When the euro shorts take off
Currency speculators boosted bets against the euro to a record high in the latest week of data (to end December 27) and built up the biggest long dollar position since mid-2010, according to the Commodity Futures Trading Commission. Here — courtesy of Reuters’ graphics whiz Scott Barber, is what happens to the euro when shorts build up:
from Global Investing:
Can Eastern Europe “sweat” it?
Interesting to see that Poland wants to squeeze out more income from its state-owned enterprise (SOE) sector in the face of slowing economic growth and financing pressures.
Warsaw wants to double next year's dividends from stakes in firms ranging from copper mines to utility providers to banks.
Fellow euro zone aspirant Lithuania has also embarked on reforms aimed at increasing dividends sixfold from what UBS has dubbed "the forgotten side of the government balance sheet". It wants to emulate countries such as Sweden and Singapore where such companies are managed at arm's length from the state and run along strict corporate standards to consistently grow profits.
The impetus isn't entirely ideological. Poland and Lithuania are desperately trying to balance their books and under European Commission rules, privatisation proceeds cannot be taken into account when calculating the budget deficit but SOE dividends can.
But "sweating" government assets to yield higher profits doesn't always come easy for central and eastern Europe. After all, this is a region where state ownership has been synonymous with inefficiency and stagnation.
Even so, the track record of emerging European governments on privatisation is mixed.
The haste at which state resources were sold off following the collapse of the Soviet Union had disastrous repercussions for economies such as Russia and Croatia. Recent efforts at state divestment from Poland to the Czech Republic to Romania have run aground on unrealistic price expectations, corruption or regulatory obstruction.
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.
So what exactly have investors and been doing while waiting for the fog to clear in Brussels? The truth on most benchmark prices and indices is "not very much" -- at least not since world markets got the collywobbles in early August about US downgrades and debt ceilings, euro sovereign debt angst and double dip recession. Yet, since the European stocks nadir in late September prodded the Franco-German alliance into more serious action, there has been some impressive market gains of between 10 and 20% across most equity sectors and national indices. More broadly, after a year of intense political and financial turmoil across the globe, developed market equities are only down about 4% year-to-date -- a 10 point outperformance on emerging markets, for example.
And the clearing of the euro fog now allows investors to start looking beyond the Brussels cauldron and review how the rest of the world is shaping up. What they find, surprisingly for those drowning in disaster commentaries, is‘not all that bad – especially, but not exclusively in the United States. There's been a string of more positive economic data releases throughout October and these have continued through the back end of last week and early this week. The bellwether Philadelphia Fed industrial index rose to its highest in six months; U.S. durable goods orders (excluding volatile aircraft orders) rose at their fastest pace in six months in September; U.S. new home sales rose at their fastest in five months; business surveys show Chinese manufacturing is back expanding again in October for the first time in three months; U.S. power firms are reporting a pickup in industrial activity in H2, Ford has increased fourth quarter forecast for North American vehicle production. The U.S. Q3 earnings season hasn’t been half bad either – with a third of the S&P500 reported, some 70 percent beat forecasts and the main strength was in the industrial world. What’s more for markets, seasonal equity flows are typically in an updraft for the rest of the year, all things being equal. Fund managers already started rebuilding equity positions in September.
European business and consumer sentiment surveys have continued to push lower through the policy logjam, unsurprisingly, even if real data contradicts some of that anecdotal ‘evidence’. And this may well translate into the wider investment theme as the euro crisis ebbs. Europe may agree to adapt grudgingly to solve its immediate problem but tyhen pay the price in economic growth because it’s less worse than the alternative of financial chaos.
On the more immediate horizon, there may be groans from those hoping to escape summit mania as G20 leaders are set to meet in Cannes next Thursday and Friday -- with a hoped-for endorsement of the euro plan and a specific interest in the EFSF/IMF/SPV idea that seems to be courting sovereign wealth funds from China and other emerging giants from the BRICs to use a special conduit to buy euro sovereign bonds. ECB rate cuts too may be firmly back in the frame on Thursday as Mario Draghi takes the helm of the central bank for the first time. The Federal Reserve's Open Market Committee gives us its latest decision on Wednesday. US payrolls looms large on Friday, with a heavy European earnings sked including Barclays, BMW, ING, BNPP, Unilever, CS, ArcelorMittal, RBS, Commerzbank, and many more.
from Jeremy Gaunt:
Getting there from here
Depending on how you look at it, August may not have been as bad a month for stocks as advertised. For the month as a whole, the MSCI all-country world stock index lost more than 7.5 percent. This was the worst performance since May last year, and the worst August since 1998.
But if you had bought in at the low on August 9, you would have gained healthy 8.5 percent or so.
In a similar vein, much is made of the fact that the S&P 500 index ended 2009 below the level it started 2000, in other words, took a loss in the decade.
That completely ignores, however, a more than doubling of the index between 2002 and 2007.
There is a danger sometimes in allowing the calendar to dictate your interpretation of financial market behaviour.
The thin line between love and hate
The opinion on Turkey’s unorthodox monetary policy mix is turning as rapidly as global growth forecasts are being revised down.
Earlier this month, its central bank was the object of much finger-wagging after it defied market fears over an overheating economy by cutting its policy rate. It defended the move, arguing that weaker global demand posed a greater risk than inflationary pressures.
Investors were not persuaded. When I told one analyst about the Turkish rate move, he practically sputtered down the phone: “You’re not kidding?!”
The lira sold off, dropping to 2-1/2 year lows against the dollar.
But the central bank could yet be vindicated. With fears intensifying over weakening global demand, its decision to cut rates looks increasingly prescient. As my colleague Sujata Rao has pointed out, other emerging-market central banks have followed the Turks.
Witness Societe Generale’s head of emerging markets strategy Benoit Anne‘s mea cupla in a note issued just two weeks after Turkey’s controversial rate decision:
“I guess I need to apologize to the Central Bank of Turkey which on many occasions had been the object of my sarcasm over the past few months: the Central Bank of the Republic of Turkey is actually at the forefront of policy-making in the emerging-markets universe. And I bet some other central banks will follow suit with rate cuts in the pipeline.”
Give me liberty and give me cash!
Come back Mr Fukuyama, all is forgiven.
In his 1992 book “The End of History and the Last Man”, American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.
Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.
Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually ‘immortal’ in countries with a GDP per capita above $10,000.
” Only five democracies above the $6,000 income level have died. Even democracies above the $6,000 level have a 99 percent chance of sustaining their political system each year. The only exceptions were the military coups in Greece in 1967 ($9,800), Argentina in 1976 ($8,180) and Thailand in 2006 ($7,440), and the events in Venezuela in 2009 ($9,115), as well as Iran in 2004 ($8,475),” RenCap global chief economist Charles Robertson writes.
The $6,000 per capita GDP seems to be a crucial level, marking the point where a country is likely to shift to democracy. Tunisia, which early this year triggered the wave of uprisings against autocracy across the Arab world, recently crossed that threshold.
Conversely, democracy is most fragile at the lowest income levels and when incomes are shrinking. The world’s populous democracy, India, is a notable exception as its per capita income was under $800 from 1950-1967, and only exceeded $2,000 in 2003.
What emerging animal are you?
Ever since Goldman Sach’s Jim O’Neill came up with the idea of BRICs as an investment universe, competitors have been indulging in a global game of acronyms. Why not add Korea to Brazil, Russia, India and China and get a proper BRICK? Or include South Africa, as it wants, to properly upper case the “s” – BRICS or BRICKS?
Completely new lists have also been compiled — HSBC chief Michael Geoghegan has championed CIVETS to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (ignoring the fact, as Reuters’ Sebastian Tong points out here, that a civet is a skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia).
Fun though some of this is — and no one can argue that BRICs has not had an impact — there is a danger that the acronym could become more relevant than the actual countries involved. For example, imagine Mexico, Uruguay, Panama, Philippines, Egypt, Turkey and Sierre Leone being lumped together because they spell MUPPETS.
With this in mind, the Spanish bank BBVA is now arguing that what is needed is a more dynamic concept, one that can remain in place acronymically, so to speak, but allow for new entrants without the need to rewrite everything. Enter BBVA’s EAGLEs – an Emerging And Growth-Leading Economy, defined by its incremental GDP rather than absolute size. The founding 10 are China, India, Brazil, Korea, Indonesia, Russia, Mexico, Turkey, Egypt and Taiwan.
But BBVA reckons that is not enough. It also has an EAGLE’s nest, which included fledglings that might soon grow up to soar – Nigeria, Poland, South Africa, Thailand, Colombia, Vietnam, Bangladesh, Malaysia, Argentina, Peru and the Philippines.
MacroScope likes the idea of animals coming to the aid of investors and economists. It would like to suggest FERRETs — Fast Emerging, Relatively Robust Economic Treasures. But it encourages anyone who feels inspired to submit their own suggestions.
WesternSahara, Australia, Namibia, Korea, East Timor, Russia, Senegal.
from Global Investing:
Clever Fed
Proof that a little surprise can be quite big.
Ahead of the Federal Reserve's decision on more quantitative easing there were three possible outcomes that could have threatened what is becoming a strong global equity rally. In short:
-- Meeting expectations could have been seen as boring, leading to a sell off
-- Not meeting expectations could have been seen as widely disappointing, leading to a sell off
-- Exceeding expectations could have been seen as a sign that the U.S. economy is in worst shape than feared, leading to a selloff.
In the event, the Fed's $600 billion by June was a tad more than expected but not enough to spook the horses. "Slightly pleasantly surprising," is how Jonathan Schiessl of wealth managers Ashburton put it.
As for the markets. MSCI's benchmark gauge of global stocks decided it was a good day to rise above where it was when Lehman Brothers collapsed, the seminal event that turned a bear market into a rout.
from Global Investing:
Investors love those emerging markets
No question that investors are in the throes of passion over emerging markets. The latest Reuters asset allocation polls show investors pouring money into Asian and Latin American stocks in October to the detriment of U.S. and euro zone equities. Exposure to equities in emerging Europe, Asia ex-Japan, Latin America and Africa/Middle East rose to 15.6 percent of a typical stock portfolio from 14.3 percent a month earlier.
from Summit Notebook:
Is emerging Europe out of the woods yet?
A surge in portfolio inflows is flooding into emerging central Europe, although yield-hungry investors are picking solid policy and higher growth over countries still struggling to put the crisis behind them.
After deep contractions across the region, a two-speed recovery is underway, with countries boasting better debt fundamentals like Poland and the Czech Republic for the moment ahead of those who depend on foreign lending.
Investors are also dipping into countries like Hungary, but struggles by the new centre-right Fidesz government to get its budget deficit under control mean it is lagging for now, along with fellow International Monetary Fund benefactor Romania.
"There has... been clear differentiation between the more robust and the weaker economies of the region," Goldman Sachs wrote in a research note on the region.
"We believe that the region's stronger economies -- namely, Poland, Turkey, Israel and the Czech Republic -- will be the first to see an acceleration in financial inflows both in debt and, increasingly, equity." Turkey and Israel are often grouped with emerging European markets.
Extremely easy monetary policy in the world's developing economies, including expectations the Fed will push ahead with more asset-buying, plus continued worries over debt in troubled euro zone countries like Greece and Ireland have helped push investors into these higher-yielding countries.
But these new, more volatile, portfolio flows carry risks.
The question is how many more weeks to go before a serious correction in equities?