Three snapshots for Thursday
The VIX volatility index has fallen below the average level seen during the 2003-2008 pre-crisis period.
The low level of the VIX is also being matched by moves down in other ‘safe haven’ assets. The dollar is near an 11-month high against the yen, and a rise in U.S. Treasury yields is pushing up the spread between U.S. and Japanese bond yields.
President Barack Obama and British Prime Minister David Cameron discussed the possibility of releasing emergency oil reserves during a meeting on Wednesday, two sources familiar with the talks said.
While likely to be popular with many Americans, tapping the SPR alone could antagonize allies in Europe, several of whom remain unhappy over last year’s action and are unlikely to back another release.
The head of the Paris-based IEA, Maria van der Hoeven, has said in recent weeks she sees no current need for consuming nations to release strategic reserves.
Becoming less negative on Europe
Markets are unimpressed today by Europe finally agreeing to bail out Greece for the second time, with European stocks down -0.6% on the day.
But here’s some encouraging news: Credit Suisse has become less negative on Continental European stocks for the first time in almost two years.
The bank has moved to benchmark weighting from 5% underweight for a currency hedged portfolio.
Why?
We think that the ECB is increasingly dovish (and we would not rule out another three-year LTRO after the one on 29 February), which should help weaken the euro; and we now only expect a 1% decline in European credit (down from our previous estimate of a 5% decline); relative to other regions, economic momentum and earnings momentum have troughed. But there is not enough for us to raise weightings to overweight.
In CS’s earnings momentum scorecard, Europe ex-UK has moved up one place, off the bottom of the list, with a total score of -0.1 — above Japan’s -1.2.
On previous occasions when relative Continental European earnings revisions have troughed, Europe ex UK equities have on average outperformed 75% of the time and when they did outperform, it was by 3–5% in the next three to six months (in local currency terms).
from MacroScope:
When the euro shorts take off
Currency speculators boosted bets against the euro to a record high in the latest week of data (to end December 27) and built up the biggest long dollar position since mid-2010, according to the Commodity Futures Trading Commission. Here -- courtesy of Reuters' graphics whiz Scott Barber, is what happens to the euro when shorts build up:
Hungary and the euro zone blame game
More tough talk from Hungarian officials on the ‘unjustified’ weakness of the country’s currency, which has dropped 11 percent against the euro this year to all-time lows.
This time, it’s central banker Ferenc Gerhardt arguing that the weakness of the forint is out of sync with economic fundamentals and blaming it on the debt turmoil in the euro zone.
Perhaps he should look a little closer to home.
Hungary’s drift from orthodox economic policy since the centre-right government took over the reins last year has made it the most exposed of eastern European economies.
The ruling party Fidesz swept into power promising to create a new social contract that would subject the economic system to the “popular democratic will”. Ironically, the policies of Prime Minister Viktor Orban have made Hungarian markets more sensitive to the global sentiment than ever.
Domestic investor participation in local bonds and stock markets has fallen since the government controversially seized private pension fund assets to boost state coffers this year.
Average daily trading volumes on the Budapest stock exchange have slipped 25 percent this year while non-resident ownership of local-currency bonds are at elevated levels — as high as 40 percent — and estimated to be worth a considerable 4.8 trillion forints ($20 billion)
@ Intriped
Buffet said to CNBC that he was looking to buy up equity of large eurozone companies if the price was cheap enough.
The bearish eurozone headline splatter is the usual market fodder directed towards softening those prices.
Wouldn’t get too excited unless you are a shareholder.
Phew! Emerging from euro fog
Holding your breath for instant and comprehensive European Union policies solutions has never been terribly wise. And, as the past three months of summit-ology around the euro sovereign debt crisis attests, you’d be just a little blue in the face waiting for the ‘big bazooka’. And, no doubt, there will still be elements of this latest plan knocking around a year or more from now. Yet, the history of euro decision making also shows that Europe tends to deliver some sort of solution eventually and it typically has the firepower if not the automatic will to prevent systemic collapse. And here’s where most global investors stand following the “framework” euro stabilisation agreement reached late on Wednesday. It had the basic ingredients, even if the precise recipe still needs to be nailed down. The headline, box-ticking numbers — a 50% Greek debt writedown, agreement to leverage the euro rescue fund to more than a trillion euros and provisions for bank recapitalisation of more than 100 billion euros — were broadly what was called for, if not the “shock and awe” some demanded. Financial markets, who had fretted about the “tail risk” of a dysfunctional euro zone meltdown by yearend, have breathed a sigh of relief and equity and risk markets rose on Thursday. European bank stocks gained almost 6%, world equity indices and euro climbed to their highest in almost two months in an audible “Phew!”.
Credit Suisse economists gave a qualified but positive spin to the deal in a note to clients this morning:
It would be clearly premature to declare the euro crisis as fully resolved. Nevertheless, it is our impression that EU leaders have made significant progress on all fronts. This suggests that the rebound in risk assets that has been underway in recent days may well continue for some time.
So what exactly have investors and been doing while waiting for the fog to clear in Brussels? The truth on most benchmark prices and indices is “not very much” — at least not since world markets got the collywobbles in early August about US downgrades and debt ceilings, euro sovereign debt angst and double dip recession. Yet, since the European stocks nadir in late September prodded the Franco-German alliance into more serious action, there has been some impressive market gains of between 10 and 20% across most equity sectors and national indices. More broadly, after a year of intense political and financial turmoil across the globe, developed market equities are only down about 4% year-to-date — a 10 point outperformance on emerging markets, for example.
And the clearing of the euro fog now allows investors to start looking beyond the Brussels cauldron and review how the rest of the world is shaping up. What they find, surprisingly for those drowning in disaster commentaries, is‘not all that bad – especially, but not exclusively in the United States. There’s been a string of more positive economic data releases throughout October and these have continued through the back end of last week and early this week. The bellwether Philadelphia Fed industrial index rose to its highest in six months; U.S. durable goods orders (excluding volatile aircraft orders) rose at their fastest pace in six months in September; U.S. new home sales rose at their fastest in five months; business surveys show Chinese manufacturing is back expanding again in October for the first time in three months; U.S. power firms are reporting a pickup in industrial activity in H2, Ford has increased fourth quarter forecast for North American vehicle production. The U.S. Q3 earnings season hasn’t been half bad either – with a third of the S&P500 reported, some 70 percent beat forecasts and the main strength was in the industrial world. What’s more for markets, seasonal equity flows are typically in an updraft for the rest of the year, all things being equal. Fund managers already started rebuilding equity positions in September.
European business and consumer sentiment surveys have continued to push lower through the policy logjam, unsurprisingly, even if real data contradicts some of that anecdotal ‘evidence’. And this may well translate into the wider investment theme as the euro crisis ebbs. Europe may agree to adapt grudgingly to solve its immediate problem but tyhen pay the price in economic growth because it’s less worse than the alternative of financial chaos.
On the more immediate horizon, there may be groans from those hoping to escape summit mania as G20 leaders are set to meet in Cannes next Thursday and Friday — with a hoped-for endorsement of the euro plan and a specific interest in the EFSF/IMF/SPV idea that seems to be courting sovereign wealth funds from China and other emerging giants from the BRICs to use a special conduit to buy euro sovereign bonds. ECB rate cuts too may be firmly back in the frame on Thursday as Mario Draghi takes the helm of the central bank for the first time. The Federal Reserve’s Open Market Committee gives us its latest decision on Wednesday. US payrolls looms large on Friday, with a heavy European earnings sked including Barclays, BMW, ING, BNPP, Unilever, CS, ArcelorMittal, RBS, Commerzbank, and many more.
Too much correlation
Globalisation is evident in this graphic put together by James Bristow, a global equities portfolio manager at BlackRock. It shows the correlation between the U.S. S&P stock index and counterparts in Europe, Australasia and the Far East.
Basically, what happens these days on Wall Street is matched everywhere else, or vice versa.
It is a bit of a problem for long-term investors. One of the best ways to diversify used to be to buy outside your domestic market. Not so now. This is likely to push more institutional investors to non-correlated assets and hedge funds.
from MacroScope:
Are CDS markets the euro zone’s iceberg?
In an unfortunate turn of phrase at the height of his country's current debt crisis, Greek Finance Minister George Papaconstantinou on Monday compared his government's Herculean task in slashing deficits and debts as akin to changing the course of the Titanic. Sadly, we all know where the great "unsinkable" ended up almost a century ago and I'm sure, given the chance, Mr Papaconstantinou would have chosen another metaphor. But if the Greek economy (or perhaps the euro zone at large?) is to be cast as the Titanic, then what is its potential iceberg?
For some euro politicians, look no further than the sovereign Credit Default Swaps market. France's finance chief Christine Lagarde said as much last week when she questioned "the validity, solidity of CDSs on sovereign risk" and warned speculators to be careful as regulators took a "second look" at the market and European governments closed ranks. Lagarde, of course, is not alone. You can be sure CDS are being examined long and hard by Spanish intelligence services investigating the "murky manoeuvres" in the debt markets. But what is the exact charge against CDS?
CDS are ways to buy or sell insurance on the risk of debt defaults without needing to own the underlying bonds in the first place. It's a way of hedging your debts, if you like, without having to go through the often more complicated game of selling securities short (or selling borrowed paper). In essence, it allows you to take a bet on default without having to go to the trouble of owning the bonds you're insuring against. Some critics, not unreasonably, would view this as the epitome of the casino capitalism that has elicited so much public outrage over the past three years . The fear is this market has become the tail wagging the dog.
About 10-years old, CDS were for years seen as a valuable bellwether of sentiment on corporate default risk. But its opacity as an over-the-counter market came in for heavy criticism during the credit crunch, mainly because it allowed speculators with no interest in the underlying securities to sow panic in the real marketplace, particularly in banking stocks, and offered them the power to precipitate the very crises they were betting on. There were also cases, most notably in attempts by Kazakhstan's then biggest bank BTA to restructure its debts, where conflicts of interest were alleged. Some bondholders acting as creditors stood to gain more from forcing the bank default because they were substantial CDS holders too. What's more, Commerzbank points out, many even doubt the sense of sovereign CDS markets at all because it's far from clear who would pay out in the event of default. Insurer AIG was certainly unable to pay when the financial industry went south in 2008.
One defence of CDS is they merely allow a liquid market to anticipate future credit rating moves rather than outright defaults per se and, as such, are important not in their absolute but in their relative rankings of credit. Greek CDS prices last week indicating a one-in-three chance of default, for example, were wildly at odds with a consensus view such an outcome was highly unlikely. Yet, Commerzbank said that even the acceptance of sovereign CDS as a useful market signal still exposed some odd anomalies, such as German CDS trading cheaper than the US when the US and not Germany had control of its own printing presses.
Barclays Capital have burrowed deeper with a note called "Sovereign CDS: Cat or Canary?" They concluded that both CDS exposures and volumes are just fractions of the cash bond markets for the likes of Greece, Spain, Ireland, Italy and Portugal -- only between 2% and 10% on exposures and 1% to 12% on volumes, with Portugal showing the highest CDS to cash bond ratios. And although there was a correlation between CDS volumes and widening cash bond spreads, this was unsurprising and showed no cause and effect.
However, Barclays did point out the CDS market appeared skewed toward fear and volatility. "CDS activity drops quite a bit when spreads tighten. This would suggest that the CDS market tends to be dominated by players who are looking to buy protection," it said, adding that this was even more likely in markets like Greece where the absence of centrally-cleared cash repo markets makes many players reluctant to "short" the cash market.
It’s the exit, stupid
Anyone wondering what ghoul is most haunting investors at the moment could see it clearly on Tuesday — it is the exit strategy from the past few years’ central bank liquidity-fest.
Germany came out with a quite positive business sentiment indicator, relief was still there that Greece had managed to sell some debt a day before, and Britain formally left recession – albeit in a limp kind of way.
But what was the main global market mover? It was China implementing a previously announced clampdown on lending.
Doesn’t bode well for when the euro zone stops lending banks low-interest money, Britain stops buyng gilts and the Federal Reserve raises interest rates.
from MacroScope:
Britain heading for rude awakening?
There is a divisive election ahead for Britain, the threat of a ratings downgrade on its sovereign debt and a deficit that has ballooned into the largest by percentage of any major economy. UK stocks, bonds and sterling, however, are trundling along as if all were well. What gives?
For a fuller discussion on the issue click here, but the gist is that all three asset classes are being support by factors that may be masking the danger of a broad reversal. UK equities have been driven higher by the improving global economy, bonds held up by the Bank of England's huge buying programme and sterling by valuation and the distress of others.
But with the Bank of England's buying spree due to end soon and the possibility that UK voters won't give a clear victory to either the Conservatives or Labour, meaning political stalemate, is this set to change?
Royal Bank of Canada does not go as far as saying it will. But it says it is clear that not enough attention is being paid the prospect of politics grinding to a halt and failing to solve the fiscal problem
Many sacred cows will have to be sacrificed in the years ahead, and this will require effective leadership, imagination, and courage. But the danger is that because of the political situation, the country is instead left with weak government, temporary expedients, and initiatives that are the lowest common denominator of long and exhausting negotiation.
Britain is not yet headed back to the 1970s, in our view, but such economic and political recidivism cannot be ruled out. Policy makers and money managers would do well to consult their history books and be alert to the errors and failings of 35 years ago
Well it was down, down, down for 2008.
And up, up, up for 2009.
So it stands to reason that in 2010, we are right back where we damn well started.
At least we broke even.
