Global Investing

Bad economic data, please

Interesting twist at the moment – how are financial markets going to view not-so-bad or good data out of the United States in the run-up to the next Federal Reserve meeting.

Investors have been pricing in a chunky operation by the Fed to feed the markets with cheap cash – look at the gold, silver, the Australian dollar and the Canadian dollar. Bad data from the United States will keep investors confident of such Fed action and support the flows into high yielding assets.

But any data showing the pace of recovery in the world’s largest economy is not in such a bad shape. Investors will adjust their expectations and positions, causing a sell-off in equities, speculative-grade credit and high-yielding currencies.

Maybe bad data is what investors want over the next few weeks.

from Funds Hub:

Cazenove’s Russell eyes market turning point

Cazenove's Tim Russell, one of the UK's best-regarded fund managers, reckons cyclical stocks -- the winners in 2009 -- look expensive while defensives look cheap and says he may increase his bets.

RTR1WR9UHe gives the examples of Kazakhmys and GlaxoSmithKline, which are both on roughly 10 times earnings. Whereas Glaxo has tended to report results ahead of forecasts in recent years, Kazakhmys has tended to disappoint, he says.

The miner's results are less dependable and very reliant on commodity prices, meaning it should be on a p/e of around 6 times, he thinks.

from The Great Debate UK:

Is a bubble burbling in financial markets?

JaneFoley.JPG-Jane Foley is research director at Forex.com. The opinions expressed are her own.-

The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.

A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.

The Big Five: themes for the week ahead

Five things to think about this week:

APPETITE TO CHASE? 
- Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally’s momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week — as much from China as from the major developed economies — will show how much appetite there is to keep chasing the rally higher. 

TAKING CONSUMERS’ PULSE 
- A better picture of the health of the consumer will emerge this week as U.S. retailers’ earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers’ profit margins, are the only thing that will tempt them to shop — both key issues for the macroeconomic and corporate outlook. 

CENTRAL BANK WATCH 
- After last week’s Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE’s expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 — and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead. 

The Big Five: themes for the week ahead

Five things to think about this week:

GOOD RUN 
-  Stocks have managed to extend their rally but potential hurdles, such as this week’s U.S. non-farm payrolls, could prove increasingly hard to leap given valuations — European stocks are trading at their highest multiples of earnings since May 2008 while the multiple for the S&P is the highest since mid-September 2008. If investors are to boost equity holdings — which Reuters polls show already back to pre-Lehman levels — it may require more concrete evidence of economic expansion, rather than just economic stabilisation, and signs that profit margins will be supported by revenue growth, rather than cost cutting. 

BOE – HANGING IN THE BALANCE
- The Bank of England will have to decide this week whether to end its asset-buying programme or extend it. Concern about potential longer-term inflation implications will have to be weighed against the signs of economic weakness still manifest in recent Q2 GDP data. With economists split on the outcome, markets look set for volatility, not least as the MPC’s decision is likely to be viewed as a indication of when other central banks could start to halt/unwind their credit easing strategy. 

SQUARING CIRCLES
- The dexterity with which China can manage surging lending and potential price pressures without unsettling markets with any rapid reversal of stimulative policy is increasingly in focus and will have financial market and macroeconomic repercussions well beyond its borders and Asia, as last week showed. Australia, which felt the spillover effect of the China jitters, has its own policy dilemma as the RBA is trying to push back against its currency’s appreciation while giving markets another reason to buy A$ by its more upbeat view on the domestic economic outlook. The RBA policy meeting this week will give the central bank a chance to show how it squares this circle. 

The Big Five: themes for the week ahead

Five things to think about this week:

Q3 – CLUES AND CUES
- Global equity markets started the quarter positioned for economic stabilisation after a strong Q2 performance but, even so, EPFR data shows less than a third of the cash that flooded into money market funds in 2008 has exited in the year to date. The Q2 reporting season, which is about to kick off (Alcoa out this week), will show whether there are reasons for investors to draw down their cash holdings further. The U.S. data that came out before the long July 4 weekend held more negative surprises than positive ones, and macroeconomic confirmation of recovery will be needed to tempt more wary investors into equities.

BOND YIELDS
- Benchmark U.S. and euro zone bond yields broke lower after the U.S. non-farm payroll data but the VIX hit some of its lowest levels post-Lehman and a recent compression of intra-euro zone spreads has yet to go markedly into reverse. Which of these trends turns out to be sustainable will become more evident in the next few weeks, particularly as U.S. supply resumes this week with TIPS, 3, 10, and 30 year auctions.

L’AQUILA SUMMIT
- The slow-burning international reserve currency debate could pop up at the G8/G8+5 big emerging powers summit in Italy this week. China’s public stance is that it is not pushing the issue but Beijing also reckons a debate on this would be normal at such a forum. It is unclear if any final statement will mention it in a way that would rattle FX markets. But sideline comments on the debate will be closely watched and particular focus will be on which countries, if any, would be willing to join China, Brazil and Russia in their commitment to buying the IMF SDR notes — for which crucial groundwork was laid down this week.

The Big Five: themes for the week ahead

Five things to think about this week:
    
PUTTING THE RALLY TO THE TEST
- The surge in risk markets has tapered off as investors take stock of recent weeks’ rally and the data flow injects a dose of sobriety. The scale and duration of any market pullback will be the test of how much sentiment has really changed. Sluggish April U.S. retail sales were the biggest cause for pause and this week’s flash PMIs will give more Q2 information.

FX FOCUS
- A pause in the recent recovery in relatively risky markets is shifting attention to the changing FX environment. Clear-cut correlations between moves in major FX rates and swings in risk appetite could be in the process of being eroded and some in the financial markets are wondering if and when relative economic performance will replace risk appetite as a driver for exchange rates. Investment flows will be affected if the dollar looks like it might resume a long-term downtrend.

QE EXIT STRATEGY
ECB, BOE, Fed officials are making reassuring noises about QE exit strategies but no clear mechanism or timeframe has yet emerged and all indications are that balance sheet expansion is still the order of the day. Yield moves suggest bond markets are more enthused in the short term by signs they will kept on the QE drip feed than by concern about the potential price problems down the road. Central bankers have yet to address the back up in yields that would be seen if they were they to exit the market at a time when debt issuance is continuing to flood the market – as it will for some time to come.

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).

from MacroScope:

Big five

Five things to think about this week:

-- IS RATE OF ECONOMIC CONTRACTION SLOWING?
Some economic reports have been pointing to a slowdown in the pace at which economic conditions are deteriorating -- eg U.S. home sales data; auto sales data; PMIs; UK lenders seeing improved credit availability in Q2, and PMI data. While job destruction is continuing apace, signs that inventories are being drawn down leave room for hope for those inclined to look for the silver lining, or even seek a bottom to the current downturn.

-- REBOUND MOMENTUM
Investors are wondering whether equity markets can extend a solid Q2 start now that major fiscal stimulus announcements, rate cuts, QE  (in most developed economies), the London G20 meeting, and other big milestones are largely behind them. A sustained narrowing of corporate spreads, the VIX clearly breaking out of ranges that have held post-Lehman, and any shift out of defensive stocks are just some of the signals that would suggest that the rebound has legs.

-- QE CLUB
The European Central Bank opted to wait another month before deciding on whether to join the QE club and unexpectedly left itself room for a further refi cut. By contrast, curveballs are unlikely from Bank of England and Bank of Japan policy meetings given their quantitative easings are under way. The relative performance of their respective sovereign debt markets is in focus as a result, as are the inflation outlooks being priced in by index-linked paper at a time when some are pondering the longer-term fallout of QE policy. The Reserve Bank of Ausstralia also meets this week week but markets finding it tough to call the outcome.