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.

Weekly Radar: Glass still half-full?

ECB,BOE,RBA MEETINGS/ US-CHINA DEC TRADE DATA/CHINESE INFLATION/EU BUDGET SUMMIT/EUROPEAN EARNINGS/BUND AUCTION/SERVICES PMIS

Wednesday’s global markets were a pretty good illustration of the nature of new year rally. The largest economy in the world reported a shock contraction of activity in the final quarter of 2012 despite widespread expectations of 1%+ gain and this month’s bulled-up stock market barely blinked. Ok, the following FOMC decision and Friday’s latest US employment report probably helped keep a lid on things and there was plenty of good reason to be sceptical of the headline U.S. GDP number. Reasons for the big miss were hooked variously on an unexpectedly large drop in government defence spending, a widening of the trade gap (even though we don’t get December numbers til next week), a drawdown in inventories, fiscal cliff angst and “Sandy”. Final consumer demand looked fineand we know from the jobs numbers (and the January ADP report earlier) that the labour market remains relatively firm while housing continues to recovery. The inventory drop could presage a cranking up assembly lines into the new year given the “fiscal cliff” was dodged on Jan 1 and trade account distortions due to East Coast storms may unwind too. So, not only are we likely to see upward revisions to this advance data cut, there may well be significant “payback” in Q1 data and favourable base effects could now flatter 2013 numbers overall.

Yet as logical as any or all of those arguments may be,  the reaction to the shocker also tells you a lot about the prevalent “glass half full” view in the market right now and reveals how the flood of new money that’s been flowing to equity this year has not been doing so on the basis on one quarter of economic data. An awful lot of the investor flow to date is either simply correcting extremely defensive portfolios toward more “normal” times or reinvesting with a 3-5 year view in mind at least. There’s a similar story at play in Europe. Money has come back from the bunkers and there’s been a lock-step improvement in the “big picture” risks – we are no longer factoring in default risk into the major bond markets  at least and many are now happy to play the ebb and flow of economics and politics and market pricing within more reasonable parameters. There are no shortage of ghosts and ghouls still in the euro cupboard – dogged recession, bank legacy debt issue, Cyprus, Italian elections etc – but that all still seems more like more manageable country risk for many funds and a far cry from where we were over the past two years of potential systemic implosion. Never rule out a fresh lurch and the perceived lack of market crisis itself may take the pressure off Brussels and other EU capitals to keeping pushing hard to resolve the outstanding conundrums. But it would take an awful lot now to completely reverse the recent stabilisation, not least given the ECB has yet to fire a bullet of its new OMT intervention toolkit.

Three snapshots for Tuesday

The euro zone just avoided recession in the first quarter of 2012 but the region’s debt crisis sapped the life out of the French and Italian economies and widened a split with paymaster Germany.

Click here for an interactive map showing which European Union countries are in recession.

The technology sector has been leading the way in the S&P 500 in performance terms so far this year with energy stocks at the bottom of the list. Since the start of this quarter financials have seen the largest reverse in performance.

Research Radar: Very 20th century

Wednesday’s market commentaries are loaded with the buzz around another technical UK recession in Q1 (the first time Britain has suffered what many see as a ‘double-dip’ since the 1970s); guessing about Wednesday’s FOMC outcome; and the European Commission letting Hungary off the hook about its controversial constitutional changes. In aggregate, and probably due to the looming FOMC,  markets are fairly stable – world equities, including euro stocks, emerging markets and even Britain’s FTSE are all higher. The US dollar, Treasuries,  volatility gauges, gold and even peripheral euro government bond yields are all down a bit.

Following is a selection of some of Wednesday’s interesting research ideas:

- Barclays’ Barry Knapp reckons US and world equities face a dilemma from the endless distortion to multiples and risk premia from monetary intervention and QE that is artifically lowering the risk-free rate akin to the “financial repression” of the 1950s — no one is sure now if equity is cheap or bonds just very expensive. He concludes that best thing for equities in the medium to long term is to avoid further QE but the problem is that stocks will almost certainly suffer in the short run if the Fed takes QE3 off the table. What’s more, Wednesday’s FOMC could be problem for markets initally if the Fed frets about the growth outlook, but a worsening of the economy might bring QE3 sooner than similar bouts in 2010 and 2011.

from MacroScope:

UK recession in charts

Britain's economy slid into its second recession since the financial crisis after official data unexpectedly showed a fall in output in the first three months of 2012:

Starting real GDP at 100 in 2003 for the UK, U.S. and euro zone shows UK GDP flat since mid-2010 and well below the 2007 peak.

Survey data had been suggesting a stronger GDP number and perhaps points to upwards revisions to come.

Hair of the dog? Citi says more LTROs in store

Just as global markets nurse a hangover from their Q1 binge on cheap ECB lending — a circa 1 trillion euro flood of 1%, 3-year loans to euro zone banks in December and February (anodynely dubbed a Long-Term Refinancing Operation) — there’s every chance they may get, or at least need, a proverbial hair of the dog.

At least that’s what Citi chief economist Willem Buiter and team think despite regular insistence from ECB top brass that the recent two-legged LTRO was likely a one off.

Even though Citi late Wednesday nudged up its world growth forecast for a third month running, in keeping with Tuesday’s IMF’s upgrade , it remains significantly more bearish on headline numbers and sees PPP-weighted global growth this  year and next at 3.1% and 3.5% compared with the Fund’s call of 3.5% and 4.1%.

Japan… tide finally turning?

Until recently, when you mentioned  ”Japan” in the investment context, you could almost hear a collective sigh of disappointment — it was all about recession, deflation and poor investment returns.

However, sentiment does seem to be finally changing, not least because Tokyo stocks have rallied almost 20 percent since the start of the year, outperforming benchmark world and emerging indexes.

The yen has also been on a (rare) declining trend since the start of February, with the selling momentum accelerating since the Bank of Japan set an inflation goal of 1 percent in a surprise move and boosted its asset buying programme by $130 billion on Feb 14.

Beneath the Greek bailout hopes…

Who’s tired of the ”Markets up on Greece, markets down on Greece” headlines of the past few weeks? (I am.)

Today it’s an up day, with world stocks hitting a six-month peak on hopes that Greece will secure a second bailout package next week (finally, really).

But beneath the optimism lies a dire Greek economic and fiscal situation.

The Greek economy slumped 7 percent in the last quarter of 2011, with the rate of contraction since Q4 2008 reaching a whopping 16 percent in cumulative, real GDP terms.

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece — rising debt and weak economic growth pushing the country to seek a bailout — as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

Facial, massage, dating… In search of recession-proof industries

Facial, massage and dating… what do they have in common?

These are the industries which seem to be recession-proof and saw improved sales and revenues in recent months.

The Professional Beauty Association says its main tracking indexes for the salon and spa industry all posted a rise in the fourth quarter of 2011, driven by stronger sales, traffic levels and a more optimistic outlook for the economy.

The Salon & Spa Performance Index, which is the main index of the three, is a quarterly composite index that tracks the health and outlook of the U.S. salon/spa industry.  It rose  1% from the third quarter of 2011 to stand at 102.9 in the fourth quarter. A base level measurement of 100 is used, with values above considered positive.