Global Investing

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.

Global equities are up another 1.5 percent over the past week, although – somewhat oddly – core bonds in Germany and the US have pushed higher too. The latter could be explained by renewed Fed expectations, the former can only be due to some temporary year-end demand for liquid safety — even if that’s not yet obvious in other markets such as Swiss franc or gold.  But with volumes so low, it’s still possible we could see a bit more of this over the final weeks of the year – as YTDs in many markets remain punchy – still 10-20 pct at least in big index plays on western stock markets,  emerging debt and equity and high-yield bonds and some peripheral euro bond markets etc.

Offsetting any pullback on the other hand between now and Christmas is the growing feeling – made clear in our 2013 Investment Outlook summit coverage last week — that there is some healing of the world economy underway and one that may take shape next year. The November all-industry global PMI,  for example, jumped to 53.7 – that’s its highest since March and consistent with global GDP growth of about 2.5%, according to JPMorgan… still below trend but a decent bounceback from where we were in early Autumn.

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: Cliff dodging and Euro recessions

Most everything got swept up in the US election over the past week but, for all the last minute nail biting  and psephology, it was pretty much the result most people had been expecting all year. So, is there anything really to read into the market noise around the event? The rule of thumb in the runup was a pretty crude — Obama good for bonds (Fed friendly, cliff brinkmanship, growth risk) and Romney good for stocks (tax cuts, friend to capital/wealth, a cliff dodger thanks to GOP House backing and hence pro growth). And so it played out Wednesday. But in truth, it’s been fairly marginal so far. Stocks were down about 2 pct yesteray, but they’d been up 1 pct on election day for no obvious reason at all. But can anyone truly be surprised by an outcome they’d supposedly been betting on all along. (Just look at Intrade favouring Obama all the way through the runup). Maybe it’s all just risk hedging at the margins. What’s more, like all crude rules of thumb, they’re not always 100 pct accurate anyway.  Many overseas investors just could not fathom a coherent Romney economic plan anyway apart from radical political surgery on the government budget that many saw as ambiguous for growth and social stability anyhow.  Domestic investors may more understandably wring their hands about hits on dividend and income taxes, but it wasn’t clear to everyone outside that that a Romney plan was automatically going to lift national growth over time anyhow.

That said, it was striking on Wednesday that even though global funds were mostly relieved the Fed won’t now be shackled after 2014, nearly everyone still expects the fiscal cliff to be resolved by compromise. Whether that’s wishful thinking or the smartest guess remains to be seen. But, just like in Europe, it means they are at the very least going to have endure a barrage of political noise in headlines and endless scaremongering before any deal is ultimately forthcoming. Some say the nature of the GOP defeat, even with an incumbent saddled with an 8 pct unemployment rate, will force enough moderate Republicans to seek distance from Tea Party and seek compromise. But others point out that post-Sandy relief  spending may also bring the dreaded debt ceiling issue forward sooner than expected now too. All in all, the overwhelming consensus still betting on an eventual cliff dodge may be the most worrying aspect of market positioning and may be the best explanation the slightly outsize and sudden stock market reaction.

It also presupposes markets are trading solely on U.S. issues when the other world worries remain.

INVESTMENT FOCUS-Bond-heavy overseas funds want Obama win

Overseas investors, many of whom are creditors to the highly-indebted U.S. government, reckon a re-election of President Barack Obama would be best for world markets even if U.S. counterparts say otherwise.

For the second month in a row, Reuters’ monthly survey of top fund managers around the world was evenly split when asked whether a win for incumbent Democrat Obama or Republican hopeful Mitt Romney in the Nov. 6 presidential poll would be good for global markets.

The split was clearly dependant on whether the asset manager was based in the United States or not. Domestic funds, by and large, tend to favour Romney; overseas investors Obama.

Weekly Radar: Leadership change in DC and Beijing?

Any hope of figuring out a new market trend before next week’s U.S. election were well and truly parked by the onset of Hurricane Sandy. Friday’s payrolls may add some impetus, but Tuesday’s Presidential poll is now front and centre of everyone’s minds. With the protracted process of Chinese leadership change starting next Thursday as well, then there are some significant long-term political issues at stake in the world’s two biggest economies.  Not only is the political horizon as clear as mud then, but Sandy will only add to the macro data fog for next few months as U.S. east coast demand will take an inevitable if temporary hit — something oil prices are already building in.

Across the Atlantic, the EU Commission’s autumn forecasts next week for 2012-14 GDP and deficits will likely make for uncomfortable reading, as will a fractious EU debate on fixing the blocs overall budget next year. But the euro zone crisis at least seems to have been smothered for now. Spain seems in no rush seek a formal bailout, will only likely seek a precautionary credit line rather than new monies anyway and needs neither right now in any case given a still robust level of market access at historically reasonable rates and with 95% of its 2012 funding done. According to our latest poll, more than 60% of global fund managers think Spanish yields have peaked for the crisis. Greece’s deep and painful debt problems, shaky political consensus and EU negotiations are all as nervy as usual. But tyhe assumption is all will avoid another major make-and-break standoff for now. More than three quarters of funds now expect Greece to remain in the euro right through next year at least.

The extent to which the relative calm is related to today’s introduction of a wave of EU regulation on short-selling of bonds and equities and, in particular, rules against ‘naked’ credit default swap positions on sovereign debt is a moot point. This may well have reined in the most extreme speculative activity for now and it has certainly hit liquidity and volumes.

Weekly Radar: Earnings wobble as payrolls, BOJ, G20 eyed

Easy come, easy go. A choppy October prepares to exit on a downer – just like it arrived. World equities lost about 3 percent over the past seven, mostly on Tuesday, and reversed the previous week’s surge to slither back to early September levels. Just for the record, Tuesday was a poor imitation of the lunge this week 25 years ago – it only the worst single-day percentage loss since July and only the 10th biggest drop of the past year alone. But it was a reminder how fragile sentiment remains despite an unusually bullish, if policy-driven year.

Why the wobble? t’s hard to square the still fairly rum, or at best equivocal, incoming macro data and earnings numbers alongside year-to-date western stock market gains of 10-25%. There’s more than enough room to pare back some more of that and still leave a fairly decent year given the macro activity backdrop and we now only have about 6 full trading weeks left of 2012. So it will likely remain bumpy – not least with U.S. and Chinese leadership changes into the mix as mood music. The sheer weight of a gloomy Q3 earnings season seems to have hit home this week, with revenue declines or downgraded outlooks  – particularly in “real economy” firms such as Caterpillar, Dupont,  Intel and IBM etc – worrying many despite more decent bottom line earnings. As some investors pointed out, earnings can’t continue to beat expectations if revenues continue to wither and there are still precious few signs of an convincing economic turnaround worldwide to draw a line under the latter.

The policy-driven equity boom of the past couple of months has also been suspect to many strategists given the lack of rotation from defensive stocks to cyclicals, showing little conviction in central bank reflation policies succeeding soon even though ever more ZIRP/QE has seen something of an indiscriminate dash to any fixed income yields you care to mention – from junk to ailing sovs and now even CLOs! The bond rush has swept up an awful lot of odd stuff –  not least 10-year dollar debt from countries such as Bolivia and Zambia, whatever about Spain, and corporate junk with CCC ratings and current default rates of almost 30%! As some other funds have pointed out, another weird aspect of this has been the appetite for long duration – which doesn’t fit with any belief that reflationary policies will work on a reasonable timeframe. So, is that it? Central banks will continue to wrap everything in cotton wool for the next decade without ever succeeding in boosting growth or even inflation? Hmmm. The various U.S. growth signals are not ultra-convincing, not yet at least, but they’re not to be ignored either. Thursday’s news of a bounceback in the UK economy in Q3 also shows the prevailing stagnation narrative is not without question. And everyone seems convinced Chinese growth has troughed in Q3 –and  just look at the 66% rise in Baltic Freight prices in little over a month. The rebound in super-low equity volatility in the U.S. and Europe this week is also worth watching – though it has to be said, these gauges remain historically low about 20%.

Pricing ‘new brooms’ at White House and Fed

With less than two weeks left to the U.S. presidential elections and all three televised debates done and dusted, investors are at last squaring up to the detailed financial market impact of the event itself and the column inches in newsprint and research reports lengthen by the day.

Barclays interest rate strategists are one of the first to stick hard numbers on likely market outcomes in a report late Tuesday that dug deep into both the well-documented “fiscal cliff” but also into the less discussed uncertainty surrounding the medium-term direction of the Federal Reserve and its leadership.

With news reports suggesting Fed chief Ben Bernanke will not now choose to stand again for a third term at the helm of the U.S. central bank in 2014, some may argue Fed risk from the election has been neutered. But with monetary policy still the only game in town policy-wise for many asset managers – at least on the stimulus side — then even the slightest risk to the Fed’s mandate remains a significant market factor.

Weekly Radar: Global PMIs; US/UK GDP; FOMC; Heavy earnings, inc Apple

Whoosh! The gloomy start to the final quarter seems to have been swept away again by the beginnings of a half decent earnings season stateside – at least against the backdrop of dire expectations – and a steady drip feed of economic data surprises from the United States and elsewhere. Moody’s not downgrading Spain to junk has helped enormously and the betting is now that the latter will now seek and get a precautionary credit line, which would not require any bailout monies up front but still unleash the ECB on its bonds should they ever even need to – and,  given Thursday’s successful sale of 4.6 billion euros of 3-, 5- and 10-year Spanish government bonds,  they clearly don’t at the moment (almost 90% of Spain’s  original 2012 borrowing target has now been raised). What’s more, Greek euro exit forecasts have been put back or reduced meantime by big euro zone debt bears such as Citi and others, again helping ease tensions and defuse perceived near-term euro tail risks. Obama’s bounceback in the presidential polls after the latest debate may be helping too by rolling back speculation that a clean sweep rather than a more likely gridlock was a possible outcome from Nov 6 polls. China Q3 GDP came in as expected with a marginal slowdown to 7.4% and signs of growth troughing — all adding to the picture of relative calm.

So, in the absence of the world ending in a puff of smoke – and the latest week of data, earnings and reports suggests not – we’re left with a view of a hobbled but stabilising world economy aided by hyper-easy monetary policy that is bolting core interest rates to zero. Tactical investors then, at least,  are being drawn into the considerable pricing anomalies/temptations across bond and credit markets as well as the giant equity risk premia and regional price skews.

The upshot has been a sharp bounceback of some 2.5% in world equities since last Wednesday, falling sovereign bond spreads in euroland and in credit and emerging markets, a higher euro and financial volatility gauges still rock bottom. Dax vol, for example, is at its lowest in well over a year. Year to date, developed market equities are now scaling 15-20%! Germany stands out with gains of some 25%, but the US too is homing in on 20%. These are extremely punchy numbers in any year, but are doubly remarkable in year of so much handringing about the future. So much so, you have to wonder if the remainder of the year will be remain so clement. That doesn’t mean another shock or run for the hills, but shaving off the extremes of that perhaps?

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.