MacroScope

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.

And the currency’s relentless strength is what makes investing in Europe a risky long-term bet.

Until the exchange rate falls, many countries in the euro zone have little hope of boosting their exports, and more broadly, becoming more economically competitive.

Allocation to herd: 100 percent

They’re bleating and buying. And you had better not let them run you over.

The latest Reuters surveys of global asset managers confirm what we’ve all been watching over the past month: a mad rush out of safe havens and into stock markets. There seems to be little else to report out of financial markets.

That stampede, particularly into U.S. shares by U.S. money managers, clocked the single biggest rise in equity allocations since at least 2007, before the financial crisis began, according to the latest Reuters poll data. The rush into global stocks by investment firms all over the world was the biggest in at least three years.

Other reports are saying the same thing.

What is more puzzling, other than a desperate need for change, is why.

It’s clear that most people any way connected to debates in financial markets are tired of all the doom and gloom and don’t mind taking a more positive view. But is that enough?

Attempting to measure what QE3 will and won’t do

Deutsche Bank economists have tried to quantify what effect QE3 is likely to have on the U.S. economy. For an assumed $800 billion of purchases of both agency securities and Treasuries through the end of next year, the economy gets a little over half a percentage point lift over the course of two years and a net 500,000 jobs – or about two months’ worth of job creation in a typical strong recovery from recession.

In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:

1. Reduce the 10-year Treasury yield by 51 bps

2. Raise the level of real GDP by 0.64%

3. Lower the unemployment rate by 0.32 percentage points

4. Increase house prices by 1.82%

5. Boost the S&P 500 by 3.06%, and

6. Raise inflation expectations by 0.25%

Apart from the fact we are more likely to win a lottery jackpot of epic proportions than see all of those predictions come true to that degree of precision, the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. After all, the Fed tied whether or not it would be satisfied by the results of QE3 to a substantial improvement in the labour market.

Dear G20, welcome to Washington

Thank you for visiting. Admission is free, but your generous donation would greatly help with our capital improvement projects such as bank bailouts, depositor guarantees and mortgage overhauls. We normally like to keep this an intimate gathering of just the Group of Seven, but given our current predicament, the more the merrier.

Depositors gather outside a bank in 1933.

D.C. bank

As global stock markets tanked once again, the pressure was mounting on the G7 to come up with a comprehensive plan to guide the economy past the credit crisis that threatens to trigger a global recession. The G7 meets on Friday, and the broader G20, which includes reserve-rich developing economies such as China and Russia, will convene on Saturday.

The buzz words are “coherent” and “coordinated” as world leaders acknowledge that they can no longer afford to focus on problems at home when everyone is feeling the pain.