Three snapshots for Wednesday
Most U.S. banks passed their annual stress test driving shares higher. Where does this leave their valuation? Looking at price-to-book value in aggregate (1st chart) they are only just trading above a ratio of one, looking cheap compared to a 15-year average ratio of two. However a premium is opening up over European banks which are still trading below book value, and analyst forecasts for return on equity suggest banks are in a very different environment to the last 15-years (2nd chart)
The UK could start issuing 100-year bonds as it seeks to lock in current low interest rates. Recent sales of long-dated UK gilts have met with strong demand, and as the chart below shows yields on 50-year gilts hit a record low of around 3 percent in January.
Betting on a strike on Iran?
It’s always hard to calculate how to factor political risk into investment decisions, it can feel a bit like taking a punt.
That may be why analysts are starting to look at the bets on Intrade, a Dublin-based online exchange, to measure market expectations of issues like the chances of a U.S. or Israeli strike on Iran.
Richard Fox, head of Middle East and Africa sovereigns at ratings agency Fitch, told a seminar last week that Intrade contracts show fears are rising of such a strike.
Expectations of a strike at the end of the third quarter had soared to more than 40 percent, compared with under 20 percent only a month before.
That heightened concern has levelled off a bit since then, with expectations of a strike at the end of Q3 currently at 30 percent. But expectations of a strike by the end of the fourth quarter remain at 39 percent.
The fears have also fed into oil prices, which have soared above $125 a barrel. It’s draining some of the euphoria triggered by last week’s orderly debt restructuring for Greece and by the massive liquidity injections from the European Central Bank.
According to Imran Ahmad, emerging markets strategist at RBS:
Three snapshots for Tuesday
The German ZEW economic sentiment index for March smashed expectations, coming in at 22.3 against the Reuters poll of 10.0. Over the last couple of years the German 10 year Bund yield has tended to track the ZEW, however this has broken down with yields staying below 2% despite the rebound in economic sentiment.
Improving earnings momentum has been backing up the rally in equities with fewer analysts taking the hatchet to earnings forecasts. The chart below shows that the 3-month average revisions ratio (the number of earnings upgrades minus downgrades as a percent of the total) looks to have turned back towards positive – especially in Europe.
Are emerging markets joining the dividend race?. As this chart of Datastream equity indices shows, the payout ratio for emerging market equities is now above that of the US. Traditionally seen as a growth-based investment, is this another sign of emerging market equities moving closer into line with developed?
Like Greece, but better?
It’s a country with one of the highest debt to GDP ratios in the world, it recently launched a debt exchange to avoid a messy default and it is a member of a currency union. Sounds like Greece?
Oh, and its bond documentation already includes collective action clauses (CACs) to force the minority who don’t want to participate in the debt exchange to do so. So it can’t be Greece, as Greece had to retroactively legislate for CACs.
In fact, this particular indebted nation is the tiny Caribbean country of St Kitts & Nevis, which has launched a bond exchange tender that closes on Wednesday.
St Kitts is a member of the Eastern Caribbean Currency Union, with a currency pegged at 2.7 to the U.S. dollar. But its total debts of EC$3 billion (US$1.1 billion) give it a debt to GDP ratio of 160 percent, much the same as Greece.
The country (population 50,000) is restructuring around $750 million of that debt through the bond exchange, which includes a partial guarantee from the Caribbean Development Bank (Caribbean version of EFSF support?)
But where most Greek debt was issued under Greek law, requiring the imposition of retro-CACs to push through the country’s bond swap last week and regarded as a default by ratings agencies — triggering pay-outs on credit default swaps — the St Kitts debt is covered by St Kitts law.
St Kitts law is based on English law and this means that any debt issued within the last 20 years or so will automatically contain a CAC.
Yuan risks uniting bulls and bears?
Is the outlook for China’s yuan uniting the biggest global markets bulls and bears? Well, kind of.
As China posts its biggest trade deficit (yes, that’s a deficit) of the new millennium and its monetary authorities flag greater “flexibility” of the yuan exchange rate (the PBOC engineered the US$/yuan’s second biggest daily drop on record on Monday), the chances of an internationally-controversial weakening of yuan in a U.S. election year have risen. A weaker yuan would clearly up the ante in the global currency war, coming as it does amid Japan’s successful weakening of its yen this year and as Brazil on Monday felt emboldened enough in its battle to counter G7 devaluations by extending a tax curbing foreign inflows. And, arguably, it could bring the whole conflagration around full circle, where currency weakening in the BRICs and other emerging economies blunts one of the desired effects of money-printing and super-lax monetary policy in the G7 — merely encouraging even more printing and so on.
Societe Generale’s long-time global markets bear Albert Edwards argued as much last week: “We have long stated that if the Chinese economy looks to be hard landing, as we believe it will, the authorities there will actively consider renminbi devaluation, despite the political consequences of such action.”
But, unusually, BRIC-inventor and long-time global economy bull Jim O’Neill, in an FT op-ed this weekend, is not that far away from this yuan call either — even if he’s keener to stress the likelihood of a more volatile yuan rather than the risk of a weaker one per se and, unlike Edwards’ typically gloomy wider take, reckons it’s a benign development related to China’s healthy rebalancing of its economy away from export dependency to more domestic consumption
…currency reform does not equal currency appreciation. The renminbi is going to become more volatile like other currencies. It will go up as well as down against the dollar, partly because China’s current account surpluses are coming to an end, but also because it is opening up its capital account.
So if not a meeting of minds on the bigger picture, then at least something approaching harmony on the risks to anyone betting on an endlessly rising yuan – especially those in Washington.
Venezuela: yields bed down on Chavez treatment
It is often thought that bonds are among the most perverse instruments, rallying on bad news. And Venezuelan bond yields have dived so much of late on the news about the deteriorating health of the country’s incumbent president Hugo Chavez that it seems perversity comes in many forms.
Chavez, not known as the most market-friendly of presidents, has been in the spotlight of late following radiation therapy for pelvic cancer in Cuba, raising fears he could be weakened ahead of a re-election bid on October 7. Chavez announced in June 2011 that he was being treated for cancer. Since then he has had three chemotherapy sessions in Cuba and one in Venezuela.
Perversely, Venezuelan bonds have rallied. Venezuela’s benchmark 2027 bond is quoted at 86 cents to the dollar, much above the 65 cents level it was at before Chavez’s surgery, with yields falling from around 13 percent in July to 11.2 percent in March.
Fund managers at an Emerging Markets Trade Association (EMTA) conference in London last week said they were bullish on Venezuela, claiming it was undervalued given the untapped oil resources it holds and that it has been a “huge underperformer for so long.”
Frontier markets broker Exotix was more cautious.
Last week’s news that Chavez will return to Cuba for more cancer treatment saw the bonds extend their recent rally. However, we caution that a scenario where Chavez does not run is potentially more destabilising in the near-term than one where he does.
Three snapshots for Monday
China’s trade balance plunged $31.5 billion into the red in February as imports swamped exports. It followed reports on Friday that inflation cooled in February while retail sales and industrial output fell below forecast, all pointing to a gradual cooling.
Investors ploughed more money into hedge funds over the past month as performance has picked up after last year’s losses.
Final Q4 Italian GDP growth came in at -0.7%q/q. This chart showing GDP vs the Markit purchasing managers’ index shows the current recession may continue into this year.
from MacroScope:
Greek debt – remember the goats
Greece's creditors have essentially let it off the hook by overwhelmingly agreeing to take a 74 percent loss. So what better time to remember one of the first times Athens got in trouble with paying its debts.
In 490 BC, the bucolic plains before the town of Marathon were the site of a bloodbath. Invading Persians lost a key battle against Greeks, who were led by the great Athenian warrior Kallimachos, aka Callimachus.
The trouble is, Kallimachos shares some of the difficulty with numbers that modern Greek leaders appear to have. Before launching himself upon the Persians, he pledged to sacrifice a young goat to the Gods for every enemy that was killed.
His troops slaughtered some 6,400 invaders. Unfortunately the Athenians didn't have that many young goats. So they had to spread the repayment and legend has it that it took them a century to honour the pledge.
Apparently, Zeus and the other Gods had not heard of the Institute of International Finance and were unwilling to take a 74 percent cut in goats.
Three snapshots for Friday
The U.S. economy probably created 210,000 jobs last month, according to a Reuters survey. If the forecasts are accurate, the government’s jobs report on Friday would mark the first time since early 2011 that payrolls have grown by more than 200,000 for three months in a row. Refresh chart
China’s annual consumer inflation slowed sharply to a 20-month low in February, and factory output and retail sales also cooled more than forecast, giving policymakers ample room to further loosen monetary policy to support flagging growth.
Greece averted the immediate risk of an uncontrolled default, winning strong acceptance from its private creditors for a bond swap deal which will ease its massive public debt and clear the way for a new international bailout.
Fresh skirmishes in global currency war
Amid all the furious G7 money printing of recent years, Brazil was the first to sound the air raid siren in the “international currency war” back in 2010 and it continues to cry foul over the past week. With its finance ministry issuing fresh warnings last night over hot-money flows being dropped by western economies on its unsuspecting exporters via currency speculation, Brazil’s central bank then set off its own defensive anti aircraft battery with a surprisingly deep interest rate cut late Wednesday. Having tried everything from taxes on hot foreign inflows to currency market intervention, they are braced for a long war and there’s little sign of the flood of cheap money from the United States, Europe and Japan ending anytime soon. So, if you can’t beat them, do you simply join them?
The prospect of a deepening of this currency conflict — essentially beggar-thy-neighbour devaluation policies designed to keep countries’ share of ebbing world growth intact — was a hot topic this week for Societe Generale’s long-standing global markets bear Albert Edwards. Edwards, who represent’s SG’s “Alternative View”, reckons the biggest development in the currency battle this year has been the sharp retreat of Japan’s yen and this could well drag China into the fray if global growth continues to wither later this year. He highlighted the Japan/China standoff with the following graphic of yen and yuan nominal trade-weighted exchange rates.
Edwards goes on to say that this could, in turn, create another explosive FX standoff between China and the United States if Beijing were to consider devaluation — the opposite of what the protectionist U.S. lobby has been screaming for for years.
“We have long stated that if the Chinese economy looks to be hard landing, as we believe it will, the authorities there will actively consider renminbi devaluation, despite the political consequences of such action.”
“Clearly, the US will not respond well if China chooses to devalue. But China might argue that as its reserves are now declining there is clear downward pressure on its currency and that, after all, the US has asked it to allow market forces to have more of an influence!”
