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Readings

China's New Focus on Africa - Time
Wall Street Hiring Jumps Most Since 2008 as Guarantees Return - Bloomberg
Interest rates may need to rise, warns BIS - Financial Times
We May Be Reaching the Limits of Economics - Real Clear Markets
A deeper look at China's currency reform - Market Watch
The G-20 Blues - Forbes
Greece's best option is an orderly default - Financial Times
In Ireland, a picture of the high cost of austerity - New York Times


CEE quarterly outlook

- "The EEMEA region has weathered the European sovereign debt crisis relatively well to date, as growth indicators continued to improve during 2Q."
- "Over the coming months, we believe a lot of attention will focus on the likelihood of a global double dip and its negative implications on capital flows."
- "The Eurozone debt problem ought to have limited effect on CEE markets in the near term as long as core Eurozone performs and EUR weakens in an orderly way."
- "Inflation has remained off the agenda for a good number of months, apart from that we see increasing upside risks in the next few months."
- "CEE public debt is lower than Eurozone but many countries had to address fiscal problems during the last few months, leading to austerity programs."
Unicredit CEE Quarterly 2010Q3

New price floors materialising

- "Commodity prices appear to be finding new price floors after the massive spring sell-off. Notably, cost curves may now be catching up with oil and metals prices alike."
- "We have made few changes to our price forecasts. US demand is now clearly improving and we still look for the strength of the OECD recovery to surprise the market."
- "China remains a crucial factor and we argue that the Chinese economy sees good chances of a soft landing."
- "We see oil prices averaging USD81 this year and USD90 in 2010 with future supply concerns a new supportive factor."
- "Copper currently lags aluminium on the demand side but we continue to see the former outperform in the longer term."
DenDanske Commodities Monthly 20100630

Patents and trade policy in the era of climate change

- "Calls for patent-free green technologies on the one hand and for trade barriers on the other highlight the deep rift between developing and industrial countries:"
- "In the debate about climate protection, there have recently been calls for the abolition of patent protection for climate-friendly technologies to allow faster dissemination of these technologies among the world’s poorer countries."
- "However, in an economic system based on private property, patent protection is seen as an important precondition for innovation and should therefore not be considered for abolition in this field of technology either."
- "Similarly, demands by a number of industrial countries that climate tariffs or similar barriers to trade should be introduced for countries with less ambitious climate policies must be rejected. Such barriers would probably trigger countermeasures and dampen these countries’ climate protection efforts."
- "There are possible solutions to both the issue of patent protection and trade policy which would yield better results than the calls for patent-free green tech and/or climate tariffs. Technology transfer could be financed via climate funds replenished by the industrial countries. To avoid competitive distortions and shifts in production to countries without ambitious climate policies, (temporary) exceptions to climate regulation could be a sensible alternative for certain sectors of the economy."

DeutscheBank Economics&Politics 20100630

A long-term assessment of world trade

- "The fall of the Iron Curtain was followed in the early 1990s by a surge in globalisation that sent global exports rising sharply. World trade rose from USD 5.4 tr in 1990 (equivalent to some 16% of global GDP at 2009 prices) to its all-time high of USD 15.5 tr in 2008 (24.4%). The global downturn triggered by the financial crisis reduced global trade to around USD 10.1 tr in 2009. Developments since then have varied widely in the individual countries and regions. Analysing bilateral trade flows is therefore a worthwhile way of tackling economic issues, such as how global imbalances materialise."
DeutscheBank Talking Point 20100630

Homo economicus – or more like Homer Simpson?

- "The final judgement has not yet been passed on what prompted the recent financial market crisis. The Fed‟s loose monetary policy, regulatory and supervisory shortcomings, the banks‟ unbridled pursuit of profit, and systemic complexity, not to mention non-rational behaviour by economic agents, have all been advanced as explanations. As a result, the homo economicus model still common in economic theory, which effectively forms the microeconomic basis for market efficiency, has once again come under hefty criticism."
- "In this paper the assumptions of the homo economicus model are compared with the results of psychological experiments. It clearly emerges that in real life people do not always make rational decisions based on established preferences and complete information. In many ways their behaviour thus contradicts the homo economicus model. Much of the behaviour observed is caused through people trying to cope with the complexity of the world around them by approximating, because collating and evaluating all the factors of relevance to a decision overtaxes their mental processing capacity. As a rule these approximation methods deliver serviceable results, but they often also lead to distorted perceptions and systematic flaws."
- "These psychologically driven inadequacies also occur with investment decisions. Distortions arise due to information availability, errors of judgement about how representative such information is, loss aversion, the search for confirmation, isolation and endowment effects, status quo bias and – particularly on the financial markets – the misinterpretation of patterns."
- "Investors and investment advisors should be aware of these effects when assessing financial products, when estimating future factors of relevance to the success of an investment decision and their own appetite for risk, and when considering their own investment behaviour – especially since they are dealing with typically non-linear processes in conjunction with long maturities for some financial investments."
- "Making allowance for these effects in investment decisions can help avoid wrong decisions – but it is still no guarantee of above-average performance."
DeutscheBank International Topics 20100629

Derivatives reform: Evolution, not revolution

- "The Dodd-Frank Wall Street Reform and Consumer Protection Act stands to be the most sweeping overhaul of US financial regulation in decades. In this article, we focus primarily on those provisions in the legislation that deal with the regulation of OTC interest rate derivatives markets."
• "Almost all OTC derivatives, including those for interest rate swaps, swaptions and credit default swaps will be affected by the legislation. However, we expect the bill to lead to a continued evolution of the interest rate derivatives market – we do not foresee any immediate changes to market structure."
• "Central clearing is likely to be beneficial to the market, reducing systemic risk and improving market transparency, as long as the number of clearinghouses is not allowed to proliferate (as this reduces the benefit of multilateral netting)."
• "Clearing in itself should not impose a very heavy collateral or cost burden on large banks. The burden may actually be larger for users with higher funding costs."
• "Considering the potential systemic impact of the failure of a clearinghouse, it is crucial to ensure that margining methods and capital requirements across clearinghouses are consistent. We see a risk that clearinghouses could become the new GSEs: “too big to fail”, yet run for private profit."
• "Of all the provisions in the legislation, we view the requirement that trades be publicly reported as having the greatest impact on the liquidity of derivative markets. These requirements should lead to greater transparency around pricing and tighter bid-ask spreads for smaller market participants."
• "However, if real-time reporting is implemented in illiquid products that involve a small number of large trades among sophisticated investors, it may reduce the incentive for dealers to make markets, and significantly reduce depth."
• "For plain vanilla swaps, existing electronic platforms may be able to transition into swap execution facilities without too many impediments, as long as certain requirements are met."
• "However, for more illiquid products, the best possible outcome for investors would be the evolution of facilities where most trading is done via “block trades” with reporting delays as this could retain the benefits of bilateral trading."
• "Standardization of even plain vanilla products is non-trivial. We discuss the surprising challenges involved and their ancillary impact on accounting practices."
Barclays Interest Rate Strategy 20100630

Baltic Sea economies expand again – but to remain competitive, more reforms are needed

- "We expect GDP in the Baltic Sea region, after shrinking by almost 6% last year, to grow by 2.6% in 2010 and 3.1% in 2011. The European sovereign debt crisis, with lower demand and financial turbulence as possible consequences, poses major forecast risks."
- "Russia and Ukraine show the strongest growth over the forecast horizon (2010 and 2011), following substantial declines last year and with the support of higher commodity prices. However, without a more ambitious reform agenda, growth will not be sustainable. Russia (4.5) and Ukraine (4.1) also score the lowest in the region in our new Baltic Sea index (BSI) on business conditions, in which the average for the region is 7 (out of a possible 10)."
- "Poland has avoided a recession and is set to grow by a moderate 3% per year, as domestic demand growth will slow when budget consolidation takes off. Also, Poland has room for improvement on structural reforms, scoring 5.8 in our BSI. The goal to join EMU remains, but entry is not likely to be before 2015."
- "Estonia, on the other hand, is set to join EMU in 2011. Latvia and Lithuania plan to follow in 2014 if their budget consolidation processes continue. The Baltic countries will grow by 3-4½% next year and have already started to recover slowly after the recession. Estonia (7.3) scores above the BSI average (high on foreign trade, governance, and education), while Lithuania (6.5) and Latvia (6.3) must accelerate structural reforms to catch up."
- "The Nordic countries score the highest in the region on the BSI and are, at 8.5-8.8, among the 15% most competitive countries in the world. GDP in Sweden and Norway (2 ½-3% per year) will grow faster than GDP in Denmark and Finland (1-2% per year), but all four countries must boost labour supply as competition and demography remain major challenges."
- "Germany is projected to grow by 1½-2%, with exports recovering. As fiscal consolidation starts next year, there is a risk that domestic demand will slow. As for all countries undertaking fiscal consolidation, the negative effects on demand must be compensated for by economic reforms that create room for higher medium- and long-term growth. Germany, scoring 8 on our BSI, is doing well, but there is room for improvements, especially with regard to labour markets and tax policy."
Swedbank Baltic Sea Report 20100630