European Central Bank
Earlier we noted the European economic 'recovery' is rolling over rapidly, and now - confirmed by Adidas - it seems the impact of weakening JPY and weakenig USD are starting to weigh on European companies:
- *ADIDAS CUTS 2013 NET INCOME FORECAST TO EU820M-850M RANGE (from EU890-920m)
- *ADIDAS CITES FURTHER WEAKENING OF SEVERAL CURRENCIES VS EURO
With EURJPY at four-year highs and EURUSD back at 2013 highs, it seems the reality of currency wars are coming home to Draghi - when's the next ECB meeting?
The day when the Fed will begin the unwind of its latest QE program (for the fourth time) has finally arrived (as has the day when an impeachment committee will vote whether to ban Berlusconi from public office, but understandably that is getting far less press). In a few short hours the answer to all those questions of whether and how much of the taper was priced in, will be revealed. But while the Taper discussions will dominate the airwaves, as they have for the past five months, there actually were some news in the world that had nothing to do with the US Politburo in charge of capital markets and the US economy, located in the Marriner Eccles building. Here is a brief summary.
- Less Tapering Becomes Tightening Credit No Matter What Fed Says (BBG)
- Yellen Is Now Top Fed Hopeful (WSJ)
- Syria - A chemical crime, a complex reaction (Reuters)
- More ECB collateral: Wrecked cruise ship Costa Concordia raised off rocks in Italy (Reuters)
- Aging Boomers Befuddle Marketers Eying $15 Trillion Prize (BBG)
- Abe Turns Pitchman, Says Japan Is Now A Buy (WSJ)
- Ex-JPMorgan Employees Indicted Over $6.2 Billion Loss (BBG)
- Barack Obama blinked first in battle for Lawrence Summers (FT)
- Berlusconi to support Italian government in video message: sources (Reuters)
- How China Lost Its Mojo: One Town's Story (WSJ)
For all complaints about painful, unprecedented (f)austerity, the PIIGS (even those with restructured debt such as Greece) sure have no problems raking up debt at a record pace. Over the weekend, Spanish Expansion reported that Spanish official debt (ignoring the contingent liabilities) just hit a new record. "The debt of the whole general government reached 942.8 billion euros in the second quarter, representing an increase of 17.1% compared to the same period last year. Debt to GDP of 92.2% exceeds the limit set by the government for 2013..." Moments ago, it was Italy's turn to show that with employment still plunging, the only thing rising in Europe is total debt. From Reuters, which cites a draft Treasury document it just obtained: "Italy's public debt will rise next year to a new record of 132.2 percent of output, up from a previous forecast of 129.0 percent."
While the only market moving event of note had nothing to do with the economy (as usual), and everything to do with the Fed's potential propensity to print even more dollars and inject even more reserves into the stock market (now that Summers the wrongly perceived "hawk" is out) some other notable events did take place in the Monday trading session. Of note: while India's August inflation soared far higher than the expected 5.7%, rising to 6.1% from 5.79% (making life for the RBI even more miserable, as it is fighting inflation on one hand, and a lack of liquidity on the other), in Europe inflation decelerated to 1.3% from 1.6% in July driven by a drop in energy prices, while core inflation was a tiny 1.1%. In a continent with record negative loan growth this is to be expected. Additionally, as also reported, Merkel appears to be positioned stronger ahead of this weekend's Federal election following stronger results for her CDU/CSU, if weaker for her broader coalition. In Libya, oil protesters said they would continue stoppages at oil terminals until their demands are met in yet another startling outcome for US foreign intervention. Finally, some headline on Syria noted a Kerry statement "will not tolerate avoidance of a Syria deal", while Lavrov observed that it may be time to "force Syria opposition to peace talks." And one quote of the day so far: "Don't want market to become excessively exuberant" from the ECB's Mersch- just modestly so?
US Fed's exit plan poses a critical dilemma and underscores important contradictions. The calendar says Europe should be talking about exits too--as aid packages for Spanish banks, and Ireland and Portugal are to wind down in the coming year--yet more rather than less assistance may be neeed.
Five years after the collapse of Lehman Brothers triggered the largest global financial crisis since the Great Depression, outsize banking sectors have left economies shattered in Ireland, Iceland, and Cyprus. Banks in Italy, Spain, and elsewhere are not lending enough. China’s credit binge is turning into a bust. In short, the world’s financial system remains dangerous and dysfunctional. Worse, despite years of debate, no consensus about the nature of the financial system’s problems – much less how to fix them – has emerged. And that appears to reflect the banks’ political power. Unfortunately, despite the enormous harm from the financial crisis, little has changed in the politics of banking. Too many politicians and regulators put their own interests and those of “their” banks ahead of their duty to protect taxpayers and citizens. We must demand better.
Much to the amazement of doom-and-gloomers, everything's been fixed and as a result, everything's great. The list is impressive: China: fixed. Japan: fixed. Europe: fixed. U.S. healthcare: fixed. Africa: fixed. Mideast: well, not fixed, but no worse than a month ago, and that qualifies as fixed. Doom and gloomers have been wrong, just like Paul Krugman said. The solution to every problem is at hand: create more money and credit, in ever larger sums, until a tsunami of cash washes away all difficulties. Let's scroll through a brief summary of everything that's been fixed.
Overnight asset classes got a jolt following a report by Nikkei that Obama was moving toward naming Summers the next Fed chairman, citing “several close US sources,” pushing stocks modestly lower in Europe, with bond yields higher. According to the report, Obama is to name Summers as next Fed chairman as early as late next week, after the Federal Open Market Committee meeting. Otherwise, risk is still digesting the news of the confidential Twitter IPO, as it is becoming quite clear that some of the largest names (Hilton also announced yesterday) are seeking to cash out in the public markets. Is this the top?
Following Barroso's State of the EU speech, we thought it useful to reflect on the true state of the EU. Nigel Farage's recent tirade slamming "Communist" Barroso's pro-bureaucrat policies are poignant as he exclaims the "disaster" that the EU has become for the poor and unemployed. To further color this rant we note Charles Gavekal's recent note on why Europe's still broken as worthless IOUs are 'transferred' around the union and "no one really knows who is going to take the final loss." Perhaps it is The Hamiltonian's summary of the structural problem (an interlocking set of European political, bureaucratic, media, academic and financial elites) and the sad fact that history suggests a crisis deferred is a crisis magnified.
As Angela Merkel prepares for her third term - in whatever odd coalition that lurches from the election - the following four charts may surprise many that believe in the core European nations' dominance uber alles. As Bloomberg's Niraj Shah notes, Merkel may find rebalancing the German economy, as its reliance on exports increases, harder than ever. The low levels of growth, high trade balances, excepotionally low consumption and homeownership, and growing "shadow" economy all point to a European core that is far from the beacon of stability so many assume it to be.
With everyone focused on the 5th anniversary of the Lehman failure, we are taking a quick look at how the world's developed (G7) nations have fared since 2008, and just what the cost to restore "stability" has been. In a nutshell: the G7 have added around $18tn of consolidated debt to a record $140 trillion, relative to only $1tn of nominal GDP activity and nearly $5tn of G7 central bank balance sheet expansion (Fed+BoJ+BoE+ECB). In other words, over the past five years in the developed world, it took $18 dollars of debt (of which 28% was provided by central banks) to generate $1 of growth. For all talk of "deleveraging" G7 consolidated debt has been at a record high 440% for the past four years. So in the G7, which is a good proxy for the developed world, debt continues to increase whilst nominal growth remains extremely low thus ensuring that the deleveraging process has yet to start. As Deutsche Bank states, "at best we’re stabilising the ratio at or around record highs."
Jitters from Syria still abound, as confirmed by reports from the Israeli army that two shells had hit the Southern Golan region. Despite the reports that the shelling appeared to be errant, WTI remains near session highs as markets remain sensitive ahead of the meeting between US Secretary of State Kerry and Russian Foreign Minister Lavrov in Geneva over the next two days. Buying of the 10Y is also prevalent and the yield on the benchmark bond was has dropped below 2.90%, or at 2.88% at last check. Today's key economic news in the US session will be the weekly claims report, the Fed buying 10 Year bonds at 11 am followed by the Treasury selling 30 Year bonds at 1 pm (this follows the Fed buying 30 Year bond yesterday: yes ironic).
A dispassionate discussion of the weekend events and a look at the week ahead.
While the market has been fixated lately on the question of when and how the Fed will taper its asset purchases, perhaps as important for the rates market (and the magic that levitates stocks) is the outlook for the Fed’s forward rate guidance. On this front, BofAML suggests that recent evidence shows the effectiveness of forward guidance is diminishing... already. Simply put, policy makers are finding it harder to convince markets that central bankers have more insight into the future course of the economy and policy than they actually do. Meanwhile, markets are learning that it can be painful to rely too heavily on forward guidance when the risk/reward of being long fixed income is asymmetrical when close to the zero lower bound. In BofAML's view, this should lead to a return to persistently higher front-end risk premiums than have prevailed over the last two years, barring a sharp deterioration in the economic outlook.