German Ifo Business Climate Index unexpectedly dropped to 102.3 as Euro Zone crisis wanes the confidence in Germany
US Q2 Gross Domestic Product (GDP) revised higher to 1.7% due to export rise
China official manufacturing Purchasing Managers’ index (PMI) contracted to 49.2
Fed Chairman Ben Bernanke defended the further easing at Jackson Hole as the growth in the US is still saggy
ECB has drafted the bond buying proposal and sent to 17 central banks in the currency bloc for review
Key Events to Focus On This Week
Reserve Bank of Australia (RBA) rate decision, Australia Retails Sales and GDP
UK PMI, Bank of England (BOE) rate decision and Asset Purchase Facility (APF)
ECB Press Conference
US NFP, Automatic Data Processing (ADP) and Institute for Supply Management (ISM) manufacturing PMI
The focus this week will be on the European Central Bank (ECB) press conference and the US Non-Farm Payroll (NFP); the prior directly offers investors some clues that what is likely to happen after investors have been guessing around the possibility for more than 60 days. The key US economic releases later might increase the various speculations on the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) decision in September. Meanwhile, Bundesbank President Jens Weidmann’s position of opposing bond purchase has raised the worries among investors as the ECB’s intervention would have a limited function until gaining the full support from Germany. Thus it’s the week for “BMW”.
Global Macro Brief
Correlations between different assets broken because policy makers dominate sentiment at current stage
The single currency remains its uptrend since middle of July due to more and more determination from the ECB, whose mandate is aiming to defend the stability of the entire region. It seems that much bailout work is under the planning although there are no official details to be announced yet.
The common currency was trading 0.64% higher against the Greenback last week; Pound, which sets as a proxy to the Euro (sometimes although not always), traded 0.46% higher against the US dollar. Despite the sentiment in the Euro Zone has improved, the Aussie and Kiwi couldn’t reverse from the current downtrend due to:
global commodity market outlook turns bearish after top global miner BHP Billiton postponed its mega-projects
no signs of the bottoming of China’s economy even after a few rounds of easing
Euro Zone’s bailout implementation risk
global economic releases remain soft in general
On the equities side, the US equities outperformed almost all the major indices last week due to the further easing hope still on the table after Bernanke’s speech at Jackson Hole. Dow Jones closed at 13090.84, which was 0.69% higher.
In Asia, China’s economic slowdown has dragged the major indices’ performance such as Hang Seng Index (HSI) and the Shanghai Composite Index, which hardly cheered the external sentiment to improve in the US and the Euro Zone. Given the low P/E ratio of the HSI now at 9.94X only, investors still felt uncomfortable to pick the stocks at lower range. The HIS usually tracked the Dow Jones Index closely in the past (refer to the graph shown) below. However recently it has lost some momentum no matter how many easing has been done in China.
Source: BloombergClick the image to enlargeIf the different assets among the world’s economies have lost their correlation, there are usually two possibilities:
Natural disasters or wars
Turmoil together with different political moves
Obviously the case is no. 2 at this time. I have summarised the different situations below by geographies:
United States: economic releases showed slight improvement so far in Q3, with the rising speculation on the QE3
Euro Zone: economic conditions deteriorated further without little improvement; however ECB’s possible bold actions would lift the different asset classes in the Euro Zone such as equities, currencies and bonds
China: Whether hard landing or soft landing remains an unknown status no matter how much the Chinese officials have done since the beginning of Q2. Recent property price hike could worry the policy makers to ease further aggressively. But the contagion of China’s slowing down has threatened the commodity outlook. Thus the Aussie underperformed compared to its peers.
The current scenario puts the assets in the “Big Apple” to become traders’ top pick besides the Greenback. The “free cash” from the central banks has reasonably bolstered the price of equities and bonds regardless the slow job growth and fiscal cliff next year. It is the main reason to cause this rally. In my point of view, the Fed holds part of the responsibility for the US Sub-Crime Mortgage crisis as it allowed the price to go to the place where it shouldn’t be there in 2008. There are many approaches to gauge the current valuations, but stocks are trading at multi-year high in a low business confidence environment. Despite the argument by managers, the valuations are still suggesting high stock prices. The modest to moderate growth in the US is not able to produce much earnings surprise, which is the basic fundamental to derive a company’s share price.
I believe that the Fed is aware of the cheap loans that might form the “asset bubble” and the risk of bubble burst; but when the Euro Zone’s crisis and China’s stalling economy are around, there is not too much things that monetary policy can do in a sustainable way. As monetary policy can’t help much on the export when external demand is weak; monetary policy can’t improve the unemployment rate either when the ‘fiscal cliff” threatens the domestic confidence, as hiring pace has no way to pick up under such kind the environment. But what else can be done? Rate has been lowered for a prolong period and liquidity is not an issue within the US financial system. So the UK’s Funding for Lending Scheme (FLS) may not work at all in the US even if the Fed wants to implement a similar innovative instrument.
In my Market Brief of the Week article on 27 August 2012, I have raised the concern that it “is the trend of best friend” when political factors move the market as the dark clouds still hanging in the sky at this time. Global manufacturing has no signs of improving, growth is stalling among the major economies and more countries in the currency bloc entered into the recession zone. Spain and Italy are expected to continue to be suffering from the vigorous fiscal and credit tightening, so many risks ahead is far enough to be solved merely by a few sentences from the policy leaders. The chart below proves that the expanding ECB’s balance sheet can’t help to grow the region’s economy on a long term basis as divergence showed a few times among the “lending” and “growth”.
Source: BloombergClick the image to enlarge Sluggish global and China’s growth made top global miner BHP Billiton put its 3 mega projects – Outer Harbour, Olympic Dam and Jansen potash on hold most likely until next year as profit slump requesting a spending cut. There are analysts even flagged out that the mining industry boom in Australia is over soon. Besides that, below is the price comparison between BHP and AXS 200, which clearly tells that the biggest mining company has underperformed the benchmark index since beginning of the year.
Source: BloombergClick the image to enlargeBased on the chart above, the divergence period is much longer than the time in 2008, which signals the current crisis is more severe than the Lehman Brothers’ crisis in 2008. Thus “bailout” will not solve the problems if there is no reform structure to be seen.
In the short term, the ECB press conference and the US NFP are the top tier events to watch this week. I do not think the US jobs expansion in August is going to be same upbeat as July’s, and the NFP could expand around 110,000 last month. As long as the growth is not 2-digits, there will be less bets on the FOMC in September to release any breaking news. Even if the actual figure is below 100,000, the Fed is also unlikely to act further aggressive in the next 2 weeks. I remain my view since the beginning of 2012 that there should be any kind of extra-large asset purchasing in 2012.
Before the ECB conference from now on, there could be some other clues to be hinted by the policy makers in these few days, and any news should be treated as positive as long as it’s relevant to the ECB, not announced by country leaders, especially from Spanish Prime Minister Mariano Rajoy. But I do not expect the bond buying details to be released by this Thursday as the ECB needs the confirmation from the German constitutional court regarding the approval of the ESM.
For China, the official PMI showed the manufacturing activities declined for first time in 2012 as export orders decreased due to the lack of enough expansion in business which triggered a large surplus.
Source: BloombergClick the image to enlargeSo far China has not been failing to reach the growth target since 1998 due to the Asian financial crisis upon that period, and it could be a risk if growth rate in the second half of the year deteriorate further. The recent rising property price has put the further easing by the People’s Bank of China (PBOC) on hold, and there is no evidence that the exact amount to be invested by the government is reliable or it is just some tactics to attract the domestic and international investments.
For the stock performance, it is still in line with the country’s growth rate thus I’m not surprised by the underperforming YTD (year-to-date).
Source: BloombergClick the image to enlargeEuro Zone
Finally it’s September – Heavy schedule for currency bloc
Many policy makers have returned to work at the end of August, and lots of tasks and plans could be under the setup stage amid the extreme busy schedule in September. Thus I expect the policies could fuel the market’s volatility in the coming few weeks in the Euro Zone.
The key events will be the ECB press conference and German constitutional court’s verdict on the European Stability Mechanism (ESM). Hopes on political events were lifted on nearly all the asset prices more than 2 month ago, and now the implementation stage is coming. Having said that, let’s not forget the words called “implementing risk”. Besides that, the S&P is going to review Spain sovereign rating on 13 September.
There were much bolder words from ECB President Mario Draghi recently, from the “policy leaders to act before ECB steps in” in July to “ECB is ready to intervene and it will be enough” in August. The only barriers for the ECB’s further action is more or less from the Bundesbank, which could escape the bond purchasing proposals prepared by the ECB last week.
The message from the ECB last week was clear: ECB is ready, “and do not feel panic if there are no details from the ECB press conference this week”. The market expected a lot from the ECB now. It is not a surprise that the ECB looks to cushion at this stage since they can’t act too much without the full support from Germany. ECB has sent a list of options to 17 central banks in the currency bloc. Some unofficial information includes:
credit spread capped
asset purchasing more than sovereign debts which considered as “bazookas”
These options are unlikely to be announced at the coming Thursday before the German court verdict. The market will not hear any details after 12 September. In the next 10-15 days, hopes will definitely be provided but without the implementation details.
On the Spain’s side, they have been a player since “Bankia Case” a few months back. Before they seek external financial assistance or the market expects external bodies to step in soon. The first thing that I saw was the increase of Spanish sovereign bond yield while domestic banks or regions were in trouble. This is exactly the same case this time. Spain has delayed the bailout plan but highlighted that the country can’t survive if it finances by itself. Bond yield surged thereafter. Actually it has been proven that the Spanish government and domestic banks have benefited by this kind of “trick”, as picking up the bond when the price is low and then make profit later when the yield falls. Currently the country’s 10-year bond yield has climbed close to 7% level amid the potential turmoil.
From the chart below, you can see that it is always the case that the Spanish 10-year yield has a strong negative correlation with Fibre; however they swing to the same direction in the past week.
Source: BloombergClick the image to enlargeAs I mentioned last week, Bundesbank’s Weidmann said that the extra sovereign bond purchasing will only increase the governments’ burden and spoilt those indebted countries because the central bank financing will become addictive like a drug, and debts sharing decreases the determination to reform. In my point of view, I do not consider these comments as a negative factor for a potential break-up of the currency bloc because German central bank’s tradition is to act independently. But on the other hand, I have also mentioned last week that the ESM can’t work well without Germany’s support as the 2010 Securities Markets Programme (SMP) designed for Greece has set a good example. Germany showed the strong objection at that time, which limits the function of bond purchasing programme. After a few days (which were yesterday) ESM Chief Klaus Regling also said that the ESM would not work well without Germany’s backing.
I will remain my view that the ECB might put everything on hold at this time besides the limited options before 12 September. I see little chance for the German constitutional court to define the ESM as illegal, because if the government loses the case, it would probably need to call for a referendum to change the German constitution, and then the political conflicts would rise. But I do foresee a few conditions would be required by the Germans once the ESM is approved, such as from the aspect of fiscal compact and supervisor’s regulation.
United States
Nothing new at Jackson Hole; all eyes on Institute for Supply Management (ISM) and Non-Farm Payroll (NFP) this week
There is nothing really new from Bernanke’s transcript last Friday although it looks like more easing is ready. However, there is no clear answer for the near term monetary policy guideline, which means the US ISM PMI and the NFP will attract much focus this week besides the ECB press conference in Europe.
Regarding the NFP, I do not expect a higher job expansion compared with the latest jobs report because the weak external demand and domestic fiscal cliff do not support a sustainable jobs expansion, and many employers are cutting the expansion and investment at this time.
From the chart below, you may be able to sense the reasons why the Fed is not rushing for the QE3 at this time. The expansion in the jobs market has been stalling until now even before the QE2. Over the past 2 years, jobs market expansion has been swinging higher and lower, more like a range pattern. It just simply implies that the QE is not the solution to cure stalling labour market. QE1 is more successful than QE2 because the Fed is not only purchasing a large amount of Treasury bills (T-bills), but also buying large quantity of Mortgaged Back Securities to spur corporate growth. Given the historical low rate and borrowing cost, I do not see many effective points for the Fed to buy any large T-bills again at this time, which is not the same case as in the Euro Zone.
Source: BloombergClick the image to enlarge
Tidak ada komentar:
Posting Komentar