Tuesday, August 31, 2010

Swedish Dreams In Debt

This story in charts comes from the SEB's Nordic Outlook, that was released today.

Click on charts to enlarge, courtesy of SEB.

As historical evidence shows, debts make all dreams come true.

Monday, August 30, 2010

Nordea Sees Depression Economy Of Latvia "Towards Brighter Times"

From the lips of Nordic bankers, as per Economic Outlook, today:
While the outlook for the Nordic economies is still fine ...

For the depressed Latvia the outlook should be as follows:
The economic recovery continued in Q2, with GDP growing quarter-on-quarter for the second consecutive quarter. The pick-up in GDP has so far been fairly modest, but the cycle seems to have bottomed. Exports have so far been the main driver of the recovery, as expected, with Latvia benefiting from the recovery in the other EU countries as well as Russia. The domestic economy is seen improving in the second half of the year, although consumption is likely to remain weak due to the still elevated unemployment, the tight credit markets and the weak income development.

Nevertheless, the improving consumer confidence indicates that domestic demand is on the recovery track as well. We see the economy returning to year-on-year growth in 2011 on improving exports and strengthening consumption, with growth gaining further momentum in 2012. However, it will take years for the economy to reach the levels seen a couple years back.
Click on charts to enlarge, courtesy of Nordea Markets.

Just pray that global slowdown is not hitting the export dependant Latvia again.

Friday, August 27, 2010

Partly A Question Of Semantics

A lot of discussions around "double-dip" in the US. Christopher Wood, the strategist at CLSA Asia-Pacific Markets, wrote yesterday:
... GREED & fear is not an economist and is not going to get into a discussion about whether this will prove to be a “double dip” US or just a severe loss of economic momentum. This is partly a question of semantics. The critical point from a market standpoint is that the bond action is giving a strong message that nominal GDP growth is slowing in the US, and it is clear from the Japanese experience since 1990 that stock markets trade around swings in nominal GDP growth in a deflationary environment.

Click on chart to enlarge, courtesy of CLSA Asia-Pacific Markets.

Thursday, August 26, 2010

Short Squeeze Before ... Or In For A Rude Shock Anyway?

Jim Reid, the strategist at Deutsche Bank, writes today:
July proved to be a horrible month for the US housing market as the expiration of the homebuyer’s tax credit deeply impacted transaction volumes. For the second day in a row we saw terrible US housing numbers as yesterday’s new home sales report extended the very poor existing home sales data released on Tuesday. New home sales fell by -12.4% to 276k units in July, a record low since the data series started in January 1963...

Interestingly the two housing reports actually marked the low point for risk on both days. The S&P 500 was -1.14% post yesterday's data but recovered steadily throughout the day to close +0.33% higher. The data was brushed aside by the homebuilders for the second day (+3.73% in the session). Indeed the sector has gained +7.2% since the release of Tuesday’s existing home sales data. There does seem to be a belief that July will mark a bottom in activity given that it was the first post tax credit month. Whilst this may be true we suspect that there has been a psychological shift against housing amongst US consumers...

Given the weakness in data yesterday, which included a very weak underlying Durable goods orders report, we have to admit that the resilient of equities markets was somewhat surprising. Is the data getting so bad that QE2 is now more likely than it was 48 hours ago? ...

Then, Albert Edwards, the global strategist at Societe Generale, writes also today:

So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move. The equity market will though crumble like the house of cards it is, when the nationwide manufacturing ISM slides below 50 into recession territory in coming months. Indeed the new orders data for August, already reported in regional ISM's suggests the equity market is going to get some sentiment crushing data in the very near term. ...

Click on chart to enlarge, courtesy of Societe Generale.
Now, when bad data are increasing the likelihood of QE2, JPY is weakening for the second day on speculation Japan to intervene, and the resilience of markets in face of really bad data does suggest a short squeeze before a rude shock?

Wednesday, August 25, 2010

On JPY Watch

While everyone is watching Japanese Yen (JPY) now, the hope of technical equity bulls is about a rebound lead by JPY fall.

Click on chart to enlarge, courtesy of Nomura.

Tuesday, August 24, 2010

What About Capitulation?

The strategists at BCA Research in their weekly "US Investment Strategy" note wrote yesterday:

Risk assets will probably rally if the Fed pumps more liquidity into the system, but the stock and corporate bond markets may riot before the Fed acts. Thus, the risk/reward balance has become too unfavorable to maintain a pro-growth investment stance in our view.
Is this the capitulation of rational bulls? There are, of course, other types of bulls too. In the meantime it becomes widely accepted that Japanese Yen makes some problems for the "risk-on trade". Is this due to inter-market correlations?

Is this a signal for a contrarian?

Monday, August 23, 2010

Emerging Markets Are Not Safe Haven

As Barclays Capital rightly points out today, some emerging markets countries have to deal with fiscal challenges.

Click on chart to enlarge, courtesy of Barclays Capital.

Friday, August 20, 2010

Global Trade In Pictures

Economists at Societe Generale looked at global trade yesterday. The main question, asking - who will lead the global trade expansion?

Really nice story told in pictures, click on charts to enlarge, courtesy of Societe Generale.

Would emerging economies provide the boost? Or, is the entire market already riding that horse?

Thursday, August 19, 2010

Quote Of The Day

Julia Coronado, the US economist at BNP Paribas, writes today, my emphasis:

In light of recent developments we are revising our view of the magnitude and shape of the US economic recovery.

The inventory cycle has apparently had only a modest positive follow through impact on growth which now threatens to slow to the sluggish pace of final demand as the inventory cycle is largely played out. In this sense the recovery has not so much lost momentum, as it never really had solid underpinnings.

No wonder the red color on screens today ... with a still bullish hope, that never was a good investment strategy.

Wednesday, August 18, 2010


I post here the picture only, people at FT Alphaville have the story, sourced originally from The Big Picture.

Click on picture to enlarge ....

Fascinating relic ...

UPDATE: EconomPic has done some math.

Tuesday, August 17, 2010

Merrill Sees "A Cautious, Careful Consensus"

Bank of America Merrill Lynch is out with monthly Global Fund Manager Survey today. Last time I looked at the survey was when Merrill saw Buy Signal Close in May, however, today the key conclusions are as follows:

The August consensus: cautious and careful

Our August FMS reveals a consensus that is cautious on global growth and risk. The bearishness of June & July has abated. But few investors hold extreme views or extreme positions right now, so directional signals from the August FMS are limited.

Growth expectations stabilize, trough in China
The collapse in growth expectations in June and July was followed by stabilization
in August. A mere 5% of investors forecast stronger global growth in the next 12 months, but a large 78% majority do not expect another recession. China growth expectations have troughed: the growth diffusion index rises sharply to -19% from -39% last month, which caused commodity exposure to rise.

Risk metrics back in their trading range
In a new question our survey said the two largest "tail risks" are premature fiscal
tightening and US municipal/EU sovereign debt defaults. That said, risk appetite in August has stabilized. The BofA-ML Risk Appetite & Liquidity Index rose to 39, a fraction below the long-term average level. The average investor cash balance fell to 3.8% from 4.4%. But hedge fund net exposure remains near a 4-year low.

Still uw bonds, but raising exposure to commodities
No contrarian "sell signal" for bonds: global asset allocators remain stubbornly underweight bonds (exposure dropped to -23% from -15%) and modestly overweight equities (broadly unchanged at a net 12% ow). Commodity exposure has risen to 9% ow from marginally uw last month.

Out of US/Japan into Europe/UK
Big drop in exposure to US, with a net 14% uw the market, the lowest level since Jan'08. Big drop in exposure to Japan, with a net 27% uw. A net 62% of investors view the Yen as overvalued, the highest reading on record. Big rotation into Europe (+11%) and to UK equities (lowest uw since May '07). GEM remains the most preferred region (+38%) for asset allocators but is not at extreme levels (a net 53% were ow last Nov).

Out of utilities/pharma into banks/industrials August saw rotation into banks, though investors are still uw (-19%), and further rotation into industrials (+12%), financed by lower weightings in pharma (12% ow from 23% last month) and utilities (-27% = least loved sector). Tech remains the most-favoured sector (net 34% ow) despite recent underperformance.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.

However, the technical team by Mary Ann Bartels is really worried about a potential head and shoulders top on the S&P500:

A break of 2 July low of 1010 would indicate a much deeper correction is likely ahead of us. Support is 1010-1000 then support is 950.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.

We are miles away from 1010 ...

Monday, August 16, 2010

J.P.Morgan's View On Markets: Ranging Risk Markets Favor Income, Yield, And Spreads

Latest view by J.P.Morgan:

• Economics — Weak US retail sales and claims raise downside risks.
• Asset allocation — Risk markets have been in a range for almost a year. This will make investors favor income, yield, and spreads over capital gains.
• Fixed income — Stay long and in flatteners. MBS now offers good value.
• Equities — Downshift in global manufacturing and the search for yield are negative for Industrials and Cyclical sectors more broadly.
• Credit — Record US$22 billion issuance in US HY this week. Stay long given strong demand and strong corporate fundamentals.
FXJPY forecast to rally to all-time low of 79 versus USD by year-end.
• Commodities — Stay underweight in Oil and Base Metals, and overweight Agriculture.

Click on chart to enlarge, courtesy of J.P.Morgan.

Sounds reasonable with the given track record?

A Look At EuroStoxx 50 Implied Correlation

From the European equity strategy desk at Barclays Capital. Click on chart to enlarge, courtesy of Barclays Capital.

What next? Before we move into dark days of autumn, some sort of rally still favored?

Friday, August 13, 2010

Deflation And Pricing Power

Nice chart from US economists at Societe Generale today. Labor pricing power versus the corporate pricing power.

Click on chart to enlarge, courtesy of Societe Generale.

Indeed, something happened in the beginning of 80-ties. One may be looking for answers starting from here, move to The Bestest Generation, look at Financial sector profits, and move to Globalization's critical imbalances to get a kind of feeling ...

Average STOXX Rallies And Pullbacks In Bull Market

Citi is looking at average rallies and pullbacks of European equities (STOXX ex-UK) in the first 18 months of a bull market over the last 25 years, and suggests that this is an average rally since the beginning of July.

Click on charts to enlarge, courtesy of Citigroup Global Markets.

As also Euro has rallied circa 10% in recent months, they conclude:
Post Euro rallies, equities are usually weak, suggesting short-term caution.
However, the strategy outlook is as follows:
As risk appetites have grown in recent months, equities have rallied and the Euro has strengthened against the Dollar. When this has happened in the past, the equity market has generally reacted positively in the shorter-term but has been more mixed over 6-12-months. On a sector basis, what’s been interesting this time round is the resilience of the Banks sector.
Uffff... First, post Euro rallies, equities are usually weak, suggesting short-term caution? Then, when this has happened in the past, the equity markets has generally reacted positively in the shorter term?

And then also, look at resilience of the Banks sector from different perspective.

However, the maximum pain for Friday the 13th are buy tickets?

Thursday, August 12, 2010

Wednesday, August 11, 2010

Parasitic Ponzi Growth, Dysfunctional Credit Markets, Bank Nationalizations And Final Demand

A very short and refreshing wrap-up around the "big picture" today, that still makes macro investors awake at night.

I posted about the US growth revisions yesterday, and I also mentioned "Recovery in asset prices and financial ponzi growth do not require a lot of working hands". It is worth adding here a comment by Dean Baker on Final Demand and the Inventory Cycle, for a different quality in details. The readers, of course, do know that "final demand" has been pumped with steroids, also via banker bonuses ...

However, Steve Keen is out in streets with Minsky-an-style "Bank Profits a sign of economic sickness, not health" today. And this is the point about the macro view.

Governments have been doing everything to support and keep the banks alive, starting from steep yield curves via monetary policy and down to all kind of back-door recapitalization phantasms. To me it appears that the only thing that markets are bothering is whether the governments/regulators will force the banks to step-up with additional equity, nothing more, as one may deduct from anti-stressed market reaction to European stress tests.

As to stress-testing, one of great examples is Modelling Fannie Mae and Freddie Mac by John Hempton at Bronte Capital (it is worth studying the entire series of posts). With a following conclusion (my emphasis) from extensive modelling:

Pre-tax, pre-provision operating profits of Freddie Mac are running at over $15 billion. If the government were not demanding 10 percent on its preference shares the companies would be sufficiently well capitalised to repay their interest in 4 years. With the drag of having to pay the government $5 billion per annum it will take a bit over five years. Either way the operating profits of Freddie Mac are big enough to ensure the government gets its money back. If you do the same analysis for Fannie Mae its is even better. However Fannie has less aggressively marked private label securities to market so it has less chance of recoveries from their current marks. The consensus view that the GSEs are forever toast – and forever a drain on the US Government is very likely wrong.

But here we come to the causes of the dysfunctional credit markets, that are driven by debt maturity ... Average maturity of bank debt is (about) less than 3 years (see, for example, the chart below with US banking elephants), and this debt should be rolled-over for bank to remain liquid and also solvent, or they are forced to shrink their balance sheets. Debt maturity and roll-over risks is the only criteria for any stress-test in credit markets, all else is "gaming the game".

Click on chart to enlarge, courtesy of Nomura.

Instead of solving the issues around the bank liquidity and solvency, governments have not undertaken any serious steps to DO SO. Quite the opposite, they have decided to pay the not yet identified price of moral hazard and promote the "parasitic role as the financier of Ponzi schemes".

So far so good, but Michael Pettis, while discussing the Chinese consumption today, rounds it up very well with this paragraph, my emphasis:

The PBoC seems to be increasing its purchases of the yen, and that is causing the yen to rise. It is also causing very unwelcome weakness in the Japanese economy. Whenever people argue that the US wants and needs net Chinese investment in USG bonds, you should ask how that can possibly make sense when every country seems to be doing all it can to repel foreign capital inflows (or to increase their own net capital outflows, as in the case of China, Japan and Germany). The idea that the US or any other country “needs” foreign financing is total nonsense. Nearly every country in the world is trying to export capital and import demand. The world has no urgent need of capital. It needs consumption.
QE2 will bring consumption?

Tuesday, August 10, 2010

BNP Paribas Ruminates About The JGB Market Correction In 2003

From the Japanese interest rate strategists at BNP Paribas today. Click on chart to enlarge, courtesy of BNP Paribas.

History repeating?

US Growth Revisions Visualized

The self-sustained US growth hype was revised officially. Here are some charts to get visualized.

Click on charts, courtesy of BNP Paribas.

Click on charts, courtesy of CLSA Asia-Pacific Markets.

Recovery in asset prices and financial ponzi growth do not require a lot of working hands. Still, we may need QE2, especially for bankers. Let's see what FOMC delivers today, and what the markets have priced in!

Chinese Wage Chartology

With a short comment by economists at DBS Vickers:

Low-end processing companies will likely be the first to deflect investments away from China in light of very thin margins. This is usually a major concern facing investors because they fear other countries will take FDI permanently away from China. We, however, believe the trend merely shows that these low-value added production lines require an even lower cost structure to survive. It does not point to an across-the-board hollowing out of the manufacturing sector.

Moreover, unlike other Asian countries, China is vast in terms of its geographical size. Companies have the option to relocate to inland China to benefit from the relatively lower labor costs there. This should make foreign-invested enterprises think twice before pulling out of the country. In 2008, there was a 42% difference in minimum wages between the highest paid city, Shanghai, and lower paid provinces like Anhui (Chart 6). Relocation inland is likely to rise significantly when inland transportation accessibility is improved following the completion of the high speed rail by 2012.

Click on charts to enlarge, courtesy of DBS Vickers.

Relocating some production to Vietnam and India? Or high speed train will save the China inland?

Monday, August 09, 2010

Food Decision Time For Emerging Markets?

Now, when the wheat story has occupied all the headlines, it is time to re-visit the food inflation. The Reformed Broker sees three ways from here. I doubt "The Malthusians" scenario right now, but who knows? Rather stretched between "Next Sugar Trade" and "It all blows over", again, but spending bulls will retreat, at least for small ticket discretionary items.

However, Citi sees the glorified emerging markets under increasing stress, if prices do not retreat:

Inflation expectations in EM could be seriously disrupted if wheat and maize prices keep rising, just as benign food price developments in Q2 played an important role in pushing inflation expectations down. Global food inflation fell from 21% in Q1 to 7.2% in June, but is now on the rise again: the FAO’s global food index for July was published last week, and shows food inflation rising to 12.5%.

The impact of higher food prices on CPI varies widely across countries, but broadly speaking it appears that Asia has the highest sensitivity to higher food prices, and Latin America the lowest.

It is difficult to generalise about how higher food prices will affect policy interest rates, particularly since the impact of more expensive cereals can be partially offset by stronger exchange rates, both for wheat-importing and for wheat-exporting countries.

On balance, though, we think that the risk of accelerated rate hikes should be taken seriously, given the sensitivity of inflation surprises to food prices in the past few months. And since China is one of the countries whose CPI seems to be particularly sensitive to rising food prices, the global consequences might become more visible. The market would probably not welcome a Chinese dilemma in which policymakers had to struggle against sharply higher inflationary pressure as well as a real economy slowdown.

An additional risk arises from the fact that foreign ownership of EM domestic fixed income markets has risen in the past few months. If food prices produce nasty inflation surprises in the next few months, the risk is that investors lighten their positions in EM fixed income markets, producing a small negative spiral of higher inflation, capital outflow and weaker exchange rates.

Click on charts to enlarge, courtesy of Citigroup Global Markets.

Hmmm, nasty inflation surprises just blowing it all over, again?

Standard Chartered On US Rates & US vs Chinese Consumer

Alex Barrett, Global Head of Client Research, talks about forecasts and the Fed's measures to stop a fall back in to deflation, as well as Chinese consumer ...

But, there may be so much disappointment, if Fed fails to deliver according to market expectations?

Thursday, August 05, 2010

Third Transition In Global Manufacturing Since 1750

Fascinating chart from Mother Morgan, click on chart to enlarge, courtesy of Morgan Stanley.

Those Leading Indicators

I mentioned the weird yield curve argument some time ago, but Albert Edwards, the highly regarded global strategist at Societe Generale, writes today:

I've read some real rubbish recently. I read, for example, that a recession cannot be imminent because the yield curve has not yet inverted. Indeed one of the key components for Conference Board leading indicator is the shape of the yield curve (10y-Fed Funds). This has been regularly adding 0.3-0.4% per month to the overall indicator, which is now falling MoM! The simple fact is that with Fed Funds at zero, it is totally ridiculous to suggest there is any information content in the steep yield curve, which will now never predict a recession. Without this yield curve nonsense this key lead indicator is already predicting a recession.

Click on chart to enlarge, courtesy of Societe Generale.

Also the team of global economists at Goldman Sachs had similar fear mongering charts last week. Click on charts to enlarge, courtesy of Goldman Sachs.

However, ECRI went out to streets yesterday in order to defend its stance in regard to US WLI. As to recession call, they stated:
However, a recession is hardly baked in the cake, which is why we aren’t making a recession call at this time. Simply put, we don’t predict the predictors. If we see our collection of leading indexes (including the USLLI, which turns ahead of stock prices) swing decisively toward the recession track, we’ll make a clear recession call. Until then, we’ll keep monitoring our leading indexes, as we’ve done for decades.

Wednesday, August 04, 2010

Extreme Disparity Between Bonds and Equities?

Jim Reid, the strategist at Deutsche Bank, writes today:

We tend to side more with the bond market but suspect that the truth lies somewhere between. With bond yields at these levels we are really pricing a high certainty of ultra low growth, inflation and no real prospects of Fed rate rises for two-three years. While we have sympathy with such a view we wouldn't be as confident in the certainty of such an outcome. Some additional risk should perhaps now be priced in at these extreme levels. The equity market is probably pricing in more of a normal recovery even if it’s not pricing in a strong one. The reality is that the two markets continue to tell us wildly different things. Such an extreme disparity between the two asset classes is fairly unique outside of 1990s Japan so anyone that has a high level of conviction as to how this pans out is likely ignoring the high degree of uncertainty prevalent in markets today.

On top of that look for an excellent technical inter-markets take on link between Japan and US via Trader's Narrative by Matthew Claassen - Claassen: Warning From Intermarket Correlations.

Tuesday, August 03, 2010

BBVA Reassessing The Risks For The Global Economy

BBVA just released the presentation of latest Global Economic Outlook ... that is on track for a mild and differentiated slowdown?

Europe Anti-Stressed By Seigniorage Back-Up?

FT's Wolfgang M√ľnchau was quite vocal with "A test cynically calibrated to fix the result", and credit analysts at UniCredit were quick to summarize the gap between "stress" and BIS data as follows. Click on charts to enlarge, courtesy of UniCredit.

However, whatever happens, there is a possibility of silent seignoirage by ECB, that makes Buiter to wonder it is not traditional European central banking (H/T FT Alphaville). Again, we are gaming the "Games of ‘Chicken’ Between Monetary and Fiscal Authority: Who Will Control the Deep Pockets of the Central Bank?". As Willem Buiter et al puts it in conclusion on 21st July before the release of results (my emphasis):

Even if the leading central banks can resist being forced to monetise private or public debt and deficits to the point that their price stability mandates are compromised, the redistribution over time of a given NPV of seigniorage can have major political and fiscal (redistributive) consequences. Even without either raising the NPV of current and future seigniorage or shifting a given NPV of seigniorage forwards in time, the actions of the central bank as lender of last resort, market maker of last resort and quasi-fiscal subsidiser of last resort can redistribute wealth and income among financial institutions and between financial institutions and the rest of the private sector. The pressure is on for central banks to act in ways that relax the government budget constraint. The question is not whether central banks will be forced to act as quasi-fiscal actors, but the scale, scope, nature and transparency of their future quasi-fiscal interventions.

In the case of the ECB, the game of chicken between the fiscal authorities and the Eurosystem is plain for all to see. With the ECB/Eurosystem intervening to support the P5 debt markets since 10 May 2010, there is no reason for the Euro Group member states to rush the activation of the EFSF. When the stress test results begin to be reported on 23 July 2010, the EFSF will not yet be operational. Between 23 July and the date the EFSF finally becomes operational, any government other than Greece that needs to borrow because it has to recapitalise one or more of its banks but finds itself locked out of the sovereign debt markets can only turn to the ECB/Eurosystem for funds. We predict that the clearly expressed wish of the ECB to exit from its policy of outright purchases of sovereign debt will not be heeded. That exposure to risky sovereign debt is, of course, but a small fraction of the total exposure to private and sovereign credit risk the ECB/Eurosystem has taken onto its balance sheet since August 2007. The losses suffered by the Eurosystem as a result of its exposure to Lehman and to the Icelandic banks clearly demonstrate the risks involved in central banks moving from the provision to liquidity to the supporting the solvency of banks and governments subject to material credit risk. Our analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined.

Bull market in equities never ended ... for the benefit of Richistan.

Is It Expectations For QE That Drive The Markets Now?

From the house of Nomura today:

We are raising the weighting of HK to Bullish from Bearish as we expect QE measures in the US to be re-introduced. We are lowering our Bullish call on Singapore. An expansion in the balance sheet of the Fed ought to mean a better period for financial markets in HK.

Richistan needs higher asset prices ...

Standard Chartered On Risk Appetite

I am back, and trying to get the feeling for the markets ...

Standard Chartered had a video footage on Risk Appetite and Three Key Factors last Friday, watch the video by clicking on the quote below.
Alex Barrett, Global Head of Client Research talks about the main drivers for current markets: European sovereign debt and banking issues, the threat of a double-dip recession in the US and worries over the slowdown in China.