Global Investing

Weekly Radar: Elections and housing in last big week of 2012

So an extra dose of medicine from the Fed on Wednesday helps smother global market volatility further into the yearend — even though naming an explicit 6.5% unemployment rate could well send Treasury bond volatility soaring as the current 7.7% rate likely approaches that level in 2014 just as the Fed low-rate pledge expires. Not a story for early next year maybe, but…

More nose-against-the-windshield, the busy end to this week – with the EU Summit today and December’s flash PMIs tomorrow – makes it difficult to clear the decks yet for yearend — at least not as much as market pricing and volumes would suggest. Moves to some form of EU banking union are already in the mix from Brussels, however, so another plus at the margins perhaps.

And looking back over the past week — who’d have thought we could still be surprised by an upset in Italian politics? It was the only real significant pre-Fed news of the past week and maybe packed more of a initial punch that it warranted as a result. But for all the interest in Monti stepping aside and Silvio’s attempt to return, there was no really big shift in picture already in front of investors. Ok, so the election is now likely in February not March/April and no one wants to write off Berlusconi completely. But he’s still more than 10 points adrift in polls and Monti himself may well stand for PM in the election too. In short, it adds some political risk at the edges, but if you were happy to hold or buy more Italian bonds before this (still a big ‘if’), then all that really changed for investors is they got a better yield at this week’s relatively successful auction.

So, into next week then? There’s plenty of “events” still in the diary – Japan’s election at the weekend, the fiscal cliff deadline on Dec 21, key US housing reports and the UK government’s response to its commission on the future of banking etc. But thin-trading spikes aside, it’s increasingly unlikely investors’ broadly positive tilt going into 2013 will be derailed at this stage. Never say never, but the short-lived reaction to the Italian hiccup says a lot in itself. World stocks are less than one percent from the year’s peaks set in the summer and it would be brave to bet against them setting 2012 highs in the final fortnight given the relative bullishness about next year.

Egypt referendum on draft constitution Sat

Japanese general elections Sun

Venezuela state elections Sun

US Treasury 2/5/7 yr auctions Mon/Tues/Weds

China Nov house prices Tues

UK Nov inflation Tues

Sweden/Hungary/Turkey rate decision Tues

SKorea presidential elections Weds

Japan Nov trade data Weds

German Dec Ifo Weds

UK govt response to Independent Commission on Banking Weds

BoE mins Weds

Norway/Czech rate decision Weds

US Nov housing starts/permits Weds

UK Nov retail sales Thurs

EZ Dec consumer confidence Thurs

US Nov existing home sales/Dec Philly Fed index Thurs

Italy Dec consumer confidence Fri

SNB quarterly monetary policy report Fri

 

 

 

Weekly Radar: China and Fed steal the show

Even though US cliff talks remain unresolved, many of the edges have been taken off seasonal yearend jitters elsewhere. Euro pressures have been kept under wraps since the Greek deal,  the possibility of yet another Fed QE manoeuvre next Wednesday is back in play and a significant pulse has been recorded in the global economy via the latest PMIs – thanks in large part to China and the US service sector.US payrolls loom again tomorrow, but the picture is one of stabilisation if not full-scale recovery.

All this has kept markets pretty calm with a positive tilt as investors parse 2013. The Greek deal has proved to be a very important juncture for the euro zone, with Italian 10-year yields down yet another 14bp Wednesday-to-Wednesday. The parallel recentr lunge in Spanish yields backed up a few notches after this week’s auction disappointed some traders. Yet even here the relative ease with which a supposedly-cornered Madrid raised more than 4 billion euros for next year’s coffers keeps the financial side of their crisis, if not the economic one, in context for now at least.

Elsewhere, the past seven days saw the euro surging again – partly a result of a mega euro/Swiss jump after Credit Suisse’s decision to charge for franc deposits – negative interest rates in the cold light of day. What that also shows again this year is the danger of betting against central banks. Even though the world and it’s mother were betting against the euro against the Swiss franc all year, the SNB remains successful so far in capping the franc at 1.20. Like the ECB and the Fed – it means business. Once committed, the central banks will not change tack without a dramatic shift in thinking. Perhaps in tandem, gold has continued to drift lower.

Weekly Radar: Bounceback as year winds down

Yet another Greek impasse, a French downgrade, ongoing DC cliff dodging and a downturn in Citi’s G10 economic surprise index (though not yet in the US one) could have been plausible reasons this week to extend the post-election global markets swoon. But at 8 consecutive days in the red up to last Friday, that was the longest losing streak since last November, and a lot of froth had been shaken off these year-end markets already.

We’ve seen a decent bounceback in nearly all risks assets instead. That may be partly due to volume-sapping Thanksgiving week and partly due to the fact that more and more funds think the year is effectively over now anyhow. The only big wildcard left is the timing of an fiscal agreement stateside and few managers now honestly believe there won’t be some sort of a deal. (Deutsche, for the record, said this week that the divide between the sides over tax is much less than many assume).  Greece is a slower burner but again, few people believe it will be hung out to dry any time soon and a deal on the next tranche – whatever about deep and meaningful OSI, payment moratoriums and loan rate cuts – will most likely be reached next week at the latest. Talk of a EFSF-funded Greek debt buyback meantime has helped pushed its debt yields to the lowest since the restructuring.  And the French downgrade was probably the least surprising move of the past five years.

So we’re left closing out a half-decent investment year with a view of early 2013 that is framed by a Chinese cyclical upswing, a likely additional fillip to business planning from a US fiscal deal on top of an already brisk housing recovery there, and the likely return of one the euro bailout patients, Ireland, to the syndicated dollar capital markets almost a year before its bailout programme ends. Further into the year gets much trickier as usual, with elections in Germany, Italy, Israel and Iran to name but four… but  as Bernanke reminded us this week and every investor experienced in full voice in 2012, the central banks are heavily committed to reflation policies now and will not stand idly by if there’s yet another serious downturn.

Weekly Radar: In the shadow of the cliff

It’s been another rum old week market-wise, with global stocks off another 2 percent or more and recording seven straight days in the red for the first time since August. Throw any spin you like at the reasoning, but the pretty predictable post-election hiatus on U.S. fiscal cliff worries now seem to be front and centre of everything. And that will just has to play itself out now, leaving markets stuck in this funk until they come up with the fix. The running consensus still seems to be that some solution will be reached, but no one wants to be too brave about it. And given the cliff is one of the few good explanations for the sharp divergence between the equity market and still rising US economic surprises,  you can see why many feel the US fiscal standoff is merely delaying a resumption of the rally.

The euro zone story has rumbled again of course, with the Greek hand-to-mouth financing, pressure for official sector debt write-offs there and another nervy wait for the latest tranche of bailout funds. Anti-austerity protests in Greece, Spain, Portugal and elsewhere meantime stepped up a gear this week and Q3 data out today confirmed the euro bloc back in recession.

Yet Europe is not the main driver of global markets at the moment. The latest MerrillBoA funds survey this week showed that, at 54%, more than twice as many funds now think falling off the US cliff and not the euro crisis is the biggest global investment risk. The euro group meets next week on Greece  ahead of a two-day EU summit and we still have no clarity on Spain’s bailout either. There’s plenty of headline risk then, for sure, and the parallel release next week of November PMIs is hardly going to bring sweetness and light. That said, there’s been about as much good as bad news from Europe of late. The ECB is simply not going to pull the plug on Greece even if OSI gets pushed up to governmental level and take a lot more time. Spain and Italy have both now effectively completed funding for this  year and there were very positive noises this week on Ireland returning to markets in early 2013 with a 10-year syndicated dollar bond, while Fitch raised its sovereign rating outlook to stable from negative.

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.

Euro emigration – safety valve or worker drain?

Four years of relentless austerity in many of the euro zone’s most debt-hobbled countries have forced many of their youngest and sometimes brightest workers to grab the plane, train or boat and emigrate in search of work. For countries with a long history of emigration, such as Ireland, this is depressingly familar — coming just 20 years after the country’s last debt crisis and national belt-tightening in the 1980s crescendoed, with the exit of some 40,ooo a year in 1989/90 from a population of just 3-1/2 million people.

The intervening boom years surrounding the creation and infancy of the Europe’s single currency and expansion of the European Union eastwards saw huge net migration inflows back into the then-thriving euro zone periphery  — Ireland, Greece, Portugal, Spain and Italy — and created a virtuous circle of rising workforces, higher demand for housing/goods and rising exchequer tax receipts.

But all that has gone into reverse again since the credit, property and banking crash of 2008.

Put down and Fed up

Given almost biblical gloom about the world economy at the moment, you really have to do a double take looking at Wall Street’s so-called “Fear Index”. The ViX , which is essentially the cost of options on S&P500 equities, acts as a geiger counter for both U.S. and global financial markets.  Measuring implied volatility in the market, the index surges when the demand for options protection against sharp moves in stock prices is high and falls back when investors are sufficiently comfortable with prevailing trends to feel little need to hedge portfolios. In practice — at least over the past 10 years — high volatility typically means sharp market falls and so the ViX goes up when the market is falling and vice versa. And because it’s used in risk models the world over as a proxy for global financial risk, a rising ViX tends to shoo investors away from risky assets while a falling ViX pulls them in — feeding the metronomic risk on/risk off behaviour in world markets and, arguably, exaggerating dangerously pro-cyclical trading and investment strategies.

Well, the “Fear Index” last night hit its lowest level since the global credit crisis erupted five-years ago to the month.  Can that picture of an anxiety-free investment world really be accurate? It’s easy to dismiss it and blame a thousand “technical factors” for its recent precipitous decline.  On the other hand,  it’s also easy to forget the performance of the underlying market has been remarkable too. Year-to-date gains on Wall St this year have been the second best since 1998. And while the U.S. and world economies hit another rough patch over the second quarter, the incoming U.S. economic data is far from universally poor and many economists see activity stabilising again.

But is all that enough for the lowest level of “fear” since the fateful August of 2007? The answer is likely rooted in another sort of “put” outside the options market — the policy “put”, essentially the implied insurance the Fed has offered investors by saying it will act again to print money and buy bonds in a third round of quantitative easing (QE3) if the economy or financial market conditions deteriorate sharply again. Reflecting this “best of both worlds” thinking, the latest monthly survey of fund managers by Bank of America Merrill Lynch says a net 15% more respondents expect the world economy to improve by the end of the year than those who expect it to deteriorate but almost 50 percent still believe the Fed will deliver QE3 before 2012 is out.  In other words, things will likely improve gradually in the months ahead and if they don’t the Fed will be there to catch us.

A case for market intervention?

As we wait for ECB Mario Draghi to come good on his promise to do all in his power to save the euro,  the case for governments intervening in financial markets is once again to the fore. Draghi’s verbal intervention last week basically opened up a number of fronts. First, he clearly identified the extreme government bond spreads within the euro zone, where Germany and almost half a dozen euro countries can borrow for next to nothing while Spain and Italy pay 4-7%,  as making a mockery of a single monetary policy and that they screwed up the ECB’s monetary policy transmission mechanism.  And second, to the extent that the euro risks collapse if these spreads persist or widen further, Draghi then stated  it’s the ECB’s job to do all it can to close those spreads. No euro = no ECB. It’s existential, in other words. The ECB can hardly be pursuing “price stability” within the euro zone by allowing the single currency to blow up.

Whatever Draghi does about this, however, it’s clear the central bank has set itself up for a long battle to effectively target narrower peripheral euro bond spreads — even if it stops short of an absolute cap.  Is that justified if market brokers do not close these gaps of their own accord?  Or should governments and central banks just blithely accept market pricing as a given even if they doubt their accuracy?  Many will argue that if countries are sticking to promised budgetary programmes, then there is reason to support that by capping borrowing rates. Budget cuts alone will not bring down debts if borrowing rates remain this high because both depress the other key variable of economic growth.

But, as  Belgian economist Paul de Grauwe argued earlier this year,  how can we be sure that the “market” is pricing government debt for Spain and Italy now at around 7% any more accurately than it was when it was happily lending to Greece, Ireland and Portugal for 10 years at ludicrous rates about 3% back in 2005 before the crisis? Most now accept that those sorts of lending rates were nonsensical. Are 7%+ yields just as random? Should governments and the public that accepts the pre-credit crisis lending as grossly excessive now be just as sceptical in a symmetrical world? And should the authorities be as justified in acting to limit those high rates now as much as they should clearly have done something to prevent the unjustifiably low rates that blew the credit bubble everywhere — not just in the euro zone? De Grauwe wrote:

Devil and the deep blue sea

Ok, it’s a big policy week and of course it could either way for markets. An awful lot of ECB and Fed easing expectations may well be in the price already, so some delivery would appear to be important especially now that ECB chief Mario Draghi has set everyone up for fireworks in Frankfurt.

But if it’s even possible to look beyond the meetings for a moment, it’s interesting to see how the other forces are stacked up.

Perhaps the least obvious market statistic as July draws to a close is that, with gains of more than 10 percent, Wall St equities have so far had their best year-to-date since 2003. Who would have thunk it in a summer of market doom and despair.  Now that could be a blessing or a curse for those trying to parse the remainder of the year. Gloomy chartists and uber-bears such as SocGen’s Albert Edwards warn variously of either hyper-negative chart signals on the S&P500, such as the “Ultimate Death Cross”, or claims that the U.S. has already entered recession in the third quarter.

What would a benign dictator do with the euro?

The idea of a “benign dictator” may well be an oxymoron but as a thought exercise it goes a way to explaining why giant global fund manager Blackrock thinks the chances of a euro zone collapse remains less than 20 percent.  When push comes to shove, in other words, Europe can sort this mess out. Speaking at an event showcasing the latest investment outlook from Blackrock Investment Institute, the strategy hub of the investment firm with a staggering $3.7 trillion of assets under management,  Richard Urwin said the problem in trying to second-guess the outcome of the euro crisis was the extent to which domestic political priorities were working against a resolution of the three-year old crisis.

“The thing is if you could imagine a benign dictator, then the problems are all solvable and could be fixed in a matter of weeks,” said Urwin, who is Head of Investments at Blackrock’s Fiduciary Mandate Investment Team.  Playing with the idea, Urwin said parts of a workable plan may involve debt rescheduling or restructuring for the existing bailout countries Greece, Portugal and Ireland; a buildup of a sufficiently large liquidity fund to help the larger countries such as Spain and Italy; a euro banking union with deposit guarantees and single supervisor to ring-fence and close insolvent banks that will never function properly; the creation of a central finance ministry and the issuance of jointly-guaranteed euro bonds etc etc.

Urwin’s point of course was not to advocate a dictator for the euro zone — although he acknowledged the euro was not exactly a child of European electorates to begin with–  rather that euro members have the ability if not the willingness yet to solve the crisis and that global investors looking for signposts in the saga needed to watch closely the runes of political cooperation and leadership instead of the economics and debt dynamics alone.  Where exactly that turns is hard to guess, but but it may well be that the process that has to wait until the German elections next year, he added.