Global Investing

The crisis of confidence in Greece's fiscal health has dented U.S. equities, though not enough to compromise a budding American economic recovery. Even a significant slowdown in European growth prospects might have limited immediate impact on the United States. However, that benign backdrop could vanish, economists at Morgan Stanley say, if the Greek situation were to turn in to an outright credit crisis.  They call it the "contagion tail risk":

While the retreat in risky assets in the past few weeks is not yet a headwind for growth, it is hardly a plus.  If the crisis spills over into broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime crisis — the consequences could be more dire.

JP Morgan, for its part, notes that it's not just Greece investors need to worry about.

No country in the Euro area has yet experienced a liquidity issue, even though marginal borrowing costs have risen.  Nevertheless, a liquidity issue could arise in the coming months, as new funds are needed and as existing debt is rolled over.

Neither firm expects the problem to be insoluble. Like most analysts, they expect the EU will step in if necessary. But just as with the U.S. housing crisis, the mere threat of a meltdown could be enough to damage what fragile trust financial institutions have managed to rebuild after the 2008/2009 credit crunch.

The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

Coming out of one of the darkest recessions, have we learned the lesson at all? Or are we going to repeat the mistakes of the past again?

Khuram Maqsood, managing director of boutique corporate financing advisory firm Emirates Capital, thinks we may well repeat them.

He says a second wave in the downturn – if it comes at all – is unlikely to come from a new, unseen fault in world markets.

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.

The Dow Jones Industrial Average has recouped more than 50 percent of the losses from the October 2007 peak and the March 2009 bottom.

It’s been a remarkable rally, and the cheerleaders of the world’s major economies say it indicates a return of confidence to markets.

They say the world’s market rallies are based on galloping improvements in economic fundamentals, and this just eight months after many of them were predicting the end of the world as we know it.

  By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Five things to think about this week:

CENTRAL BANKERS IN A HOLE
– The global economy and financial system appear on the road to recovery but that is in large part due to unprecedented official stimulus that will have to be withdrawn at some point – the questions investors want answered are when, and how.  Central bankers no longer appear to be quite as shoulder to shoulder with one another on coordinated policy as they were last year in the aftermath of Lehman’s collapse.
 

CHINA STOCK WATCHING
–  It is August, liquidity has dried up with the summer holiday season in full swing, and investors are palpably more cautious about the economic outlook now than they have been for months. It is against this backdrop that that the Chinese stock market is emerging as the focal point and driver of all other asset markets. The Shanghai Composite technically slipped into bear market territory earlier last week, shedding 20 percent in the two weeks from Aug. 4 to Aug. 19 on profit taking from the 90 percent surge this year. There is no major Chinese economic data scheduled for release this week, leaving thin markets at the whim of sentiment in what is a notoriously volatile stock market.
 

GROWTH FOUNDATIONS
– The United States, Britain and Germany unveil revised estimates of Q2 economic growth. Revised GDP figures rarely garner much attention but with initial estimates from Germany, France and Japan earlier this month all showing that these countries exited recession in the last quarter, investors will be looking for further evidence the world economy has turned the corner. The hard data is stronger now than it has been for some time but is the global economy building a solid base for recovery, or is it more likely to buckle were authorities to begin withdrawing the massive fiscal and monetary stimulus?
 

Investors have been forced to contend with a severe pullback in consumer demand and the panic that overtook the banking sector in late 2008.

Since March, stocks are up by nearly 50 percent and investors have shifted into riskier fixed-income assets as well, but whether these rallies continue will hinge on whether investors are drawn to those purchases, not whether they're forced into it because nothing else looks attractive.

That's how Mohamed El-Erian, chief executive at bond fund manager Pacific Investment Management Co., put it when speaking with Reuters Television earlier today. He noted that investors in longer-dated Treasuries were moving in that direction, in part because of the desire by authorities to move them away from short-dated risk.

It used to be that Citigroup was one of the market's most important stocks, if not the most important. At the nexus of the banking, securities and lending industries that benefited most from the easy-credit boom of the middle of the decade, its success as a stock mirrored the market and the economy.Somewhere around 2006, when people started to call for a breakup of the company, it was supplanted by a company even more tied to the derivative-fueled mess that masked the holes in the economic landscape - Goldman Sachs.

But Goldman continued to earn massive profits while Citigroup nearly died a painful death. Shares eventually fell to less than $1 a share, it was kicked out of the Dow and investors started to view other consumer banks as better indicators of the market's health.

Still, there's a chance that Citigroup may become more important once again, provided it survives (with substantial help from the government). Kevin Depew, recently writing on Minyanville.com, noted that most of Citigroup's short-term debt has returned to spreads present before the blowup of Lehman Brothers, suggesting that bond investors believe the debt crisis has receded. He notes (using a bit of technical analysis) that "Citigroup right now might again be The Most Important Stock in the Universe."

It must be tough to be a Spanish homeseller right now.

Just as investors pluck up the courage to once again dip a toe in the Mediterranean housing market, along comes a killer flu pandemic that keeps bargain-hunting foreigners thousands of miles from a purchase.

Earlier this week, Palma Property Auctions – one of Spain’s biggest holiday home auctioneers – said rising swine flu fears among clients had forced it to shelve its eagerly-awaited summer sale.

 “We had nine concrete cases of people who called us to say they wanted to have a look at a property and possibly take part in the auction, but they were not going to because of swine flu,” Daniel Westerlund, a spokesman for Palma Property Auctions, told Reuters.