Friday, September 20, 2013

Economic Summary for the week ended 19th Sep 2013

Global - Global stocks jumped to a five-year high on Thursday, while bonds and metals rallied after the Federal Reserve unexpectedly refrained from reducing U.S. monetary stimulus. The Malaysian ringgit strengthened the most since 1998.
The MSCI All Country World Index climbed 1.2%, set for the highest close since May 2008, as Asia’s benchmark index gained 2.4% and the Stoxx Europe 600 rose 1%. Standard & Poor’s 500 Index futures added 0.2%.
Many investors had speculated that the Federal Reserve would begin reducing its $85bn bond-buying plan this month. But in a statement released after its two-day policy meeting, the Fed said there was no fixed timetable for it to begin scaling back, or "tapering", its stimulus.
The central bank said it was taking a more cautious stance because of an "elevated" unemployment rate and concerns about the U.S. economic recovery. "The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," it said.
The Fed also cut its forecast for growth this year to between 2.0% and 2.3%. That compares to a June estimate of between 2.3% and 2.6%.
Japan - Japan’s exports rose the most since 2010 in August, boosting Prime Minister Shinzo Abe’s growth drive even as rising energy costs extended the streak of trade deficits to the longest since 1980.
Exports rose 14.7% from a year earlier, the sixth straight advance, a Finance Ministry report showed in Tokyo.
A surge in exports to the U.S., along with a rebound in shipments to China in the wake of bilateral tensions last year, are offering momentum to Japan as it prepares for the first sales-tax increase since 1997. Rising competitiveness from the yen’s 20% drop against the dollar in the past year also has helped manufacturers including Panasonic Corp. as they cope with higher energy costs with the nation’s nuclear industry shuttered.
“We are finally seeing a clear recovery in exports, led by a weak yen and a moderate global recovery,” said Takeshi Minami, chief economist at the Norinchukin Research Institute in Tokyo.
India - India has seen its growth forecast dramatically reduced to 5.3 % for the current fiscal year by the prime minister’s economic advisory panel, says Reuters.
GDP has been brought down to 5.3% from an original estimate of 6.4%. The lower estimate is closer to figures from India’s central bank and economists who have already predicted 5% GDP growth for the fiscal year.
The panel’s revised figure remains higher than GDP growth than the 5% witnessed over the fiscal year 2012/13.
India’s economy has battled decade-low growth along with a record current account deficit and a steep fiscal shortfall already this year, according to Reuters.
The prime minister’s economic advisory council has also warned that keeping India’s fiscal deficit within the budgeted target of 4.8% of GDP could prove difficult, while finance minister Palaniappan Chidambaram has stated that the target will not be exceeded.
Europe - The European Central Bank (ECB) is concerned that investors could be spooked by next year’s bank balance-sheet reviews and stress tests unless their results are carefully timed.
As the ECB prepares to take over supervision of all euro-area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch last month, the bank will start with a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based European Banking Authority.
Now central bankers are wrestling with how to move through the exercise without releasing conflicting numbers at different times, particularly for banks that aren’t in good health.
Commodities - Gold fluctuated between gains and losses after jumping the most in 15 months following the Federal Reserves’ unexpected decision to reduce the pace of monthly bond purchases.
Gold for immediate delivery rose and fell as much as 0.4% before trading at $1,364.42 an ounce, taking this week’s gain to 2.8%. Prices added 4.1% on Wednesday, the most since June 1, 2012, rebounding after a drop below $1,300 for the first time in six weeks.
Spotlight on: Fund Manager confidence highest in almost 4 years
A net 72% of global investors expect the world economy to pick up over the next 12 months, according to August’s Bank of America Merrill Lynch Fund Manager Survey.
This number shows a “surge” from the 52% of respondents in July and is the highest amount in nearly four years.
More investors are bullish on the eurozone recovery than last month too, with 88% of European fund managers anticipating strengthening in the region by the end of 2013.
BofA Merrill Lynch European investment strategist John Bilton says: “The current earnings season shows global recovery reflected in European companies’ performance. With the eurozone the most undervalued major market by far, optimism on the region’s equities should be sustained.”
Specifically, sentiment towards China has improved within this time, with 32% of investors in August expecting China economic growth to be weaker, compared to the 65% from the previous month.
Sentiment to emerging markets continued to suffer in August, with EM equity exposure falling to its lowest level since November 2001 at 19% underweight.
BofA Merrill Lynch Global Research chief investment strategist Michael Hartnett says: “While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favour emerging markets offer some enticing opportunities to deploy these balances.”
In terms of portfolio weightings, the percentage of investors overweight equities crept up to a net 56% in August while those underweight to bonds increased to a net 57%.
In terms of regional weighting, there was a decrease in exposure to Japan equities from 27% in July to 19% in August.
August also saw the third largest overweighting to US equities in ten years, coinciding with 72% of investors favouring the US dollar over a 12-month horizon.
And stocks in the eurozone saw their highest allocation since January 2008, with 17% of asset allocators saying they are overweight to the region, a further 20% said they would overweight the market on a 12-month view.
The month also saw the highest exposure to UK stocks since December 2002, with this being the first overweight reading since February 2003.

Saturday, September 14, 2013

Economic Summary for the week ended 11th Sep 2013

India - The Indian prime minister's economic advisory council has lowered the growth outlook for the current financial year. It now expects the economy to expand by 5.3% this year, down from its earlier projection of 6.4% growth.
The new growth outlook is in line with the projections of the central bank and many other economists.
The council also warned that keeping the fiscal deficit within the budget target of 4.8% of gross domestic product (GDP) "could be a challenge".
In its latest economic outlook, the council said that the fiscal deficit during the first four months of the current financial year had already reached 62.8% of the budgetary provision for the full year.
China - China's economy is going through a "crucial" stage of restructuring, says the country's Premier, Li Keqiang.
At the World Economic Forum in the Chinese port city of Dalian, Mr Li pledged to improve relations with foreign firms. He stressed that multinationals would get "equal treatment" with state-owned enterprises.
He added that China was well-placed to hit a growth target of 7.5% this year, despite a "complex" economic climate.
China posted its lowest growth in two decades for the second quarter of 2013, and there had been some concerns that the world's second-largest economy might be headed for a so-called "hard landing".
However, Mr Li sought to allay those fears by saying the Chinese economy was stable and had strong fundamentals.
Japan - Asian stocks soared this week, led by Japan's Nikkei, as investor confidence was boosted by Tokyo winning the race to host the 2020 Olympics.
Sentiment was also helped by an upwards revision to Q2 GDP for the Japanese economy. The annualised estimate was revised up to 3.8%, compared to an expected figure of 2.6%.
The Nikkei index has jumped 2.4% on the positive news and the broader Topix is up 2.1% while the yen has slid against the dollar to 99.7.
According to Japan's Prime Minster Shinzo Abe, the Olympics will spur construction and help beat deflation, delivering stronger economic growth.
U.S. - An anticipated reduction in stimulus by the Federal Reserve that has roiled the financial markets for months will be seen as “no big deal” if it goes ahead next week, according to a Bloomberg Global Poll of investors.
57% of those surveyed say they don’t expect a sudden change in the markets because investors already anticipate tapering action by the U.S. central bank. 8% see a rally on such news, while just under a third are looking for declines.
“A taper-lite seems priced in” by the markets, Greg Lesko, managing director at New York-based Deltec Asset Management LLC, said, referring to what he says will be a small reduction in stimulus by the Fed.
Opinions - The largest developing nations for the first time have the worst market opportunities as optimism for stronger growth shifts to the U.S. and Europe, according to a Bloomberg Global Poll.
India fared the poorest, followed by Brazil, Russia and China, a worldwide poll of investors, analysts and traders who are Bloomberg subscribers showed this week.
“The BRICs will always be playing second fiddle to the developed economies,” said survey respondent Ben Kelly, an analyst at Louis Capital Markets in London. “The pro-growth monetary policy of the U.S. allowed emerging countries to thrive due to very low or negative real rates,” he said, referring to borrowing costs adjusted for inflation.
Now that the U.S. and “to a certain extent Europe are beginning to stabilize, maybe part of this trade may unwind and we have seen that already in the bond markets,” Kelly said.
Commodities - As concerns over the Syria crisis persist, oil and gold prices have risen, prompting investors to look at commodities as “the only contrarian play left in the market”.
WTI Crude oil is currently trading at $108.5 per barrel and Brent has shot up to $115.6, while gold topped the $1,400 mark last week to enter a new bull market.
The Thomson Reuters/Jefferies CRB Commodity index has climbed more than 6% from its June trough, up from 275.6 on 28 June to 292.7 on 3 September.
Flows data from BofA Merrill Lynch shows investors have begun cautiously returning to commodities in the two weeks to 28 August, after 27 straight weeks of redemptions.
Spotlight on: Post-holiday allocations
The British summer months are traditionally a quiet time for the financial world. This year was no exception, with markets gently going nowhere throughout August, in spite of a raft of stronger economic news.
Commentators variously blamed concerns in Syria or the prospect of the end of quantitative easing but it was only as investors returned from their holidays towards the end of the month that markets gathered any meaningful direction.
The most significant trend was a wholesale move out of emerging markets. This was less a move out of risk assets (European equity fared well, for example) and more a clear move away from the developing economies as investors started to fret about their long-term growth prospects and, more importantly, their currencies.
The prospect of monetary tightening in the West has seen currency traders driving money towards developed markets in expectations of higher rates. This has hit currencies such as those of Brazil, India and Indonesia, particularly hard.
This was reflected in outflows from emerging market equity funds, which, in the last week of August, reached almost $4bn, according to data from EPFR Global.This was more than double the outflows for the previous week of $1.7bn. Emerging market debt was similarly unpopular, with $2bn exiting the sector in the last week of August, on the back of $1.3bn the week before.
Manager views
Expert investors tend to be moving in the opposite direction to the wider market in terms of emerging market exposure. For example, Tim Wilson, manager of the Newton Managed Income fund, said he expects developing markets to be the major beneficiary of improved economic data in the West.
“They boast relatively low levels of debt, export-orientated economies and strong growth rates in comparison to their more developed peers, even if growth is currently subdued on a historic basis,” he said.
Stephen Thornber, manager of the Threadneedle Global Equity Income fund, goes one step further, maintaining an overweight to the unpopular Asian region. He is attracted by the region’s “fantastic growth”. That said, his exposure is in more defensive sectors, such as telecoms or utilities, in countries like Malaysia and Thailand, which have high population growth.
Meanwhile, the prospect of higher interest rates continue to trouble many expert investors or, at the very least, they are still avoiding conventional fixed income.
Tom Beckett, chief investment officer at Psigma, dipped a toe back into conventional government bonds for the first time since 2011, having bought some US treasuries on the basis that bonds had fallen “too far, too quickly”. However, he remains an exception.
Meena Lakshmanan, co-head of Investment Solutions, said: “There may be a bond rally if something goes wrong, such as an escalation in the Syrian crisis, but given where the US economy is, the downside on bonds still looks significantly greater than the upside. We remain less worried about default risk, so we are focusing our fixed income exposure on credit and floating rate areas.”
For Gary Potter, co-head of multi-manager at F&C Investments, the climate is still right for risk assets.
“The world is undergoing a marginal improvement in its prospects. Things are definitely off the bottom,” he said.
“We like the coupon in some bonds but most of the value has already been realised. That said, we have tempered our equity overweight as the market has edged near 6,600 because there are still a number of issues. We have been using any weakness to top up, rather than taking profits on the dips.”
The market has rallied in the early days of September and it should shortly become clear whether investors have returned from their holidays in a bullish mood. The possible military intervention in Syria and the end to quantitative easing are likely to continue to dampen spirits, however.

Tuesday, September 10, 2013

Economic Summary for the week ended 7th Sep 2013

Rising Demand Adds to Evidence World Growth is Picking Up – Euro zone businesses had their best month in over two years in August as orders increased for the first time since mid-2011 while growth in China's services sector hit a five-month high, underpinned by new orders and business optimism. Pockets of weakness remain across the world, however. Dataon Wednesday showed Indian services activity shrank in August at its quickest pace since the depths of the global financial crisis. Italian services also contracted more than expected and the downturn continued in France. "The advanced economies have clearly picked up, China is the exception among the major emerging economies but the other emerging economies are still struggling and India in particular," said Andrew Kenningham, senior global economist at Capital Economics.
Emerging economies are particularly vulnerable to a tightening of United States monetary policy, the International Monetary Fund warned in a note prepared for the Group of 20 meeting in St. Petersburg this week. Markets are preparing for the Federal Reserve to begin slowing down its huge bond-buying program this month as the US recovery remains on track.
The US Institute of Supply Management is due to publish its PMI for US services on Thursday and a Reuters poll predicted a dip to 55.0 from July's 56.0. A sister survey on Tuesdaycovering factories showed a surprise upturn. Markit's Eurozone Composite Purchasing Managers Index (PMI) rose to 51.5 last month from 50.5 in July, its highest reading since June 2011. The headline figure was revised down a touch from a preliminary reading of 51.7. Anything over 50 indicates expansion.
But there are still major differences between Europe's two most important economies. The composite PMI for Germany, the euro zone's largest, jumped to a seven-month high of 53.5, but the French PMI dipped to 48.8 from 49.1. Across the channel, a rush of new business last month drove the fastest growth in Britain's services sector for more than six years, challenging the Bank of England's cautious outlook for the economy. It's services PMI beat forecasts with a rise to 60.5.
Led by firm US growth, the outlook is gradually improving for advanced economies and even crisis-weary Europe is at last joining the recovery, the OECD said on Tuesday, but warned a slowdown in many emerging economies meant global growth would remain sluggish.
The Chinese Markit/HSBC Services Purchasing Managers' Index (PMI) climbed to 52.8 in August after seasonal adjustments, up from July's 51.3 and the highest since March. Qu Hongbin, an HSBC economist, cited new business growth as the key driver of the PMI and expected the momentum to be sustained. "A rebound in manufacturing output is expected to support service industry growth in the coming months," Qu said.
Any improvement will cheer investors as fears of a sharp slowdown in the world's second largest economy had kept markets in check but the good news will be tempered by a slowdown in India, Asia's third largest economy. Having fallen below the 50-mark in July for the first time in nearly two years India's services PMI slipped further last month and with a survey of factories published on Monday showing activity shrank for the first time since early 2009, the picture is grim.India's economic growth has almost halved in the past two years and the economy grew 4.4 percent in April-June, its slowest quarterly growth rate since early 2009. The weak run is set to continue with macroeconomic uncertainty and tighter financial conditions weighing on growth," said Leif Eskesen, HSBC's chief India economist.
Emerging Nations Save USD 2.9 Trillion Reserves in Rout - Developing nations from Brazil to India are preserving a record USD 2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.
After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.
“If fundamentals are going against you, it’s not credible to defend a currency level - investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.
Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to USD 2.9 trillion as of 28 August, from USD 2.95 trillion on 31 Decemberand an all-time high of USD 2.97 trillion in May,. The holdings increased from USD 722 billion in 2002. The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds USD 3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.
Spotlight On: Indonesia Loses its Allure as Prices Chill Buyouts
Indonesia has lost much of its allure for private equity as steep valuations restrain buyouts in a country that two years ago was, in the words of one investor, “probably the sexiest destination in the emerging markets.”
International private-equity firms have acquired stakes in four Indonesian companies this year, down from 10 in 2011 and seven last year, according to data compiled by Bloomberg and the Asian Venture Capital Journal. Total transaction values fell from USD 649 million for the nine deals in 2011 where terms were disclosed to USD 324 million for the six deals last year for which prices were available, the data show.
Deals have fallen precipitously this year, to USD 87 million for three of the four announced deals. “Expectations have been high over the past two years for private-equity deal making in Indonesia,” said Nicholas Bloy, Kuala Lumpur-based managing partner at Navis Capital Partners Ltd., which oversees USD 3 billion in public and private equities in Asia. “But many players in the industry had a sobering reality check and now need to be more realistic in their return expectations, as they are facing inflated valuations by sellers.”
Even after its 22 percent decline from its all-time high on May 20, the Jakarta Composite Index (JCI) has surged 75 percent over the past four years, compared with a 11 percent increase in the MSCI Emerging Markets Index. The companies in the Jakarta index are trading at 17 times earnings, compared with 11 times earnings for companies in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. “Value expectations have been at record highs,” Bloy said. “Cautious investors are looking at valuations in a different way than bullish entrepreneurs.”
In addition to valuations, deal making is being chilled by shifting government regulations, which complicate market assumptions for acquirers, and competition from strategic buyers.
Growth in private equity in Indonesia has turned out to be “lumpy” rather than “a straight line,” said Juan Delgado-Moreira, a Hong Kong-based managing director at Hamilton Lane Advisors LLC, which invests in private equity. “There is a bid-ask gap to bridge” because of high prices in the stock market, “which some would say is overheated” despite the recent drop, he said. Delgado in January 2012 had said that “Indonesia is probably the sexiest destination in the emerging markets now,” calling it “one of the key long-term investment destinations in Asia.”
Large global private-equity firms this year have been selling more than buying. Deals in Indonesia have failed because of unrealistically high valuation expectations by sellers. One consumer company seeking a valuation at 12 to 14 times earnings before interest, taxes, depreciation and amortization for a private-equity stake should have been priced around eight times Ebitda based on comparable public companies, according to Navis Capital’s Bloy. “When you have a slight divergence you can adjust, but here you can’t bridge the gap,” Bloy said. “Someone has to give.”
If the selloff in share prices as well as Indonesia’s rupiah continues, it may improve opportunities for private-equity investors, according to Sebastien Lamy, a Singapore-based partner at management consultancy Bain & Co.
The rupiah has plunged 13 percent this year to the weakest level in four years, making it the worst performer among Southeast Asia’s currencies, according to data compiled by Bloomberg. “If the stock-market adjustment lasts, it will also have an impact on private-equity valuations, and those lower valuations would mean that private equity deploys more capital in the country,” Lamy said. “A lasting devaluation of the rupiah will have the same effect.”
High asking prices have also been bolstered by the prospect of increasing economic expansion. Growth rates in Indonesia, Southeast Asia’s largest economy and home to 249 million people, are forecast to increase from 5.8 percent this year to 6.4 percent in 2015, according to the median forecast of 24 economists surveyed by Bloomberg. That’s higher than projections for neighboring Malaysia and about double the growth expected for the global economy.
Economic growth of about 6 percent a year would mean Indonesia’s economy will surpass Germany and the U.K. in size by 2030, according to a report last year by consulting firm McKinsey & Co. By 2020, the number of middle-class and affluent Indonesians may double to more than 141 million, Boston Consulting Group said in a March report. That’s greater than the population of Japan, and almost that of Russia.

Sunday, September 1, 2013

Economic Summary for the week ended 30th August 2013

Growth Beats Estimate as US Weathers Budget Cuts: Economy - The US economy expanded more than estimated in the second quarter, providing evidence that growth is picking up as the nation overcomes the effects of federal tax increases and budget cuts.
Gross domestic product rose at a 2.5 percent annualised rate, up from an initial estimate of 1.7 percent, Commerce Department figures showed on Friday in Washington. Other reports today showed claims for unemployment benefits dropped and consumer confidence weakened.
The improvement in growth shows the world’s largest economy gaining momentum after a drought, Superstorm Sandy and budget battles in Washington stalled growth in the last three months of 2012. Recent data have shown the labour market is gaining strength while home prices rise, bolstering household finances.
“The economy is doing fine,” said Brian Jones, a senior US economist at Societe Generale in New York, who correctly projected the gain in GDP. “It is going to weather the sequestration. Growth will accelerate in the second half.”
Japan’s Prices Rise Most Since 2008 in Boost for Abe - Japan’s consumer prices increased at the fastest pace since 2008 in July, as energy costs rise and Prime Minister Shinzo Abe makes progress in pulling the economy out of 15 years of deflation.
Consumer prices excluding fresh food climbed 0.7 percent from a year earlier, the statistics bureau said on Friday in Tokyo. Industrial output increased a less-than-forecast 3.2 percent from the previous month.
“Japan is moving into real inflation,” said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan official. “Today’s data is encouraging for the BOJ, and they are likely to keep monetary policy on hold.”
Higher energy costs following the shutdown of the country’s nuclear reactors drove prices higher as the BOJ rolls out an unprecedented easing that helped spur a third straight quarter of growth. The central bank’s pledge in April to double the monetary base over two years has weakened the yen, which has tumbled 20 percent against the dollar over the past year, making imported oil and wheat more expensive.
Malaysia Plans Projects-to-Subsidy Curbs to Contain Budget Gap - Malaysia said it plans to delay infrastructure projects, cut subsidies and may start a consumption tax, seeking to contain the budget deficit and bolster a shrinking current-account surplus.
Public building projects with high import content are most likely to be rescheduled, Idris Jala, a minister in the Prime Minister’s Department, told reporters in Kuala Lumpur on Thursday. The government may unveil plans to adjust subsidies as early as next week and is trying to include a goods and services tax in its 2014 budget, said Mohd Irwan Serigar Abdullah, secretary general at the finance ministry.
Asia’s policy makers are working to regain investor confidence as the prospect that the US will reduce stimulus spurs outflows from the region, with Indonesia’s central bank holding an unscheduled board meeting on Thursday. The ringgit has fallen 7.9 percent this year, and Fitch Ratings cut Malaysia’s rating outlook to negative last month, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform.
“The market expects us to manage our deficit and balance of payments in a way to ensure the market will have confidence in the macro and fiscal management of this country,” Prime Minister Najib Razak told reporters in Putrajaya, outside Kuala Lumpur. “The details relating to that will be announced when appropriate.”
The benchmark FTSE Bursa Malaysia KLCI Index has fallen 5.9 percent from a record on July 24.
Construction of a subway in Kuala Lumpur, the country’s biggest infrastructure project, won’t be among those projects held up, said Jala, who heads the government’s Performance Management & Delivery Unit.
Dialogues on the implementation of a goods and services tax have been underway, said Najib, who is also finance minister. “Whether this is included in the budget or not, we’ll have to wait for the budget,” said the premier, who is due to deliver his 2014 fiscal plans on 25 October.
GST would take 14 months from next year to implement if the government goes ahead, Irwan said. To ease the public’s burden, rebates would be given to some people and smaller companies, and some essential items like rice and baby milk could be zero-rated, he said.
A consumption tax is “a must not an option,” said Irwan.“We are trying our best to include it in this year’s budget.”
Malaysia is on target to lower its budget deficit to 4 percent of gross domestic product this year and to 3 percent in 2015, Irwan said. It aims to achieve a surplus in 2020, he said.
“The steps announced are reassuring and will help calm fears about the large fiscal deficit and debt, and worsening current-account position,” Chua Hak Bin, a Singapore-based economist at Bank of America Corp., said by e-mail. “What will probably help are also steps to address ballooning government spending and operational costs, and not just tax increases.”
Brazil raises interest rate to 9% to battle inflation – The central bank's monetary policy committee, the Copom, voted unanimously for a third straight half percentage point rate rise. The Copom left the door open for more hikes by reiterating that the latest rise is part of an ongoing rate-adjustment process. A fall in the value of Brazilian real has stoked inflation, currently 6.15%.
The currency's fall has been blamed on an outflow of capital triggered by expectation that the US Fed will end its stimulus policy, leading to a stronger dollar. The real has lost 20% of its value against the dollar since the start of the year. Other emerging nations, including in southeast Asia, have suffered similar currency problems.
Higher interest rates would help Brazil control inflation, and also bolster investors' confidence, the International Monetary Fund said in a report on Wednesday. Fabio Akira, chief Brazil economist at JPMorgan, said further rate hikes were likely. He is forecasting a 50 basis points rise in October and another 25 points rise later in the year. Last week, the real fell to as low as 2.45 to the dollar, its lowest level since December 2008.
Spotlight On: Europe – Escape from Austerity
In Europe there are finally signs that the long nightmare of the debt crisis is drawing to a close, although few Europeans can have a positive perspective on current economic conditions. The unemployment rate at 10.9% across the European Union (and 12.1% in the eurozone) represents a colossal waste of human potential and accumulated misery. Moreover, two ugly recessions have left real output across the continent below its level of six years ago.
However, there are unmistakable signs that Europe is on the mend. The actions of the European Central Bank (ECB) in recapitalising the banking system and standing behind the government bonds of peripheral nations have convinced investors to bid down the yields on sovereign debt, reducing the risk of another financial crisis. In the real economy, the eurozone composite purchasing managers’ index (PMI) in July was at its highest level in two years, suggesting a return to positive real GDP growth. At a micro level, the economy is benefiting from improving consumer confidence, a return to trade surplus and plenty of pent-up demand.
However, the European crisis has never been about Europe as a whole but rather the radical difference in economic performance across Europe and how currency union has bound regional fortunes together. Total employment is still falling, deficits are still high and the debt-to-GDP ratio is still rising in most of the nations at the centre of the debt problems of the last decade.
This remains a significant risk for Europe. The advent of the euro led to a significant increase in the interdependence of European financial systems, and the various stuttering attempts to stem the problems in the periphery have only increased this mutual dependence. Even as a long-term proposition, an exit of a peripheral country from the euro due to domestic economic collapse would inflict painful losses on eurozone taxpayers and likely revive crisis conditions with their now well-known disastrous implications for lending.
For investors, however, this continuing risk needs to be considered in the context of some compelling valuations in European equities. The ECB’s very accommodative stance and its equally dovish guidance (in line with both the Fed and the Bank of England) have left both short-term rates and long-term Bund yields at extremely low levels. Indeed, the gap between the earnings yield on stocks and long-term term government bond yields is significantly wider in Germany than in either Japan or the US, suggesting there is value to be found in European equities.