Global Investing

Three snapshots for Monday

ISM report on U.S. manufacturing shows PMI at 53.4 in March against 52.4 in February:

Euro zone unemployment rose to 10.8% in February, with youth unemployment in Spain reaching 50.5%

China’s official Purchasing Managers’ Index (PMI) hit an 11-month high with a stronger-than-expected reading but a separate private survey by HSBC, which focuses more on smaller factories than the large state-owned enterprises captured in the official data, painted a gloomier picture:

Three snapshots for Thursday

OECD growth forecasts released today show the euro zone countries lagging behind other G7 countries:

Reuters latest asset allocation polls showed global investors cut government debt from portfolios in March:

Germany’s unemployment rate fell to a record low of 6.7% in March, bucking the trend in other euro zone countries:

A Hungarian default?

More on Hungary. It’s not hard to find a Hungary bear but few are more bearish than William Jackson at Capital Economics.

Jackson argues in a note today that Hungary will ultimately opt to default on its  debt mountain as it has effectively exhausted all other mechanisms. Its economy has little prospect of  strong growth and most of its debt is in foreign currencies so cannot be inflated away. Austerity is the other way out but Hungary’s population has been reeling from spending cuts since 2007, he says, and is unlikely to put up with more.

How did other highly indebted countries cope? (lets leave out Greece for now). Jackson takes the example of  Indonesia and Thailand. Both countries opted for strict austerity after the 1997 Asian crisis and resolved the debt problem by running large current account surpluses. This worked because the Asian crisis was followed by a period of buoyant world growth, allowing these countries to boost exports. But Hungary’s key export markets are in the euro zone and are unlikely to recover anytime soon.

Three snapshots for Friday

Yesterday’s much worse than expected PMI data from the euro zone has pushed the Citigroup economic surprise index for the region below zero.

Germany has been one of the strongest performing equity markets this year but is still in the middle of the pack compared to other European countries on valuation.

U.S. new home sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate. Economists polled by Reuters had forecast sales at a 325,000-unit rate in February.

Three snapshots for Thursday

The euro zone’s economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity. The manufacturing purchasing managers indexes for France and Germany were both worse than even the most pessimistic expectations from economists polled by Reuters.

China’s HSBC manufacturing PMI also fell to 48.1, below 50 for a fifth straight month.

“Reflation trade”? Equities have been tracking the 5yr breakeven inflation rate derived from inflation-protected bonds.

Three snapshots for Friday

The U.S. economy probably created 210,000 jobs last month, according to a Reuters survey. If the forecasts are accurate, the government’s jobs report on Friday would mark the first time since early 2011 that payrolls have grown by more than 200,000 for three months in a row. Refresh chart

China’s annual consumer inflation slowed sharply to a 20-month low in February, and factory output and retail sales also cooled more than forecast, giving policymakers ample room to further loosen monetary policy to support flagging growth.

Greece averted the immediate risk of an uncontrolled default, winning strong acceptance from its private creditors for a bond swap deal which will ease its massive public debt and clear the way for a new international bailout.

from MacroScope:

Yet more lagging from Italy and Greece

At this stage in the euro zone crisis, we probably don't need to be reminded how uncompetitive the peripheral economies are. (Arguably, of course, they would not be economically peripheral if they were more competitive, but that is for tautologists to debate).  The United Nations, in the form of UNCTAD, has just pinpointed another weakness, however -- huge underperformance  in foreign directed investing, or FDI.

The numbers it has just released only go as far as 2010, so the real crisis cauldron has yet to come.  But they show that Greece and Italy have been punching way below their weight.

Greece has attracted a relatively small amount of foreign direct investment compared to other countries in the European Union (EU). In 2010, Greece’s share in the EU’s GDP was 1.9 per cent. In the same year, however, the inward FDI stock of Greece amounted to €26.2 billion ($35.0 billion), or less than 0.5 percent of the combined FDI stock of EU countries. Similarly, Greece’s share in the total outward FDI stock of EU countries was 0.4 per cent.

Teflon Treasuries?

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.

Calculating euro breakup shocks

Euro breakup risks, although subsiding, are still high on investor minds.

Almost one in two fund managers surveyed by Bank of America Merrill Lynch last month said they expect a euro zone country to leave the monetary union.

Technology services company SunGard, which has modelled different euro breakup scenarios, says the departure of Greece and Portugal will lead to a 15 percent rise in the euro against the dollar, a 20 percent fall in euro zone yields, a 15 percent fall in euro zone equities and a 20 percent increase in credit spreads.

Below are other findings:

    If all PIIGS left the euro, the single currency would rise 25% and regional equities would fall 20%. U.S. stocks would drop 15 percent. European banking stocks would fall by 25% and ITRAXX Financials credit spreads would increase by 100%, which would imply losses of up to 20% in high-grade corporate debt. VIX would be over 50. A total collapse scenario would see European equities down 40%, U.S. and global equities down 30%, euro yields down 75% and ITRAXX Europe and ITRAXX Financials credit spreads up 150% and 200%respectively. Oil would fall across the scenarios, ranging from 5% from a Greece departure through to a 50% decline from a complete breakup. Sterling would strengthen against the Euro by between 5-25% across the scenarios.

The results seek to model the impact of each scenario over three months, looking eight weeks before and six weeks after the shock to form a balanced picture.

EM growth is passport out of West’s mess but has a price, says “Mr BRIC”

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O’Neill. O’Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China’s economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy’s economy was surpassed in size last year by Brazil, another of the BRICs, O’Neill counters, adding:

“How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy.”

Emerging economies are cooling now after years of turbo-charged growth. But according to O’Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.