Global Investing

Just how miserable a month May was for global equity markets is summed up by index provider S&P which notes that every one of the 46 markets included in its world index (BMI)  fell last month, and of these 35 posted double-digit declines. Overall, the index slumped more than 9 percent.

With Greece’s anti-austerity May 6 election result responsible for much of the red ink, it was perhaps fitting that Athens was May’s worst performer, losing almost 30 percent (it’s down 65 percent so far this year).  With euro zone growth steadily deteriorating, even German stocks fell almost 15 percent in May while Portugal, Spain and Italy were the worst performing developed markets  (along with Finland).

The best of the bunch (at least in the developed world) was the United States which fell only 6.5 percent in May and is clinging to 2012 gains of around 5 percent. S&P analyst Howard Silverblatt writes:

The political and economic uncertainty resulted in another flight to safety – being to the U.S., where equity markets lost 6.47%, but were the best performing developed market.

Emerging markets fared poorly again in May, with losses of 11.4 percent. Hungary, with its own debt problems and tiffs with the IMF, lost 23 percent while Russia was hit hard by oil’s price falls in May, shedding 22 percent. Markets are likely to be on tenterhooks for the next couple of weeks as they wait for the second round of Greek elections on June 17:

India’s first-quarter GDP growth report was a shocker this morning at +5.3 percent. Much as Western countries would dream of a print that good, it’s akin to a hard landing for a country only recently aspiring to double-digit expansions and, with little hope of any strong reform impetus from the current government, things might get worse if investment flows dry up. The rupee is at a new record low having fallen 7 percent in May alone against the dollar — bad news for companies with hard currency debt maturing this year (See here). So investors are likely to find themselves paying more and more to hedge exposure to India.

Credit default swaps for the State Bank of India (used as a proxy for the Indian sovereign) are trading at almost 400 basis points. More precisely, investors must pay $388,000  to insure $10 million of exposure for a five-year period, data from Markit shows. That is well above levels for the other countries in the BRIC quartet — Brazil, China and Russia. Check out the following graphic from Markit showing the contrast between Brazil and Indian risk perceptions.

At the end of 2010, investors paid a roughly 50 bps premium over Brazil to insure Indian risk via SBI CDS. That premium is now more than 200 bps.

As credit default swaps (CDS) for many euro zone sovereigns have zoomed to ever new record highs this year, Chinese CDS too have been quietly creeping higher. Five-year CDS are around 135 bps today, meaning it costs $135,000 a year to insure exposure to $10 million of Chinese risk over a five-year period. According to this graphic from data provider Markit, they are up almost 45 basis points in the past six weeks.  In fact they are double the levels seen a year ago.

That looks modest given some of the numbers in Europe. But worries over China, while not in

the same league as for the euro zone, are clearly growing, as many fear that the real scale of indebtedness and bad loans in the economy could be higher than anyone knows.  Above all, investors have been fretting about a possible hard landing for the economy, with the government unable to control  a growth slowdown.

Fears that Athens is on the brink of crashing out of the euro zone and igniting a renewed financial crisis have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at a G8 summit later this week. This chart shows the impact on assets since the Greek election:

Euro zone banks now account for only 8% of total euro zone market value – they were over over 20% of the market in 2007:

Japan’s economy rebounded in January-March from a lull in the previous quarter, shaking off the pain of a strong yen and Europe’s debt crisis on solid consumer spending and rebuilding from last year’s earthquake.

The Indian rupee’s plunge this week to record lows will have surprised no one. After all, the currency has been inching towards this for weeks, propelled by the government’s paralysis on vital reforms and tax wrangles with big foreign investors. These are leading to a drying up of FDI and accelerating the exodus from stock markets. Industrial production and exports have been falling.  High oil prices have added a nasty twist to that cocktail. If the euro zone noise gets louder, a balance of payments crisis may loom. The rupee could fall further to 56 per dollar, most analysts predict.

True, the rupee is not the only emerging currency that is taking a hit. But the Reserve Bank of India looks especially powerless to stem the decline. (See here for an article by my colleagues in Mumbai) .  One reason  the RBI’s hands are  effectively tied is that  India is one of the few emerging economies that has failed to build up its hard currency reserves since the 2008 crisis and so is unable to spend in the currency’s defence. Usable FX reserves stand now around $260 bilion, down from $300 billion just before the 2008 crisis.  See the following graphic from UBS which shows that relative to GDP, India’s reserve loss has been the greatest in emerging markets.

But there is worse. The relative decline in reserves since 2008 coincides with a ballooning in India’s external debt, both private and public. Comprising mostly of corporate borrowing and trade credit, the debt stands at $350  billion, up from $225 billion four years back.

The euro zone just avoided recession in the first quarter of 2012 but the region’s debt crisis sapped the life out of the French and Italian economies and widened a split with paymaster Germany.

Click here for an interactive map showing which European Union countries are in recession.

The technology sector has been leading the way in the S&P 500 in performance terms so far this year with energy stocks at the bottom of the list. Since the start of this quarter financials have seen the largest reverse in performance.

Is the National Bank of Poland (NBP) the last inflation-targeting central bank still standing?

The bank shocked many today with a quarter point rate rise, naming stubbornly high inflation as the reason, and signalling that more tightening is on its way. The NBP has sounded hawkish in recent weeks but few had actually expected it to carry through its threat to raise rates. Economic indicators of late have been far from cheerful – just hours after the rate rise, data showed Polish car production slumped 30 percent in April from year-ago levels. PMI numbers last week pointed to further deterioration ahead for manufacturing. And sitting as it does on the euro zone’s doorstep, Poland will be far more vulnerable than Brazil or Russia to any new setback in Greece. Its action therefore deserves praise, says Benoit Anne, head of emerging markets strategy at Societe Generale.

(Poland’s central bank) is one of the last orthodox inflation-targeting central banks in the global emerging market central bank universe. They are taking action because they are seeing inflation creeping up and have decided to be proactive.

Equities in the countries most exposed to the euro zone crisis seem to be being hit especially hard this year. The Datastream index of shares in Portugal, Italy, Ireland, Greece and Spain has a total return of -5.3% this year compared to +8.9% for a euro zone index excluding those countries.

U.S. consumers went back to using their credit cards in March to keep spending while student and new-car loans shot up as the value of outstanding consumer credit jumped at the fastest rate since late 2001, data from the Federal Reserve showed on Monday.

Total consumer credit grew by $21.36 billion – more than twice the $9.8 billion rise that Wall Street economists surveyed by Reuters had forecast.

Euro zone factories sank further into decline last month but manufacturers in Asia upped their tempo to meet growing demand from the United States and China, exposing a widening gulf between Europe and the rest of the world.

Unemployment in the euro zone rose to a 15-year high of 10.9 percent in March – as this chart shows the level of youth unemployment paints a worrying picture:

U.S. private employers hired a far fewer than expected 119,000 people in April, the smallest gain since September 2011, a report showed on Wednesday, adding to concerns that the economy has lost some of its momentum. This chart shows the relationship between the first release of ADP figures and non-farm payrolls which are released on Friday.

The Netherlands has become the latest country to come into the firing line of the euro zone crisis.

The cost of insuring five-year Dutch debt against default jumped to its highest since January as the government's failure to agree on budget cuts spiraled into a political crisis and cast doubt over its support for future euro zone measures.

Dutch Prime Minister Mark Rutte offered to resign on Monday, creating a political vacuum in a country which strongly backed an EU fiscal treaty.