MacroScope

from Global Investing:

Watanabes shop for Brazilian real, Mexican peso

Are Mr and Mrs Watanabe preparing to return to emerging markets in a big way?

Mom and pop Japanese investors, collectively been dubbed the Watanabes, last month snapped up a large volume of uridashi bonds (bonds in foreign currencies marketed to small-time Japanese investors),  and sales of Brazilian real uridashi rose last month to the highest since July 2010, Barclays analysts say, citing official data.

Just to remind ourselves, the Watanabes have made a name for themselves as canny players of the interest rate arbitrage between the yen and various high-yield currencies. The real was a red-hot favourite and their frantic uridashi purchases in 2007 and 2009-2011 was partly behind Brazil's decision to slap curbs on incoming capital. Their ardour has cooled in the past two years but the trade is far from dead.

With the Bank of Japan's money-printing keeping the yen weak and pushing down yields on domestic bonds, it is no surprise that the Watanabes are buying more foreign assets. But if their favourites last year were euro zone bonds (France was an especially big winner)  they seem to be turning back towards emerging markets, lured possibly by the improvement in economic growth and the rising interest rates in some countries. And Brazil has removed those capital controls.

The breakdown of last month's data shows that real-denominated uridashi issuance in gross terms represented more than half the total. Another winner this year has been the Mexican peso -- peso uridashi accounted for almost 300 billion yen ($2.91 billion) of issuance as reforms have boosted Mexican assets. Almost 200 billion yen worth of uridashi sales have been in real (compared to over 400 billion back in 2011).

The other old Watanabe favourites, the Kiwi and Aussie dollars, are faring less well this year. Aussie uridashi, which topped the list in 2011, have seen redemptions of around 500 billion yen in 2013. See the Barclays graphic above.

For workers, the long run has arrived in Latin America

The outlook for emerging market economies over the next decade looks more challenging as long-term interest rates start to bottom out in the United States. Here is another complicating factor: ageing populations.

That problem is not as serious as in Japan or Europe, of course. Still, investors probably need to cut down their expectations for economic growth in Latin America over the next years, according to a report by BNP Paribas.

The graphic below shows the declining demographic contribution for economic growth in Latin American countries. The trend is particularly bad in Chile, Venezuela and Brazil:

from Global Investing:

Show us the (Japanese) money

Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.

The assumption was that the Bank of Japan's huge money-printing campaign would push Japanese retail and institutional investors out in search of yield.  Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result.  But almost a month after the BOJ announced its plans, the cash has not yet arrived.

EM investors, who seem to have been banking the most on the arrival of Japanese cash, may be forgiven for feeling a tad nervous. Data from EPFR Global shows no notable pick-up in flows to EM bond funds while cash continues to flee EM equities ($2 billion left last week).

Losing the gold medal in football – and economics

Noe Torres and Jean Luis Arce contributed to this post. Blog updated Sept 5 to add Q2 GDP data for Brazil and Mexico.

Three weeks ago, Mexico beat Brazil on Saturday to win its first-ever men’s football Olympic gold medal. What does that have to do with economics? Maybe nothing. But as The Economist notes, Mexico’s victory might just prove “just a warm-up for more good results to come” — on the economic field.

Mexico’s economy grew 4.1 percent in the second quarter from the year-earlier period. Even considering a mild slowdown from the previous quarter due to weaker U.S. demand, this growth pace far outshines Brazil’s lackluster performance since mid-2011.

Monetary policy as a skimpy spare tire

Central bankers have said repeatedly since the start of the global financial crisis that monetary policy can only do so much to heal a broken economy. Agustín Carstens, president of Mexico’s central bank, chose an interesting analogy at an IMF event this weekend to describe the adjustment needed in countries with very high debt levels:

In relatively modern cars the spare tire is (pretty small). Basically that spare tire should be enough to take you to the next gas station. But if you want to drive your car (a very long distance) it’s likely you will never get there.

So today I think what central banks have done is that the tire was gone, they used the spare tire, the spare tire is this big, and you can go just a few miles to the next gas station and you repair the car. So, if they (the fiscal authorities) don’t do that then they will be left on the road.

Carstens says Mexican peso undervalued

Mexico Central Bank Governor Agustin Carstens spoke to Reuters Insider on the sidelines of this year’s IMF/G20 meetings. He said the peso, which like many other emerging market currencies has taken a drubbing with the dollar’s recent rally, is undervalued. But unlike in Brazil, where an even more volatile exchange rate has prompted the monetary authorities to step in, Carstens said Mexico does not see the need to intervene.

As long as the markets continue to work well, I think central bank intervention is not required. If we guide ourselves by fundamentals the peso should appreciate soon.

Asked about the path of monetary policy for Mexico, Carstens said he backs a “neutral” stance for now given all the uncertainty in the global economy. Until recently, analysts were betting the central bank would lower borrowing costs to offset the drag from a global economic slowdown. But the peso’s steep depreciation, with its potentially inflationary implications, has muddled the outlook for Mexican interest rates, currently at 4.5 percent. Mexico is struggling to recover from a deep recession in 2009, with growth seen below 4 percent this year, and is particularly vulnerable to lower U.S. demand.

Spain to vote for Carstens at IMF, but heart not in it

Carstens and Lagarde in earlier days

Mexico has won Spain’s vote in the leadership contest for the International Monetary Fund. Or rather, it appears Mexico is effectively telling Spain how it will vote. Of course, Spain’s problem is that it doesn’t really have a vote.

Mexican Central Bank Governor Agustin Carstens and French Finance Minister Christine Lagarde are the only declared candidates to head the International Monetary Fund after Dominique Strauss-Kahn resigned to fight sexual assault charges.

Both have embarked on a global tour to drum up support for their bids, with Lagaarde starting off in Brazil this week while Carstens headed for Spain and Portugal. Spanish Economy Minister Elena Salgado said on Tuesday Spain would like to support Lagarde, but the IMF’s voting structure would oblige it to vote for Carstens.

from Davos Notebook:

Will Goldman’s new BRICwork stand up?

RTXWLHHJim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

from Route to Recovery:

The most unemployed town in America — or is it?

ROUTE-RECOVERY/If you’re looking for ground zero in America’s longest and deepest recession, El Centro in southern California appears on first glance to fit the bill.

The unemployment rate here and for the whole of Imperial County hit 30.1 percent in September, the highest rate in the United States. Locals say there is no denying that El Centro has suffered as a result of the recession and that jobs are more scarce in an area where agriculture is the backbone of the community and forms 25 percent of the local economy.

“We’ve always had high unemployment, but nothing like this,” said Judith Klein-Pritchard, director of the Center for Family Solutions of Imperial Valley, which provides intervention for domestic violence and shelter services in the area.

Winners in a trade war

Trade protectionism – or at least the threat of it — has raised it head as the global economy has declined, bringing with it all the historical fears about the Great Depression. Consider the flurry of concern about a “Buy American” clause in one of the U.S. stimulus bills.

It is traditionally assumed that widespread protectionism would most hurt the biggest economies, the United States and Japan. But Barclays Capital analyst David Woo says this is not so and that Russia, Canada, Australia and Sweden are the most vulnerable.

Woo studied various factors that would play on the effect of protectionism on a country, from openness and flexibility to its dependence on trade and it savings.