Nov 9 (Reuters) – Italy’s borrowing costs entered such
dangerous territory on Wednesday that traders had to reach back
to historic financial crises to find parallels.
The uncertainty created by a short-lived Greek call for a
referendum, the more recent political upheaval in Italy and the
long-running euro zone sovereign debt crisis have conspired to
drive bond yields past the critical 7 percent.
LONDON (Reuters) – The Group of Seven nations do not put their credibility on the line lightly. Those tempted to question whether their first coordinated intervention in the currency markets in a decade will be successful should be mindful how much is at stake and the G7 nations’ successful track record of getting their own way.
This is not the primary concern of corporates and hedge funds, whose yen purchases are currently diluting the impact of the yen slide that the G7 engineered with Friday’s intervention after speaking out the previous day against “excess volatility and disorderly movements in exchange rates”.
LONDON (Reuters) – The Group of Seven nations do not put their credibility on the line lightly.
Those tempted to question whether their first coordinated intervention in the currency markets in a decade will be successful should be mindful how much is at stake and the G7 nations’ successful track record of getting their own way.
Five things to think about this week:APPETITE TO CHASE? - Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally’s momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles. The symmetry/asymmetry of market reaction to data this week — as much from China as from the major developed economies — will show how much appetite there is to keep chasing the rally higher. TAKING CONSUMERS’ PULSE - A better picture of the health of the consumer will emerge this week as U.S. retailers’ earnings coincides with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising, the reports will show how willing households are to spend and whether deep discounts, which eat into retailers’ profit margins, are the only thing that will tempt them to shop — both key issues for the macroeconomic and corporate outlook. CENTRAL BANK WATCH - After last week’s Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE’s expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 — and possibly as soon as this year in Australia. Benchmark interbank euro rates have risen for the first time in two months, and central bankers everywhere, including China, face the delicate balancing act of managing monetary tightening expectations in the months ahead. PRICE PROTECTION-This week’s inflation data (from Germany, France, Italy, euro zone, U.S.) is unlikely to contain any nasty surprises. But the U.S. Treasury’s willingness to consider bringing back the 30-year TIPS suggests that enough investors and reserve managers are looking beyond current subdued price data to future inflation risks from QE programmes, etc. That will ensure a close eye is kept on breakevens and whether the main issuers of inflation-linked products in the euro zone are inclined to increase issuance of such products.TRADE - Official resistance to currency appreciation has been evident in some developed countries (Switzerland, RBA, RBNZ, among others) and there are suspicions that some Asian central banks may also be inclined to check such trends given the fierce competition among the world’s exporters to grab what orders there are. Trade data this week will show how trade flows are faringand the extent to which Chinese economic activity is driving them.
Five things to think about this weekTUSSLE FOR DIRECTION- The tussle between bullish and bearish inclinations — with bears gaining a bit of ground so far this month — is being played out over both earnings and economic data. Alcoa got the U.S. earnings season off to a good start but a heavier results week lies ahead and could toss some banana skins into the market’s path. Key financials, technology bellwethers (IBM, Google, Intel), as well as big names like GE, Nokia, Johnson and Johnson will offer more food for thought for those looking past the simple defensive versus cyclical split to choices between early cylicals, such as consumer discretionaries, and late cyclicals, such as industrials, based on the short-term earnings momentum. Macroeconomic data will need to confirm the picture painted by last week’s unexpectedly German strong orders and production figures to give bulls the upper hand.FINANCIAL FOCUS- The heavy financial results slate (Goldman, JP Morgan, Bank of America, Citi) will show the extent to which balance sheets are being cleansed of toxic assets and the health of, and outlook for margins, trading revenues, etc. The relative performance of the firms reporting could put the spotlight on the split between investment banking and retail exposure. In Europe, Swedbank’s results will be watched for Baltic exposure while clarity is still being sought on what banks plan to do with the large chunk of ECB one-year money which they continue to park back at the ECB in the form of overnight deposits.JAPANESE DILEMMA- The BOJ’s policy meeting poses thorny questions on quantitative easing (QE), with the policy debate complicated by sharp gains in the yen. The yen has risen as much as 10.5 percent in three months against the dollar and is nearing the 90 threshold which is viewed by the foreign exchanges as the point at which the Japanese authorities start ratcheting up the rhetoric. Further sustained yen gains will fuel market debate about the fallout for carry trades and for exporters — and by extension economic activity.HOOKED ON QE- The sharp jump in yields in gilts, euro zone debt, and Treasuries seen after the Bank of England deferred any decision on expanding its QE programme gave a good indication of how bond markets could react when central banks flag that the QE taps will finally be turned off for good. Implementation of exit strategies may be some way off and producer and consumer price data from both sides of the Atlantic this week are likely to be subdued. However, base effects from the oil price peaks of 2008 are expected to fade in the coming months, leaving a less supportive inflation backdrop.CHINA- The FX reserve debate was aired by the highest-ranking Chinese politician to date at L’Aquila summit and U.S. TICs data this week should keep the reserve holdings issue on the boil. Attention is also on Chinese domestic/trade policy following violence in Xinjiang and strains in relations with Australia over Rio Tinto staff detention. Any escalation in either could prompt investors to review the potential for regional outperformance.
Five things to think about this week:WHAT Q3 HOLDS - Global stocks are on track for their best quarterly performance in the 20-year history of the MSCI world index in Q2. But it will take better economic data than in recent weeks and positive earnings surprises to give the rally new impetus as Q3 kicks off, especially since volatility and liquidity remain preoccupations.FINANCIALS - The Q2 reporting season looks set to highlight the gulf between financial institutions which are emerging in robust shape from the crisis and those still plagued by credit losses. Mark-to-market accounting changes and other factors may have distorted Q1 earnings but quarter-on-quarter comparisons could prove less flattering for those which have not been lucky enough to rack up high earnings, enjoy high margins and healthy trading revenues and pick up market share from defunct or weaker rivals. Recommendations in the next few days and weeks from a clutch of national and European authorities on the future landscape of regulation could throw some curveballs but will also offer a clearer picture of what banks will look like in the future. JOBLESS SPOTLIGHT Jobless data is lagging but some key unemployment numbers next week, including from the United States, will offer clues on how deep the domestic demand downturn will be and how much of a shadow labour market woes will cast over consumer sentiment and household purchases — vital indicators for firms looking for signals as they take decisions on inventory rebuilding. CENTRAL BANKS - The ECB will be next after the Fed to perform the balancing act that central banks are engaged in as they try to manage markets’ inflation and rate outlook expectations. Breakevens on French inflation-linked bonds have eased from May peaks but those fretting about the QE exit strategy still want reassurance. Some central bankers are flagging the need to turn off the fiscal taps at the right time but the sharpness of these warnings will be tempered by a reluctance to trigger a sharp back up in yields while the market-imposed need for fiscal discipline is being blunted by these central banks’ bond buying. ISSUANCE- Huge borrowing and debt issuance from major countries around the world ensure that long-term inflation is still a concern for some people in financial markets, despite soft economic data and huge capacity utilisation slack pointing to extremely subdued price pressures. Front-loading by some sovereign issuers still leaves plenty of supply to come onto market in H2. Question marks remain over how such supply will be absorbed, and whether shifts in household savings rates will help.
Five things to think about this week:BOND YIELDS - Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.RATTLING EQUITIES? - World stocks’ are struggling to extend the near-50 percent gains seen since March 9 but they have yet to succumb to gravity despite a back up in government bond yields. Citigroup analysts reckon global equity markets can rally as long as Treasury yields stay below 5-6 percent but it might be the speed of yield moves that determines whether equities get rattled or keep looking past higher borrowing costs to the recovery story. INFLATION EXPECTATIONS - Increases in the prices of oil and other commodities have seen the CRB index rise about 30 percent in less than four months and sustained gains will risk filtering through to prices and price expectations. Inflation reports are due out on both sides of the Atlantic next week but markets are looking further out and starting to price in the risks of a pick up in price pressures. Breakevens have turned positive all along the U.S. yield curve for the first time since autumn and euro zone breakevens have risen. Also, a Bank of England survey indicates public price expectations are up. Bid/cover ratios and tails at inflation-linked bond auctions will tell their own story on extent of demand for inflation hedges.CENTRAL BANK POLICY - Futures pricing after the U.S. non-farm payrolls showed the ebbing and flowing of rate rise expectations in the U.S. and UK and a feedback loop is increasingly evident between markets, which are keenly attuned to every nuance of how QE exit strategies might play out, and policymakers, who are puzzled by what drove the dramatic swing in rate rise expectations and what is pushing up bond yields. Policymakers are treading a fine line between actions (pursuing QE) and anti-inflation rhetoric, and central bank reports (BOJ), policy meeting minutes (BOE, BOJ), and SNB policy meetings will shed more light on how they plan to manage this tightrope act. BRIC POWER - FX reserve plans, IMF financing, and the nature of the new IMF bond are on financial markets’ radar in the run-up to the first BRIC summit that will be held in Russia this week. How much the big emerging powers can agree on and how much unity they show at their first such summit will shape expectations of how much they can influence international policy and the market fallout of any proposals they table.
Five things to think about this week:VOLATILITY- World stocks’ near-50 percent gain since early March may be levelling off — investors have factored in much of the output recovery that is in the pipeline and fresh impetus could be needed from further improvements in economic indicators or the corporate outlook. With many fund managers yet to wade in with the cash piles on which they have been sitting, a bout of volatility looks more likely than a dramatic pullback.GROUP OF 8- Talk of green shoots of economic recovery has removed some of the threat of global economic meltdown and therefore reduced the pressure to come up with coordinated international policy response. The Lecce finance ministers’ meeting will test G8 nations’ commitment to putting up extra money for the IMF and an SDR allocation increase. The risk is that cracks appear on these and other issues (eg QE, fiscal stimulus, etc). Given expanded IMF resourcing was one of the planks on which the equity market/emerging market rebound was built, any signs of pullback could fuel volatility and throw up risks for the assets which have benefited most from that rally.DOLLAR STANCE- Asian reserve managers’ reassurance on Treasuries holdings came in the same week as rumblings of discomfort from some emerging market countries (eg South Africa, Israel) on the dollar’s slide and its fallout. Soothing noises from Asia about their dollar-denominated holdings and its FX impact risk being cancelled out by the chatter about international reserve currencies building in the run-up to the first BRIC summit later in June.BALTICS AND THE FALLOUT- How much international help Latvia gets to fend off devaluation pressures will determine fate of assets well beyond its own borders. CEEU assets as well as Nordics are affected by fallout and the ripple effects have been seen in euro zone countries with biggest exposure to Baltics and its banking sector.DEBT ABSORPTION- Strong demand for long-dated German and UK debt helped reverse part of the recent yield curve steepening. Fed, ECB and market watchers are having a hard time disentangling how much of that steepening was down to economic activity pick up expectations and how much should be attributed to issuance, longer-term price pressure concerns. The market’s appetite to absorb more long-dated paper (from U.S. and Japan this week) will shed more light on how soon central banks might have to fret about longer-term borrowing costs backing up.(Reuters photo: Lucy Nicholson)
Five things to think about this week:
PUTTING THE RALLY TO THE TEST
- The surge in risk markets has tapered off as investors take stock of recent weeks’ rally and the data flow injects a dose of sobriety. The scale and duration of any market pullback will be the test of how much sentiment has really changed. Sluggish April U.S. retail sales were the biggest cause for pause and this week’s flash PMIs will give more Q2 information.
- A pause in the recent recovery in relatively risky markets is shifting attention to the changing FX environment. Clear-cut correlations between moves in major FX rates and swings in risk appetite could be in the process of being eroded and some in the financial markets are wondering if and when relative economic performance will replace risk appetite as a driver for exchange rates. Investment flows will be affected if the dollar looks like it might resume a long-term downtrend.