MacroScope

A glimmer of hope in Kiev

A glimmer of hope in Ukraine?

Let’s not count our chickens after 75 people were killed over the past two days but President Viktor Yanukovich’s people are saying an agreement on resolving the crisis has been reached at all-night talks involving the president, opposition leaders and three visiting European Union ministers.
A deal is due to be signed at 1000 GMT apparently although no details are as yet forthcoming. There has been no word from the EU ministers or the opposition so far.

Even if the violence subsides and some sort of political agreement is reached (a huge if), there is potential financial chaos to deal with despite Russia’s only partially delivered pledge of $15 billion to bail its neighbour out.

Standard & Poor’s has cut Ukraine’s sovereign rating for the second time in three weeks, saying the political situation has deteriorated substantially, posing an increased risk of default. The rating is now deep in junk territory at ‘CCC’ and with a negative outlook, meaning further cuts are likely.

Moscow is expected to pay the second instalment of $2 billion soon but has signalled that Yanukovich must first restore order to get it. So in essence the EU says sanctions will be imposed if the violence doesn’t stop while Russia says aid money won’t flow if the violence does stop and the opposition has not been quelled.

Russian Prime Minister Dmitry Medvedev said Moscow would not hand over cash to a leadership that let opponents walk over it “like a doormat”. S&P said Russian support through 2014 was uncertain, putting Kiev’s abilities to service its debt at increasing risk.

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.

China bear Pettis says world coming around to his view

Few mainstream economists have been quite as downbeat on China as Peking University professor and noted China watcher Michael Pettis. Pettis has long held that the world’s No. 2 economy will grow at a maximum of 3.5 percent a year for the rest of the decade, well below a consensus call that appears to have settled into the 5-7 percent range. “And honestly, I think if I’m wrong, it will be to the downside rather than the upside,” he told Reuters.

Lately, though, Pettis says that many people inside China and in some of the countries whose fortunes are tightly tied to its economy are starting to come around to his point of view. At a recent lunch with visiting European Union officials, Pettis said the mood among the attending Chinese economists, academics, think-tankers and policy advisors was universally gloomy. “I’m used to being the most pessimistic guy in the room, but in this case, they were much worse than I.”

Pettis says that’s because the Chinese understand, far better than the average Western investor or economist, just how tough it’s going to be to rebalance from investment to consumption and shift wealth from the state to Chinese households.

Australia’s SWF lags in returns

Australia’s Future Fund reveals that the fund’s mixed asset portfolio (excluding Telstra holding) returned 5.6 percent in the third quarter.

The fund has just over 10 percent in Australian equities, 22.8 percent in global equities. Safer instruments dominate, with debt holdings at 24 percent and cash at 31 percent.

The mixed-asset fund significantly underperforms an equity-only portfolio. For example, the MSCI world equity index has risen more than 17 percent in the Q3 alone.

SWFs in Baku: Tables turning?

Sovereign wealth funds may have turned the tables on the rest of the world.

Wrapping up their inaugural meeting in the capital of Azerbaijan, 20 leading sovereign wealth funds urged host countries to make their investment regimes more transparent and discriminatory and keep investment borders and flows as open as possible. (For the story click here).

This comes after years of host countries — the West — asking them to open their books.

Much of the two-day meeting which ended on Friday was held behind closed doors, but the organisers — Azerbaijan’s state oil fund — let media in with cameras and video recorders to film the final 5 minutes of the meeting.

Australia SWF update

Australia’s Future Fund, the country’s sovereign wealth fund, is billed by some as the most transparent state-owned investment fund in the world (perhaps after Norway).

According to the latest update on its portfolio, sent by email to subscribers (you can subscribe here easily), the Fund returned 5.1 percent in the April-June quarter, giving a loss for the financial year of minus 4.2 percent.

Its mandate – also spelled out here — is to give 4.5-5.5 percent annual excess returns over the consumer price index in the long term. Since July 1, 2007, the annualised return (ex Telstra holdings) of the Fund is minus 1.3 percent.

How good are economists at forecasting CPI?

Market economists are taking a pasting worldwide for not predicting the global financial crisis. But how good is the profession at more bread-and-butter tasks, such as forecasting economic data?

 

In Australia, Reuters surveys 15-25 economists ahead of each quarterly CPI figure. A check back over analyst forecasts for the past 17 years shows:

    the median forecast mostly gets the direction right, but tends to miss the highs and lows of the cycle the median forecast is pretty close about half the time but about a quarter of the time it’s well off the mark and of those — about 10 percent of the time — it’s not even close 

Forecasts matter because financial markets closely watch surveys of analyst expectations for major data, and the consensus forecast is priced into the market well before official figures are released. So any big swings in the exchange rate or bill prices on the day are usually due to whether the result matches expectations, rather than the figure itself.

from Global Investing:

Deflation to jump the shark?

The recent spate of shark attacks on Australian beaches could mark a turning point in global deflation and signal a change in fortunes for some beleaguered emerging economies, if Nomura strategist Sean Darby is to be believed.

Speaking at a Nomura investors forum, Darby said a chance sighting of a shark on Sydney's famed Bondi Beach three weeks ago made him realise that prices of grain and other soft commodities -- punished of late by global recession fears -- could be due for a rebound.

"I actually saw a shark on Bondi Beach and that made me wonder about the impact of La Nina and how there's a severe drought around the world at a time when many farmers are finding it hard to access credit," said the Hong Kong-based analyst.