Hair of the dog? Citi says more LTROs in store
Just as global markets nurse a hangover from their Q1 binge on cheap ECB lending — a circa 1 trillion euro flood of 1%, 3-year loans to euro zone banks in December and February (anodynely dubbed a Long-Term Refinancing Operation) — there’s every chance they may get, or at least need, a proverbial hair of the dog.
At least that’s what Citi chief economist Willem Buiter and team think despite regular insistence from ECB top brass that the recent two-legged LTRO was likely a one off.
Even though Citi late Wednesday nudged up its world growth forecast for a third month running, in keeping with Tuesday’s IMF’s upgrade , it remains significantly more bearish on headline numbers and sees PPP-weighted global growth this year and next at 3.1% and 3.5% compared with the Fund’s call of 3.5% and 4.1%.
But its euro zone calls are gloomiest of all. First off, it sees two consecutive years of economic contraction of the bloc as a whole — a 1.0% shrinkage this year followed by 0.2% drop in 2013. Against this dire backdrop, it expects Spain to be forced to seek Troika (EU, IMF and ECB) support later this year that will be focussed on recapitalizing and restructuring its ailing banks and it also expects both Portugal and Ireland to need second bailouts from the same source.
And with that sort of pressure from deleveraging, austerity, sovereign debt stress and recession , the ECB will have to bring out yet another punchbowl, it reckons.
We expect that renewed EMU strains will prompt the ECB to launch at least one more multi-year LTRO and continue to pencil in one or two more rate cuts by end-2013.
Yet, just like the euphoric effects of both the binge and “morning after” drink, the problem with LTRO is that it risks causing more problems than it solves by tying the banks of weak peripheral euro states ever closer to their ailing sovereigns.
January in the rearview mirror
As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures – thanks to Scott Barber and our graphics team.
The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world’s central banks.
The ECB’s near half trillion euros of 3-year loans has stabilised Europe’s ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it’s also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It’s also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..
But to the extent that the ECB move was aimed primarily at preventing a seizure of the banks, then one measure of success can be seen in the degree to which it steepened government yield curves in Spain and Italy. A positive yield curve, which measures the gap between short-term and long-term interest rates, is effectively commercial banks’ ATM — they make money by simply borrowing short-term and lending long. This chart then shows some normality returning to the benchmark interest structure.
If China catches a cold…
China has defied predictions of a hard economic landing for some time now so it is somewhat unsettling to see investors positioning for a sharp slowdown in the world’s second-largest economy.
Over the last 10 years, the world has become accustomed to Chinese annual GDP growth of above 9 percent. A seemingly insatiable demand for commodities from soya beans to iron ore has catapulted the Asian giant to near the top of the global trade table. China is the biggest trading partner for countries on nearly every continent, from Angola to Australia.
But many are now fretting that an unhappy coincidence between stuttering global demand and domestic strains in the property and banking sectors could knock Chinese growth to below 7 percent (the level commonly identified as a ‘hard landing’), with grave implications for the rest of the world.
“It used to be the case that if the US sneezes, the rest of the world catches a cold. But with the US already confined to the emergency room since 2008 thequestion is what happens if China catches a cold,” says Citi in a recent report.
Many are now preparing for the first sneeze.
Commodity exporters are expected to bear the brunt of a sharp Chinese slowdown. Investors have pared back exposure to Brazil, Russia, Chile and South Africa, citing fears over China.
On the flipside, Turkey, Mexico, Israel and India have been identified as less vulnerable.
from Sebastian Tong:
Stop pushing and we’ll do it
The growing acrimony in the international debate over China's currency policy has led some to warn that Beijing could dig in its heels if pushed to hard to let its yuan rise.
But Barclays Capital says Beijing could let its currency strengthen as early as next month, notwithstanding its public resolve against Washington's threat to label it as a currency manipulator.
"They do have a 'If you stop pushing, we'll do it' attitude, which is kind of childish, really. But it will happen because they are the only country in the world, besides India, where there is a whiff of inflation," says Barclays' asset allocation head Tim Bond.
"It's in their own interest. It's the right thing to do."
Barclays expects the relaxation of China's de facto dollar peg to result in the equivalent of a five percent annual appreciation over the next year.
Investors should also keep the heightened rhetoric among U.S. lawmakers in perspective, Bond says.
"The anti-China lobbyists in the U.S. are a lot noisier than the pro-China lobbyists."
from MacroScope:
Press that reset button…
Mohamed El-Erian, CEO and co-CIO of the world's biggest bond fund PIMCO, says 2010 is the beginning of the multi-year resetting of the global economy.
In the period up to the crisis, there were two labels that dominated the world -- Great Moderation and Goldilocks. Not too cold, not too hot. 2009 was about crisis management -- the label was 'whatever it takes'. The 2010 label is post-crisis. It's not just about post-crisis. In our view, 2010 is about multi-year resetting of the global economy. It will be a bumpy journey to the new normal.
Speaking in London ths week, he warned that migration of wealth and growth dynamics of advanced economies to systemically important emerging economies must be on top of investor radar screen in 2010, as well as sovereign risks.
It is the year of sovereign risk. Everyone has to recognise sovereign balance sheets themselves (as) an issue. Sovereigns are called sovereigns for reasons. Everyone gets influenced.
