MacroScope

Of Iraq and Ukraine

Barack Obama’s message that any military support for Iraq’s besieged government is contingent on Prime Minister Nuri al-Maliki taking steps to broaden his Shi’ite-dominated government may be having an impact.

Just hours after Maliki’s Shi’ite allies vowed to boycott any cooperation with the biggest Sunni party and his government had accused Sunni neighbour Saudi Arabia of backing “genocide”, Maliki broadcast a joint appeal for national unity alongside Sunni critics of his Shi’ite-led government.

They have tried and failed to come together before but Shi’ite, Sunni and Kurdish leaders met behind closed doors and then stood somewhat frostily before the cameras as Maliki’s predecessor read a statement denouncing “terrorist powers” and supporting Iraqi sovereignty.

Russian President Vladimir Putin and his Ukrainian counterpart, Petro Poroshenko, discussed a possible ceasefire in eastern Ukraine in an overnight telephone call after Kiev said it was treating an explosion on a pipeline carrying Russian gas to the rest of Europe as a possible “act of terrorism”, intended to discredit Ukraine as a reliable supplier.

In Moscow, the World Petroleum Congress takes place with execs from BP, Exxon, Statoil, OPEC and the IEA expected to attend. The focus will be on whether their message has changed since St Petersburg’s economic forum, where they promised Putin ‘business as usual’ amid sanctions, and also on whether the top people turn up.

The Fed’s taper and the question of the “tag-along” $5 billion

By Ann Saphir

Federal Reserve policymakers are expected next week to trim their monthly purchases of bonds by another $10 billion, putting them on track to end the massive program by October or December. So – which will it be, October or December? Some Fed officials are pushing for an answer, and soon.

“I am bothered by the fact that I don’t really know what we are going to do on that,” Narayana Kocherlakota, the dovish chief of the Minneapolis Fed, told reporters last month. “It’s another signal that we are not being as clear about our policy choices as we should be.”

If the Fed continues to taper the program by $10 billion at each meeting, monthly bond purchases will be down to $15 billion by the time of the October policy-setting meeting. Richard Fisher, the hawkish head of the Dallas Fed, told Reuters in late May, “I will vote to end it in October.”

from Global Investing:

Market cap of EM debt indices still rising

It wasn't a good year for emerging market bonds, with all three main debt benchmarks posting negative returns for the first time since 2008. But the benchmark indices run by JPMorgan nevertheless saw a modest increase in market capitalisation, and assets of the funds that benchmark to these indices also rose.

JPMorgan says its index family -- comprising EMBI Global dollar bond indices, the CEMBI group listing corporate debt and the GBI-EM index of local currency emerging bonds -- ended 2013 with a combined market cap of $2.8 trillion, a 2 percent increase from end-2012. Take a look at the following graphic which shows the rise in the market cap since 2001:

Last year's rise was clearly much slower than during previous years.  It was driven mainly by the boom in corporate bonds, which witnessed record $350 billion-plus issuance last year, taking the market cap of the CEMBI to $716 billion compared to $620 billion at the end of 2012, JPM said.

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.

ECB forecasts to contrast with Britain’s

The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.

The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.

For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.

Fed taxonomy: Lacker is a hawk, not a bull

Not to mix too many animal metaphors but, generally speaking, monetary policy hawks also tend to bulls on the economy. That is, they are leery of keeping interest rates too low for too long because they believe growth prospects are stronger than economists foresee, and therefore could lead to higher inflation.

That is not the case, however, for Richmond Fed President Jeffrey Lacker, a vocal opponent of the central bank’s unconventional bond-buying stimulus program, particular the part of it that focuses on mortgages. He reiterated his concerns last week, saying the Fed should begin tapering in September by cutting out its mortgage bond buying altogether.

But when I asked him whether upward revisions to second quarter gross domestic product reinforced his case, Lacker was surprisingly skeptical of forecasts for a stronger performance in the second half of the year.

Time to taper the taper talk?

It’s been three months since the Federal Reserve first hinted that it’s going to have to ease off on its extraordinary monetary stimulus, but financial markets are still not settled on the matter.

But while volatility is on the rise – surely partly a result of thinned trading volumes during the peak summer vacation season – the consensus around when the Fed will start cutting back hasn’t budged.

That makes endless daily reports from traders linking that to the latest falls in asset prices, particularly U.S. Treasuries and non-U.S. share prices, not terribly convincing.

Does less QE from the Fed necessarily mean a stronger dollar?

Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency – at least for now.

The problem may just be that the theory doesn’t fully account for the situation when your largest creditors – and they are very large – are trying to beat you to the market.

The Federal Reserve first hinted in May it would start reducing its bond purchase programme because the U.S. economy is recovering and so is the job market.

Fear the Septaper

Credit to Barclays economists for coining the term ‘Septaper’

A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September.  Average employment growth for the last six months is now officially above 200,000 per month.

Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.

John Brady, managing director at R.J. O’Brian & Associates in Chicago, nails the market’s sentiment:

A day to reckon with

This could be a perfect storm of a day for the euro zone.

Portugal’s prime minister will attempt to shore up his government after the resignation of his finance and foreign ministers in successive days. The latter is threatening to pull his party out of the coalition but has decided to talk to the premier, Pedro Passos Coelho, to try and keep the show on the road.

If the government falls and snap elections are called, the country’s bailout programme really will be thrown up into the air. Lisbon plans to get out of it and back to financing itself on the markets next year. Its EU and IMF lenders are due back in less than two weeks and have already said the country’s debt position is extremely fragile.

Given the root of this is profound austerity fatigue in a country still deep in recession a further bailout is increasingly likely. Portuguese 10-year bond yields shooting above eight percent only add to the pressure; the country could not afford to borrow at anything like those levels. President Anibal Cavaco Silva’s will continue talks with the political parties today.