MacroScope

from Global Investing:

Watanabes shop for Brazilian real, Mexican peso

Are Mr and Mrs Watanabe preparing to return to emerging markets in a big way?

Mom and pop Japanese investors, collectively been dubbed the Watanabes, last month snapped up a large volume of uridashi bonds (bonds in foreign currencies marketed to small-time Japanese investors),  and sales of Brazilian real uridashi rose last month to the highest since July 2010, Barclays analysts say, citing official data.

Just to remind ourselves, the Watanabes have made a name for themselves as canny players of the interest rate arbitrage between the yen and various high-yield currencies. The real was a red-hot favourite and their frantic uridashi purchases in 2007 and 2009-2011 was partly behind Brazil's decision to slap curbs on incoming capital. Their ardour has cooled in the past two years but the trade is far from dead.

With the Bank of Japan's money-printing keeping the yen weak and pushing down yields on domestic bonds, it is no surprise that the Watanabes are buying more foreign assets. But if their favourites last year were euro zone bonds (France was an especially big winner)  they seem to be turning back towards emerging markets, lured possibly by the improvement in economic growth and the rising interest rates in some countries. And Brazil has removed those capital controls.

The breakdown of last month's data shows that real-denominated uridashi issuance in gross terms represented more than half the total. Another winner this year has been the Mexican peso -- peso uridashi accounted for almost 300 billion yen ($2.91 billion) of issuance as reforms have boosted Mexican assets. Almost 200 billion yen worth of uridashi sales have been in real (compared to over 400 billion back in 2011).

The other old Watanabe favourites, the Kiwi and Aussie dollars, are faring less well this year. Aussie uridashi, which topped the list in 2011, have seen redemptions of around 500 billion yen in 2013. See the Barclays graphic above.

Timber!

A deal on European banking union was finally struck overnight. Already the inquests have begun into how robust it is.

As we exclusively reported at the weekend, EU finance ministers agreed that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros which will be merged into a common pool in 2025. Yes, 2025.

Until then, if there is not enough money, a government will be able to impose more levies on banks. If that does not suffice, it would put in public money and if that is unaffordable, it could seek a bailout from the euro zone’s ESM bailout fund with conditions and stigma attached.

from Rahul Karunakar:

A December taper: a chance to regain lost face?

Dear Fed,

You should taper in December and regain lost  face.

Signed,

A growing but vocal minority of economists

 

Even if the latest Reuters poll consensus still shows the Federal Reserve will wait until March before trimming its monthly bond purchases, the clamor to do that in December - or rather later today - is rising.

Thirteen of 69 economists in the latest Reuters poll, almost one-in-five, now expect the Fed to start rolling back on their bond purchases in December: a sharp increase from the three of 62 in the previous poll.

Those economists forecasting the Fed to act on Wednesday said it would be a chance for the U.S. Federal Reserve to redeem its credibility after wrong footing market predictions in September.

Banking union … timber not steel

A day after she was sworn in for a third term and a day before she attends an EU summit in Brussels, Chancellor Angela Merkel delivers a speech in the Bundestag lower house. She will then head to Paris in the evening for a meeting with French President Francois Hollande. That bilateral could be the moment that the seal is set on banking union, in time for the Thursday/Friday EU leaders summit.

In parallel, the bloc’s 28 finance ministers will meet in Brussels to try and finalise a common position on the detail. “For the acceptance of the euro on financial markets, the banking union is very important,” Merkel said on Tuesday.

For the markets, it will be impossible to look beyond today’s Federal Reserve policy decision which might, or might not, start the process of slowing the pace of money-printing which has been churning out $85 billion a month. But banking union is hugely important too.
Euro zone finance ministers made progress overnight, essentially agreeing the blueprint Reuters reported exclusively over the weekend.

Decision day for Kiev … and Moscow

Decision day for Ukrainian President Viktor Yanukovich as he heads to the Kremlin seeking a financial lifeline while demonstrators in Kiev gather again to demand he steps down.

Vladimir Putin seems set to agree a loan deal, and possibly offer Ukraine a discount on the Russian natural gas.
It seemed he was the only game in town after an EU commissioner said the bloc was suspending talks on a trade agreement with Kiev. But yesterday, European Union foreign ministers said the door remained open, which in a way makes Yanukovich’s predicament harder.

Does Russia really need this? Politically yes, but economically? Ukraine is seeking help to cover an external funding gap of $17 billion next year and is in no position to pay for its gas.

Germany back in business

Germany’s Social Democrats voted overwhelmingly to join a “grand coalition” with Chancellor Angela Merkel’s conservatives. The government will offer broad continuity with some tweaks, the reappointment of Wolfgang Schaeuble as finance minister testifies to that. But could it unlock some euro zone policy doors after three months of limbo?

The big item on the agenda of an EU summit late this week is banking union. What results will dictate whether the seeds of a future financial crisis have been sown. Thanks to our exclusive at the weekend, we know that the latest proposal will see the cost of closing down a euro zone bank borne almost fully by its home country while a euro zone fund is built up over 10 years.

Key euro zone finance ministers will meet in Berlin today (as they did without success 10 days ago) to try and reach agreement in time for the summit. A full meeting of euro zone finance ministers is slated for Wednesday but it could take a bilateral meeting with the newly anointed Merkel and French President Francois Hollande to break the logjam.

Not bullish enough! How predictions for stocks in 2013 are turning out

The bulls were out in force again in Thursday’s quarterly Reuters poll of around 350 equity analysts – some 91.3 percent of forecasts for 20 major stock indexes predicted gains from here until the end of next year.

That might sound incredibly optimistic – but last year, on the whole, they weren’t optimistic enough.

Most striking is how the consensus completely missed the Nikkei’s near-50 percent rise. U.S. stocks have strongly outperformed the expectations too. On the other side, the emerging markets have been a big disappointment, especially Brazil.

Euro zone stock market investors: “Crisis? What crisis?”

European shares will be the best performers next year, according to the latest Reuters poll of more than 350 strategists, analysts and fund managers. Frankfurt’s DAX is already up nearly 20 percent this year and is forecast to rally another 10 percent in 2014.

But the experts in foreign exchange that Reuters surveys each month are also saying that the euro, just above $1.37, and not far off a two-year high against the dollar, will fall.

While both predicted outcomes may turn out to be true, the problem is that the flow of foreign money into European stocks is one of the reasons why the euro has remained so strong.

Ireland at the finishing line

Ireland will officially exit its bailout on Sunday. Not much will happen but symbolically it’s huge and will be used by the EU as evidence that its austere crisis-fighting approach can work. Today, the IMF will confirm Dublin passed the last review of its bailout programme – the final piece in the jigsaw. Finance Minister Michael Noonan is also expected to speak.

For Dublin, this is only the beginning.

Support for the coalition government has slumped with the minority Labour party suffering worst (‘twas ever thus in coalitions).
As a result, Labour is pressing for a loosening of the purse strings while the dominant Fine Gael under premier Enda Kenny seems prepared to bet on a return to growth delivering the votes they need to rule outright after the next election, due by early 2016.

There are already some signs of easing with the government opting for a smaller package of spending cuts and tax hikes in its 2014 budget and the IMF warning planned 2 billion budget cuts planned for 2015 year may not be sufficient. The main benefactor in the polls so far has been Sinn Fein. 

Judgment day for Slovenia

The Slovenian government is poised to publish the results of an external audit of its banks, which will say how much cash the government must inject to keep them afloat. We’ve heard from sources that the euro zone member needs as much as 5 billion euros to recapitalize largely state-owned banks.

The central bank said on Tuesday that sufficient funds were available to an international bailout but, while the euro zone might breathe a sigh of relief, Ljubljana’s problems are far from over. A fire sale of state assets will be triggered and the banks are so embedded into the Slovene economy that deleveraging will cause great damage.

The government may raid its own cash reserves of 3.6 billion euros, hit junior bank bondholders to the tune of 500 million euros and, if necessary, tap financial markets. But all this may just be delaying the inevitable for a country that is expected to wallow in recession until 2015. Prime Minister Alenka Bratusek has called a cabinet meeting and a news conference is tentatively scheduled for 1000 GMT.