MacroScope

Power shifts from G7 to G20

Finance chiefs from the G20 meeting in London on Friday and Saturday are likely to be in a slightly better — or at least more relieved — mood than they were last time they got together.

The world economy is still in a mess and the financial system is far from running normally. But — and it is a big but at that — fears of global economic collapse have dissipated. This is in no small part as a result of the actions of groups such as the G20 which endorsed coordinated intervention into the marketplace.

So much so, in fact, that much of this weekend’s discussions will touch on the so-called exit strategies that countries will need to get themselves back out of the stumulus and bailout business. With markets in mind, they are likely to be coy about it.

The G20 itself, meanwhile, is taking on a higher and higher profile as a result of both the global crisis and the rise of China, India and others to economic prominence. In a special report, Brown Brothers Harriman says that the G20 will soon eclipse the G7 as the most important economic policy making gathering.

It argues that it is in the G7′s interest to do so because it stops the solidifying of an emerging market bloc and waters down Russia’s role, following the latter’s now permanent presence as part of an extended G8. 

from Global Investing:

The Big Five: themes for the week ahead

Five things to think about this week:

Q3 - CLUES AND CUES
- Global equity markets started the quarter positioned for economic stabilisation after a strong Q2 performance but, even so, EPFR data shows less than a third of the cash that flooded into money market funds in 2008 has exited in the year to date. The Q2 reporting season, which is about to kick off (Alcoa out this week), will show whether there are reasons for investors to draw down their cash holdings further. The U.S. data that came out before the long July 4 weekend held more negative surprises than positive ones, and macroeconomic confirmation of recovery will be needed to tempt more wary investors into equities.

BOND YIELDS
- Benchmark U.S. and euro zone bond yields broke lower after the U.S. non-farm payroll data but the VIX hit some of its lowest levels post-Lehman and a recent compression of intra-euro zone spreads has yet to go markedly into reverse. Which of these trends turns out to be sustainable will become more evident in the next few weeks, particularly as U.S. supply resumes this week with TIPS, 3, 10, and 30 year auctions.

L'AQUILA SUMMIT
- The slow-burning international reserve currency debate could pop up at the G8/G8+5 big emerging powers summit in Italy this week. China's public stance is that it is not pushing the issue but Beijing also reckons a debate on this would be normal at such a forum. It is unclear if any final statement will mention it in a way that would rattle FX markets. But sideline comments on the debate will be closely watched and particular focus will be on which countries, if any, would be willing to join China, Brazil and Russia in their commitment to buying the IMF SDR notes -- for which crucial groundwork was laid down this week.

Why the BRICS like Africa

There is little doubt that the BRICs — Brazil, Russia, India and China — have become big players in Africa. According to Standard Bank of South Africa, BRIC trade with the continent has snowballed from just $16 billion in 2000 to $157 billion last year. That is a 33 percent compounded annual growth rate.

What is behind this? At one level, the BRICs, as they grow, are clearly recognising commercial and strategic opportunities in Africa. But Standard Bank reckons other, more individual, drivers are also at play.

In a new report, the bank looks at what each of the individual BRIC countries is trying to do. To whit:

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.

from Global Investing:

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.

Victory for emerging BRICs?

Emerging market ministers, particularly those from the BRIC economies — Brazil, Russia, India and China — are painting this weekend’s G20 meeting as a victory in dragging them out of the shadows of global policy-making.

The finance ministers’ statement included the promise of more money for the International Monetary Fund and regional development banks, on whom struggling emerging economies rely for support.

It accelerated a review of IMF quotas by two years to 2011, which should give emerging economies more say in the running of the multilateral lender. It also suggested that the headship of IFIs — international financial institutions — would no longer be guaranteed to Americans or Europeans. 

Bye bye, Japan

Goldman Sachs has long been a keen advocate of the BRICs — Brazil, Russia, India and China – as a new power tool for world growth. Indeed, it is credited with coining the phrase.

In a note, the firm says that even though the group is being hit differently by the global slowdown — Russia suffering most,  India least — a uniform drive from the four will return as soon as the cycle starts to turn.

It is predicting big things as early as next year.  It says China’s economy is already the third largest in the world and it sees it eclipsing current No. 2  Japan as early as 2010. Furthermore, as a group, the four countries are set to be dominant.

from Global Investing:

2009 preview… from Goldman

Goldman Sachs is previewing the 2009 outlook from a light hearted perspective. “We hope readers take these thoughts in the spirit that they are meant and don’t take any offence at any of the contents,” reads the disclaimer.

The year starts with an interesting twist in the UK, where Chelsea Football Club releases a letter written to incoming US Treasury Secretary, Tim Geithner, asking whether if they signed David Beckham, would it make them eligible for TARP funds?

In February, Russian Prime Minister Putin declares that the American word recession would not be translated into Russian.