Foreign investors still buying American
Overseas investors have yet to sour towards U.S. assets despite high government debt levels, according the latest figures on capital flows.
Including short-dated assets such as bills, foreigners snapped up $107.7 billion in U.S. securities in February, following a downwardly revised $3.1 billion inflow for January. At the same time, the United States attracted a net long-term capital inflow of just $10.1 billion in February after drawing an upwardly revised $102.4 billion in the first month of 2012.
The data showed China boosted purchases of U.S. government debt for a second month in February, but also some waning of demand for longer-dated securities.
Still, recurring fears that foreign investors might be scared off by high levels of U.S. debt have thus far proven overdone. Writes Millan Mulraine at TD Securities:
Overall, the massive foreign flow into U.S. assets in March suggests that US securities continue to enjoy healthy global appetite in time of fear (Treasuries) and times of hope (equities). The reallocation from Treasuries to shorter-term securities in February is broadly consistent with the risk-on tone that prevailed during the month, reversing the trend of the past few months, when concerns in Europe resulted in the flight to quality.
Even the downtrend in Treasuries may have been short-lived, said George Goncalves at Nomura, as evidence by the recent drop in benchmark 10-year yields to around 2 percent:
Euro zone perspective – nowhere near out of the woods
After the Easter break, a bit of perspective — to paraphrase the immortal Spinal Tap, maybe too much perspective.
Over the past two weeks, Spanish and Italian borrowing costs have continued to rise – in the former’s case they have now relinquished more than half their fall since December and are heading back into the danger zone. Stocks have also appeared to have given up on their first quarter rally, presumably testament to the realization that the ECB and other top central banks are unlikely to be writing any more blank cheques for banks to reinvest.
Late last year, it was Italy that seemed to have the power to drag Spain into the debt crisis mire. Now, it’s the other way round and after the ECB anaesthesia wears off, it’s clear the euro zone patient is still sickly.
The European Commission will cast an eye over Spanish budget plans at some point this week. Spanish risk premiums have leapt since Prime Minister Mariano Rajoy defied Europe in early March by unilaterally easing Madrid’s 2012 deficit target. The silver lining for Madrid is that it has taken advantage of the benign market conditions early in the year to clear almost half its 2012 debt issuance needs and Rajoy is pushing through sweeping labour reforms and savage spending cuts. The trouble is that policy mix is likely to drive Spain further into recession – a recipe for debt to rise not fall.
Approaching elections in Greece and France throw further uncertainty into the mix. The former could weaken austerity resolve and the latter may elect a socialist president intent on rewriting the bloc’s new fiscal rules.
After weak U.S. jobs data on Friday, even a surprise Chinese trade surplus in March – suggesting it’s fabled soft landing is on track – has failed to lift equities. European stocks have dropped more than one percent in early post-holiday trade and safe haven German Bunds have jumped at the open with yields at their lowest level since September. For the first time this year, the markets have reverted to a glass half empty rather than half full bent.
The U.S. data overhang continues to be the strongest driver for now but a wobbly Spanish bond auction last week is also fresh in investors’ memories, given a big Italian debt sale looms on Thursday.
Stocks rally not sustainable: Prudential
Want the recent rally in stocks to last? Don’t count on it, says John Praveen of Prudential Financial. The Dow Jones industrial average is up over 20 percent since September, and has gained 7 percent since the start of the year. But Praveen sees too many headwinds for the boom to continue.
The pace of gains thus far in 2012 is likely to be unsustainable and volatility is likely to remain high as several downside risks remain. These include:
1) Greek risks: The second Greek bailout and debt restructuring deal are likely to be a short-term reprieve, with still high Greek debt/GDP burden and Greek elections due in April. A negative election outcome with no clear mandate and/or a new government reneging on its commitments (to reduce debt) could potentially roil markets.
2) Other euro zone risks: Further debt rating downgrades of euro zone countries and banks; recession in euro zone and the continued negative feedback loop between the high debt burden and economies in recession.
3) Oil price and geopolitical risks: Continued surge in oil prices with simmering Middle East tensions and risk of short-circuiting the global recovery.
from Global Investing:
Emerging consumers’ pain to spell gains for stocks in staples
Food and electricity bills are high. The cost of filling up at the petrol station isn't coming down much either. The U.S. economy is in trouble and suddenly the job isn't as secure as it seemed. Maybe that designer handbag and new car aren't such good ideas after all.
That's the kind of decision millions of middle class consumers in developing countries are facing these days. That's bad news for purveyors of everything from jeans to iphones who have enjoyed double-digit profits thanks to booming sales in emerging markets.
Brazil is the best example of how emerging market consumers are tightening their belts. Thanks to their spending splurge earlier this decade, Brazilian consumers on average see a quarter of their income disappear these days on debt repayments. People's credit card bills can carry interest rates of up to 45 percent. The central bank is so worried about the growth outlook it stunned markets with a cut in interest rates this week even though inflation is running well above target
All that bodes ill for shares in companies selling so-called consumer discretionaries in developing countries -- non-essential items such as autos and high-end cosmetics.
But someone's loss is someone's gain. Shares in companies selling consumer staples --food, beverages, prescription meds and tobacco -- are starting to pick up. In short, everything that outperforms during economic downturns. MSCI's index of emerging market staples is flat on the year, doing only slighly better than consumer discretionaries. But guess what? In August, when everything was selling off staples did ok. They fell 2.4 percent, much better than MSCI's discretionaries index which lost 8 percent.
Bank of America/Merrill Lynch's monthly survey shows fund managers went overweight consumer staples in August for the first time this year. Back in January when investors were optimistic about the U.S. economic outlook, almost 60 percent of fund managers were underweight staples. They still like discretionaries but cut that position pretty sharply last month.
What of Brazil? Carlos de Leon, a fund manager at RCM still sees opportunities there, especially as minimum wages will rise by an above-inflation 12 percent next year. But unsurprisingly, his picks are consumer staples and defensives including toll road operators, fuel distributors and utilities.
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 promise of middle age
The wave of popular discontent now sweeping the Middle East and North Africa has been driven by the region’s youth, frustrated by chronic umemployment and enraged by widespread corruption.
In a special report entitled ‘Youth bulges and equities’, Deutsche Bank argues that the proportion of angry young men to the general population is not only a gauge of socio-political stability but also a key indicator of market performance.
The ‘youth bulge’ — the ratio of males between 15-29 versus those aged 30-59 – came in at an average of 106 percent in the 251 conflicts seen around the world between 1950 and 2006. Two-thirds of countries that suffered social upheaval had a young-to-old men ratio of above 100 percent compared to the current 45-55 percent average seen in developed countries.
“The history of war is the history of young men in conflict. Over history, a number of revolutions and wars have been associated with rising youth bulges…the civil war in medieval Portugal, the Spanish Conquistadors in Latin America were mainly second and third sons…and the French Revolution in 1789. Student uprisings in the late 1960s have also been linked with the youth bulge,” Deutsche said.
This demographic factor has “predictive power” in projecting equity market returns.
Examining the equity market performance of 10 developed countries — five with the lowest youth bulge, five with the highest — Deutsche found that in six out of eight discrete periods between 1970 and 2010, those markets with the lowest proportion of youth outperformed their peers with the highest ratios.
Over the coming decade, emerging markets will see the most dramatic decline of this ratio.
from Global Investing:
Solar activities and market cycles
Can nature's cycles enrich our finance and market theories?
Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.
Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).
But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.
"The concern is that something weird is going on and that the current extreme low in the sunspot cycle, similar to the stock market, can be followed by an unusually high sunspot cycle leading to a solar maximum, or in other words, a peak in sunspot activity," he writes in his latest book.
"Our analysis is currently indicating a stock market low in the United States in approximately year 2012, which coincides with either a sunspot low or high depending on the cycle. "
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 Global Investing:
Bad economic data, please
Interesting twist at the moment - how are financial markets going to view not-so-bad or good data out of the United States in the run-up to the next Federal Reserve meeting.
Investors have been pricing in a chunky operation by the Fed to feed the markets with cheap cash – look at the gold, silver, the Australian dollar and the Canadian dollar. Bad data from the United States will keep investors confident of such Fed action and support the flows into high yielding assets.
But any data showing the pace of recovery in the world’s largest economy is not in such a bad shape. Investors will adjust their expectations and positions, causing a sell-off in equities, speculative-grade credit and high-yielding currencies.
Maybe bad data is what investors want over the next few weeks.
