Global Investing

Hung, drawn and (second) quartered

By any standard the second quarter of 2009 was remarkable. Here are some numbers to chew over as the third quarter gets under way:   

— World stocks as measured by the MSCI All-Country World Index had their best quarter since the benchmark was first compiled in 1988.

    — The world index gained 21.2 percent for the second quarter. Its nearest “competitor” was the fourth quarter of 1998 when it rose 20.66 percent.

    — Much of the index’s gain this quarter came in the first two months. The index was essentially flat in June as investors began trading in a tight range.

    — Emerging markets were the main driver. MSCI’s sub-index for the sector gained 34.3 percent for the quarter, also a record high. Asian shares have been among the stars, with the MSCI Asia-Pacific ex-Japan index rising 33.7 percent. This was more than twice the gain on the U.S. Standard & Poor’s 500 index.

Bad Corp is better than Zqjrlbawzx Corp

Got a company to set up? Better go for a simpler name.

That is what psychologists at Princeton University found in a  survey when they studied data from two major U.S. stock exchanges on initial public offerings.

They found that people are more likely to purchase newly offered stocks that have easily pronounced names than those that do not. After the IPO, investing $1,000 in companies that have easy-to-pronounce names generated $333 more than investing in the 10 hardest to pronounce companies.

In one case, an initial investment of $1,000 yielded a profit of $112 more after one day of trading for a basket of fluently named shares than for a basket of “disfluently” named shares.

The Big Five: themes for the week ahead

Five things to think about this week:

STALLING RALLY
- The global equity market rally has stalled in June and is threatening to go into reverse. With this week effectively the last full week of the second quarter, the temptation for many funds to book profits on such a lucrative quarter will be high. Any knock on boost to volatility would pose more risks for some of the trades that looked the most attractive in a lower volatility environment, such as cyclical versus defensives plays, emerging markets, and foreign exchange carry trades.

POLICY, SUPPLY RISKS FOR BONDS
- How the U.S. Federal Reserve will respond to the interest rate market gyrations of the past month has been a key market talking point. Questions centre on whether it will expand the size of buybacks, whether there will be any change in the length of time the buyback programme lasts, whether the central bank makes any effort to unwind the rise in bond yields seen in the past months, and whether there will be any talk of an exit strategy. Another risk to the front end will be the Treasury refinancing, which resumes after a week of no supply and will be concentrating on the shorter end.

WHAT COLOUR ARE THE SHOOTS
- This week’s data will show both whether the inventory rebuilding that was priced in over recent months is actually materialising and whether there are any other drivers of economic activity out there. The flash PMI in Europe and sentiment indicators will be particularly relevant in deciding on the latter issue, with consumer and income data out from both sides of the Atlantic providing an additional window on how domestic demand is shaping up.

from MacroScope:

The Big Five: themes for the week ahead

Five things to think about this week:

BOND YIELDS 
- Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.

RATTLING EQUITIES? 
- World stocks' are struggling to extend the near-50 percent gains seen since March 9 but they have yet to succumb to gravity despite a back up in government bond yields. Citigroup analysts reckon global equity markets can rally as long as Treasury yields stay below 5-6 percent but it might be the speed of yield moves that determines whether equities get rattled or keep looking past higher borrowing costs to the recovery story. 

INFLATION EXPECTATIONS 
-  Increases in the prices of oil and other commodities have seen the CRB index rise about 30 percent in less than four months and sustained gains will risk filtering through to prices and price expectations. Inflation reports are due out on both sides of the Atlantic next week but markets are looking further out and starting to price in the risks of a pick up in price pressures. Breakevens have turned positive all along the U.S. yield curve for the first time since autumn and euro zone breakevens have risen. Also, a Bank of England survey indicates public price expectations are up. Bid/cover ratios and tails at inflation-linked bond auctions will tell their own story on extent of demand for inflation hedges.

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).

Stocks and the City

The amorous intentions of the British are intimately connected to the performance of the stockmarket, extra-marital dating website illicitencounters.co.uk says.

It notes that although the website has been running since 2004, by far the biggest jump in membership has been in the past 12 months, when it leapt to 310,000 from 180,000 in the previous fiscal year.

“We’re not financial analysts here, but we have noticed a sharp increase in the number of new profiles posted – each time the FTSE moves dramatically, up or down,” says Sarah Hartley, spokesperson for the site.

The site previously reported a surge in membership in the aftermath of the collapse of Lehman Brothers last September, “suggesting the credit crunch had made way for the ‘lingering lunch’”.

Morgan Stanley bales out

Say this for Morgan Stanley — it is not afraid to buck the trend. With world stocks up more than five percent in the few days that have been April trading and up 24 percent since hitting a low on March 9, the bank has decided bale out. In its latest strategy report, MS says it is moving 5 percent out of stocks to neutral. It likes cash.

This puts Morgan Stanley in the camp that sees the current stock rally as just part of a bear market. It says it is looking at fundamentals to get better before it will decide that trouble is past. 

“The three fundamentals we look at are : 1) earnings; 2) U.S. housing; and 3) banks’ balance sheets”,  it says.

Fool me three times, shame on me

World stocks are up 22 percent since March 9 and a sell-off earlier this week was unable to break the trend.

“Like the old saying ‘Fool me once, shame on you, fool me three times, shame on me’, we think it’s OK to investors to be cautious, but not dismissive… We believe there is a good chance that we saw the low for this bear market in early March,” says Sam Stovall, chief investment strategist from the S&P Equity Research, in the Investment Policy Committee note.

The Comittee’s end-2009 targets are: 850 for the S&P 500 index and 675 for MSCI emerging market index.

Bear market rally/Bull market beginning?

Another month and another Reuters asset allocation poll. This time saw investors in United States, Europe and Japan lifting their equity holdings and cutting back slightly on bonds.  Fits with what has been happening on global financial markets, where MSCI’s main world stock index is heading for its best month in at least six years.

So the big question is what happens now. Is this a bear market bounce that will soon dissipate?  Or is it the start of something bullish that will last?