Weekly Radar: In the shadow of the cliff
It’s been another rum old week market-wise, with global stocks off another 2 percent or more and recording seven straight days in the red for the first time since August. Throw any spin you like at the reasoning, but the pretty predictable post-election hiatus on U.S. fiscal cliff worries now seem to be front and centre of everything. And that will just has to play itself out now, leaving markets stuck in this funk until they come up with the fix. The running consensus still seems to be that some solution will be reached, but no one wants to be too brave about it. And given the cliff is one of the few good explanations for the sharp divergence between the equity market and still rising US economic surprises, you can see why many feel the US fiscal standoff is merely delaying a resumption of the rally.
The euro zone story has rumbled again of course, with the Greek hand-to-mouth financing, pressure for official sector debt write-offs there and another nervy wait for the latest tranche of bailout funds. Anti-austerity protests in Greece, Spain, Portugal and elsewhere meantime stepped up a gear this week and Q3 data out today confirmed the euro bloc back in recession.
Yet Europe is not the main driver of global markets at the moment. The latest MerrillBoA funds survey this week showed that, at 54%, more than twice as many funds now think falling off the US cliff and not the euro crisis is the biggest global investment risk. The euro group meets next week on Greece ahead of a two-day EU summit and we still have no clarity on Spain’s bailout either. There’s plenty of headline risk then, for sure, and the parallel release next week of November PMIs is hardly going to bring sweetness and light. That said, there’s been about as much good as bad news from Europe of late. The ECB is simply not going to pull the plug on Greece even if OSI gets pushed up to governmental level and take a lot more time. Spain and Italy have both now effectively completed funding for this year and there were very positive noises this week on Ireland returning to markets in early 2013 with a 10-year syndicated dollar bond, while Fitch raised its sovereign rating outlook to stable from negative.
So, generalised cliff gloom seems to have hit all risk markets indiscriminately. Over the past seven days, equities are lower, EM equities underperformed, Treasury and bund yields are down again (German 2-year back negative) and peripheral European yields have nudged back up again too. The dollar’s a little higher on the euro. On the other hand, oil and commods are up a bit – though that has as much to do with renewed MidEast tensions. What’s more, commodities in general are one of the few macro price gauges still in the red for 2012 — so to the extent that some of the global market pressures are related to year-end profit taking, then they may be in different territory.
All in all, this looks like a tired rather than overly anxious market. Implied equity vol remains relatively low and euro/dollar FX vol hit another five-year low this week.
Without detente in DC, maybe we’ll see continued chipping away of winning trades of the year so far. Developed market equity and emerging market equity and debt are all still up 10-20% YTD – so there’s plenty of room for that.
Frontier markets: safe haven for stability seekers
Frontier markets have an air of adventure and unpredictability about them. One is tempted to ask: Who knows what will happen next?
The figures tell a different story.
In fact, emerging markets overtook frontier markets in terms of volatility of returns as long ago as June 2006, as a recent HSBC report shows. And a more significant milestone was passed a year later, in June 2007, when even developed markets overtook frontier markets in terms of volatility of returns.
Emerging Policy-Data vindicates doves but not all are cutting
Rate decisions last week in emerging markets well anticipated this week’s crop of economic data.
Russia for instance not only kept rates on hold last Friday (after raising them at its previous meeting) but struck a less hawkish tone than expected. Voila, data this week showed growth in the third quarter was 2.9 percent compared to 4 percent in April-June.
We’ll have to wait for November 30 to see what Poland’s Q3 growth numbers look like but data today shows inflation eased to two-year lows in October. That appears to vindicate the central bank’s decision to cut interest rates last week. for the first time in three years. Simon Quijano-Evans at ING Bank writes:
Crisis? What crisis? Global funds grow stronger
Global funds are having a good year.
According to a report by financial services lobby TheCityUK, pension funds, insurance funds and mutual funds are on track to finish the year with $21 trillion more of assets under management than when they hit rock bottom in 2008 with the Lehmann collapse.
They are growing for the fourth year in a row, and much more so than last year, thanks to the recovery in equity markets.
Weekly Radar: Cliff dodging and Euro recessions
Most everything got swept up in the US election over the past week but, for all the last minute nail biting and psephology, it was pretty much the result most people had been expecting all year. So, is there anything really to read into the market noise around the event? The rule of thumb in the runup was a pretty crude — Obama good for bonds (Fed friendly, cliff brinkmanship, growth risk) and Romney good for stocks (tax cuts, friend to capital/wealth, a cliff dodger thanks to GOP House backing and hence pro growth). And so it played out Wednesday. But in truth, it’s been fairly marginal so far. Stocks were down about 2 pct yesteray, but they’d been up 1 pct on election day for no obvious reason at all. But can anyone truly be surprised by an outcome they’d supposedly been betting on all along. (Just look at Intrade favouring Obama all the way through the runup). Maybe it’s all just risk hedging at the margins. What’s more, like all crude rules of thumb, they’re not always 100 pct accurate anyway. Many overseas investors just could not fathom a coherent Romney economic plan anyway apart from radical political surgery on the government budget that many saw as ambiguous for growth and social stability anyhow. Domestic investors may more understandably wring their hands about hits on dividend and income taxes, but it wasn’t clear to everyone outside that that a Romney plan was automatically going to lift national growth over time anyhow.
That said, it was striking on Wednesday that even though global funds were mostly relieved the Fed won’t now be shackled after 2014, nearly everyone still expects the fiscal cliff to be resolved by compromise. Whether that’s wishful thinking or the smartest guess remains to be seen. But, just like in Europe, it means they are at the very least going to have endure a barrage of political noise in headlines and endless scaremongering before any deal is ultimately forthcoming. Some say the nature of the GOP defeat, even with an incumbent saddled with an 8 pct unemployment rate, will force enough moderate Republicans to seek distance from Tea Party and seek compromise. But others point out that post-Sandy relief spending may also bring the dreaded debt ceiling issue forward sooner than expected now too. All in all, the overwhelming consensus still betting on an eventual cliff dodge may be the most worrying aspect of market positioning and may be the best explanation the slightly outsize and sudden stock market reaction.
It also presupposes markets are trading solely on U.S. issues when the other world worries remain.
Emerging Policy-Hawkish Poland to join the doves
All eyes on Poland’s central bank this week to see if it will finally join the monetary easing trend underway in emerging markets. Chances are it will, with analysts polled by Reuters unanimous in predicting a 25 basis point rate cut when the central bank meets on Wednesday. Data has been weak of late and signs are Poland will struggle even to achieve 2 percent GDP growth in 2013.
How far Polish rates will fall during this cycle is another matter altogether. Markets are betting on 100 basis points over the next 6 months but central bank board members will probably be cautious. Inflation is one reason along with the the danger of excessive zloty weakness that could hit holders of foreign currency mortgages. One source close the bank tells Reuters that 75 or even 50 bps would be appropriate, while another said:
“The council is very cautious and current market expectations for rate cuts are premature and excessive.”
INVESTMENT FOCUS-Bond-heavy overseas funds want Obama win
Overseas investors, many of whom are creditors to the highly-indebted U.S. government, reckon a re-election of President Barack Obama would be best for world markets even if U.S. counterparts say otherwise.
For the second month in a row, Reuters’ monthly survey of top fund managers around the world was evenly split when asked whether a win for incumbent Democrat Obama or Republican hopeful Mitt Romney in the Nov. 6 presidential poll would be good for global markets.
The split was clearly dependant on whether the asset manager was based in the United States or not. Domestic funds, by and large, tend to favour Romney; overseas investors Obama.
Weekly Radar: Leadership change in DC and Beijing?
Any hope of figuring out a new market trend before next week’s U.S. election were well and truly parked by the onset of Hurricane Sandy. Friday’s payrolls may add some impetus, but Tuesday’s Presidential poll is now front and centre of everyone’s minds. With the protracted process of Chinese leadership change starting next Thursday as well, then there are some significant long-term political issues at stake in the world’s two biggest economies. Not only is the political horizon as clear as mud then, but Sandy will only add to the macro data fog for next few months as U.S. east coast demand will take an inevitable if temporary hit — something oil prices are already building in.
Across the Atlantic, the EU Commission’s autumn forecasts next week for 2012-14 GDP and deficits will likely make for uncomfortable reading, as will a fractious EU debate on fixing the blocs overall budget next year. But the euro zone crisis at least seems to have been smothered for now. Spain seems in no rush seek a formal bailout, will only likely seek a precautionary credit line rather than new monies anyway and needs neither right now in any case given a still robust level of market access at historically reasonable rates and with 95% of its 2012 funding done. According to our latest poll, more than 60% of global fund managers think Spanish yields have peaked for the crisis. Greece’s deep and painful debt problems, shaky political consensus and EU negotiations are all as nervy as usual. But tyhe assumption is all will avoid another major make-and-break standoff for now. More than three quarters of funds now expect Greece to remain in the euro right through next year at least.
The extent to which the relative calm is related to today’s introduction of a wave of EU regulation on short-selling of bonds and equities and, in particular, rules against ‘naked’ credit default swap positions on sovereign debt is a moot point. This may well have reined in the most extreme speculative activity for now and it has certainly hit liquidity and volumes.
Emerging Policy-surprises all round
A cut was expected, but not there. Israel sliced rates to 2 percent on Monday, surprising even the central bank’s own economists, who forecast steady rates till the end of next year. India’s central bank, meanwhile, kept rates steady earlier today, even though the country’s government had been pushing for a trim.
Emerging economies continue to grapple over whether it’s better to tackle growth or to fight inflation. For the Reserve Bank of India, which left rates at 8 percent but chopped banks’ cash reserve ratios, an inflation rate of nearly 8 percent in September was enough to cause alarm.
A sop to the government though, which has called for a rate cut to boost flagging growth – the central bank said it might take the hatchet to rates early next year.
Emerging Policy-Philippines cuts, Mexico to hold steady?
Emerging market economies continue their trend to spur on growth rather than fight possible QE-induced inflation, with the Philippines cutting rates earlier today.
The Philippines’ central bank cut overnight rates by 25 bps to a new low of 3.5 percent for the borrowing window and 5.50 percent for the lending facility, a move helped by annual inflation at the lower end of the country’s 3 to 5 percent target band.
In fact, analysts and even central bankers in Asia appear less worried about the possible effects of the easy money sloshing around the world just now than regions like Latin America.
