Thursday, February 23, 2012

Economic Summary for the week ending 23rd Feb 2012

Greece - Eurozone finance ministers agreed a second bailout for Greece this week. Greece is to receive loans worth more than EUR130bn (USD170bn).
In return, Greece will undertake to reduce its debts to 120.5percent of its GDP by 2020 and accept an "enhanced and permanent" presence of E.U. monitors to oversee economic management.
Greece needs the funds to avoid bankruptcy on 20 March, when maturing loans must be repaid. After five straight years of recession, Greece's debt currently amounts to more than 160percent of its GDP.
Europe - Meanwhile, however, the eurozone's economy is heading into its second recession in just three years, while the wider E.U. will stagnate, an E.U. executive said on Thursday, warning that the area has yet to break its vicious cycle of debt.
Economic output in the 17 nations sharing the euro will contract 0.3percent this year, the European Commission said a report, reversing an earlier forecast of 0.5percent growth in 2012. The wider, 27-nation European Union, which generates a fifth of global output, will not manage any growth this year, the Commission forecast.
"The E.U. is set to experience stagnating GDP this year, and the euro area will undergo a mild recession," the Commission said in its interim forecast report.
Germany - German business confidence rose more than economists forecast to a seven-month high in February as progress in taming Europe's debt crisis tempered the risk of a recession.
The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 109.6 from 108.3 in January. That's the fourth straight gain and the highest reading since July. Italian consumer confidence also rose more than forecast, a report showed on Thursday.
China - China's central bank has cut the amount of money banks must keep in reserve, in an effort to boost lending and sustain economic growth.
The reserve requirements will fall by half a percentage point from 24 February, the People's Bank of China (PBOC) said. Analysts said this could add as much as CNY400bn (USD63.5bn) to the financial system.
The Chinese economy is showing signs of slowing, as Europe's debt crisis damages Chinese exports.
Japan - Standard & Poor's (S&P) has maintained Japan's AA- long-term sovereign credit rating but warns that the country's outlook remains negative.
The ratings agency says the country's rating is "supported by the country's ample net external asset position, relatively strong financial system, and diversified economy".
It also cites the yen's status as a key international reserve currency as a support for its sovereign rating.
"However, Japan's sovereign ratings are constrained by the government's weak policy foundations, large fiscal deficits, and high debt, as well as prolonged deflation and an aging and shrinking workforce," S&P adds.
U.S. - Profits in the Standard & Poor's 500 Index are rising faster than its price, leaving the gauge 9percent cheaper than it was in April 2011, even though U.S. equities climbed within 6 points of last year's peak.
Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to USD104.27 per share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69percent increase in earnings since 2009, compared with the 22percent rally in the index in the past two years.
"The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E ('Price-to-earnings ratio': a measure of the price paid for a share relative to the profit earnt per share) higher," said David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc, who oversees USD600bn in investment. "Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn."
Commodities - The price of oil has reached its highest level since May last year as concerns mount over Iran's nuclear programme.
Benchmark crude oil rose by USD1.67 to USD105.27 a barrel and Brent crude futures rose 44 cents to USD120.49 on Wednesday, marking the second day in a row of rises after Iran announced oil export bans on the U.K. and France on Sunday.
The E.U. banned Iran's oil imports from 1 July over fears that it is developing nuclear weapons. The E.U. wants to stem Iran's oil revenues as part of sanctions which will restrict its ambitions to develop a nuclear capability.
Spotlight on: what the latest Greek deal means for its private investors
Whilst most of the news headlines this week have been focussed on an agreement being reached between Greece and its public creditors (namely the European Central Bank and International Monetary Fund), it is the country's private investor creditors that have suffered the most.
However, as important as it has been to reach a conclusion of the long running Greek debt issue, it is the distinct differences in the way in which public and private creditors are to be treated that is causing some commentators to worry about the long term effect this may have on the availability of private investment in the future, something that cannot afford to be compromised at a time when governments around the world are at their most desperate to attract inward investment.
Under the agreement of the Private Sector Involvement Procedure (PSIP), it is likely that the public sector will not suffer any loss on the basis that they are prepared to provide further finance to Greece at some point in the future. Furthermore, and most importantly, a clear precedent has been set should other eurozone countries (or indeed Greece, again) find themselves in a similar situation in the future, hardly encouraging news for private investors that would normally take on government debt.
Under the agreement, private investors could lose as much as 60percent on the EUR206bn of Greek debt that they own, collectively.
If agreed, the PSIP would present private investors with new bonds with a face value that is half that of the existing bonds. The new bonds would have a longer maturity and pay an average interest rate of less than 4percent (compared with an estimated 5percent on the existing bonds).
The painful alternative to private investors, however, is that without the deal, which would reduce Greece's debt load by at least EUR120bn, the private investors' bonds would likely become worthless. Many of these investors also hold debt from other eurozone countries, which would also lose value in the event of a Greek default.
The agreement taking shape is a key step before Greece can get a second, EUR130bn bailout from its European Union partners and the International Monetary Fund, although there are other issues involved before Greece can get that aid. The EU and the IMF signed off on a EUR110bn aid package for Greece in May 2010, most of which has already been disbursed.
Greece faces a EUR14.5bn bond repayment on March 20, which it cannot afford without additional help.
Private investors hold roughly two-thirds of Greece's debt, which has reached an unsustainable level, almost 200 per cent of the country's economic output. By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 per cent by the end of this decade.
In return for the first bailout, Greece's public creditors, the International Monetary Fund, the European Union and the European Central Bank, have unprecedented powers over Greek spending. However, austerity alone will not fix Greece's problem. The country must also find ways boost its economic output, which at the moment is shrinking.
If a debt-exchange deal wasn't reached with private creditors and Greece was forced to default, the contagion fears it would very likely hit Europe's, and possibly the world's, financial markets.
It is the view of some, however, that the issue with the PSI procedure is that it does not reward public and private investors accordingly. The PSI precedent means that in the future, should a government debt crisis occur, private investors will be less willing to support troubled government debt, and speculators will be rewarded for being 'short' (i.e. betting against similar bonds).
Obviously this will impact the sustainability of government finances at precisely the time they would be seeking to generate confidence in their ability to service their debt obligations.

Friday, February 17, 2012

Economic Summary for the week ended 17 Feb 2012

Europe - World stocks fell on Thursday amid growing fears that the latest deal to resolve Greece's debt crisis is faltering.
Global markets rose briefly on Wednesday following news that China would keep investing in Europe and Greece would fulfill obligations imposed by its creditors. But those hopes waned after a European official warned Greece's assurances might be inadequate, possibly jeopardizing the latest infusion of money from its European partners.
Asian investors were put off by the lack of a clear outcome over Greece.

Europe - Two of the eurozone's biggest economies have fallen into recession, according to the latest economic figures.
Italy and the Netherlands both saw their economies shrink by 0.7percent in the fourth quarter, the second consecutive quarter of economic contraction. Germany had its first negative quarter since 2009 with a decline of 0.2percent, compared with the previous quarter.
But in France there was surprise growth of 0.2percent at the end of last year, attributed to healthy export growth.
Overall, the 17 nations that make up the eurozone saw economic activity shrink by 0.3percent in the fourth quarter. By comparison the U.S. reported growth of 0.7percent.
The eurozone has not slipped into recession as it reported growth of 0.1percent in the third quarter.

Japan - The Bank of Japan (BOJ) has made a surprise move to boost growth as the country's economy continues to struggle.
The central bank has announced it is to expand its asset purchase programme by JPY10tn (USD130bn). The move comes just a day after data showed that Japan's economy shrank by 2.3percent, more than expected in the last three months of 2011.
"The Bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets," the bank said.

U.S. - U.S. manufacturing grew for the second month in a row in January, according to figures released by the Federal Reserve.
A jump in auto production helped manufacturing grow by 0.7percent last month. December's growth figure was also revised upwards to 1.5percent.
"Some encouragement can be taken from the sharp upward revision to the performance in December, which underscores the turnaround in U.S. economic fortunes in recent months." said Millan Mulraine, from TD Securities in New York.

Greece - Eurozone finance ministers have demanded much greater oversight of Greece's economy in return for a EUR130bn bailout package.
The E.U. praised Greece's "substantial progress", but demanded more detail, including a full timeline for implementing the measures. A decision on the bailout is expected to be finalised on Monday.
Greece faces a looming deadline in mid-March when it needs to make repayments on a 14.5bn-euro bond, or face bankruptcy.

Russia - Russia's economy will remain dynamic in the first half of 2012 before losing steam in the final six months because the central bank will try to curb lending, Standard & Poor's (S&P) has said.
"Following 4.2percent growth in 2011, we think the slowdown will lead to GDP growth of about 3.5percent for the full year," Jean-Michel Six, chief economist for Europe at S&P, said in the report.
Russia, the world's largest energy exporter last year, returned to output levels achieved before a 7.8percent contraction in 2009 as the global financial crisis shackled credit flows and dampened demand for commodities. Prime Minister Vladimir Putin, who is seeking to return as president in a March 4 election, has said Russia must grow by at least 6percent annually to become one of the world's five largest economies in terms of purchasing power.

Commodities - Global demand for gold has been estimated at more than 4,000 tonnes, worth approximately USD206bn, during 2011, according to the World Gold Council.
According to the gold industry body, demand in 2011 was the highest level since 1997, driven by investment demand in India, China and Europe.
Marcus Grubb, managing director of investment at the World Gold Council, says: "What we can see from these 2011 figures is that there were two main factors driving the results: Asian growth and optimism on the one hand and western desire to protect assets against uncertainty on the other.

Spotlight on: Why Japan is a classic 'special situation'
Chris Taylor, manager of the Neptune Japan Opportunities fund, insists that despite its headlines, investment in Japan can offer investors access to a potential growth story that many are foolishly ignoring.
Japan can best be summed up as a classic 'special situation', whereby investing in Japan is all about investing in companies and not the country. The two have very different prospects.
Essentially, Taylor argues, investors do not appreciate the underlying fundamental and positive corporate changes that have occurred across Japan's industrial and commercial base, which make selective investment in Japanese stocks attractive.
They are still deterred by the market's poor historic performance, the assumed negatives of an overvalued currency and the country's ongoing structural problems.
The structural problems, worsened further by the tsunami, earthquake and nuclear plant triple disasters, are combined with little political will to tackle the problems.
By contrast, the Japanese corporate population has sought to escape their domestic negative demographic, fiscal and economic circumstances by investing very heavily outside of the OECD and has cut its operating costs within Japan to reduce its yen break even sales level.
So, despite the yen's sustained strength, these measures have enabled Japanese firms to dominate many worldwide sectors, which combined with their truly global multinational nature and their larger exposure to non-OECD countries than their U.S. or European rivals has lifted their overall profitability back to where it was before the credit crunch.
A significant number of Japanese firms remain undervalued as investors do not yet appreciate the substantial positive changes that have occurred over the last few years. These changes should underpin their prospects to generate positive returns

Friday, February 10, 2012

Economic Summary for the week ended 10th Feb 2012

Greece - Greek Prime Minister Lucas Papademos failed to secure the support of his coalition for a raft of new austerity measures, after more than seven hours of talks. He met officials from three parties on Wednesday night to try to secure a deal leading to a fresh bailout package. The main problem appears to be pension cuts worth EUR600m reportedly proposed in a draft text agreed by the troika and the prime minister. The document is also said to include a 20percent minimum wage reduction and the sacking of 15,000 public sector workers. The stalemate potentially further jeopardises the bailout of EUR130bn that Greece needs in order to meet its March debt obligations. Meanwhile, private sector lenders are negotiating with Greece to write off up to 70percent of the value of the money that the Greek government currently owes them.

Germany - Germany's trade surplus reached EUR158bn in 2011 on record exports that rose 11.4percent to top EUR1tn for the first time. The national statistics office also said that imports rose 13.2percent to reach an all-time high of EUR902bn. In 2010, the trade surplus for Europe's biggest economy was EUR155bn. German exports to countries outside the 27-nation European Union showed the strongest growth last year, up 13.6percent to EUR432.8bn. Exports to other European Union countries rose 9.9percent to EUR627.3bn. Of those, EUR420.9bn went to the eurozone bloc, 8.6percent rise.

India - India's economic growth is likely to dip below 7percent for the 2011-12 financial year, new government statistics show. The downward revision reflects the slowdown in mining, agriculture and manufacturing sectors. On Monday, ratings agency Standard and Poor's warned there could be a downgrade in India's investment-grade credit rating. Despite the growth forecast reduction, the main Sensex stock exchange has continued to perform well, up almost 15percent this year.

Global - Global stocks hit a fresh six-month high on Wednesday as hopes for a worldwide economic recovery were outweighed by the lingering eurozone fiscal crisis. The FTSE All-World equity index was up 0.4percent, its best level since the start of August. Wall Street's S&P 500 started the session with a gain of 0.1percent, leaving the benchmark index just 1percent short of its best close since the summer of 2008. The FTSE Eurofirst 300 advanced 0.3percent as miners and banks stocks demonstrated promise. The move higher in core bond yields and main equity gauges enforces the conviction among traders that better economic data from the world's two biggest economies, the U.S. and China, mean global commerce can absorb the fallout from the eurozone's debt woes. The yields on Italian debt remain at four-month lows, another sign, say some, that the chances of sovereign debt contagion, beyond Greece, and potentially Portugal, is becoming increasingly unlikely.

China - China's central bank pledged support for first-home buyers as a crackdown on real estate speculation threatens to trigger a property slump in the world's second biggest economy. Officials will increase support for construction of affordable housing and ensure that "loan demand from first-home families" is met, the People's Bank of China said. Policy makers aim to limit public discontent by making housing more affordable, with Vice Premier Li Keqiang, a possible contender to be the next premier, describing the distribution of low-cost homes as a key test of government credibility. At the same time, the ruling Communist Party aims to avoid the economic "hard landing" that Fitch Ratings recently said is a key global risk.

U.S. - Federal Reserve Chairman Ben S. Bernanke is holding to his pledge to keep borrowing costs close to zero at least through late 2014 even after unemployment unexpectedly fell to a three-year low this week. Bernanke told the Senate Budget Committee that the decline in the jobless rate to 8.3percent in January veils weaknesses in the U.S. labour market. Fed officials last month said they didn't expect such progress until the fourth quarter. "It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work," Bernanke said in response to a lawmaker’s question during his testimony. "There are also a lot of people who are either out of the labour force because they don't think they can find work" or who have taken part-time jobs.

Spotlight on:  Value in Equities

Investors should have 100 percent of investments in equities because of valuations and higher returns than bonds, said Laurence D. Fink, chief executive officer of BlackRock Inc., the world's largest money manager.

Investors who seek the safety of government bonds will have minimal returns and will not be able to meet their needs with the U.S. Federal Reserve expected to keep interest rates low, said Fink, who in 1988 co-founded the New York-based manager with USD3.5tn of assets. By contrast, equities are trading at the lowest valuations in 20 or 30 years.

"I don't have a view that the world is going to fall apart, so you need to take on more risk," he said in Hong Kong on Wednesday. "You need to overcome all this noise. When you look at dividend returns on equities versus bond yields, to me it’s a pretty easy decision to be heavily in equities."

The Federal Open Market Committee last month pledged they would keep borrowing costs low through at least late 2014 to boost the economy and put more Americans back to work, extending a previous end date of mid-2013. Investors pulled money from funds that buy equity stocks for a fifth year in 2011.

Fink said in a May 31 interview he's more bullish on equities than bonds because companies are benefiting from the weak dollar and have surplus cash to invest for growth. While equities around the world were off to the best start in 18 years, the S&P 500 Index gained just 1.2percent since Fink's prediction last year, compared with the 6.8percent return in U.S. government bonds, according to Bank of America Merrill Lynch indexes.

Meanwhile, the MSCI All-Country World Index rallied 5.8percent last month, topping gains in commodities and handing investors January's best returns in almost two decades, according to data compiled by Bloomberg.

"I'm very bullish on the market," he said, citing the increased liquidity from the U.S. and European central banks. "I think the market is focusing too much on noise like Greece. And yet we’re going to have a lot of volatility and we’re going to have to live with it."

Thursday, February 2, 2012

Economic Summary of the week ending 02 Feb 2012

Global - Strategists at some of the world's biggest banks are retracting on their bearish ('downbeat') forecasts, following the best start to a year for global stocks since 1994 and gains of more than 7percent in emerging-market currencies.
Just two weeks after saying that investors should "remain cautious," Larry Hatheway, the chief economist at UBS, raised his recommendations on global shares and high-yield bonds in a note to customers entitled, "Wrong, but not too late.", and Benoit Anne, the global head of emerging-markets strategy at Societe Generale, said their estimates for developing nations were proven wrong.
The MSCI All-Country World Index climbed 5.7percent in January, surprising strategists at Bank of America, Goldman Sachs and Barclays who had forecast first-half losses because of Europe's debt crisis. JPMorgan Chase and Citigroup, which predicted the rally in stocks, say it will continue as the U.S. housing market rebounds and China eases lending restrictions to bolster economic growth.
"In hindsight, everybody was so negative at the end of last year, there was nowhere for the market to go but up" said Mary Ann Bartels, the New York-based head of technical and market analysis at Bank of America.
Global - The World Trade Organisation's (WTO) appeals body has upheld a ruling that China restricted exports of certain raw materials to protect its domestic manufacturers.
China had appealed a WTO ruling in July that it had broke global trade rules.
The U.S., Europe, and Mexico argued that China's export block on such things as magnesium and bauxite drove up prices. China had argued that its export limits on nine raw materials were needed to protect the environment.
In a statement, the appeals body said China must now "bring its export duty and export quota measures into conformity with its WTO obligations".
Europe - Unemployment in the eurozone hit a record high at the end of last year, the Eurostat agency has said.
The jobless rate in the 17 countries that use the single currency was 10.4percent in December, unchanged from November's figure which was revised up from 10.3percent.
Some 16.5 million people were out of work in the eurozone in December, up 751,000 on the year before.
The highest unemployment rate remains in Spain (22.9percent), while the lowest is in Austria (4.1percent).
Greece - Greece has rejected German proposals for the E.U. to hold power over its budget.
Culture Minister Pavlos Yeroulanos said that it would be "impossible" for Greece to cede control of its tax and spending powers. There are concerns that the measures Greece has taken to cut its budget deficit have not gone far enough.
Meanwhile, Greece and its private creditors are close to a deal to cut the country's debt levels. Charles Dallara and Jean Lemierre, representing the creditors, said on Saturday that they were "close to the finalisation" of a deal that would see banks and investors write off approximately 50percent of the money they are owed.
Japan - Japan's industrial output rose more than expected in December as manufacturers recovered from the aftermath of the floods in Thailand.
Factory output rose 4percent from the previous month, the Ministry of Economy, Trade and Industry said, compared with a 2.7percent decline in November.
The rebound was led by a recovery in car and electronics manufacturing.
However, Japan's manufacturing has yet to see full recovery. Compared to a year earlier, industrial output fell 4.1percent.
Brazil - Brazil's real rallied to the strongest level in almost three months on Wednesday as signs of increased manufacturing output worldwide spurred optimism about global growth and fuelled demand for higher-yielding assets.
Manufacturing in China, Brazil's largest trading partner, rose last month as the world's second-biggest economy withstood weaker exports driven by the European debt crisis. A gauge of manufacturing in the euro area beat estimates in January while a report on Thursday showed U.S. factory output grew at the fastest pace in seven months. The data fuelled bets of increased demand for Brazilian exports such as iron ore and sugar, said Felipe Brandao, emerging-markets strategist at Icap do Brasil.
"The market is being influenced by the positive impact of international equities and a more optimistic climate because of this data in Europe and China," Brandao said "This data is driving stocks this morning and benefiting risk assets."
Commodities - Gold extended gains on Thursday, rising to its highest level in nearly two months, as the euro firmed on upbeat global manufacturing data and expectations that a Greek debt deal to avoid a default was close at hand.
Investors now await the release of U.S. weekly jobless claims data to gauge the health of the world's largest economy, after higher January factory activity was reported for China, the U.S. and Germany.
Gold added USD4.74 an ounce to USD1,748.44 an ounce, having earlier risen to a high of USD1,751.30 an ounce, its strongest since December 8. Gold remains below a lifetime high around USD1,920 an ounce achieved last September.
Spotlight on: the case for India
Its poor absolute market performance and equally poor relative economic performance has dampened enthusiasm for India. However, many believe that this should lead to investment opportunities opening up, not closing down.
A 20percent loss (in addition to a weak rupee) for Indian equities in 2011 represents their worst performance in decades. It was also branded the most disappointing BRIC nation by Goldman Sachs chairman Jim O'Neill, highlighting a poor record in productivity, foreign direct investment and reform. Rather than writing off the world's most populous country, he says serious leadership is required to ensure India achieves China-style development.
On top of this, India's growth estimates have declined in recent months, largely due to its high fiscal deficit, weak rupee and ongoing inflation fears.
But advocates of the region suggest that the prospects for the market in 2012 and beyond are far healthier than these headline-grabbing numbers would suggest.
What were previously full valuations have recently reversed and many managers are seeing better opportunities now than for some time. There are also positives on the macroeconomic front with tightening interest rates, predicted to be cut further, and monetary policy. Inflation too is expected to fall, to around 6.5percent by the end of Q1.
Some fund managers are pinning hopes on the positives arising from weak equity performance with Barings, for example, recently launching an India equity fund citing "an opportunity for nimble investors, with valuations as low as they have been since late 2008".
The long-term opportunity and biggest potential for India, as is being witnessed in China, comes from its demographics, particularly its burgeoning young workforce, in a decade, its population will be greater than China's.
While not ignoring the risks that remain with an investment in India (its bureaucracy, a high fiscal deficit, weak rupee, ongoing inflation fears etc) many feel that the negative numbers that were produced in 2011 will not automatically follow through to 2012 and beyond. It is the view of many long-term strategists that if investors can be both nimble and long-term minded, India may well be worth considering