Weekly Comment on the Markets, Politics and Economics by Alastair Winter, Chief Economist at Daniel Stewart & Co.
The Week Ahead
After spending much of the period 2009-12 bemoaning mindless RORO markets, I should probably applaud the diverse movements in recent weeks but I cannot help feeling that at least some of them are driven by confusion, if not yet panic.
Equities generally seem to be going through some form of correction, albeit not the full theoretical10%, arising from unease that prices have run ahead of fundamentals. This looks like continuing over the next few weeks and may yet bring out the proverbial sellers in May.
In the US, investors seem unsettled by a succession of softer data as well as-illogically enough-by hints from FOMC members about reining back the QE programme.
Japanese equity prices seem to have been taken over by the punters, who see an opportunity to double up on the much more justifiable strategy of selling the yen. There is no doubt that a weaker yen will help many Japanese companies but they still have to go out and sell much more of their products to reap any benefit. The Nikkei's gain of 28% in 2013 is built on a lot of future good news and very vulnerable to any yen rallies.
European equities seem to have better reflected the dire economic situation in most EMU countries but there are signs of complacency returning to bank share prices and also to peripheral bond yields. I remain very wary of all things EMU-related.
Fitch 'tactfully' delayed the UK downgrade until late on Friday but it is unlikely to have much impact beyond another modest tilt at the pound.
Emerging market equities have had a rather rough ride in 2013 and are perhaps now through the worst of any correction. Investors also still seem happy enough with bonds.
Talk of the death of Gold seems greatly exaggerated as it remains a hedge against both inflation and a new financial crisis but, as I have said before, the punters have lost interest and a major rally is unlikely.
Oil prices may have just about sunk low enough to tempt another speculative flurry soon.
The dollar looks like continuing to react to yen tumbles and euro rallies rather than have momentum of its own.
The 'Economic Insights' team have been travelling in Italy and France and everywhere were told of a need for a 'local Mrs Thatcher'. This is no dewy-eyed sentimentality associated with the passing of 'La Donna di Ferro': it is all about restraining trade union power and rolling back the role of the state. Both countries, Italy more obviously so, are in very deep political trouble and this matters more than ever now that Germany and its northern allies are throwing their weight about. After learning the lesson over the last two years that politics rather than economics would determine the fate of the EMU, investors seem to be failing to keep up with political developments. This week is unlikely to be decisive but should feature two major threats:
The 'resolution' of Italy's Presidential Election impasse allows the real power struggle to resume. The Grillini are describing the unprecedented and surely short-term re-election of Giorgio Napolitano as a 'coup d'Ã©tat' but they may yet be the main beneficiaries in the inevitable re-run of parliamentary elections. The most immediate loser is Mr Bersani and the fractious Left, which suggests that Mr Berlusconi and his allies could also gain. Whatever happens, the Monti austerity programme will not survive and a referendum on EMU membership will loom large. I sense the German government no longer cares much but the markets would surely fret over an Italian exit.
President Hollande is already so unpopular that his latest plan to cut public spending by an unprecedented â‚¬14bn and increase taxes by a further â‚¬6bn have so far been met with cynicism. He may well be playing for time in the hope that Mrs Merkel will lose the September election and/or Italy blazes the anti-austerity trail but it seems unlikely that he will be willing or able to implement his plan. This points to a crunch later in the year when a new German government may well have to choose between softening its stance on austerity (and probably common eurobonds as well) and winding up the whole EMU project. A French exit would be fatal whereas the damage from an Italian exit might be containable or even bear a silver lining.
Not much data is due but what there is includes several potential market-moving numbers:
The first cut of US Q1 GDP could well be soft enough to add to the current market jitters as could anything short of another strong set of Existing Homes Sales.
In the UK, the triple dippers should be silenced by a positive first cut of Q1 GDP but the real interest will be how good is the latest Index of Services. The CBI surveys of its Industrial and Retail members should be quite encouraging. Much fuss will surround March Public Sector Borrowing but any numbers will be subject to subsequent and potentially substantial revision.
The monthly PMI cycle kicks off with flash numbers from April from the EMU, Japan, China and the US and not much can be expected from any of them.
Most major equity markets sustained substantial losses with the intriguing exceptions of Shanghai and Mumbai, where a lot of bad news has been priced in over recent weeks. The prospect of more flexibility on foreign shareholdings in Chinese companies and also on pegging the renminbi has been well received. Similarly, lower imported commodity prices and domestic inflation pointing to another rate cut in May, together with a supreme court ruling favouring mining companies, has cheered up investors in India.
Gold and Silver even more had another torrid start to the week but this was enough to tempt some brave buyers back in for a rear-guard action.
The yen got a further thrashing with official blessing while the euro enjoyed a strong week across the board as complacency over the EMU crisis returned. The dollar gained from yen weakness while the pound was generally more out of favour than in, with the Fitch downgrade helping to make a softer close.
There was plenty of hand-wringing over tepid global growth at the meeting of G20 finance ministers but no consensus as to what to about it. It seems that Japan has the others' blessing for its three arrows/bazookas that are causing the yen to fall. No blessing for Europe for its austerity but it will carry on regardless.
Much is being made of a spat between the IMF and Chancellor Osborne over the need for a Plan B for public spending cuts. In fact, this seems to be as much about internal divisions between the economists within the IMF and, as is obvious to most people, Mr Osborne has already several times adapted the Plan A that it suits him to be portrayed as steadfastly pursuing 'unchanged'. He has, however, got drawn into the controversy over the Rogoff-Reinhart data on public deficits and growth, which has, along the way, brought some cheer to those of us practising the 'dismal science'.
UK data was softer after a run of better numbers. Unemployment, previously, a source of much hope, has surged but it remains to be seen how much this due to more people in January seeking to become 'economically active' rather than a jobs cull. Grim weather kept shoppers at home in February while inflation steadied in March, which is just as well in view of the remarkable soft average earnings numbers. The MPC remains divided 6-3 against more QE, which surely reflect genuine differences but it is quite tempting to see it as part of a general desire to make Sir Merv's final months as inglorious as possible..
The monthly batch of data plus Q1 GDP may have dashed hopes of China's sparking faster global growth but it could also indicate that a switch really is taking place from manufacturing exports to domestic consumption. Provided always that the numbers are genuine!
The dismal state of much of the rest of Europe (even the Netherlands, which remains mired in recession) seems to be dispiriting German economists in the latest ZEW survey and that contributed to the 3.7% fall in the DAX. Stormy weather!
The latest IMF world outlook yet again cut growth forecasts, notably in respect of the two largest economies, the US and China, but buys into the magic of Abenomics in Japan. The latest forecasts also show the damage being done to Russia and Eastern Europe by the EMU recession as well as to most of its members. Much has been made of the big mark downs of UK growth in both 2013 and 2014 but with rather less mention of the upwards estimate for 2012 reversing the previous forecast for recession.