time.
Pity Poor Pound
Britain’s pound has long been the whipping boy of notoriously fickle currency markets, but there are worrying signs that it’s not just hedge funds and speculators who have lost faith in sterling. Reuters FX columnist Neal Kimberley neatly illustrated yesterday just how poor sentiment toward sterling in the dealing rooms has become and the graphic below (on the sharp buildup of speculative ‘short’ positsions seen in U.S. Commodity Futures Trading Commission data) shows how deeply that negative view has become entrenched.
While the pound’s inexorable grind down to parity with the euro captures the popular headlines, the Bank of England’s index of sterling against a trade-weighted basket of world currencies shows that weakness is pervasive. The index has lost more than a quarter of its value in little over two years — by far the worst of the G4 (dollar, euro, sterling and yen) currencies over the financial crisis. The dollar’s equivalent index has shed only about a third of the pound’s losses since mid-2007, while the euro’s has jumped about 10% and the yen’s approximately 20% over that period.
There’s no shortage of negatives — Britain’s deep recession, recent housing bust, near zero interest rates and money printing, soaring government budget deficit (forecast at more than 12% pf GDP next year, it’s the highest of the G20) and looming general election in early 2010. In the relative world of currency traders, not all of these are necessarily bad for the pound — the country is emerging tentatively from recession, the dominant financial services sector is recovering rapidly and short-term interest rates (3-month Libor at least) do offer better returns than the dollar, yen, Swiss franc or Canadian dollar.
But recent data from the IMF on global hard currency reserves shows there may be a more disturbing exit of central bank reserve managers from the pound (no stranger to process of losing reserve currency status, as its pole position was ceded to the dollar after WWI). Sterling’s share of the almost $7 trln of world central bank reserves — which are rising sharply again after a brief hiatus due to the credit crunch — is being steadily eroded.
Although nominal reserve holdings of sterling (the rise of which prior to the crisis was seen as a powerful supporter of both the currency and gilt market) did rise by more than $10 bln in the second quarter, they remain about $24 billion below the peaks of Q2 2008. What’s more, Citi economist Michael Saunders estimates that once you adjust for revaluation effects of currency rate swings, central bank holdings of sterling actually fell in Q2 this year. He reckons that, accounting for these adjustments, Q2 was the second consecutive quarter of net sterling sales by central banks and that the 4 billion pound drop in nominal sterling holdings was the biggest on record. Saunders concludes:
The huge inflows of global FX reserves into sterling and gilts have played a big role in financing the fiscal deficit in recent years. At present, the fiscal deficit is being wholly funded by the BoE, but sterling remains vulnerable and gilts seem highly vulnerable as and when QE ends.
(Graphs by Scott Barber and IMF/Citi)
I don’t know why people get so worked up about this. The drop in sterling is doing exactly what it should do – relieving stresses in other parts of the system. Thank God we’re not in the euro. They’ve gone quiet for the moment, but believe me the French and others will soon be screaming again about the strength of the euro against the pound and even more so against the dollar. The one-size-fits-all suit now has a 54 inch chest and keeps growing, and most of the eurozone is looking pretty bloody daft in it.
from FaithWorld:
France courts Islamic finance, as long as it’s not too obvious
In researching an article on what lay behind government plans to develop France as a European hub for Islamic finance, I was struck by the uneasy atmosphere surrounding the subject. On the one hand, the government sees it as a way to attract Middle Eastern money and wants to push the idea. But on the other, there is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité -- the strict separation of church and state -- tries to keep anything religious out of the public sphere as much as possible.
The bankers, lawyers, government officials and Islamic finance specialists trying to get Islamic finance off the ground in France speak publicly about the bright prospects they see for the market. France has the biggest Muslim population in Europe at over five million. The government is pushing the idea hard. There is a huge need for financing of future projects.
But privately, many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides. Ever since the French Revolution, France has upheld the idea that its people are all individual and equal citizens and not members of regional, ethnic or religious minorities. Stressing membership in a sub-group is considered divisive. The French frequently point to the multicultural approach taken in Britain and the United States as the source of political and social problems -- such as ethnic or religious "ghettoisation" and "identity politics" -- that they want to avoid.
Given this outlook, some French fear the Muslim community here is seeking to nurture its own identity in a way that sets them apart from ordinary French citizens and undermines the unity of the nation. The way in which Muslims openly speak about religion, rather than keeping their faith to themselves, looks to these French as a challenge to the principle of laïcité.
Not every charge of laïcité violation is necessarily valid. As one analyst put it: "You can see in so many papers that Islamic finance is a threat to laïcité , which is a complete nonsense. It proves that the people who write about this know nothing about Islamic finance. It has nothing to do with religion. It is making financial transactions according to a set of rules ... these rules are ethical because they are Islamic."
One expert admitted that the label Islamic would "not help" when French companies were deciding whether to raise cash by issuing Islamic bonds or conventional ones. Another said it would be "absolutely crazy" to call an institution conducting such business an Islamic bank. The Idea that a bank branch would have a giant sign reading "Banque Islamique de Paris" or something similar is so outlandish as to not even come up in conversation.
"The crux of the problem is that nobody wants it except for the Muslims and the Muslims have no power in France. They are not organised enough and have no lobbying power to see Islamic retail banking see the light of day," said one industry specialist on condition of anonymity.
It is archaic method for a bank to pronounce that they are adhering to a certain set of rules. Naming a bank as Islamic always give the impression that it is only serving a particular religious group and engaging business with them indicate adherence to that specific religion. It makes non-Muslims uneasy and doubtful whether it is religiously correct for them to do business with them.
They should come up with a certain neutral rule set, calling it something like the Vienna Laws or something, which is able to serve both the Muslims and non-Muslims.
A Islamic bank has one too many terms Islamic terms in their offerings for their own good.
Society as a whole should embrace a secular institutions rather than regress back to the medieval ages when things are segregated by faith.
We must not bow down to these Islamic pressure. Especially Europe which had been at the forefront of human civility and societal advances. Integrate, immigrants, not isolate!! ( Don’t confuse with assimilate) After all, if you wish to migrate to France or any other European nation, you must be prepared to absorb their culture and their way of life, rather than pressuring them to adhere to yours.
Unless you’re an illegal immigrant who knows no better. If that’s the case, go back home. Don’t create trouble here, and make a bad name for the rest.
Crowing about good earnings
Investors have been cock-a-hoop about the latest earnings season — and probably with some reason. There has been positive surprise after positive surprise, particularly in America. Thomson Reuters latest research shows that of the 337 companies in the S&P 500 that had reported through Friday, 74 percent came in above analysts expectations.
A wag might suggest that this only means that analysts are not very good. Chances are, however, that it reflects that they overshot in their pessimism, a not unusual factor. Are they now being overly optimistic?
Investors are now buying away and putting bad news to one side. Consider as one example how the ballooning of bad debts in European banks have not stopped the sector from rallying sharply.
Rupert Robinson, chief executive at Schroders Private Bank, is one of those who have injected a note of caution into the earnings euphoria. Speaking primarily of FTSE 100 index, which is up 35 percent since a March low, he says:
“One should not lose sight of the fact that the reason profits have come in ahead of expectations is cost-cutting –- not top-line revenue growth. Cost-cutting means higher unemployment and less consumption. Less consumption means less final demand, and therefore top-line growth is likely to remain very sluggish.”
Robinson says that investors need to see real evidence of stronger economic activity feeding through into corporate earnings for signficant progress to be made from here. He is looking more closely at defensives than he was and excpects a market consolidation or correction is likely.
But he too is relatively bullish. He says the FTSE could well hit 5,000 – about 7 percent above todays levels – in the first quarter of next year.
When you hear the outlook that most give with earnings, I don’t see the justification. Companies are beating expectations because analysts underestimated the severe cost cutting most are doing.Still skeptical about where we go from here. The market wants to go up, so it’s going up. The slightest good news sends it up triple digits. Not going to short that.
Is it time for a Scottish wealth fund?
Oxford SWF Project, a university think tank on sovereign wealth funds, is looking at reports that the latest entry in the field could be Scotland. The project has a new post about the Scottish government floating the idea of an oil stabilisation fund to use oil and gas revenues. It cites Scottish cabinet secretary for finance John Swinney looking abroad gleefully:
“We want to harness the benefit of oil revenues now for future years. An oil fund can provide greater stability, protect our economy and support the transition to a low carbon economy. Norway’s oil fund is worth over £200 billion – despite the first instalment being made as recently as the mid 1990s – and Alaska’s oil fund even gives money back to its citizens every year.”
The SWF project reckons the idea is a good one, but wonders if something other than meets the eye is at play. It had two questions.
First, it wonders whether the plan might just be a political rebuke for the UK government from the ruling (and separatist) Scottish National Party over a perceived lack of savings over the years. Second, it notes that the UK government floated the idea of a strategic investments fund back in April and questions whether “the Scottish SWF reflects a ‘whatever they have, we should have’ mentality”.
Here’s a third question. Is it not a bit late for an oil fund? UK oil and gas output, most of which is in Scottish waters, has more than halved since 1999.
Better late than never I would say, what really impressed me is Norway’s 200 billion Sterling oil fund, this is a massive amount of money for a country with only 4.5 million inhabitants.
