Saturday 30th April 2016
NEWS TICKER: Central bank policy is still dominating the trading agenda, even though most analysts believe that the Fed will, if it does move, move only once this year and will raise rates by a quarter of a percent. The statement of the US FOMC was terse and most likely signals extreme caution on its part, though there is a belief that hawkish voices are rising in the committee. The reality is though that the US economic growth story is slowing. Many think the June meeting will spark the uplift. Let’s see. The US dollar is continuing to lose ground across the board after data showed the US economy expanded at its slowest pace since the second quarter of 2009, according to the BEA, which FTSE Global Markets reported on last Friday. GDP increased at a 0.5% annualised rate - versus an expected 0.7% - after rising 1.4% in the fourth quarter of 2015 as personal consumption failed to boost growth in spite of low gasoline prices. Central bank caution makes sense in that context, however timing will be sensitive. If the central bank moves in the autumn it threatens to unbutton the presidential elections; but the reality is that mixed data will emanate from the US over this quarter which will make a June decision difficult. It’s tough being an FOMC member right now. The Bank of Japan meanwhile signalled its intention to stay the course this week with current policy, which discombobulated the markets. The Japanese markets were closed today for a public holiday, so it won’t be entirely clear if the market will suffer for the central bank’s decision. Certainly if fell 3.61% yesterday and is down 5% on the week. so the omens aren’t great. Of course, the pattern that is well established of late is that as the market falls, the yen appreciates. The yen was trading at 107.14 against the dollar last time we looked, compared with 108 earlier in the session, having at times touched 111/$1 yesterday (the lowest point for more than 18 months) The month to date has seen a rise in both the short term and long term volatility gauges. Coinciding with the rise, Nikkei 225 Index Structured Warrant activity has also significantly picked up. Nikkei 225 Structured Warrants showed increased activity with daily averaged traded value up 33% month-on-month. The Nikkei 225 Index Structured Warrants had significant increase in trading activity year-on-year with total turnover up by 6.8 times. – ASIAN TRADING SESSION - Australia's ASX 200 reversed early losses to close up 26.77 points, or 0.51%, at 5,252.20, adding 0.3% for the week. The uptick today was driven by gains in the heavily-weighted financials sub-index, as well as the energy and materials sub-indexes. In South Korea, the Kospi finished down 6.78 points, or 0.34%, at 1,994.15, while in Hong Kong, the Hang Seng index fell 1.37%. Chinese mainland markets were mixed, with the Shanghai composite dropping 7.13 points, or 0.24 percent, at 2,938.45, while the Shenzhen composite finished nearly flat. The Straits Times Index (STI) ended 12.42 points or 0.43% lower to 2862.3, taking the year-to-date performance to -0.71%. The top active stocks today were SingTel, which gained 0.26%, DBS, which declined 1.03%, NOL, which gained closed unchanged, OCBC Bank, which declined 1.00% and CapitaLand, with a 0.63% fall. The FTSE ST Mid Cap Index gained 0.60%, while the FTSE ST Small Cap Index rose 0.49%. Structured warrants on Asian Indices have continued to be active in April. YTD, the STI has generated a total return of 1.3%. This compares to a decline of 4.9% for the Nikkei 225 Index and a decline of 6.3% of the Hang Seng Index. Of the structured warrants available on Asian Indices, the Hang Seng Index Structured Warrants have remained the most active in the year to date with Structured Warrants on the Nikkei 225 Index and STI Index the next most active – FUND FLOWS – BAML reports that commodity fund flows went back to positive territory after taking a breather last week, supported again by inflows into gold funds. “The asset class is currently the best performer, with year to date % of AUM inflow at 15%, far ahead of all other asset classes. Global EM debt flows reflected the bullish turn of the market on EMs, recording the tenth consecutive week of positive flows. On the duration front, short-term funds recorded a marginal inflow, keeping a positive sign for the last four weeks. The mid-term IG funds continue to record strong inflows for a ninth week. But it looks like investors have started to embrace duration to reach for yield, as inflows into longer-term funds have recorded a cumulative 0.8% inflow in the past two weeks,” says the BofA Merrill Lynch Global Research team – GREEN BONDS - Banco Nacional de Costa Rica is the latest issuer with a $500m bond to finance wind, solar, hydro and wastewater projects. The bond has a coupon of 5.875% and matures on April 25th 2021. Banco Nacional will rely on Costa Rican environmental protection regulations to determine eligible projects. This is the fourth green bond issuance in Latin America, according to the Climate Bonds Initiative (CBI). Actually, Costa Rica is one of the global leaders in terms of renewable energy use. In the first quarter of 2016 it sourced 97.14% of its power from renewables. Hydro's share alone was 65.62%. – SOVEREIGN DEBT - After coming to market with a 100 year bond last week, the Kingdom of Belgium (rated Aa3/AA/AA) has opened books on a dual tranche bond; the first maturing in seven years; the second in 50 years, in a deal managed by Barclays, Credit Agricole, JP Morgan, Morgan Stanley, Natixis and Société Générale. Managers have marketed the October 22nd 2023 tranche at 11 basis points (bps) through mid-swaps and the June 22nd 2066 tranche in the high teens over the mid of the 1.75% 2066 French OAT – LONGEVITY REINSURANCE - Prudential Retirement Insurance and Annuity Company (PRIAC) and U.K. insurer Legal & General say they have just completed their third longevity reinsurance transaction together, further evidence that longevity reinsurance continues to be a vehicle for UK insurers seeking relief from pension liabilities exposed to longevity risk. “This latest transaction builds on our relationship with Legal & General and solidifies the platform from which future business can be written,” explains Bill McCloskey, vice president, Longevity Risk Transfer at Prudential Retirement. “It's also a testament to our experience in the reinsurance space and our capacity to support the growth of the U.K. longevity risk transfer market.” Under the terms of the new agreement, PRIAC will issue reinsurance for a portion of Legal & General's bulk annuity business, providing benefit security for thousands of retirees in the UK. PRIAC has completed three reinsurance transactions with Legal & General since October 2014 – VIETNAM - Standard & Poor's Ratings Services has affirmed its 'BB-' long-term and 'B' short-term sovereign credit ratings on Vietnam. The outlook is stable. At the same time, we affirmed our 'axBB+/axB' ASEAN regional scale rating on Vietnam. The ratings, says S&P, reflect the country's lower middle-income, rising debt burden, banking sector weakness, and the country's emerging institutional settings that hamper policy responsiveness. Even so, the ratings agency acknowledges these strengths are offset by Vietnam's sound external settings that feature adequate foreign exchange reserves and a modest external debt burden. The country has a lower middle income but comparatively diversified economy. S&P estimates GDP per capita at about US$2,200 in 2016. “Recent improvements in macroeconomic stability have supported strong performance in the sizable foreign-owned and export-focused manufacturing sector (electronics, telephones, and clothing). This strength will likely be offset by weaker domestic activity as the impetus to growth stemming from low household and company sector leverage is hampered by weak banks and government enterprises, and shortfalls in infrastructure. We expect real GDP per capita growth to rise by 5.3% in 2016 (2015: 5.6%) and average 5.2% over 2016-2019, reflecting modest outlooks for Vietnam's trading partners. Uncertain conditions in export markets and the slow pace in addressing government enterprise reforms, fiscal consolidation, and banking sector resolution add downside risks to this growth outlook – RUSSIA - Russia's central bank held interest rates steady at 11% today, in line with expectations, although it hinted that if inflation kept on falling it would cut soon. Last month, the bank held rates steady, warning that inflation risks remained "high" and that the then oil price rise could be "unsustainable." However, the decision came at a time of renewed hope for Russia's beleaguered economy and the country's oil industry with commodity prices showing tentative signs of recovery. The central bank noted that it "sees the positive processes of inflation slowdown and inflation expectations decline, as well as shifts in the economy which anticipate the beginning of its recovery growth. At the same time, inflation risks remain elevated." Yann Quelenn, market analyst at Swissquote explains: "The ruble has continued to appreciate ever since it reached its all-time low against the dollar in early January. At that time, more than 82 ruble could be exchanged for a single dollar note. Now, the USDRUB has weakened below 65 and even more upside pressures on the currency continue as the rebound in oil prices persists. The outlook for Russian oil revenues is more positive despite the global supply glut. Expectations for increased oil demand over the coming years and the fear of peak oil are driving the black commodity’s prices higher – MARKET DATA RELEASES TODAY - Other data that analysts will be looking out for today include Turkey’s trade balance; GDP from Spain; the unemployment rate from Norway; mortgage approvals from UK; CPI and GDP from the eurozone; CPI from Italy; and South Africa’s trade balance – FTSE GLOBAL MARKETS – Our offices will be closed on Monday, May 2ndt. We wish our readers and clients a happy and restful May bank holiday and we look forward to reconnecting on Tuesday May 3rd. Happy Holidays!

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Of mice and men and bailouts

Wednesday, 25 July 2012
Of mice and men and bailouts With the sovereign debt crisis still in full swing it is becoming a moot point as to where you should place your money. Popular reflection throws up the usual suspects, gold, bunds, gilts, US T-bonds and so on, but one does begin to wonder whether this accepted order of security is actually right. We have seen haircuts taken on quite a bit of sovereign debt. However, were not for central banks still accepting such debt as collateral, the yields on certain national issuance would be considerably higher than they are at right now. Simon Denham, managing director of spread betting firm, Capital Spreads gives the bearish view. http://www.ftseglobalmarkets.com/

With the sovereign debt crisis still in full swing it is becoming a moot point as to where you should place your money. Popular reflection throws up the usual suspects, gold, bunds, gilts, US T-bonds and so on, but one does begin to wonder whether this accepted order of security is actually right. We have seen haircuts taken on quite a bit of sovereign debt. However, were not for central banks still accepting such debt as collateral, the yields on certain national issuance would be considerably higher than they are at right now. Simon Denham, managing director of spread betting firm, Capital Spreads gives the bearish view.

Simon DenhamSimon Denham, managing director of spread betting firm Capital Spreads. Photograph kindly supplied by Capital Spreads.We have the curious situation of New Spanish issuance being bought by Spanish banks then repoed at favorable rates back into the ECB as collateral against debt taken out for this very purpose. The politicians have now agreed bailouts for the banks (but not for Spain itself) in the full knowledge that most of such bailout monies will be used for exactly the purposes described above.

The question must be: how much more will northern Europe tolerate? As times get tougher in Greece, Spain and Italy more of the little business still being done is actually flowing into the black market, exacerbating already critical deficit problems. 



Forcing through stern excise adherence needs to be done when times are good not when many businesses are struggling for survival. This actually is the knub of the problem of the eurozone since its inception; Southern States previously accepted a generally deteriorating currency in exchange for a certain laxness in fiscal responsibility. Other the other hand, the much bigger North (economically) certainly did not.

When the good times rolled all the politicians basked in the supposed genius of the new bloc studiously ignoring all of the ever more strident warnings of productivity dislocation and failing dismally to impose any form of regional spending controls. The saying ‘your sins will find you out’ could hardly be more apposite in this situation as Germany and France (who were amongst the first to break the piously agreed deficit limitations back in 2003) are now requiring just such a response from the weaker members.

Where then, does this leave equities?

Well, oddly enough there is an argument to say that corporate assets might well become the safe haven investment of the future. The ability to move companies from one jurisdiction to another if the regulatory/tax burdens becomes too extreme, the general fiscal responsibility of the vast majority of executive boards, their generally low debt position and the high profit margins lead one to consider that equities and corporate bonds are a rather safer home than ­sovereign debt (of whichever nation).  

The major advantage of a sovereign nation has always been the accepted lore of their ability to raise taxes no matter what the economic situation. Even so, as we see from Spain and Italy’s recent tax receipt numbers—and even the UK over the past few months—this accepted truism may be starting to wear thin.  People in general continue to lose any respect for their government’s ability to spend wisely. If then the average German, Finn or Dutchman decides that bailing out Southern Europe is not his responsibility and we effectively move towards a Greek position on paying tax, or voting for parties that espouse a more isolationist policy, the general deficit situation may well ­deteriorate exponentially.

All the while, returns on equities look to be attractive in the current interest rate environment. The FTSE 100 yield is over 4% as is the Stoxx 50 and the dividend adjusted price versus the cost of acquisition is now at historically high levels. Obviously, dividends might well be lowered over the coming years as growth looks more remote, but interest rates are likely to remain sub 1% as well, so even a reduction in payments might not be accompanied by a fall in price. Returns on stocks have remained remarkably stable despite the current political brouhaha. However, this might be the time that this ‘value’ was reappraised upwards to reflect falling returns elsewhere. 

For all of the truly awful news of the last six to twelve months the FTSE is still pretty much where it was this time last year. It might not take much in the way of good news to send us higher. Of course, this said, we do still need the politicians to make at least a couple of good choices!

As ever ladies and gentlemen, place your bets! 

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