Winter’s Weekly Economic Shot
By Alastair Winter, Chief Economist at Daniel Stewart
As new money keeps rolling in, the good run in equities is likely to continue while bonds, especially the safest government bonds, look increasingly to have their best days behind them. This is more like the traditional relationship of equities and bonds rather than a return to the mindless RORO movements that persisted until the middle of last year. Nevertheless, there is also likely to be plenty of day trading: buying something that is going up and selling it when it starts to go down.
On this basis, emerging markets and the FTSE 100 (with all its global components) look the most plausible equity candidates for further gains while Tokyo, Madrid and Milan may see some profit-taking.
The hunt for yield could see ‘peripheral European’ bonds in further demand and some moderate selling of US Treasuries, gilts and bunds.
After the good start to the year, FX traders may be unable to resist pushing the yen to new (recent) lows and the euro to highs (no rate cut from the ECB in sight). The pound could be next candidate for a sustained push: downwards on this occasion.
Mr Cameron’s speech on Europe is now expected on the 21st or 22nd but the jostling for position just goes on and on. Planned or not, he looks like achieving his goal of making an early ‘in/out’ referendum look plain daft.
After years of premature announcements of the death of ‘L’Exception FranÃ§aise’ there really are going on make-or-break negotiations between unions and employers to change employment laws and practices and no-one is watching more nervously than Mr Hollande.
Mrs Merkel and her CDU/CSU supporters may be riding high but her FDP coalition partners are in deep trouble in the polls before next Sunday’s election in Lower Saxony with implications for the Federal election in September.
Another problem for Mrs Merkel is the possibility of the Bundestag’s rejecting a â‚¬17.5bn bail-out of Cyprus’s banks on the grounds that they have used deposits laundered by Russian oligarchs to lend recklessly on to Greek borrowers. Another fine example of European solidarity!
Retail Sales and Industrial Production data is due from both the US and China (Q4 GDP as well) and this should maintain the positive trends in those locomotive economies.
In the UK, inflation was probably quite subdued in December, thereby keeping the headline annual flat or thereabouts. Retail sales should show that some shopping is going on, albeit mainly on-line bargain-hunting.
More dismal Consumer Confidence is likely from Japan. Australians may also be in sombre mood, especially if November’s surprising improvement in unemployment turns out to be a false dawn.
According to EPFR Global, investment into equities exceeded that into bonds in December and the flows are getting even larger in early 2013. This certainly seemed to have limited profit-taking last week. Madrid, Milan and Tokyo powered on with the FTSE 100 and US markets following sedately behind but the gains of previous weeks elsewhere proved too tempting.
A major plus for both European equities and peripheral bonds was last Sunday’s decision in Basel to delay and make more flexible the introduction of the new Bank Liquidity Requirement. This will reduce the need for emergency rights issues, fire sales of assets and even government bail-outs. Spanish and Italian two-year yields fell by more than 30 basis points and Ireland had some luck for once in the timing of its return to the capital markets with a five-year issue yielding 3.31%.
After spending much of last year complaining about the ‘wrong’ sort of volatility (erratic movements in narrow ranges) FX traders have enjoyed the last few weeks of recurring euro strength and yen weakness, with the prospect of more to come.
The selection of Chuck Hagel as US Defense Secretary following that of John Kerry as State Secretary (both decorated war veterans but the opposite of war mongers) confirms Mr Obama’s desire to avoid new overseas military entanglements and keep the lid on existing ones.
Things are getting exciting in Italy’s election campaigning with Mr Berlusconi wrapping up an alliance with the Northern League and humiliating his bitterest media critics. With untypical modesty, however, he will not put himself forward as Prime Minister but instead (hear the alarm bells in Berlin and Brussels!) as Minister for the Economy.
Messrs Cameron and Clegg may not be as matey in public as they used to be but they left no doubt that they intend to stick together until May 2015. Moreover, they clearly have ambitious plans on welfare benefits and care for the elderly while quietly encouraging Chancellor Osborne to roll out Plan B (oops, stick with Plan A….more or less).
Censorship has become a major political issue in China even earlier than Mr Xi’s worst nightmares and sooner or later he will conclude that more oppression is not the answer. The economy is bound to be affected to some extent by widespread social unrest but the command economy cannot now be re-imposed.
The Chinese trade figures were very encouraging for global growth prospects with imports growing, albeit more slowly, as well as exports. However, there is some doubt that the numbers may be over-stated.
All the data from Europe was dire: record EMU unemployment, a renewed slump in Spanish Industrial Production and no improvement in Germany. None of this affected the grim-faced men on the ECB Governing Council, all of whom seemed to have changed their mind from last month’s flirtation with a rate cut. None of this came as a surprise.
No surprises either from the MPC as the Funding for Lending Scheme remains the great hope. Hope is definitely needed, as the November Industrial Production numbers point to negative Q4 GDP growth but there were little bits of comfort from the British Retail Consortium and from non-EU exports.
The new Japanese government announced a Â¥10tn stimulus package including infrastructure projects, promoting competitiveness and innovation and regional funding. This is only one of three prongs; more monetary easing by the BoJ (or else!) and ‘structural reforms’ are the others. The spending should be enough to halt the crippling deflation but to do more than that is a big ask: radical change has never been easy in Japan.