MacroScope

from Global Investing:

January in the rearview mirror

As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures - thanks to Scott Barber and our graphics team.

The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world's central banks.

The ECB's near half trillion euros of 3-year loans  has stabilised Europe's ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it's also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It's also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..

But to the extent that the ECB move was aimed primarily at preventing a seizure of the banks, then one measure of  success can be seen in the degree to which it steepened government yield curves in Spain and Italy. A positive yield curve, which measures the gap between short-term  and long-term interest rates,  is effectively commercial banks' ATM -- they  make money by simply borrowing short-term and lending long. This chart then shows some normality returning to the benchmark interest structure.

 

 

 

 

 

 

 

 

 

 

 

 

The problem, as highlighted by bond investor Pimco and others, is twofold. One, how does all this extra liquidity find its way to the real economy if fearful households and companies don't or can't borrow more or are still assiduously paying down debts -- the suffocating 'deleveraging' process scaring investors and policymakers alike? It's one thing lending back to governments, and that may be a necessary move to prevent economic meltdown, but that's not going to generate renewed economic activity or job growth on its own. And then, two, what if banks -- under regulatory and market pressure to rebuild shot balance sheets -- simply refuse to expand "risky" lending again and hoard these cheap borrowings as cash that gets put back on deposit at the central bank?

from Global Investing:

EM growth is passport out of West’s mess but has a price, says “Mr BRIC”

Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O'Neill. O'Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China's economy is growing by $1 trillion a year  and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece?  Italy's economy was surpassed in size last year by Brazil, another of the BRICs, O'Neill counters, adding:

"How Italy plays out will be important but people should not exaggerate its global importance.  In the next 12 months the four BRICs will create the equivalent of another Italy."

Emerging economies are cooling now after years of turbo-charged growth. But according to O'Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent,  a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.

from Global Investing:

Home is where the heartache is…

On a recent trip home to Singapore, I was startled to learn just how much housing prices in the city-state have risen in my absence.

A cousin said he had recently paid over S$600,000 -- about US$465,000 -- for a yet-to-be-built 99-year-lease flat. Such numbers are hardly out of place in any major metropolis but this was for a state-subsidised three-bedroom apartment.

Soaring housing prices have fueled popular discontent -- little wonder as median monthly household incomes have stagnated at around S$5,000.

from Amplifications:

A centralized Europe is a globalized Europe

By Jean-Claude Trichet

The views expressed are his own.

PARIS – Whenever people seek a justification for European integration, they are always tempted to look backwards. They stress that European integration banished the specter of war from the old continent. And European integration has, indeed, delivered the longest period of peace and prosperity that Europe has known for many centuries.

But this perspective, while entirely correct, is also incomplete. There are as many reasons to strive towards “ever closer union” in Europe today as there were back in 1945, and they are entirely forward-looking.

Sixty-five years ago, the distribution of global GDP was such that Europe had only one role model for its single market: the United States. Today, however, Europe is faced with a new global economy, reconfigured by globalization and by the emerging economies of Asia and Latin America.

from Global Investing:

A shoe, a song and the promise of the West

I found myself at Selfridges this week, specifically in what the London retailer says is the world's largest shoe department.

Slightly dazed by cornucopia of women's shoes on slick display, I was roused only when the haze of muzak wafting over the PA system was suddenly dispersed by the jaunty strains of the Chinese New Year ditty 'Gongxi Gongxi'.

A 1946 composition from Shanghai, the song has gone from classic to kitsch, evolving to become the most popular festive song in the Chinese-speaking world. Its ubiquity rests on the many -- for me at least -- teeth-grindingly cloying versions played all over shops and markets in Asia. (Click here for example and don't say I didn't warn you)

from Global Investing:

Retail volte face confirms India as BRIC that disappoints

Jim O'Neill, the Goldman Sachs banker who coined the term BRICs to capture the fast-growing emerging-markets quartet of Brazil, Russia, India and China,  has fingered India as the BRIC that has disappointed the most over the past decade in terms of reforms, FDI and productivity. New Delhi's latest decision to put on hold a landmark reform of its retail sector will only confirm this view.

The government's backtracking on plans to allow foreign investment in supermarkets will not surprise those accustomed to New Delhi's record on key economic reforms. But it means India's weak performance on FDI receipts will continue and that's bad news for the worsening balance of payments deficit.  Speaking of the retail volte face, O'Neill said: "They shouldn’t raise people's hopes of FDI and then in a week, say, 'we’re only joking'".

Various Indian lobby groups that oppose the reforms contend that foreign giants such as Wal-Mart and Tesco will kill off the livelihoods of millions of small traders.

America’s jobs jam

Graph of Civilian Unemployment Rate

The St. Louis Fed had a public forum this week to talk about their research into the ailing U.S. jobs market. Not a feel-good scenario.

The bottom line was something the regional Fed bank’s research director Christopher Waller told Reuters in a recent interview: the last three recessions have brought jobless recoveries and this one is no exception. No one can clearly explain why, except that employers are less likely to hire back workers they’ve fired than in the past, and that with so much of the recent downturn due to the collapse of housing, it’s evident that unemployed construction workers can’t easily find new work in, say, nursing or IT.

At this week’s gathering, Waller and his staff fleshed out their research with a number of interesting take-aways. In no particular order:

from Global Investing:

Phew! Emerging from euro fog

Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise.  And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you'd be just a little blue in the face waiting for the 'big bazooka'. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse.
And here's where most global investors stand following the "framework" euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers -- a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros -- were broadly what was called for, if not the "shock and awe" some demanded.  Financial markets, who had fretted about the "tail risk" of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible "Phew!".

Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:

It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.

Drop in Fed custody holdings reflects FX interventions

A sharp recent drop in the Fed’s holdings of U.S. Treasuries for foreign central banks probably reflects the effort by many developing economies to stem rapid declines in their currencies, not some frightening move by the likes of China out of U.S. bonds. That’s the argument put forth by Marc Chandler at Brown Brothers Harriman, who notes the pullback of recent weeks appears to have been the most dramatic since the Asian financial crisis of the late 1990s.

His reasoning makes sense: a September spike in the U.S. dollar was accompanied by steep plunges in the exchange rates of many emerging economies. Still, Chandler remains puzzled as to why the selling accelerated to a hefty $21 billion even as the dollar reversed course in the last week:

This is the seventh consecutive weekly decline and over this period, custody holdings have fallen an average of about $12-$12.5 billion a week, making this past week quite large relative to trend. It likely reflects foreign central banks’ selling of Treasuries to intervene to support their currencies rather than a dumping of Treasuries to diversify reserves or as a protest to such low interest rates.

from Global Investing:

If China catches a cold…

China has defied predictions of a hard economic landing for some time now so it is somewhat unsettling to see  investors positioning for a sharp slowdown in the world's second-largest economy.

Over the last 10 years, the world has become accustomed to Chinese annual GDP growth of above 9 percent. A seemingly insatiable demand for commodities from soya beans to iron ore has catapulted the Asian giant to near the top of the global trade table. China is the biggest trading partner for countries on nearly every continent, from Angola to Australia.

But many are now fretting that an unhappy coincidence between stuttering global demand and domestic strains in the property and banking sectors could knock Chinese growth to below 7 percent (the level commonly identified as a 'hard landing'), with grave implications for the rest of the world.