Global Investing

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

The wealthy in the United States have a reputation for being firmly on the side of the Republican Party, but maybe they shouldn’t be for the November presidential election.

According to Tom Stevenson, investment director at asset manager Fidelity Worldwide Investments, past evidence points to Democrat Barack Obama as possibly the more lucrative bet for equity  investors.  He says:

Looking at stock market performance following the last 12 elections suggests that investors should, in the short term at least, be rooting for an Obama victory. History shows that markets tend to rally after a win for the incumbent party by more than 10% on average, but fall modestly if the challenger is successful.

Financial markets are odd sometimes. For weeks they have fretted about the outcome of the Greek election and its impact on the future of the euro zone as a whole. But today they appeared to dismiss the outcome despite a result that was about as positive as global investors fearful for euro zone stability could have hoped for.  So what gives?

The logic behind the weeks of trepidation was fairly simple and straightforward. After an inconclusive election on May 6, a second Greek poll on June 17 was due to give a definitive picture of whether Greeks wanted to stay in the euro and with all the budgetary conditions necessary to keep EU/IMF bailout funds in place.  If a victory for parties wanting to scrap the bailout agreement and austerity led to a halt of EU/IMF funds, the fear was that Greece would inevitably be forced out of the single currency bloc in time too. And if that unprecedented event happened, then a chain reaction would be hard to avoid.  If one country goes back to its domestic currency, despite all its debts being denominated in euros, investors would then find it impossible not to assume at least some element of euro exit risk for fellow-bailout recipients Portugal and Ireland and possibly even Spain and Italy, where doubts remain about their market access over time.

Extreme tail risk or not, this set the scene for the jittery markets that ensued during the Greek electoral hiatus of May 6- June 17. Athens stocks lost more than 17%;  Spanish 10-year government bonds lost more than 7% and the euro/dollar exchange rate was down almost 4%. etc. The fear of euro-wide contagion was so-great that the Spanish bank bailout in the interim had a little or no positive impact. And with the global economic growth picture weakening in tandem with, and partly because of, the euro mess, then prices reflecting world demand in general were hit hard by concerns that another shock to the European banking system could trigger a reversal of trillions of euros of European bank lending from around the globe. Crude oil dropped almost 14%, broad commodity prices and emerging market equities lost about 8%.

The Greek vote next Sunday now stands front and centre of pretty much all investment thinking, but the problem is that it may still be days and weeks before we get a true picture of what’s happened, whether a government can be formed and what their stance will be. If the new parliament cannot clearly back the existing bailout, even after a bout of  horse-trading, then a game of chicken with Europe ensues.  Eurogroup meets again on Thursday and there’s a German/French/Italy/Spain summit on Friday.  But G20 leaders gather in Mexico as all this is unfolding, so they will certainly be quorate if some sort of global response is required to any initial market shock. What’s more, the FOMC is meeting Tuesday and Wednesday should Bernanke feel the US needs urgent insulation from the fallout regardless of broader action. But it’s certainly not beyond the bounds of reason that coordinated central bank action materializes next week if markets do indeed go skewways after the Greek poll. They have all clearly been consulting on the issue lately via telephone and bilaterals. And the assumption of more QE is there among investors. Three quarters of the 260+ funds polled by BoAMerrill Lynch this month expect another ECB LTRO by the end of Q3 and almost a half expecting more Fed QE over the same time.

And maybe it is this assumption of massive policy response that’s preventing markets capitulating outright. Money is gradually going to ground, but it’s not yet thrown in the towel completely as you can see from major equity indices, volatility gauges and interbank spreads etc. And there are a lot of headwinds everywhere over the next six months, the US election, fiscal cliff, end of operation twist stateside – and that’s in one of the few major western economies that was generating any significant growth this year. In other words, there are no shortage of arguments for another monetary boost. A heavy econ data slate during the week will also reveal just how much the world economy has run into sand this quarter. The standouts are the flash PMIs for June, the US Philly Fed index for June and UK jobs and inflation numbers.

As to the lack of response to last weekend’s Spanish bank bailout, it was weird in many ways that anyone really expected a major rally on this just six days ahead of a Greek vote which could throw the whole bloc into chaos.  Even if you thought the Spanish bailout was good, and it was certainly a necessary if not sufficient step, you would still not return to Spanish debt until the next couple of weeks of events had cleared. So, in that respect, it’s unlikely the market made any real judgement on it either way. The subsequent credit rating cuts from Moody’s have not helped and yields have spiked to the 7% level flashing red lights. But it’s hard to see how any exposed frontline euro market, from Spain to Italy and Ireland to Portugal, can really stabilise ahead of the weekend.  One fear on the Spanish rescue was of private investors’ subordination to EU/IMF creditors in any workout of Spanish debt. But even that too may have been overstated when it comes to the sovereign. For a start, the interest rate charged on the funds means a massive saving for Madrid compared with prevailing market rates and, as Barclays argued, actually increases the overall pie available for any workout, with a possible increase in projected recovery rates compared with the pre-bailout setup.  If that was the big concern, then the subsequent rise in Spanish yields most likely is more Greek than Spanish in origin.

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.

Ukrainian officials were at pains to reassure investors last week that no debt default was in the offing. But people familiar with the numbers will find it hard to believe them.

The government must find over $5.3 billion this year to repay maturing external debt, including $3 billion to the IMF and $2 billion to Russian state bank VTB. Bad enough but there is worse:  Ukrainian companies and banks too have hefty debt maturities this year. Total external financing needs– corporate and sovereign – amount to $58 billion, analysts at Capital Economics calculate. That’s a third of Ukraine’s GDP and makes a default of some kind very likely. The following graphic is from Capital Economics.

In normal circumstances Ukraine — and Ukrainian companies — could have gone to market and borrowed the money. Quite a few developing countries such as Lithuania recently tapped markets, others including Jamaica plan to do so. Ukraine’s problem is its refusal to toe the IMF line.  Agreeing to the IMF’s main demand to lift crippling gas subsidies would unlock a $15 billion loan programme, giving  access to the loan cash as well as to global bond markets. But removing subsidies would be political suicide ahead of elections in October.  And with the sovereign frozen out of bond markets, Ukrainian companies too will find it hard to raise cash.

The pleasant surprise of Friday’s upbeat U.S. employment report rattled the U.S. Treasury bond market, as you’d expect, encouraging as it did some optimism about a sustained U.S. economic recovery, tempering fears of deflation and casting some doubts on the likelihood of another bout of quantitative easing or bond buying by the Federal Reserve.  And investors wary of seemingly teflon Treasuries are always keen to use such a backup in U.S. borrowing rates as a reason to rethink a market where supply is soaring and national debt levels are accelerating and where the country has just entered a presidential election year.

The release then by Eurostat on Monday of 2011 government debt  levels for the European Union and euro zone — where bond markets have been in chaos for the past couple of years — provided another reason to look sceptically at Treasuries as it showed aggregate EU and euro zone debt more than 10 percentage points of GDP lower than in the United States.

And with no fresh debt reduction plan likely this side of November’s presidential elections, the comparative U.S. debt trajectory over the coming years looks alarming.

Come back Mr Fukuyama, all is forgiven.

In his 1992 book "The End of History and the Last Man", American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually 'immortal' in countries with a GDP per capita above $10,000.

What a week it has been for Egypt.  All the regional political upheaval  happened in Tunisia, half a continent away, but most of the pain has been felt on Cairo’s financial markets. The Egyptian stock market has fallen almost 8 percent and the Egyptian pound is languishing near seven-year lows to the dollar. The cost of insuring exposure to Egyptian debt has risen to 18-month highs.

So are investors preparing for a Tunisia-style popular uprising in Egypt? Or is it that its market, more sophisticated than Tunisia’s, is bearing the brunt of investors’ increasing bearishness on the North African region? Probably a bit of both.

Egypt faces elections later this year and 82-year old Hosni Mubarak, president for almost 30 years, is likely to run again. Just like much of North Africa and the Middle East, inflation, especially food inflation is high while youth unemployment rates are higher than most of the developing world. Risks of uprisings are seen highest in Egypt and Jordan, where there is relatively more political freedom than, say Libya, but leaders lack the oil wealth cushion that the Gulf states or Libya boast. Given Egypt’s “youth bulge” — the proportion of the population comprised of young men aged 15-34 –regime change is a risk, reckons Charles Robertson, chief economist at Renaissance Capital.

By Barani Krishnan

A decade ago, Malaysia's former deputy prime minister Anwar Ibrahim was on trial for sodomy and corruption in a trial that exposed the seamy side of Malaysian justice and the anxieties of a young country grappling with a crushing financial crisis and civil unrest.

Anwar is Malaysia's best known political figure, courted in the U.S. and Europe and probably the only man who can topple the government that has led this Southeast Asian country for the past 51 years. Photo: Anwar Ibrahim, with a bruised eye, at court on Sept 30, 1998 during his his first trial. REUTERS/David Loh Now the leader of the opposition, will go on trial next week again charged with sodomising a 23-year old male aide. The trial once again looks likely to provide gory evidence and bringing some unwanted attention from the world's media on this Southeast Asian country of 27 million people. It could also embarrass the government and draw international criticism.

Anwar vowed in a recent interview to fight what he says are trumped up charges.