Morning all,
Apols for the delay in getting this out.
I like the fact volumes are holding up in Europe. With leaders, once again dragging their feet, I was really expecting inflows to slow. This was helped on Friday by a strong performance by the financials with BNP and SG both up nearly 4%. With the US elections coming up in November, Spain and Italy questioning bail out terms, and no direct strategy to improve growth, volumes will fall.
Press over the weekend feels like sentiment is falling away. There talks of a number of countries falling into a technical recession in 2013. This is not surprising, given some of the aggressive budget cuts and politicians doing little to ease concerns.
There are continued coverage over Japan and China's dispute over land ownership. This is not helped by the US sending out the new Osprey aircraft to Okinawa. Tensions are also building between Turkey and Syria, whilst Iraq saw the worst month for violence since 2010.
With policies designed to help ease the debt burden, with the US buying bonds and now mortgages, Europe set to become the lender of last resort to both governments and financial institutions, we are still yet to see anything directly related to encouraging growth.
With central banks so fixated on balancing budgets, politicians are looking to increase taxes, rather than cut public spending, or even redirecting public spending. Clearly, politicians such as Merkel and Hollande have great focus on self-preservation and votes. During Hollande's election campaign we was keen to keep votes but not increasing spending cuts.... now we see how he plans to reduct the deficit, through tax. This will only hit growth over the next 10+ years, with lower R&D, investment and onshore capital.
With the macro data showing global markets under continued pressure, fighting sentiment and growth, investors will look to new data for signs of improvement. The key is improved liquidity. Real interest rates still remain high. For example in the UK, where BoE rates are 0.5%, mortgage rates are currently offered at around 3.5%. Credit markets remain tight and with growth still slow, banks have a limited interest in lending to home buyers.... once bitten, twice shy.
What to look for? Governments are already trying to free up credit markets. The recent announcement to buy mortgages was something they were desperate not to do back in 2008. Products are too complicated; pricing is made difficult due credit/risk and mark-to-market of the property. Still, 4 years on and the banks are now reluctant to lend, leaving the government to step up and try to defrost the credit markets.
With the recent announcements, we should see credit improving. The buying of mortgage securities by the Government, should encourage competition to increase in the mortgage markets. It should also improve corporate credit facilities, so we should see an increase in inventories.
The US wholesale inventory number is one I will be watching closely, as will US earnings. With improving credit, we should see lower interest rate payments, so earnings data and consumer spending should also we watched closely. Earnings should improve before the unemployment rate.
Where from here? Markets should give back some of the recent gains. The current inflows into the equity markets will now be replaced with rotation, as under-weight positions are covered.
Talks of a technical recession will continue, but the outcome of a market having to quarters of negative growth, will be discounted due to the EFSF and US stimulus packages. Defensives will remain in favor, but with data set to improve in 1H2013, I would be looking at a more aggressive growth strategy.
In currencies, we should continue to see the Euro rally. With bond yields in Italy and Spain still trading above 5%, despite being able to borrow from the EFSF, investors will be looking to take advantage of the improving credit.
With capital inflows into Europe, and the current level of the Euro encouraging exports, Gold, silver and to a lesser degree oil, should also see in flows, as investors hedge against a weakening Euro. The AU$ should see some support here, despite easing rates, however, with such large inventories, its hard to see the AU$ getting back up to 1.08 level.
Japan is desperate for the Yen to fall. With imports making up a large part of its GDP, companies are being forced to increase overseas production or in some cases, close operations. A weaker Yen would help support domestic jobs and increased exports. Unfortunately it is doubtful we get back to the 2006 levels, purely due to huge overseas loans in that period, but within the next 6 months the JPY should be trading nearer the 83.00 level.
Key data this week:
Monday: Watch out for German Industrial production
Tuesday: UK trade balance
Wednesday: IT, FR industrial prod, US wholesale inventories, beige book
Thursday: US jobs and trade balance
Friday: US PPI
Stoddart
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