Global Investing

Weekly Radar: May days or Pay days?

So, it’s May and time for the annual if temporary equity market selloff, right? Well, maybe – but only maybe.  A fresh weakening of the global economic pulse would certainly suggest so, but central banks have shown again they are not going to throw in the towel in the battle to reflate. The ECB’s interest rate cut today and last night’s insistence from the Fed that it’s as likely to step up money printing this year as wind it down are two cases in point. And we’re still awaiting the private investment flows from Japan following the BOJ’s latest aggressive easing there.

So where does that all leave us? A third of the way through 2013 and it’s been a good year so far for nearly all bulls – both western equity bulls and increasingly bond bulls too! Not only have developed world equities clocked up some 13 percent year-to-date (the S&P500 set yet another record high this week while Europe’s bluechips recorded a staggering 12th consecutive monthly gain in April) , but virtually all bond markets from junk bonds to Treasuries, euro peripherals to emerging markets are now back in the black for the year as a whole. For the most eyebrow-raising evidence, look no further than last week’s debut sovereign bond from Rwanda at less than 7 percent for 10 years or even newly-junked Slovenia’s ability this week to plough ahead with a syndicated bond sale reported to already be in the region of four times oversubscribed. For many people, that parallel rise in equity and bonds smells of a bubble somewhere. But before you cry “QEEEEE!” , take a look at commodities — the bulls there have been taken a bath all year as data on final global demand hits yet another ‘soft patch’ over the past couple of months.

So is this just an idiosyncratic random walk of asset markets (itself no bad thing after years of stress-riven hyper correlation) or can we explain all three asset directions together? One way to think of it is in terms of global inflation. If QE-related inflation fears have been grossly exaggerated then pressure to remove monetary stimulus or wanes again and there may even be arguments – certainly in Europe – for more. This would intuitively explain the renewed dash for bonds and fixed income in general even in the face of the still-plausible, if long term, “Great Rotation” idea. You could argue the monetary free-for-all is buoying equities regardless of demand concerns. But why wouldn’t commodities gain on that basis too?

The answer likely lies in the desperate demand among big institutional investors for income in a low-growth, QE-buoyed world. The paltry income left in ‘safe’ bond markets becomes less unappealing if the inflation horizon is lower than we thought and from there the push for more yield fuels all bond markets. Similarly this year’s equities rally has been remarkable because it’s been led by income-like, blue chip defensive stocks with decent dividends that ape bond returns – and not by growth stocks or even emerging markets, which still remain in the red.

And if income is the only game in town and there’s no inflation scare, then the last place you want to be is income-less commodities.

Will gold’s glitter dim in India?

Indians have reacted to the latest gold prices falls by — buying more gold. And why not? Aside from Indians’ well known passion for the yellow metal (yours truly not excluded) gold has by and large served well as an investment: annual returns over the past five years have been around 17 percent, Morgan Stanley notes.

Now, gold’s near 20 percent plunge this year has wiped some $300 billion off Indians’ gold holdings, Morgan Stanley estimates in a note (households are believed to own about 15,000 metric tonnes of gold). So is the gold rush in India over?

Possibly. Indian gold imports have doubled to around 3 percent of GDP in the past five years. That rise is partly down to greater wealth which translates into more wedding jewellery purchases. But the more unpleasant side of the equation is India’s inflation problem. Look at the following charts from MS that shows how negative real interest rates have encouraged savings in gold rather than financial instruments:

Cheaper oil and gold: a game changer for India?

Someone’s loss is someone’s gain and as Russian and South African markets reel from the recent oil and gold price rout, investors are getting ready to move more cash into commodity importer India.

Stubbornly high inflation and a big current account deficit are India’s twin headaches. Lower oil and gold prices will help with both. India’s headline inflation index is likely to head lower, potentially opening room for more interest rate cuts.  That in turn could reduce gold demand from Indians who have stepped up purchases of the yellow metal in recent years as a hedge against inflation.

If prices stay at current levels, India’s current account gap could narrow by almost one percent of GDP in this fiscal year, analysts at Barclays reckon.  They calculate that $100 oil and gold at $1,400 per ounce would cut India’s net import bill by around $20 billion, bringing the deficit to around 3.2 percent of GDP.

‘Ivanovs’ keen on new cars despite high inflation – Sberbank

Sberbank’s hypothetical Russian middle-class family metric – the ‘Ivanovs’- shows the average Russian family is concerned about high inflation, though that is still barely denting some peoples’ aspirations of getting behind the steering wheel of a new car.

April’s Ivanov index, a survey of more than 2,300 adults across 164 cities in Russia with a population of more than 100,000, notes people are still concerned about persistently high inflation, which in Russia is at around 7 percent.

Household budgets are most concerned by this factor (70 percent), up 1 percent from two months ago, as the average family spends around 40 percent on food. To put that in context, consumers in western Europe spend on average between 15 and 20 percent of income on food, according to the research. But more than 40 percent of respondents still plan to spend on one big-ticket item – to replace their car within the next two years. That is slightly down from 42 percent in the previous survey in February. Car markers have invested heavily in Russia, with sales growing more than 10 percent in 2012 according to AEB, the Association of European Business, as a relatively low level of car ownership and large numbers of older vehicles need replacing.

Abenomics rally: bubble or trend?

“Abenomics” is the buzzword in Japan these days — it refers to Prime Minister Shinzo Abe’s aggressive reflationary fiscal and monetary policies that triggered the yen’s 10 percent decline against the dollar and 17 percent rally in Tokyo stocks this year.

So it’s no wonder that the Japanese mutual fund market, the second largest in Asia-Pacific, enjoyed the largest monthly inflows in almost six years last month, raking in as much as $11 billion.

With all that new money coming in, will you be late to the game if you haven’t gone in already?

Here comes the real

Inflation is finally biting Brazilian policymakers. The real strengthened around 1.5 percent last week without triggering the usual shrill outcries from government ministers. Nor did the central bank intervene in the currency market even though the real is the best performing emerging currency this year. The bank in fact shifted towards a more hawkish policy stance during its March meeting, a move that seems to have had the blessing of the government.

Friday’s data showed the benchmark consumer price index, IPCA,   up 0.6 percent for a year-on-year inflation rate of 6.31 percent. President Dilma Rousseff, who faces elections next year, took to the airwaves soon after to reassure voters about her commitment to taming inflation, announcing a series of tax cuts. That effectively is a signal that there is now no political constraint on raising interest rates. According to the political risk consultancy, Eurasia:

If the government doesn’t enact measures during the first half of this year to anchor inflationary expectations, Rousseff would run one of two risks. She would either run the risk of inflation starting to eat into the disposable income of families in a manner that could hurt her politically, or relatedly, put the central bank in a position of having to raise interest rates more aggressively later in the year to control inflation with more negative repercussions to growth.

Emerging Policy-”Full stop” in Poland but a start in Mexico?

An action-packed week for emerging monetary policy.

First we had Poland stunning markets with a half-point rate cut when only 25 bps was priced. Governor Marek Belka said the double-cut marked a “full stop”  after several cuts.  Then came Brazil which kept rates on hold at 7.25 but turned hawkish after spending over 18 months in dovish mode. (Rates stayed on hold in Indonesia and Malaysia).

In Brazil, it was high time. Inflation and inflation expectations have been rising for a while, the yield curve has been steepening and anxiety has grown, not only about the central bank”s commitment to controlling inflation but also about its independence.  Whether the central bank will actually start a hiking cycle anytime soon is another matter. Barclays reckon it will, predicting three consecutive 50 bps rate hikes starting from April. But analysts at Societe Generale are among those who are betting on flat rates for now. They point out that since the meeting, the Brazilian yield curve has moved to its flattest in a year and the 2017 inflation breakevens (the difference between the yields on fixed-rate and inflation-linked bonds of similar maturity) have fallen more than 50bps:

This implies that simply by showing a small amount of vigilance, a great deal of structural inflation concerns seem to have dissipated.

Emerging Policy-More cuts and a change of governors in Hungary

All eyes on the Hungarian central bank this week.  Not so much on tomorrow’s policy meeting (a 25 bps rate cut is almost a foregone conclusion) but on Friday’s nomination of a new governor by Prime Minister Viktor Orban.  Expectations are for Economy Minister Gyorgy Matolcsy to get the job, paving the way for an extended easing cycle. Swaps markets are currently pricing some 100 basis points of rate cuts over the coming six months in Hungary — the question is, could this go further? With tomorrow’s meeting to be the last by incumbent Andras Simor, clues over future policy are unlikely, but analysts canvassed by Reuters reckon interest rates could fall to 4.5 percent by the third quarter, compared to their prediction for a 5 percent trough in last month’s poll.

A rate cut is also possible in Israel later today, taking the interest rate to 1.5 percent. Recent data showed growth at a weaker-than-expected 2.5 percent in the last quarter of 2012 while inflation was 1.5 percent in January, at the bottom of the central bank’s target range.  But most importantly, according to Goldman Sachs, the shekel has been strengthening, having risen 7 percent against the dollar since November and 6.8 percent on a trade-weighted basis in this period. That could prompt a rate cut, though analysts polled by Reuters still think on balance that the BOI will keep rates unchanged while retaining a dovish bias. A possible reason could be that house prices — a sensitive issue in Israel — are still on the rise despite tougher regulations on mortgage lending.

 

Emerging Policy-Doves reign

Rate cuts are still coming thick and fast in emerging markets — in some cases because of falling inflation and in others to deter the gush of speculative international capital.

Arguably the biggest event in emerging markets is tomorrow’s Reserve Bank of India (RBI) meeting which is expected to yield an interest rate cut for the first time in nine months.

India’s inflation, while still sticky, eased last month to a three-year low of around 7 percent. And a quarter point rate cut to 7.75 percent will in effect be a nod from the RBI to the government’s recent reform efforts.  In anticipation of a rate cut, Indian 10-year bond yields have dropped 50 basis points since the start of the year.  But the RBI, probably the world’s most hawkish central bank at present, has warned that markets need not expect a 50 bps cut or even a sustained rate-cutting campaign. Governor Duvvuri Subbarao said last week inflation still remains too high for comfort, while on Monday the RBI said in a quarterly report that more reform was needed to make the central bank turn its focus on growth.

Emerging policy-One cut, two steady

What a varied bunch emerging markets have become. At last week’s monetary policy meetings, we saw one rate rise (Serbia) and differing messages from the rest. Mexico turned dovish while hitherto dovish Brazilian central bank finally mentioned the inflation problem. Russia meanwhile kept markets guessing, signalling it could either raise rates next month or cut them.

This week, a cut looks likely in Turkey while South Africa and the Philippines will almost certainly keep interest rates steady.

Turkey’s main policy rate – the one-week repo rate – and overnight lending rate are widely expected to stay on hold at 5.50 percent and 9 percent respectively on Tuesday. But some predict a cut in the overnight borrowing rate – the lower end of the interest rate corridor, motivated partly by the need to keep the currency in check.   The lira is trading near 10-month highs, thanks to buoyant inflows to Turkish capital markets.  That has helped lower inflation from last year’s double-digit levels.