Global Investing

Three snapshots for Tuesday

U.S. consumer confidence came in slightly weaker than expected but the ‘jobs-hard-to-get’ index – historically a good lead indicator of the unemployment rate - fell to 37.5 in April.

Spanish equities in price terms are near their 2009 lows but valuations are still some way above:

Australian consumer prices rose by less than expected last quarter while key measures of underlying inflation showed the smallest rise in more than a decade, paving the way for a cut next week and suggesting further cuts were possible.

Play the mini-cycles, not the euro crisis

For all the headline attention on euro zone political heat over the next six weeks or so  (Spain is already in the spotlight, Sunday is the first round of the French presidential elections, Greece goes to the polls on May 6, Ireland votes on the EU fiscal pact on May 31 etc etc),  global investors may be better rewarded if they follow the more mundane runes of the world’s manufacturing cycle for tips on market direction.

As showcased by the IMF this week, the big picture global growth story remains one of a relatively modest slowdown this year to 3.5% before a substantial rebound in 2013 to well above trend at 4.1%. Of course, there are some who think that’s hopelessly optimistic and others who may quibble about the absolute numbers but agree with the basic ebb and flow.

Yet within even these headline numbers, many mini-cycles are  playing out — especially within manfacturing, which accounts for about 20% of global GDP.  But problems in deciphering these twists and turns have been compounded over the past year or so by the impact from natural disasters and supply chain disruptions such as Japan’s devastating earthquake and Thailand’s floods.

Three snapshots for Wednesday

Spanish house prices fell 7.2 percent in the first quarter from a year earlier while Spanish banks’ bad loans rose to their highest level since October 1994 (see chart).

The Bank of England is poised to turn off its money-printing press next month. Minutes of the Bank’s April meeting, combined with a stark warning on inflation from deputy governor Paul Tucker on the same day, signalled a sharp change in tone that could bring forward expectations for interest rate rises.

Does the E in PE need a reality check too?

 

from MacroScope:

Foreign investors still buying American

Overseas investors have yet to sour towards U.S. assets despite high government debt levels, according the latest figures on capital flows.

Including short-dated assets such as bills, foreigners snapped up $107.7 billion in U.S. securities in February, following a downwardly revised $3.1 billion inflow for January. At the same time, the United States attracted a net long-term capital inflow of just $10.1 billion in February after drawing an upwardly revised $102.4 billion in the first month of 2012.

The data showed China boosted purchases of U.S. government debt for a second month in February, but also some waning of demand for longer-dated securities.

Hard times for EM in QE-less world of higher US yields

Now that the Fed appears to have dashed any lingering hopes for an imminent QE3, what’s next for emerging markets? Most observers put this year’s stellar performance of emerging bonds, currencies and equities largely down to the various money-printing or cheap money operations in the developed world. That’s kept core government bond yields bumping along near record lows and benefited higher-yielding emerging assets.

Many would add that in any case a solid economic recovery in the United States should be fairly good news for the rest of the world too. Not so, says HSBC. It argues that a better U.S. outlook is not necessarily good news for emerging markets simply because the side effect of economic improvement is a stronger dollar and higher Treasury yields and that’s an environement in which EM assets tend to underperform.

For an example, it looks back to the days between November 2010 and Feb 2011 when signs of improvement in the U.S. economy steepened the U.S. yield curve,  pushing the spread between 2-year/10-year Treasuries almost 100 bps wider.  Flows to emerging markets dipped sharply, the following graph shows:

All in the price in China?

It’s been a while since Chinese stocks earned investors fat profits. Last year the Shanghai market lost 22 percent and the compounded return on equity investments there since 1993 is minus 3 percent. This year too China has underwhelmed, rising less than 3 percent so far. Broader emerging equities on the other hand have just concluded their best first quarter since 1992, with gains of over 13 percent.

Given all that, bears remain a surprisingly rare breed in China. A Bank of America/Merrill Lynch’s monthly survey found it was fund managers’ biggest emerging markets overweight in March and that has been the case for some months now.  Clearly, hope dies last.

Driving many of these allocations is valuation. China’s equity market has always tended to trade at a premium to emerging markets but in recent months it has swung into a discount, trading at 9.2 times forward earnings or 10 percent below broader emerging markets.  MSCI’s China index is also trading almost 25 percent below its own long-term average, according to this graphic from my colleague Scott Barber (@scottybarber):

Three snapshots for Wednesday

Markets starting to worry about an end to QE/LTRO liquidity?

 

Forward looking PMI data is starting to show a divergence between the UK and the euro zone:

German factory orders, which tend to lead GDP growth, fell 6.1% in February from the previous year.

Yield-hungry tilt to equity from credit

For income-focused investors, the choice between stocks and corporate bonds has been a no-brainer in recent years. In a volatile world, corporate debt tends to be less sensitive to market gyrations and also has offered better yields – last year non-financial European corporate bonds provided a yield pickup of  73 basis points above stocks, Morgan Stanley calculates.

But, long a fan of credit over equity, MS reckons the picture may now be changing and points out that European equities are offering better yields than credit for the first time in over a decade. (The graphic below compares dividend yields on non-financial euro STOXX index with the IBOXX European non-financial corporate bond index. The former narrowly wins.)

The extra yield available on equities, coupled with perceptions of a more stable macro backdrop, may encourage income-oriented investors back into stocks.

March world equity funk flattered by Wall St

It was all about the United States last month as far as equity markets were concerned. S&P’s world equity index may have ended the month with a small gain of just 0.3 percent but that was down to a 3 percent rise on  U.S. markets, data from the index provider shows. Strip out the U.S. contribution and it would have been a pretty poor month for world equities. Beyond Wall St, there was a decline of 1.7 percent and $285 billion lost in market value. Instead, the $418 billion added to U.S. market capitalization dragged the global aggregate up by $132 billion.

Behind the robust U.S. equity performance was a steady flow of strong economic data which also pushed up U.S. 10-year yields 20 bps last month. S&P index analyst Howard Silverblatt writes:

The overall rationale for the U.S. outperformance is the perception that several parts of the world have re-entered a recession, while the U.S. continues to show a slow, but steady recovery.

Three snapshots for Friday

The correlation between individual country equity indices is rising again:

U.S. consumer spending jumps in February but income growth tepid.

Apple vs. RIM market value: