Global Investing

Three snapshots for Friday

JPMorgan profit beats expectations:

In China the annual rate of GDP growth in the first quarter slowed to 8.1 percent from 8.9 percent in the previous three months, the National Bureau of Statistics said on Friday, below the 8.3 percent consensus forecast of economists polled by Reuters.

Italian industrial output was weaker than expected in February, falling 0.7 percent after a revised 2.6 percent fall the month before, data showed on Friday. On a work-day adjusted year-on-year basis, output in February fell 6.8 percent, compared to a revised 4.6 percent decline in January.

from MacroScope:

Central bank balance sheets: Battle of the bulge

Central banks across the industrialized world responded aggressively to the global financial crisis that began in mid-2007 and in many ways remains with us today. Now, faced with sluggish recoveries, policymakers are reticent to embark on further unconventional monetary easing, fearing both internal criticism and political blowback. They are being forced to rely more on verbal guidance than actual stimulus to prevent markets from pricing in higher rates.

How do the world’s most prominent central banks stack up against each other? The Federal Reserve was extremely aggressive, more than tripling the size of its balance sheet from around $700-$800 billion pre-crisis to nearly 3 trillion today. Still, the ECB’s total asset holdings are actually larger than the Fed’s – it started from a higher base.

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The Bank of England, for its part, went even deeper into uncharted territory, with its assets as a percentage of GDP surpassing the Fed’s. By the same measure, the ECB has overtaken the Bank of Japan, which has been grappling with deflation for some two decades and started from a much higher level.

Central banks and the next bubble (2)

In the previous bubble blog earlier in the week I wrote that G4 central bank balance sheets are expanding to a whopping 26% of GDP.

In what Nomura’s Bob Janjuah called “Monetary Anarchy”, some analysts worry that central bank liquidity expansion is a timebomb which if/when it explodes would have very negative consequences.

Swiss private bank Lombard Odier, weighing in on the debate, warns that not only has the quality of central bank balance sheets deteriorated, there has been no visible impact on the real economy.

How Turkey cut interest rates but didn’t really

How do you cut interest rates without actually loosening monetary policy? Turkey’s central bank effectively did that today.

I wrote this morning that the bank and its boss Erdem Basci were gearing for rate cuts, thanks to the lira’s steady rise (see the graphic)  that should help tame inflation later this year (provided the global investment feel remains positive). But I also said a rate cut was unlikely to happen today. I was wrong — and right too. The central bank cut its overnight lending rate by 100 basis points to 11.5 percent while keeping the one-week repo rate  — the main policy rate — steady at 5.75 percent.

So why is this not a real cut? Note that the former overnight rate hasn’t been used for over a month. Instead the central bank has been using the “corridor” between the lending and borrowing rates to adjust policy on an almost daily basis. The upper end of the corridor is in fact used more to tighten policy when there is a need to defend the lira, analysts point out. And most importantly, the central bank has already been providing funds at the cheaper 5.75 percent rate.

Financial repression revisited

At a monetary policy event hosted by Fathom Consulting at the Reuters London office today, former Bank of England policymakers were discussing the pros and cons of “financial repression”.

Financial repression is a concept first introduced in the 1970s in the United States and is becoming a talking point again after the financial crisis, especially with a NBER paper last year written by economists Reinhart and Sbrancia reviving the debate.

In the paper, authors define financial repression as follows:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression”.

Sparring with Central Banks

Just one look at the whoosh higher in global markets in January and you’d be forgiven smug faith in the hoary old market adage of “Don’t fight the Fed” — or to update the phrase less pithily for the modern, globalised marketplace: “Don’t fight the world’s central banks”. (or “Don’t Battle the Banks”, maybe?)

In tandem with this month’s Federal Reserve forecast of near-zero U.S. official interest rates for the next two years, the European Central Bank provided its banking sector nearly half a trillion euros of cheap 3-year loans in late December (and may do almost as much again on Feb 29). Add to that ongoing bouts of money printing by the Bank of England, Swiss National Bank, Bank of Japan and more than 40 expected acts of monetary easing by central banks around the world in the first half of this year and that’s a lot of additional central bank support behind the market rebound.  So is betting against this firepower a mug’s game? Well, some investors caution against the chance that the Banks are firing duds.

According to giant bond fund manager Pimco, the post-credit crisis process of household, corporate and sovereign deleveraging is so intense and loaded with risk that central banks may just be keeping up with events and even then are doing so at very different speeds. What’s more the solution to the problem is not a monetary one anyway and all they can do is ease the pain.

from Jeremy Gaunt:

Why is the euro still strong?

One of the more bizarre aspects of the euro zone crisis is that the currency in question -- the euro -- has actually not had that bad a year, certainly against the dollar. Even with Greece on the brink and Italy sending ripples of fear across financial markets, the single currency is still up  1.4 percent against the greenback for the year to date.

There are lots of reasons for this. The dollar is subject to its country's own debt crisis, negligible interest rates and various forms of quantitative easing money printing -- all of which weaken FX demand. There is also some evidence that euro investors are bring their money home, as the super-low yields on 10-year German bonds attest.

Finally -- and this is a bit of a stretch -- some investors reckon that if a hard core euro emerges from the current debacle, it could be a buy. Thanos Papasavvas, head of currency management at Investec Asset Management, says:

Turkey’s central bank: still a slippery customer

The Turkish central bank has done it again, wrong-footing monetary policy predictions with its latest interest rate moves.

On Thursday, the central bank hiked its overnight lending rate by widening the interest rate corridor. While most analysts correctly predicted the central bank would leave its policy rate unchanged, few foresaw the overnight lending rate hike to 12.5 percent from 9 percent.

As Societe Generale’s emerging markets strategist Gaelle Blanchard put it: ”They managed to find another trick. This one we were not expecting.”

Eight days could point to a correction

Morgan Stanley has been crunching some numbers about Europe and come up with something that (not surprisingly) fits their scenario of  a near-term stock correction but only within a longer-term cyclical bull market for equities. It all comes down to eight days in March, apparently.

Here is the gist:

During 8 days in March, MSCI Europe was up (more than) 50 percent year-on-year.  This is a rare event, has happened on only 80 individual days since 1919.  It is a bullish signal on a 12-month view, a cautious signal on a 6-month view.  On average, the next 12 months  the market has been up 10 percent, up 96 percent of the time, the next 6 months down 4 percent, down 77 percent of the time

As for timing of the correction, MS says it will be when good economic news becomes bad market news sometime in Q2. That is to say, when a string of positive economic data prompts  central banks into a policy reaction or when markets react by sending bond yields and inflation expectations up.

Big Five

Five things to think about this week:

VALUATIONS
- The MSCI world stocks index has rebounded 37 percent since March, the VIX fear gauge has hit its lowest level since September 2008, and positive earnings surprises in Europe are marginally outstripping negative ones. But there are serious questions over the equity market’s ability to sustain its rise.

MACRO SIGNALS
- Trade data from the U.S., Canada and the UK, all out in this week, will be combed for signs of any recovery in global commerce. Also due are flash GDP data from the euro zone, industry output for the U.S., France, Italy, the euro zone and the UK, and Japan machinery orders.  
  
QUANTITATIVE EASING
- The ECB has finally shown willingness to deploy unconventional easing measures but it’s hard to judge the success of such steps. Narrowing credit spreads, stock markets’ bounce and gains in emerging market assets all show efforts to restore confidence in the financial system are having an effect. But if getting and keeping bond yields down is the yardstick for success, it’s unfortunate that 10-year UK and U.S. government bond yields are back up to levels seen before the announcement of quantitative easing in those countries. And diminishing returns on further balance sheet expansion raise questions over how much more money central banks can print before inflation fears start to preoccupy policymakers and markets.
  
COMMODITIES
- Confusion over the reasons for the commodities rally has reduced the usefulness of commodities prices as indicators of the industrial outlook. An apparent economic recovery in China has helped to boost the CRB commodities index by 21 percent from February’s lows. But how much does the rise reflect a change in supply/demand for commodities, and how much is it simply due to idle money flooding back to unstable markets? Similarly, why has spot gold remained strong above $900 as jitters over the financial system decrease? Gold could be reflecting expectations that recovering economies will boost physical demand for the metal, but it may also be responding to fears of currency debasement after central banks’ radical monetary easing.

EMERGING MARKETS 
- Rising commodity prices and an easing dollar have offered a perfect environment to re-enter emerging markets. The coming week’s  EBRD meeting will focus attention on central and eastern Europe and how it is coping with a nasty period of refinancing (albeit less dire than the IMF initially estimated).