Global Investing

Weekly Radar: Draghi returns to London

ECB chief Mario Draghi returns to London next week almost 10 months on from his seminal “whatever it takes” speech to the global financial community in The City  – a speech that not only drew a line under the euro financial crisis by flagging the ECB’s sovereign debt backstop OMT but one that framed the determination of the G4 central banks at large to reflate their economies via extraordinary monetary easing. Since then we’ve seen the Fed effectively commit to buying an addition trillion dollars of bonds this year to get the U.S. jobless rate down toward 6.5%, followed by the ‘shock-and-awe’ tactics of the new Japanese government and Bank of Japan to end decades.

And as Draghi returns 10 months on, there’s little doubt that he and his U.S. and Japanese peers have succeeded in convincing financial investors of central bank doggedness at least. Don’t fight the Fed and all that – or more pertinently, Don’t fight the Fed/BoJ/ECB/BoE/SNB etc… G4 stock markets are surging ever higher through the Spring of 2013 even as global economic data bumbles along disappointingly through its by now annual ‘soft patch’.  Looking at the number tallies, total returns for Spanish and Greek equities and euro zone bank stocks are up between 40 and 50% since Draghi’s showstopper last July . Italian, French and German equities and Spanish and Irish 10-year government bonds have all returned about 30% or more. And you can add 7% on to all that if you happened to be a Boston-based investor due to a windfall from the net jump in the euro/dollar exchange rate. What’s more all of those have outperformed the 25% gains in Wall St’s S&P 500 since then, even though the latter is powering to uncharted record highs. And of course all pale in comparison with the eye-popping 75% rise in Japan’s Nikkei 225 in just six months!! Gold, metals and oil are all net losers and this is significant in a money-printing story where no one seems to see higher inflation anymore.

But with both Fed and BoJ pushes getting some traction on underlying growth and the euro zone economy registering it’s 6th straight quarter of contraction in the first three months of 2013, maybe Draghi’s big task now is to convince people the ECB will do whatever it takes to support the 17-nation economy too and not only the single currency per se. Last year’s pledge may have been a necessary start to stabilise things but it has not yet been sufficient to solve the economic problems bequethed by the credit crisis.

Coincidence or not, Draghi speech on Thursday is flanked by keynotes from his monetary allies. Fed chief Bernanke  speaks on Saturday and then to testifies to the congressional Joint Economic Committee on Wednesday, BoJ head Kuroda holds a press conference after the bank’s policymaking meeting ends on Thursday and outgoing BoE governor King speaks Friday. G20 sherpas meet in Russia this weekend, while EU leaders meet in Brussels on Wednesday. The big economic data set-piece of the week will be critical flash global PMI readings for May – is business finally pulling out of the early year funk or is confidence still evaporating?

 

Main economic events and data releases for next week:

G20 sherpas meeting in St Petersburg Sat/Sun

Fed’s Bernanke speech on long-run economic prospects Sat

Italy March Industry orders Mon

Irish PM Kenny in Boston Mon

Japan 40-yr JGB auction Tues

UK April inflation Tues

Japan April trade Weds

BOJ news conference after latest policy meeting Weds

BoE minutes Weds

EU summit Weds

German 10-yr bund auction Weds

US April existing home sales Weds

Fed’s Bernanke testifies to Joint Economic Committee of Congress Weds

FOMC minutes Weds

Global May flash PMIs Thurs

Spain govt bond auction Thurs

UK April retail sales/Q1 GDP revision Thurs

ECB’s Draghi speaks in London Thurs

EZ May consumer confidence Thurs

US April new homes sales/March house prices Thurs

SAfrica rate decision  Thurs

German May Ifo sentiment Fri

French May business climate Fri

Italy May consumer confidence Fri

US April durable goods orders Fri

BoE’s King speaks in Helsinki Fri

Rich investors betting on emerging equities

By Philip Baillie

Emerging equities may have significantly underperformed their richer peers so far this year (they are about 4 percent in the red compared with gains of more than 6 percent for their MSCI’s index of developed stocks) , but almost a third of high net-worth individuals are betting on a rebound in coming months.

A survey of more than 1,000 high net-worth investors by J.P. Morgan Private Bank reveals that 28 percent of respondents expect emerging market equities to perform best in the next 12 months, outstripping the 24 per cent that bet their money on U.S. stocks.

That gels with the findings of recent Reuters polls where a majority of the 450 analysts surveyed said they expect emerging equities to end 2013 with double-digit returns.

$1trillion of euro zone bonds to snap up in 2013

Investors keen to wade deeper into the euro zone’s quieter waters  will have 765 billion euros,  or just over $1  trillion, worth of fresh government bonds offered to them this year, nearly 8 percent less than in 2012,  Deutsche Bank writes in a report.

With the debt crisis quieting down, euro zone assets are among the top 2013 picks for many leading investors, with the likes of Societe Generale and AXA Investment Managers advising to head for the periphery with Spanish and Italian sovereign debt.

Deutsche Bank writes in its Eurozone 2013 supply outlook report, based on the bloc’s ten biggest bond issuers:

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.

Ireland descends from risky debt heights

Good news for Europe as the cost for insuring sovereign debt against default fell in the third quarter of 2012, according to the CMA Global Sovereign Credit Risk report.

Ireland slipped out of the 10 most risky sovereigns for the first time since the first quarter of 2010 according to CMA, making space for Lebanon to enter the club of the world’s ten most risky sovereign debt issuers.

Although Irish 5-year credit default swap spreads tightened to 317 basis points from 554 basis points in the third quarter, there is still a 25 percent chance that Ireland will not be able to honour its debt or restructure it over the next five years.

Euro emigration – safety valve or worker drain?

Four years of relentless austerity in many of the euro zone’s most debt-hobbled countries have forced many of their youngest and sometimes brightest workers to grab the plane, train or boat and emigrate in search of work. For countries with a long history of emigration, such as Ireland, this is depressingly familar — coming just 20 years after the country’s last debt crisis and national belt-tightening in the 1980s crescendoed, with the exit of some 40,ooo a year in 1989/90 from a population of just 3-1/2 million people.

The intervening boom years surrounding the creation and infancy of the Europe’s single currency and expansion of the European Union eastwards saw huge net migration inflows back into the then-thriving euro zone periphery  — Ireland, Greece, Portugal, Spain and Italy — and created a virtuous circle of rising workforces, higher demand for housing/goods and rising exchequer tax receipts.

But all that has gone into reverse again since the credit, property and banking crash of 2008.

Olympic medal winners — and economies — dissected

The Olympic medals have all been handed out and the athletes are on their way home.  Which countries surpassed expectations and which ones did worse than expected? And did this have anything to do with the state of their economies?

An extensive Goldman Sachs report entitled Olympics and Economics  (a regular feature before each Olympic Games) predicted before the Games kicked off that the United States would top the tally with 36 gold medals. It also said the top 10 would include five G7 countries (the United States, Great Britain, France, Germany and Italy), two BRICs (China and Russia), one of the developing countries it dubs Next-11  (South Korea), and one additional developed and emerging market. These would be Australia and Ukraine, it said.

Close enough, except that Hungary took the place of Ukraine as the emerging economy in the Top 10 and the United States actually took 46 gold medals — more than Goldman had predicted.

Optimism of the $5 mln+ in Spain, Ireland

Crisis, what crisis?

Wealthy investors across Europe are confident about the future of the euro zone and the efficiency of unpopular austerity policies, with the rich in bailed-out Ireland and Spain topping the list, according to a survey published by J.P. Morgan Private Bank on Wednesday. The study, conducted in May and June, said:

High Net Worth investors in Spain, Ireland and the UK were found to have the most optimistic outlook, with 92 per cent, 90 per cent and 85 per cent respectively believing the Eurozone will either manage to avert large defaults and is rewarded for stringent austerity, or one that survives but will look different than the current structure.

They were the most optimistic of the 325 individuals polled for the survey. Overall, over 75 percent for the investors had a positive view on the euro zone’s outlook.  Only six per cent said they expected a severe global depression.(The bank defines HNW investors as those with assets of over $5 million).

Three snapshots for Tuesday

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.