A little on China's economic reform announcements

This month China’s leading party announced a package of economic reforms.  This involved promise of changes to the one-child policy and residency laws; more important to buy-side firms were the financial measures. State-owned banks now face competition from the private sector; there will be deregulation with regards to interest rates; and capital controls will be relaxed. Whilst a dream for proponents of the free-market, it may not be a good one. Aside from other external factors, there are a lot of issues that will arise from these economic reforms which the street truly has not taken into much consideration. SOEs have stayed afloat under cheap credit, although often not repaid loans; and banks, to compensate, have profited from inflated net interest margins. China gorges on cheap credit. Liberalising this would raise borrowing costs, and would certainly bring a tide on many struggling firms with insolvency becoming a lot more evident. In addition, Chinese Banks cannot continue current lending practices. So whilst the sell-side may upgrade many, caution should definitely be taken if ‘buys’ are fuelled by macro thoughts. Additionally, the street truly has not accounted for China’s capital account liberalisation potentially seeing capital outflows rather than inflows.

21st Nov recap, 20th Nov recap

21^st November summary

Stocks were mixed in Europe and APAC as investors reacted to FOMC minutes on Wed. US share indices rallied after earlier decline in the week.

US

Stocks rebounded Thursday – economic data pointed to a slowly improving labor market and subdued inflation. Financial shares lef the market higher. Yellen talks about the need to support the economy. DJIA at all time high – crosses 16000 for the first time ever. S&P neared the 1800 milestone (which it reached the following day! On Friday 22^nd Nov!). Initial claims for jobless benefits declined 21000 to 323,000 in the latest week – from a revised 344,000 the week before. Marking flash manufacturing PMI jumped to 54.3 from October’s final reading of 51.1. Senate Banking committee voted to approve Yellen’s nomination to become Fed chair next year. Dollar was up against the JPY, CAD and AUD.

Europe

Most indices declined, weaker than expected PMI from France and China – and some worry that FED will begin reducing stimulus – although there are arguments for continued QE as well as its tapering. MIB (Italy) was up 0.6% however, and IBEX (Spain) up 0.4%. All other markets saw some retreat. China’s November flash PMI declined to 50.4 from 50.9 in October. Eurozone – Germany’s reading improved, France’s readings showed contracted in manufacturing and services. Eurozone’s private sector growth weakened for the second straight month. Raises concerns about Eurozone economic recovery. Although last week Ireland’s

APAC

All except Japan were down Thursday. Prospect of changes in Fed monetary policy still driving markets. Nikkei only jumped due to Yen’s decline against the dollar. Bank of Japan has left its monetary policy unchanged once again.

20 November – Most global markets declined as investors eyed Fed’s policy announcement.

One thing that most FOMC participants agreed upon was that curtailing quantitative easing should not be automatic.  Rather, determination of when the Fed might move continues to depend on economic data. The discussions were wide ranging. They covered such subjects as by how much should bond purchases be cut, which bonds should be cut — Treasuries and/or mortgage backed securities — and whether to change the rate paid on excess reserves. They also discussed whether qualitative guidance is better than specific numeric guidance such as explicit unemployment and inflation numbers.

The Bank of England released minutes of its monetary policy committee meeting held earlier this month. At that time, the MPC unanimously decided to retain its 0.5% interest rate and the £375 billion ceiling on its asset purchase program. The minutes implied that the interest rates are unlikely to rise in the foreseeable future even if the unemployment rate reaches its 7% threshold. The minutes echo the message of the Inflation Report released last week.

The Shanghai Composite was up 0.6% to a near one month high and the Hang Seng edged up 0.2% after the People's Bank of China signaled it would end normal intervention in the currency market and quicken the process of full yuan convertibility. The central bank plans to widen the yuan's trading band "in an orderly way" while increasing the currency's two-way flexibility.

11 - 18th Nov summary

Global Markets Weekly 11 - 18 November 2013

http://www.coutts.com/wealth-management/investment-perspective/global-markets-weekly/2013/18-nov-2013/index.asp
http://www.zerohedge.com/news/2013-11-22/sp-closes-above-1800-posts-7th-consecutive-weekly-increase-longest-streak-2007

Economics

Ireland leads improving periphery – looks set to request an exit from Troika programme EU, ECB and IMF. Suggests it can fund itself but challenges remain. Will attempt to raise money in bond markets next year – without line of credit in place from Troika. Has accumulated €25bn in cash, well above the 6-10€bn of bond issuance next year. Enough funds to finance itself for some time – can approach Troika again if needed – although there is some conditionality (probably the reason Ireland opted for no credit line).  Although in reality, this success is dubious and has come at a cost – severe austerity measures (à highest emigration in Europe, country’s debt to GDP is 123%, 4x higher than before the banks were bailed out). Spain too is expected an end to its bailout program – which ultimately went to struggling banks rather than government – and needed only €40bn of the €100bn offered. Enormous problems like billions in bad debt and high unemployment still plague Spain.

Expect other two bailout recipients – Greece and Portugal to remain under some form of support/.control from Troika.

Equities

Chinese equities have rebounded from a sharp sell-off amid initial disappointment – as details emerged from seminal plenary session of China’s leaders. Report was thin – some measures been announced – land reform, loosening of the one-child policy, marking it easier for labour to move across the country and encouraging the private sector.

Pivotal couple of weeks for the UK and Eurozone central-bank policy – bringing an upgrade to UK growth forecasts and an unexpected rate cut in Europe (0.5 to 0.25%). After a strong performance over the pase year, UK equity valuations are probably becoming less attractive – neutral outlook. Europe still potentially attractive as an equity market – supported by more aggressive stimulus from the ECB (counterargument: maybe that’s already priced in and valuations aren’t that attractive?)

Bonds

Shrinking yield premiums (spreads) of non-government over safer government bonds, and an uncertain fiscal and monetary policy outlook in the US mean that finding value in fixed income markets is getting challenging.

Take of US Fed winding down QE may die down after Chairman-elect Yellen noted need to support fragile recovery by maintaining easy monetary policy. With yields low, we are careful in balanacing duration (sensitivity to interest-rate changes) against risk of default – taking less credit risk when buying longer-dated (higher duration) bonds and vice versa. Favour three areas: dollar-denominated Asian debt, emerging-market corporate bonds and financial debt.

Commodities
Latest quarterly report from World Cold Council shows D for gold fell in Q3 with large redemptions of Gold ETFs. Whilst ETF outflows grab the headlines, report shows demand for physical gold remains robust – led by Chinese consumers buying jewellery. Irrelevant for market price, however. Despite 5 years of aggressive central bank stimulus, many economies still rely on proactive policymaking. Global risks still exist – and the world will still face continuing easy monetary policy probably. Fundamentals still favour gold over medium term. 

What's another word for ridiculous? Goldman Sachs valued the Royal Mail at £3.3 bn. JPMorgan valued it at £6.8bn to £8.5 bn. Deutsche Bank valued it at £5.5bn to £6bn. Goldman (and UBS) got the job because they were offering to do it for a lower fee

http://www.thetimes.co.uk/tto/business/industries/banking/article3927547.ece

7th Nov Recap

US

Stocks declined – over concerns regarding what a stronger Q3 GDP means for Fed policy – good news is bad news. On that note – intial jobless claims were down 9000 to 336000 in the latest week. But good news is still good for currency, and speculation of tapering also good for currency à US dollar appreciation against EUR, GBP, CHF, CAD, AUD… but down against JPY. Dollar index up 0.4%

Surprise ECB cut – provided an early boost for shares.

Twitter – a distraction from Fed policy debate. Updated: Twitter share price soars! http://uk.finance.yahoo.com/news/twitters-share-price-soars-opening-160733676.html

Europe

Stocks – mixed. Investors react to the cut. Initially markets rallied but then weakened. BoE left rate unchanged – as expected.

FTSE down 0.7%, CAC down 0.1%, DAX up 0.4% and SMI up 0.1%.

ECB cuts rates to 0.25% - alongside low inflation and 12.2% unemployment. Prior the rates had been lowered to 0.5% in May. ECB also cult marginal lending facility rate by 25 basis points to 0.75%. The previous change was a 50 basis points cut in May. Deposit rate - left unchanged at 0.

BoE kept key rate at current record low - 0.5%, and asset purchase program ceiling at £375 billion - pledged not to raise rates until the jobless rate falls to 7%.

APAC

Stocks declined as investors awaited the ECB’s monetary policy announcement and US growth and employment data.

Weekly round-up, week ending 3rd November

But are you even surprised anymore?

http://rt.com/usa/rehman-drone-grayson-hearing-924/

The five Congressmen/woman: Alan Grayson, D Florida; Jan Schakowsky, D Illinois; John Conyers, D Michigan; Rush Holt, D New Jersey; Rick Nolan, D Minnesota.

Reuters: "Obama halted NSA spying on IMF and World Bank headquarters"

http://www.reuters.com/article/2013/10/31/us-usa-security-imf-idUSBRE99U1EQ20131031

Sorry I've been rather inactive, but this hasn't: