Global Investing

It was all about the United States last month as far as equity markets were concerned. S&P’s world equity index may have ended the month with a small gain of just 0.3 percent but that was down to a 3 percent rise on  U.S. markets, data from the index provider shows. Strip out the U.S. contribution and it would have been a pretty poor month for world equities. Beyond Wall St, there was a decline of 1.7 percent and $285 billion lost in market value. Instead, the $418 billion added to U.S. market capitalization dragged the global aggregate up by $132 billion.

Behind the robust U.S. equity performance was a steady flow of strong economic data which also pushed up U.S. 10-year yields 20 bps last month. S&P index analyst Howard Silverblatt writes:

The overall rationale for the U.S. outperformance is the perception that several parts of the world have re-entered a recession, while the U.S. continues to show a slow, but steady recovery.

The U.S. picture contrasted with China’s dimmer growth outlook with Shanghai’s market down fell 6.5 percent in March. That was the main reason for big emerging markets losses of a 3.7 percent last month. In the developed world  Britain fell 1.2 percent but German stocks  rose 0.8 percent  (see chart below for details).

World stocks have had a great first quarter however, posting gains of 11.8 percent, the best start to a year since 1999. In terms of value, they gained $3.78 trillion, more than recouping last year’s $2.96 trillion loss.

The correlation between individual country equity indices is rising again:

U.S. consumer spending jumps in February but income growth tepid.

Apple vs. RIM market value:

Is now the time to shift to equities vs. bonds? Goldman Sachs think so and traditional valuation measures such as the equity risk premium (chart) make bonds look expensive relative to equities when compared to the average over the last 20 years.

It isn’t surprising that the performance of equities relative to bonds tends to be closely correlated with economic activity. However as the chart below shows this does break down from time to time, equities are currently still trailing bonds over a 12-month period while an ISM above 50 suggests equities should be winning.

Fed Chairman Ben Bernanke poured some cold water on the recent improvement in the U.S. jobs market yesterday. Today’s consumer confidence numbers were mixed, the “jobs hard to get” index rose to 41.0 per cent from 38.6 per cent the month before, but the “jobs plentiful” index also rose to 9.4 per cent from 7 per cent

Yesterday’s much worse than expected PMI data from the euro zone has pushed the Citigroup economic surprise index for the region below zero.

Germany has been one of the strongest performing equity markets this year but is still in the middle of the pack compared to other European countries on valuation.

U.S. new home sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate. Economists polled by Reuters had forecast sales at a 325,000-unit rate in February.

Russia’s upcoming dollar bond, the first in two years, should fly off the shelves. It’s good timing — elections are past, the world economy seems to be recovering and crucially for Russia, oil prices are over $125 a barrel.  And the rise in core yields has massively tightened emerging markets’ yield premium to  U.S. Treasuries, offering an attractive window to raise cash.  Russia’s spread premium over Treasuries hit the narrowest levels in 7 months recently and despite some widening this week it is still some 75 basis points below end-2011 levels.

Initial indications from the ongoing roadshow are for a two-tranche bond with 10- and 20-year maturities, possibly raising a total of $3.5 billion.

But market bullishness notwithstanding, investors say Moscow should resist temptation to price the bond too high, a mistake it made during its last foray into global capital markets in April 2010. Fund managers have unpleasant memories of that deal, recalling that Russia unexpectedly tightened the yield offered by 25-28 bps, making the bond an expensive one for investors who had already placed bids. The bond price fell sharply once trading kicked off and yields across the Russian curve rose around 25-30 basis points. Jeremy Brewin, a fund manager at Aviva said:

U.S. February housing starts fall slightly to a 698,000 annual rate:

UK inflation edged down to 3.4% in February:

Spanish banks’ bad loans highest since August 1994

The NAHB U.S. homebuilder sentiment index held at 28, below economists’ expectations for 30.

Apple will initiate a regular quarterly dividend of $2.65 a share in July and will buy back up to $10 billion of its stock starting in fiscal 2013.

Energy leads the way for commodities this year, but with a big divergence between the components – gasoline sitting at the top while natural gas sits near the bottom.

The post-crisis world has been in part shaped by the growing presence of sovereign wealth funds, which have become an important source of funding with their $4 trillion assets, replacing private equity and hedge funds. But some people are wondering whether state capitalism really is the way forward, to boost the potential growth rate of the post-crisis world.

Robert Litan, senior fellow at the Brookings Institution, believes that in fact it’s entrepreneurs who would play a key role, and it’s important for policymakers to come up with a mechanism to help them.

Litan estimates that the United States needs 30-60 new “home-run” firms a year with annual sales of $1 billion to boost U.S. growth rate by one percentage point beyond its post-war average of 3 percent. This is double the past 150-year average of 15 firms a year.

Is the outlook for China’s yuan uniting the biggest global markets bulls and bears? Well, kind of.

As China posts its biggest trade deficit (yes, that’s a deficit) of the new millennium and its monetary authorities flag greater “flexibility” of the yuan exchange rate (the PBOC engineered the US$/yuan’s second biggest daily drop on record on Monday), the chances of an internationally-controversial weakening of yuan in a U.S. election year have risen.  A weaker yuan would clearly up the ante in the global currency war, coming as it does amid Japan’s successful weakening of its yen this year and as Brazil on Monday felt emboldened enough in its battle to counter G7 devaluations by extending a tax curbing foreign inflows.  And, arguably, it could bring the whole conflagration around full circle, where currency weakening in the BRICs and other emerging economies blunts one of the desired effects of money-printing and super-lax monetary policy in the G7 — merely encouraging even more printing and so on.

Societe Generale’s long-time global markets bear Albert Edwards argued as much last week:  “We have long stated that if the Chinese economy looks to be hard landing, as we believe it will, the authorities there will actively consider renminbi devaluation, despite the political consequences of such action.”

Amid all the furious G7 money printing of recent years, Brazil was the first to sound the air raid siren in the “international currency war”  back in 2010 and it continues to cry foul over the past week. With its finance ministry issuing fresh warnings last night over hot-money flows being dropped by western economies on its unsuspecting exporters via currency speculation,  Brazil’s central bank then set off its own defensive anti aircraft battery with a surprisingly deep interest rate cut late Wednesday. Having tried everything from taxes on hot foreign inflows to currency market intervention, they are braced for a long war and there’s little sign of the flood of cheap money from the United States, Europe and Japan ending anytime soon. So, if  you can’t beat them, do you simply join them?

The prospect of  a deepening of this currency conflict — essentially beggar-thy-neighbour devaluation policies designed to keep countries’ share of ebbing world growth intact — was a hot topic this week for Societe Generale’s long-standing global markets bear Albert Edwards. Edwards, who represent’s SG’s “Alternative View”, reckons the biggest development in the currency battle this year has been the sharp retreat of Japan’s yen and this could well drag China into the fray if global growth continues to wither later this year. He highlighted the Japan/China standoff with the following graphic of yen and yuan nominal trade-weighted exchange rates.

Edwards goes on to say that this could, in turn, create another explosive FX standoff between China and the United States if Beijing were to consider devaluation — the opposite of what the protectionist U.S. lobby has been screaming for for years.