MacroScope

After “get in the hole!”, Europe remains in a hole

Team Europe golfers pour champagne over captain Paul McGinley as they celebrate retaining the Ryder Cup at Gleneagles

Who says Europe is broken? The Ryder Cup stays here again and even Nigel Farage, leader of Britain’s anti-EU party, said he wanted Europe’s golfers to win.

The euro zone is not winning the economic competition however, despite the European Central Bank’s best efforts (it should be noted that only 3 of the 12 Ryder Cup team come from euro zone countries).

Prior to the ECB’s monthly policy meeting on Thursday, we get German inflation for September data today.

One upside for the currency bloc is the falling euro which has broken below its 2013 lows and is down almost nine percent from the peak it hit against the dollar in May. With U.S. money printing about to end next month and speculation intensifying about the timing of a first interest rate rise from Washington, there are good reasons to think that this trend could continue.

If it does, it would push the prices of imports up while making it easier for euro zone countries to sell abroad which should have an upward impact on both growth and inflation.

from Global Investing:

Sanctions bite Russia but some investors are fishing

By Andrew Winterbottom

Russian stocks are up today, for the fifth day in a row and at the highest level in two weeks. What's going on? As we wrote  here earlier in the week, foreign investors have been fleeing this market.  However it could be that some of them are starting to put aside concerns about the potential for further sanctions on Moscow and are scouring Russia's stock markets for contrarian buying opportunities.

Russian stocks, chronically undervalued, are trading now at a discount of more than 60 percent to broader emerging markets, and to China which by all accounts is the standout beneficiary of the Russian woes. Just how cheap Russian shares are can be gauged from the fact they trade at a discount event to turbulent Pakistan. Here is a link that compares Russian equity valuations with other emerging and developed markets:  http://link.reuters.com/guv77v

While tensions between Russia and the West look to be only increasing, the risks of investing in Russia at present are obvious. But with greater risk comes greater potential reward, says Jonathan Bell, head of emerging market equities at Nomura Asset Management:

The much-anticipated “capex” boom? It’s already happening, and stocks don’t care

It’s a familiar narrative: companies will finally start investing the trillions of dollars of cash they’re sitting on, unleashing a capital expenditure boom that will drive the global economy and lift stock markets this year.

The problem is, it looks like an increasingly flawed narrative.

For a start, capital expenditure, or “capex”, has already been rising for years. True, the Great Recession ensured it took three years to regain its 2007 peak. But the notion companies are just sitting idly on their mounting cash piles is misplaced. As Citi’s equity strategists point out:.

“The death of global company capex has been much exaggerated.”

A new report from Citi shows that since 2010, global capex has risen 26% to $2.567 trillion. It’s never been higher:

ECB deflation risk denial has echoes of 2009

Euro zone policymakers like to talk. They often contradict each other at separate speaking engagements on the same day. But they have struck a chorus in recent weeks, asserting that deflation is not a threat.

Members of the ECB Governing Council have been particularly vocal, insisting they will not have to alter policy to counter falling prices.

Jan 9: Mario Draghi says the euro zone may “experience a prolonged period of low inflation” — steering clear of even mentioning the word deflation.

Ireland: bailout poster child, but hardly textbook

Amid the euphoria surrounding Ireland’s removal from junk credit rating status, it’s easy to get swept along by the consensus tide of opinion that the Emerald Isle is the “poster child” for euro zone austerity.

But were another country to find itself in Ireland’s unfortunate financial predicament now, few would suggest it follow the path Dublin took.

The Irish government assumed the entire nation’s private banking sector debt in 2008 after then finance minister Brian Lenihan explicitly guaranteed all bank debt in the country. It was hailed as a masterstroke at the time, but in an instant Ireland’s hands were tied and its options all but evaporated. Even the stuff that posed no systemic risk was put on the government’s – the taxpayers’ – books. This prevented the collapse of the financial system, but at a price: the country’s sovereign debt load almost doubled to around 100% of annual economic output, and in order to do that it was forced to take an €85 billion bailout from international creditors two years later.

from Global Investing:

Ukraine aid may pay off for Kremlin

Ukraine said today it was issuing a $3 billion in two-year Eurobonds at a yield of 5 percent in what seems to the start of a bailout deal with Russia. That sounds like a good deal for Kiev -- its Eurobond maturing next year is trading at at a yield of 8 percent and it could not reasonably expect to tap bond markets for less than that. In addition,  Ukraine is also  getting a gas price discount from Russia that will provide an annual saving of $2.6 billion or so.

But what about Russia? Whether the bailout was motivated by "brotherly love" as Putin claims or by geo-politics, it sounds like a rotten deal for Moscow. The credit will earn it 5 percent on what is at best a risky investment. What's more the money will come out of its rainy day fund which had been earmarked to cover future pension deficits. State gas company Gazprom will have to stomach a 30 percent price cut, which according to Barclays analysts is "a reminder of the risks of Gazprom's quasi-sovereign status."

But there could be positives.

Putin is clearly playing a long game that aims not only at giving the Kremlin tighter political control over Ukraine but also to bring it back into the Russian gas sales orbit and eventually create a bigger trade bloc encompassing Russia, Kazakhstan and Ukraine, says Christopher Granville, managing director of consultancy Trusted Sources in London.

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.

from Global Investing:

The hryvnia is all right

The fate of Ukraine's hryvnia currency hangs by a thread. Will that thread break?

The hryvnia's crawling peg has so far held as the central bank has dipped steadily into its reserves to support it. But the reserves are dwindling and political unrest is growing. Forwards markets are therefore betting on quite a sizeable depreciation  (See graphic below from brokerage Exotix).

 

The thing to remember is that the key to avoiding a messy devaluation lies not with the central bank but with a country's households. As countless emerging market crises over decades have shown, currency crises occur when people lose trust in their currency and leadership, withdraw their savings from banks and convert them into hard currency.  That is something no central bank can fight. Now Ukraine's households hold over $50 billion in bank deposits, according to calculations by Exotix. Of this a third is in hard currency (that's without counting deposits by companies).  But despite all the ruckus there is no sign of long queues outside banks or currency exchange points, scenes familiar to emerging market watchers.

Corporate responsibility: it’s time to start investing those record profits and cash piles

Corporate profits and cash piles have never been higher. But it’s not just an economic imperative that firms get spending and investing, it’s their social and moral responsibility to do so.

Three of the four sectors that make up the economy got battered by the global financial crisis and Great Recession:

    - Households: millions of workers lost their jobs, households retrenched their finances and times got extremely tough - Governments: they rescued and guaranteed the global economy and financial system at a cost of trillions - Banks: often vilified for their role in causing the crisis and apparent lack of punishment or contrition, they’re being forced to undergo huge structural change that will cost them billions

The one sector that flourished – even more than banks (and bankers) – is the corporate sector. By some measures, it has never had it so good – profits, cash reserves and share prices have rarely been higher:

ECB rate cut takes markets by surprise – time to crack Draghi’s code


After today’s surprise ECB move it is safe to forget the code words former ECB President Jean-Claude Trichet never grew tired of using – monitoring closely, monitoring very closely, strong vigilance, rate hike. (No real code language ever emerged for rate cuts, probably because there were only a few and that was towards the end of Trichet’s term.)

His successor, Mario Draghi, has a different style, one he showcased already at his very first policy meeting, but no one believed to be the norm: He is pro-active and cuts without warning. Or at least that’s what it seems.

Today’s quarter-percentage point cut took markets and economists by surprise.