Saturday, February 23, 2013

Economic Summary for the week ended 21st Feb 2013

Japan - Japan's monthly trade deficit hit a record in January after its recent aggressive monetary policy stance weakened its currency sharply. Exports rose in January, the first jump in eight months, as its goods became more affordable to foreign buyers.
However, a weak currency also pushed up its import bill resulting in a monthly trade deficit of 1.6tn yen ($17.1bn), a 10% jump from a year ago.
Meanwhile, output data also indicated that things may be starting to change. Japan's shipments to China rose by 3% in January from a year earlier, the first rise since May.
At the same time, exports to the U.S., the world's biggest economy also jumped 10.9% further, adding to hopes of a recovery in the sector. Meanwhile, the pace of decline in exports to the European Union also slowed during the month.
There are hopes that as shipments to key markets recover and the yen continues to remain weak, Japan's export sector may see a sustained recovery.
Japan - Japanese Prime Minister Shinzo Abe plans to ask U.S. President Barack Obama to approve shale gas exports to Japan, which has relied on fossil fuels to keep the world’s third biggest economy running after the 2011 Fukushima nuclear disaster.
Japan, the world’s biggest importer of liquefied natural gas, has increasingly turned to fossil fuels after most nuclear reactors were shuttered in the wake of Fukushima.
Japanese companies are investing in U.S. shale gas projects, which could begin exports from 2017 if they win government approval.
Importing U.S. gas would boost Japanese utilities’ bargaining power in negotiations with suppliers who benchmark their prices against more-expensive oil, said Reiji Ogino, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. Utilities have sought government approval to raise electricity prices and pass on the burden of higher fuel bills to consumers.
Global - The economies of the Organisation for Economic Co-operation and Development (OECD) contracted by 0.2% in the last three months of 2012.
It was the first such decline for the group of developed countries since the beginning of 2009.
The eurozone was the biggest factor, with a 0.6% contraction. Japan and the U.K. shrank too and the U.S. saw no growth. The OECD's figures highlight the continuing weakness that has afflicted the developed world.
At no stage since the financial crisis have developed economies grown very strongly. It has never been a convincing recovery.
But the figures for the final quarter of last year actually show a decline for the first time in nearly four years for the OECD as a whole.
U.K. - Britain's benchmark, the FTSE 100 equity index extended gains on Wednesday to rise to new five-year highs, and breached a key psychological level which some traders said could induce moves higher.
The FTSE 100 was up by 0.4% at 6,401.79 on Wednesday, surpassing the key 6,400 point level. The stock market extended earlier gains after minutes from the Bank of England signalled a greater likelihood of more monetary stimulus measures, which have boosted equity markets around the world.
The FTSE 100 last traded above the 6,400 point mark in late May 2008.
China - China’s foreign direct investment fell for an eighth month in January, a sign that the recovery in the world’s second-largest economy has yet to revive confidence among overseas companies.
Inbound investment dropped 7.3% from a year earlier to $9.27bn, the Ministry of Commerce said. Non-financial outbound investment rose 12.3% to $4.91bn, the ministry data showed. China’s economic data in the first two months are distorted by the timing of the weeklong Lunar New Year holiday, which fell in January last year and February this year.
Rising employee and land costs have diminished China’s attractiveness as a destination for foreign investors, with labour-intensive manufacturers leaving for other Asian countries, HSBC Holdings Plc said in a report last month. Inbound investment dropped 3.7 percent last year as economic expansion was the weakest since 1999.
“Foreign enterprises are saying, ‘OK, China’s not growing as fast as in the past, maybe we should pull back a little bit,’” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said. “The big picture is that Chinese growth potential is being lowered by less appetite by foreign businesses to move their operations into China.”
At the same time, inflows are likely to rebound by 4.5% this year as businesses realize growth is improving and the nation won’t have a “hard landing,” Kowalczyk said.
Commodities - Gold traded little changed near a six-month low in London as investors weighed signs of economic improvement against stronger physical bullion demand, before the U.S. central bank releases minutes of its latest meeting.
“Bullion’s safe-haven properties as well as its traditional use in inflation hedges are irrelevant at this point,” Andrey Kryuchenkov, an analyst at VTB Capital in London, wrote in a report. “The market’s attention is set to turn to the Federal Open Market Committee’s January minutes.”
Spotlight on: Fund Manager global allocation survey
Global fund managers’ expectations of stock market returns in the U.S. have fallen to their lowest since 2008, according to research by Towers Watson.
The professional services firm’s latest investment manager survey shows that asset allocators expect U.S. equities to deliver returns of 7% during 2013. This is down from the expected 8% in 2012 and is the lowest level recorded since the poll’s inception in 2008.
Equity return expectations have also fallen for Australia, moving from 7% to 6%, but rose in all other major regions.
Investors expect the U.K. and Japanese stock markets to advance 6% in 2013, both up from 5%, the eurozone is tipped for 7% returns, up from 6%, and China is expected to return 10%, up from 7.8%.
But despite their muted outlook for the U.S., this country is the preferred investment target for global fund managers. Asset allocators have a preference towards U.S. and China and away from the eurozone.
Towers Watson global investment committee chairman Robert Brown says: “There are some positive economic signals coming out of the U.S. which, even though driven largely by government policies, seem to be reflected in managers’ view that the U.S. is the region with the most rewarding investment opportunities in 2013, followed by China, the eurozone and frontier markets.”
The survey also reveals that fund managers have adopted a stance of “guarded optimism” with many expecting to keep their portfolio risk levels the same or carry out modest increases during 2013. Investors think equity volatility will sit between 15% and 20% in the major economies this year, which is above the historical average but “somewhat lower” than the range seen in recent years.
Brown says: “Volatile markets and heightened risk awareness continue to make asset allocation very challenging as investors balance priorities like long-term de-risking, short-term market opportunities, rebalancing and maintaining a strategic asset allocation mix.
Towers Watson agrees with the market view that government bonds do not appear to be “great value” at the moment, after yields dropped on the back of central bank policy and safe-haven flows, and argue that equities seem to be better value.
“However, it is challenging to know what to do about it when the goal for many funds is to reduce risk overall and diversify from existing equity holdings,” Brown adds.
“So many funds are buying fewer bonds than before and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”

Sunday, February 17, 2013

Economic Summary for the week ended 15th Feb 2013

The Equity Bull Market
Global equity prices this year have added to their late 2012 gains, with many stock markets hitting new cyclical highs.
Some market participants are now claiming that complacency has set in and, thus, stocks are primed for a tumble. While equities are becoming overbought on a short-term basis, the Macro Research Board Risk Appetite Indicator is still positive on a 6-12 month horizon, and expects stock bulls to be well rewarded, while bond bulls face a disappointing year ahead.
Retail investment flows and sentiment gauges have a good record of flagging equity market turning points, as extremes occur just as the tide is set to turn. To this end, a surge of inflows to stock mutual funds in the US during January has raised the fear that the bull run is nearing an end.
Over the past year, there have been near-record outflows from equity funds, while bond funds have received near record inflows over the same period. While there has clearly been a lift in sentiment recently, one month does not make a trend and it is premature to claim investors are now excessively optimistic and thus "fully invested". Rather, the Macro Research Board Risk Appetite Indicator has risen only to neutral levels, implying that there are no technical roadblocks to higher equity prices.
The equity advance should be choppier than in recent months with markets becoming overbought, but valuations remain compelling (and still very negative for government bonds). Moreover, the fundamental backdrop is slowly improving, with US and emerging economies regaining momentum, and global manufacturing surveys recovering to positive territory in January.
Monetary policies around the world will remain hyper-accommodative until the global economic expansion is decisively back on track. Therefore, there is a compulsive argument that investors should consider staying cyclically positive on stocks, especially relative to bonds.
Asian Stocks
Asian stocks rose after the Bank of Japan maintained its asset-purchasing programme before its governor steps down next month. An unexpected contraction in Japan's economy fuelled speculation policy makers will boost efforts to end deflation.
The MSCI Asia Pacific Index climbed 0.3 percent to 133.64 on Wednesday in Tokyo. About four shares advanced for each three that fell. Hong Kong's market reopened on Thursday while China, Taiwan and Vietnam remain shut for the Lunar New Year.
"Once the new governor takes over, we’ll see an acceleration of the pace of monetary easing," said Shane Oliver, Sydney-based head of strategy at AMP Capital Investors Ltd. "Valuations remain reasonable and monetary policy will remain accommodative. We're starting to transition into a phase where global growth picks up and that transfers through to earnings."
Bank of Japan Governor Masaaki Shirakawa and his colleagues left monetary policy unchanged, while raising their assessment for the economy. Shirakawa and his two deputies step down on 19 March.
EU Transaction Tax
The European Union will propose a far-reaching tax on financial transactions which could be collected worldwide as soon as 1 January next year by the 11 nations that have so far signed up to participate.
The plan by the EU in Brussels, to be outlined shortly, invokes "residence" and "issuance" ties to firms in participating countries, in a bid to prevent traders from escaping the levy by trading outside the tax's zone. The plan says that to escape the proposed tax entirely, firms in other nations would have to entirely cease financial-services business with the 11 EU nations involved.
The proposal marks a new stage in the EU's efforts to raise revenue from the financial sector and curb what it sees as a "patchwork" of local levies. Like a prior, failed proposal for all 27 EU nations, Thursday's plan would set a rate of 0.1% for stock and bond trades and 0.01% on derivatives trades.
The EU estimates the arrangement could raise EUR 30 billion (USD 40 billion) to EUR 35 billion per year. It would need approval by the 11 participants to proceed. All EU nations can sit in on the talks and have the option to join.
The proposals would exclude certain types of trading from the scope of the tax: day-to-day transactions by individuals and non-financial firms; primary offerings of stocks and bonds; and trades with central banks, the European Stability Mechanism and other official institutions. According to EU documents, it also would exclude trades in units of collective investment funds along with certain restructuring operations.
Repurchase agreements would be included, though they would be taxed differently from trades with an outright buyer and seller.
The plan also would include pension funds. The EU intends to argue that a well-designed tax could make pension funds safer by encouraging them to make untaxed purchases on the primary market and hold securities to maturity.
When EU ministers last month allowed the 11 willing nations to proceed with transaction-tax negotiations, the spillover effects on pension funds were a concern.
The Netherlands will wait before deciding whether to sign up, said Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area finance ministers. "One of the criteria for us is our pension funds," he said. "It's very important that these pension funds are not harmed by a new tax."
A weighted majority of EU finance ministers backed the measure in a Brussels meeting last month. The U.K., home to the Europe's largest financial centre, abstained along with Malta, the Czech Republic and Luxembourg. The Confederation of British Industry said yesterday that the tax plan's extended scope will require extensive review.
"The Commission’s FTT proposals are now significantly different from its initial plans, so the impact on growth and jobs must be assessed before proceeding," Matthew Fell, CBI director for competitive markets, said in a statement.
While the U.S. will study the proposal, it doesn't support the European financial transactions tax, according to a U.S. Treasury Department spokeswoman. The tax would harm U.S. investors who bought affected securities, a concern that Treasury officials have raised with their European counterparts, the spokeswoman said.
Demand for Gold
Gold demand rose 3.8 percent in the fourth quarter as Indian purchases jumped, narrowing the first drop in annual usage in three years, the World Gold Council said. India remained last year's biggest buyer, ahead of China.
Global demand gained to 1,195.9 metric tons in the quarter, the most ever for an October-to-December period, from 1,151.7 tons a year earlier, as Indian consumption surged 41 percent, the London-based industry group said today in a report. Jewellery usage rose 11 percent to the highest since the first quarter of 2011, leaving total demand for 2012 down 3.9 percent at 4,405.5 tons. That’s still 15 percent more than the five-year average.
Purchases in India, which the council had expected to be replaced by China as the top buyer, rose toward year-end on seasonal buying and expectations of higher import duties, it said. While holdings in gold-backed exchange-traded products reached a record in December as prices posted a 12th straight annual gain, the metal failed to set an all-time high for the first time since 2007. China's economic growth accelerated for the first time in two years in the fourth quarter.
"The real driver was the rise in jewellery, and within that you saw India being key" in the fourth quarter, Marcus Grubb, managing director of investment research at the council, said. "China's economy is now re-accelerating quite strongly into January and February. Both Indian and Chinese demand will be higher in 2013."
Gold for immediate delivery traded at USD 1,644.65 an ounce in London on Wednesday, down 1.8 percent this year. Prices averaged a record USD 1,717.86 in the fourth quarter, up 2.1 percent from a year earlier and 3.9 percent higher than the third quarter. They averaged an all-time high USD 1,669 in 2012, boosting the value of last year's demand to USD 236.4 billion, the most ever.
Spotlight on Current Fund Manager Sentiment
Confidence in a strong global economic outlook has consolidated while investors have indicated that they see support from current equity valuations after the recent rally, according to the Bank of America Merrill Lynch Fund Manager Survey for February.
A net 59 percent of investors believe the global economy will strengthen in the year ahead, in line with the reading in January, which marked four consecutive months of rising sentiment. The outlook for profits has improved with a net 39 percent of the panel saying that profits worldwide will improve in the coming 12 months, up from a net 29 percent in January. The desire for higher capital expenditure is strong with 48 percent of investors saying that capex is the best use of corporate cash – the highest reading since April 2011.
Investors have indicated that they continue to perceive value in equities in light of strong market performances of early 2013. A net 13 percent of global investors still say that equities are under-valued. At the same time, a net 82 percent say bonds are overvalued, the second-highest level recorded by the survey with the highest coming at the peak of the European sovereign bond crisis in 2012.
Risk appetite has also remained steady month-on-month. Average cash balances in portfolios remain at 3.8 percent, though the net percentage of investors overweight cash has fallen to 2 percent this month from 8 percent in January, the lowest reading since February 2011.
"The continued high level of optimism is a concern and markets may be vulnerable to bad news, but valuation support suggests any correction should be short and shallow, and our core 'Great Rotation' theme remains in play," said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research. "Investors are striking a balance between the optimism over growth and caution over investment decisions. Investors have so far resisted taking an exuberant stance," said John Bilton, European investment strategist.
Allocations towards equities have held at the highs reached in January. A net 51 percent of asset allocators remain overweight global equities. Within equities, sectoral allocations highlight a bias towards a measured easing of risk appetite with a shift towards defensive assets.
Pharmaceuticals, a traditional defensive sector, has returned to the number one sectoral pick for global investors, having been third in the pecking order a month ago. The proportion of investors overweight the sector rose to 27 percent from 11 percent in January.
Cyclical sectors become less popular. The biggest month-on-month faller was Technology, which saw a negative 12 percentage point swing in the number of investors overweight the sector. Materials also suffered a double-digit fall in the percentage of overweights. The number of respondents overweight Technology, Industrials and Energy also fell.
Japanese equities continue to benefit from a positive shift in sentiment by global investors. A net 7 percent of asset allocators say they are overweight Japanese equities this month, up from a net 3 percent in February. In December, a net 20 percent were underweight Japanese equities.
Local sentiment and risk appetite appears strong. A net 29 percent of Japanese investors responding to the Regional Fund Manager Survey say they are underweight cash, up from a net 5 percent one month ago. Automotives, Technology and Banks are the three most popular sectors domestically.
Global investors have indicated that their positive view towards Japan will continue. A net 21 percent of the panel says that the outlook for corporate profits in Japan is more favorable than for anywhere else, up from a net 4 percent in January. Accordingly, a net 9 percent says that Japan is the region they would most like to overweight. Two months ago, a net 17 percent said Japan was the region they most wanted to underweight.
This positive outlook comes at a time when investors see the yen as weakening, despite the fact that the currency is close to fair value based on the IMF's definition of currency valuation. Four out of ten respondents to the global survey say that USD/JPY rising to 100 is likely to happen before a U.S. debt downgrade, a Spanish bailout or gold breaking through USD 2,000 per ounce.
An overall total of 251 panelists with USD 691 billion of assets under management participated in the survey from 1 February to 7 February.

Wednesday, February 6, 2013

Economic Summary for the week ended 1st Feb 2013

Greece - Greece's finance minister believes that the worst is over for his country. "There is definitely a glimmer of hope; light at the end of the tunnel," Yannis Stournaras said this week.
As reforms were rushed through and a massive austerity package passed late last year, Greece secured a significant amount of bailout money from its international creditors.
"The probability of Greece leaving the euro - Grexit - is now very small", he told the BBC.
"We have managed to turn the economy around. From the markets, there's much more optimism. Deposits are coming back to banks, the government is paying its arrears to the private sector and there is a change in how Europe sees us. So all of the leading indicators are positive. We are two-thirds of the way towards our target. So people can have hope."
U.K. - London’s leading share index is on course to record its best January performance since 1998, despite fears the U.K. economy could fall into a triple-dip recession later this year.
The FTSE 100 has risen 5.7% so far this month, driven higher by upbeat U.S. earnings figures. The ‘great rotation' out of bonds has been one of the main drivers behind the FTSE's strong start to the year, despite ongoing economic weakness.
The last time the FTSE 100 reached such a level in January was 1998, when the leading index rose from 5,135 to 5,458, representing a 5.9% gain.
Germany - German unemployment unexpectedly declined in January, adding to signs that Europe’s largest economy is gathering pace.
The number of people out of work fell a seasonally adjusted 16,000 to 2.92 million, the Nuremberg-based Federal Labor Agency said.
The Bundesbank said last week the economy appears to be recovering from its fourth-quarter slump, when gross domestic product may have dropped as much as 0.5%. Confidence among entrepreneurs and investors rose more than economists estimated in January and a gauge of activity in service industries climbed to a 19-month high.
Russia - Russia’s economy probably grew last year at the weakest pace since a contraction in 2009 and is set to slow further, casting doubt on President Vladimir Putin’s drive for an investment-led acceleration in output.
Gross domestic product expanded 3.6% in 2012, down from 4.35% the previous two years, according to the median of 18 estimates in a Bloomberg survey. The Economy Ministry estimated growth at 3.5%. The Federal Statistics Service in Moscow will report the data this week.
The slowdown highlights the challenges facing the world’s largest energy exporter as oil prices are forecast to stagnate this year and Europe’s stumbling economy saps demand for Russian commodity exports. The government began an open campaign this month to push the central bank to lower rates, a step the regulator is resisting because of concerns the economy is already growing near its potential.
“We need a government that is more proactive on the reform side,” Peter Westin, chief strategist at Aton Capital in Moscow, said. “The central bank is doing a good job, but the government is definitely behind the curve when it comes to what needs to be done to stimulate the economy.”
Argentina - The tumble in Argentine stocks that sent valuations to an almost four-year low has spurred Morgan Stanley Investment Management and BlackRock to buy.
Timothy Drinkall, whose Morgan Stanley Frontier Emerging Markets Portfolio rose 26% in the past 12 months, said he bought Argentine shares last year after avoiding the country altogether earlier in 2012. By Dec. 31, the nation’s equities accounted for a larger percentage of holdings than were in the fund’s benchmark index.
The MSCI Argentina Index of five companies with operations in the South American country has rebounded 16% this year following a 39% fall in 2012 that was sparked by President Cristina Fernandez de Kirchner’s seizure of the nation’s largest oil company and restriction of imports and capital flows.
“Valuations are at extreme low levels,” said Drinkall, whose frontier fund beat 98% of peers tracked by Bloomberg during the past 12 months. “Sometimes for a market to adjust upwards, things just have to be less bad.”
Philippines - The Philippines has posted better-than-expected economic growth, boosted by the strong performance of the country's services sector.
Its economy grew 6.6% in 2012, the statistical bureau said, beating the government's target of 5 to 6% growth. The bureau added that a "substantial improvement" in manufacturing and construction sectors also aided growth.
Strong domestic demand has helped cushion the impact of a global slowdown on the Philippines' economic growth.
"The pace of Philippine growth has consistently surprised on the upside in the past year, as the economy displays resilience against global headwinds and is driven primarily by domestic engines," said Radhika Rao, an economist with Forecast Pte.
Spotlight on: The U.S. economy heading for recession, or a rebound?
The headline news from the U.S. this week was that gross domestic product had contracted in the fourth quarter. However, many economists and market commentators suggest that the headline does not necessarily tell the full story and that in fact, the U.S. economy is due more of a rebound than a recession.
The economy will bounce back in the current quarter after cuts to defence spending and reducing inventory growth adversely affected gains for consumers and businesses in the final three months of 2012, according to economists at JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley. Businesses probably will rebuild stockpiles while consumers and companies keep on spending.
“It would be a mistake to view this drop in GDP, driven by temporary corrections in defence spending and inventories, as a possible warning of recession,” Nigel Gault, chief U.S. economist for IHS Global Insight in Lexington, Massachusetts, said. “We expect GDP growth to rebound to around 2% in the first quarter.”
The expansion will stay on course thanks to a “mounting” housing recovery, a steadily improving job market and reviving demand for U.S. exports, said Mark Zandi, chief economist for Moody’s Analytics Inc. He sees GDP expanding 2.1% in 2013, after rising 2.2% last year.
The 0.1% decline in output in the final three months of the year was the economy’s worst performance since the second quarter of 2009, when the U.S. was still technically in a recession, according to figures from the Commerce Department in Washington.
After stripping out the inventory and defense data, the“tone of the report was positive,” said Peter Newland, an economist in New York for Barclays Plc. Consumer spending growth picked up to 2.2% from 1.6% in the third quarter, while business investment accelerated.
The steep drop in military outlays and restrained inventory building last quarter partly was a payback for the previous three months, when they both added to GDP. The slowdown in stockpiling also stemmed from supply-chain disruptions from superstorm Sandy.
Taking the two quarters together puts the “underlying” growth rate at about 1.5%, economists David Greenlaw and Ted Wieseman at Morgan Stanley in New York said in a note. That’s the pace they forecast for the first three months of 2013.
“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the Federal Reserve said at the conclusion of a two-day meeting in Washington this week. “Household spending and business fixed investment advanced, and the housing sector has shown further improvement.”
An improving job market and rising home prices should alleviate the effects of higher payroll taxes. Government figures to be released on Friday are projected to show that employers added 165,000 workers to payrolls in January after a gain of 155,000 in December, according to the median forecast of economists surveyed by Bloomberg.
The housing revival is also a plus for the economy. Homebuilding climbed 11.9% last year, the best performance since 1992.
“In the United States, we’re becoming increasingly optimistic,” Michael DeWalt, a spokesman for Peoria, Illinois-based Caterpillar Inc. , the world’s largest maker of construction and mining equipment, said. “We expect U.S. housing industry to help the economy in 2013.”
The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5% in the year through November, the biggest gain since August 2006, according to data released on Jan. 29.
Furthermore, a strengthening world economy also should bolster American exporters.
China reported economic growth accelerated in the fourth quarter for the first time in two years, raising prospects that a regional lift will fuel demand for U.S. goods. Developing nations are projected to expand 5.5% in 2013, more than last year, while Europe stabilizes, according to projections from the World Bank.