Archives par catégories : Countries/Regions

The argument that a weak dollar explains the outperformance of emerging markets is, well, weak

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Since the beginning of the year, the MSCI Emerging Markets has advanced by 25%, and is now flirting with its August 2014 level. This follows two disastrous years during which the index lost up to 30% of its value. Even though it has been amplified by the weak dollar, this performance illustrates how emerging markets have come alive again over the past three months. In local currency, Brazil and Turkey, the most dynamic of them, have risen by 7-12%, while the vast majority of the others—Colombia, China, South Africa, Mexico, Saudi Arabia and Russia—have seen 4-8% rises. In other words, emerging markets have been more or less spared the upheavals affecting the developed world since the middle of the summer. This outperformance is often attributed to the beneficial effects of the decline in the dollar, but the real causes seem more complex. Let’s take a look.

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Wage rigidity to low unemployment: an aberration? Not really.

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Central bankers and economists seem baffled by the fact that wages are failing to accelerate in economies where low unemployment is pointing to full employment, which traditionally means rising pressure on wages. In response, central banks are on the alert, fearing that this apparent anomaly will correct itself any time, possibly resulting in a sudden acceleration in pay for which they might be unprepared. In Germany, the unemployment rate is at a post-reunification low of 5.7% and the Bundesbank has been watching this risk closely for almost two years.

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Can Abe turn on the fountain of youth?

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At 17,357 points today, Japan’s flagship index has nearly doubled since Mr. Shinzo Abé took power in late 2012. Among the developed countries, it is by far the best performer. Its performance has been twice as strong as that of the S&P 500 and three times that of the EUROSTOXX 50. The country’s paltry economic performance hardly justifies such a rise. Perhaps the BoJ’s pump priming is to be considered the lone explanation for the rocketing Japanese market, which would be analogous to recognizing that we are merely facing a giant speculative bubble. What factor would justify the Nikkei’s performance? Perhaps the belief that Abenomics has the magical power to combat the primary cause of the Japanese economy’s suffering: the ageing Japanese population?

The ECB’s QE1, five years later, what’s the point?

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Will Mario Draghi, the President of the ECB, go through with a genuine quantitative easing program as he implied in his press conference on November 6th? It’s possible, especially if euro area inflation continues to fall, as we are predicting in the months to come, under the effect of falling oil prices, in particular. Besides the assurance of bigger and bigger liquidity injections to the financial sector, what impact would a potential QE plan have on the real economy?

The wheels have come off in Germany

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Business sentiment, orders, manufacturing…the telltale signs of a trend reversal in the German economy are all there: the euro area’s biggest economy is in a downturn.

This might come as news to some observers and we will discuss the primary reasons behind the situation and try to provide answers to the biggest questions raised by the impending downwards revision to German growth forecasts:

– Recession or no recession in the euro area next year?

– Another crisis looming?

– What is the solution?

Could US Housing Prices Plummet Again?

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In the past two years, the contradictions on the U.S. housing market have continued to get worse. Higher property prices, often seen as an indicator of a healthier market, now seem disproportionate compared with the reality of a market that is still limping from the battering it took during the crisis. As Fed members seem increasingly impatient to trigger a rate hike cycle, the imbalances resulting from this distortion pose a serious threat that prices could fall again.

Yellen resists market calls, but does she really have a choice?

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The main risk from the FOMC’s meeting in the past two days was a possible change of direction on Fed monetary policy. It looks like the bank is staying the course. Today’s statement was unequivocal: there will be no rate hike in the foreseeable future. We can only tip our cap to the Fed’s determination in resisting mounting pressure from the market. Janet Yellen would be taking an imprudent risk if she were to rise to the bait and hint at a possible rate hike. Indeed, the U.S. economy may be doing better than it was a few months ago but its ability to weather an increase in long-term interest rates, which would be the obvious corollary to anticipations of a rate hike, is, in our opinion, close to nil….even after apparently positive GDP numbers from the second quarter.

T-Bonds or S&P, which of these markets has got it wrong?

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Improving economic indicators, ongoing accommodative monetary policy from the Fed and the bountiful reporting season have propelled U.S. equity indices to new highs in recent days: the S&P has added gains of 6% in the last three months making for a YTD gain of 18% and has even flirted with the 2,000 point level. The confidence backing up these trends is, however, a far cry from the signals the bond markets are sending us. Since the end of April, the yield on 10-year T-bonds has fallen to below 2.50%, i.e. 25 basis points less than mid-April levels and 50bps off from where it started the year. Such distortions between equity and bond markets are tough to reconcile over the duration and will end up being corrected. It is merely a question of when and to what extent. The response will come from economic changes in the coming months. So what should the market being taking a very hard look at?