Debt brakes for Euroland

- "The economic crisis has weighed heavily on the budgets of euro-area countries. In the coming years new ways will have to be found to cut deficits and boost growth in order to achieve a long-term reduction in public debt."
- "Good budgeting rules manage the expectations of economic agents, ensure that fiscal policy outcomes are sustainable over the long term and thereby prove to be convincing measures for investors in the capital markets. There is a great deal of room for improvement for the Stability and Growth Pact (SGP) especially with regard to the fiscal policy outcomes and how they are perceived by the capital markets."
- "Euro-area countries have a wide range of national budget rules. Successful consolidation has been achieved in countries that posted high growth rates and whose deficits were cut by expenditure rules."
- "Germany’s debt brake is an intelligent and promising concept for achieving a long-term reduction in public debt. Its fiscal policy control mechanism addresses both the structural and the cyclical deficit components. Its fiscal targets are dynamic and are calculated on the basis of criteria laid down in the SGP. The debt brake could therefore easily be extended to other countries."
- "The debt brake represents Germany’s first step towards growth-oriented consolidation. Since Germany is seen as a benchmark by the capital markets, other euro-area countries could soon decide to take similar steps. The preventive arm of the stability pact would then be extended to the ―domain‖ of national policy."
- "The introduction of national debt brakes in the eurozone is technically straightforward, but politically complicated. Legally possible, but politically unrealistic is obligatory transposition in all euro-area states with a debt ratio exceeding 60% of GDP."
- "The outcome-oriented coordination of national fiscal policies via national debt brakes is effective and therefore desirable. With the medium-term objectives of the stability pact operating as fiscal guidelines they provide the eurozone countries with the commensurate scope to meet their budget goals using their own economic policy strategies."
DeutscheBank EU Monitor 20100712

Potholes in the Recovery Road – Reduce Speed Ahead

- "For various reasons that will be discussed below, we are lowering our 2010 real gross domestic product (GDP) forecast. At the same time, we are publicly unveiling our 2011 forecast – admittedly not nearly as anxiously awaited as LeBron’s revelation. For the second half of 2010, we now are projecting annualized real GDP growth of 1.8% versus our May forecast of 2.5%. This lower second-half projection and the Commerce Department’s revised lower first quarter growth reduces our Q4/Q4 2010 real GDP growth forecast to 2.2% versus May’s forecast of 2.7%. As a result of our reduced 2010 real GDP growth projection, the forecast for the unemployment rate has been increased. For Q4:2010, we now place the average unemployment rate at 10.3% versus the May forecast of 10.0%. Our Q4/Q4 2011 forecast for real GDP growth is 3.2%."
Northern Trust US Economic Interest Rate Outlook July2010

China: Real Estate Outlook

- "Building on BBVA’s first Real Estate Outlook on China last year, this edition updates developments and policiesin the residential property sector, including an evaluation of recentprice trends against fundamentals and a comparison ofinternational experience with housing price bubbles."
- "Property prices in China have continued to rise sharply over the past year. While the magnitude of China’s housing price increases is not particularly large in comparison to international experience at this stage, the authorities have taken early action to cool the market in order to maintain housing affordability and to forestall destabilizing price bubbles. The measures have resulted in a sharp fall in sales transactions and a moderation in price increases."

- "According to our estimates, housing prices over thepast year in the major first tier cities have outpaced the rise in equilibrium values for housing. This raises the likelihood of further near-term adjustments in the housing market, including a downward correction in prices."

- "Over the medium term, however, prospects for China’s property market are bright given rapid income growth, high rates of urbanization, and favorable demographics."

BBVA China Real Estate Outlook 2010

The ascension of the CNY

- "More strength to the CNY"
- "CNY flexibility is also about monetary policy, not just the exchange rate"
- "Trade data supports flexible CNY and gradual appreciation bias"
- "The yuan will become more international with reforms"
- "CNY policy changes tend to be forward looking"
DBS Asian Currency Research 20100709

Are "organised and orderly" sovereign defaults a good solution?

- "More and more voices are calling for "orderly defaults" for over-indebted euro-zone countries."
- "The advantage of a (partial) default for the sovereign debt is clear: reducing the country’s debt ratio to the level where it is sustainable (a stabilisation of the public debt ratio at this level is feasible without an excessive primary budget surplus). After an "orderly" default, the risk of a new default can be ruled out, and the interest rate on the country’s debt ought to decline."
- "What are the drawbacks or the risks?
perhaps unbearable losses for banks and institutional investors that hold the country’s debt, and need - if that is the case - to recapitalise them, which may increase other fiscal deficits;
investor expectations that an "orderly" default may affect other countries, leading to a contagion of the rise in interest rates;
moral hazard for countries posting excessive fiscal deficits;
rejection of other solutions: monetisation by the central bank, restructuring of the debt without any actuarial loss for its holders;
funding problems for the defaulting country, at least for a while."
Natixis Flash Economics 348 20100705

Challenging navigation to calmer waters

- FI Strategizer: "Yields at all-time lows make risk/reward for AAA govies unfavorable. Fiscal tightening in the EMU, lower demand for ECB liquidity and stress tests results should lead to moderately higher yields in core countries. The key risk is a significant loss of growth momentum."
- Macroeconomic focus: "In 3Q10 the debate on the possibility of a renewed recession will heat up. However we believe that the slowdown in EMU growth appears in line with standard business cycles and fiscal tightening should be manageable given currency depreciation. We see odds for a double dip recession in the eurozone at around 10%."
- EU Portfolio Strategy: "During 3Q10, the country allocation should be of exceptional importance again. After 2Q10 widening we are moderately constructive on periphery. We keep the duration slightly long."
- Money Market: "Recent ECB refinancing operations suggest MM tensions are not extreme. The reduction in maturity of ECB liquidity should increase volatility of MM rates. The end of September will be a critical date: about EUR 90bn of 6M and 12M liquidity will mature and, barring new announcements, the ECB will hold its last 3M LTRO."
- Inflation: "ILBs have underperformed nominal bonds YTD. Inflation will remain moderate in 3Q10 and so will inflation expectations. However, as the EMU 10Y BE trades at a very cheap level, we see a good buying opportunity. On the contrary, US and UK BE do not look attractive."
- Supply Corner: "3Q10 will be the most liquid quarter of the year in the EMU, with EUR 175bn of redemptions and EUR 60bn of coupons. We expect EUR 195bn of gross supply (EUR 20bn net), with risks on the upside. Even so, net supply should be much lower than in 1Q and 2Q10."
- FX Strategizer: "Swings between risk appetite and risk aversion will keep trading jerky on FX majors. Yet, CHF and JPY should outperform again."
- EUR: "EUR-USD may approach the 1.28-1.30 area in the very near term, but the global risk picture and creeping EMU budget fears still favor a weaker EUR-USD back towards 1.24-1.22 after the summer."
- JPY: "As the JPY will stay sensitive to persisting global uncertainty, EUR-JPY should also remain skewed to the downside and would hardly develop significant correction potential beyond 113 in the rest of 3Q10."
- CHF: "The recent EUR-CHF bounce appears far from convincing and we still consider a temporary test below 1.30 as a very likely scenario."
- GBP: "The bold UK emergency budget should keep sterling firm: cable should head towards 1.60, while EUR-GBP should still break below 0.80."
- Commodity Currencies: "Trading should stay choppy on AUD, NZD and CAD, reflecting global risks and a tighter monetary policy at home."
- Nordics: "Market uncertainty and prudence on rates at home will make a further EUR-SEK and EUR-NOK drop bumpier."
- FX Special: "China’s decision to allow the yuan greater flexibility should not be overstated. We doubt USD-CNY will fall well below 6.70 by 4Q10."
Unicredit Curves & Crosses 20100709

France: decision time on public finances

- "The deterioration in French public finances since the end of 2008 will result in a general
government deficit amounting to around 8% of gross domestic product this year. While the impact of the 2009 recession should not be denied, this unprecedented situation also reflects the already weak budgetary position with which France started the crisis."
- "Although sovereign debt markets remain under pressure and the economic recovery is still very fragile, the euro zone countries most affected by debt refinancing problems (Greece, Ireland, Portugal and Spain) have lost no time in implementing severe budgetary consolidation programmes. France is going to have to follow suit next year, albeit in a less brutal fashion, if only because the credibility of the European stabilisation mechanism launched in the spring partly depends on sound finances among the euro zone’s major countries. And that means Germany and France, first and foremost."
- "Continually postponed when the economic situation was more favourable, the consolidation of French public finances will be all the more difficult for the fact that it will have to be achieved, for the most part, in a context of sluggish growth."

The two problems that must be solved by the euro zone

- "To avoid deflation, the euro zone must solve two major problems:
• the high and rising level of household savings, which depresses demand;
• the low level of nominal growth, in the short and medium term, which makes it very hard to stabilise debt ratios."
- "Could economic policies be imagined that would both lower the household savings rate and increase long-term nominal growth?
• a redistribution of unearned income to wages, which could be done via fiscal policy or via income sharing rules. In that case there would be both faster wage growth, less incentive to save due to the fall in the expected return on equity, and higher nominal growth;
• an attenuation of all the persistent uncertainties (concerning pensions, social welfare and the means used to trim fiscal deficits), in order to stimulate both consumption (fall in recautionary savings) and corporate investment;
• a depreciation of the euro exchange rate could be used only if wages were inflation-indexed; otherwise it would reduce wage-earners' purchasing power and increase the savings rate."
Natixis Flash Economics 347 20100705

Quality Ideas with a Catalyst: Stock Specific Names for the Current Market

- "With last week’s strong market rally coming on the heels of the prior weeks’ strong re-entrenchment, we believe there is much investor scepticism over the future
direction of the market. Macro economic data remains weak: business and consumer confidence are soft, the manufacturing recovery has stalled and labor market growth is anaemic. On the other hand, valuations are potentially attractive in many stocks and sectors. Heading into earnings season, there is a potential for upside surprises in a number of stocks which makes a defensive positioning a risky scenario for investors."
- "We are recommending a combination approach for investors: going long highquality stocks that are attractive valued on a free-cash-flow basis that have also been experiencing significant upwards earnings revisions. We believe this combination of attractively valued high-quality names that are experiencing a “catalyst” in the form of upwards earnings revisions positions investors well for the current market. These are defensive stocks that could deliver better than expected earnings this quarter."
Barclays Equity Research 20100712


Bank Profits Depend on Debt-Writedown `Abomination'- Bloomberg
The feckless Fed - Paul Krugman
Euro Gains Damp Break-Up Talk on Germany's Strength - Bloomberg
Japan ruling party reels after vote - Reuters
Wall St. Hiring in Anticipation of an Economic Recovery - New York Times
Fidelity reopens four money-market funds - Reuters
Crisis Awaits World’s Banks as Trillions Come Due - New York Times
BIS gold swap best news to hit gold in 30 years - Mineweb

Cutting public deficits in France: between ambition and political will

- "On 30 June, the French government presented a preparatory report in the run-up to the forthcoming public finance policy debate."
- "The report sets out the main measures that need to be taken to cut public deficits in 2011-2013 from 8% in 2010 to 3% of GDP in 2013. A full, detailed, three-year budget for 2011-2013 will be presented in the autumn."
- "The reduction of 5 points of GDP in deficit ratios over three years is extremely ambitious. Four of the five percentage point would come from structural measures, and notably a very marked slowdown in public spending of 0.6% per year by volume in 2011-2013 compared with an average increase of 2.2% per year in 1998- 2008. The remaining percentage point would be achieved through the cyclical growth, with forecast volume growth of 2.5% a year."
- "This scenario clearly seems too optimistic. Based on our own forecast of growth returning very gradually to its potential rate, the ratio of deficit to GDP should come out at 4.5% in 2013. Additional measures are thus likely to be necessary to counter these cyclical effects and achieve the announced target."
CreditAgricole Eco News 20100708

European bank stress test as catalyst for a new medium-term uptrend? No!

- "In the short term, the hopes being pinned on a successful bank stress test will improve the chances on an improvement in the sector’s relative performance. The positive medium-term impact on overall market is, however, likely to remain slight, since it can neither change the pending deterioration in the growth dynamic nor defuse the causes of the tensions in the euro zone."
- "The dependence of some national banking systems on funding via the euro system remains high. This points to further potential risks for the equity market because of tensions in EMU."
- "By the end of July, roughly 65% of the S&P 500 companies will report on the development of business in 2Q (Euro STOXX 50: 50%). The earnings estimates for 2010 will likely remain supported; the estimates for 2011 will come under pressure from expected weaker macro data."
- Outlook: "In the coming months, we think weaker macro data will, on balance, result in new lows for the year. Within this picture, however, there is the chance in the coming weeks of a temporarily friendlier trend because of the concentration of (positive) corporate reports on 2Q."
- STOXX Europe 600 sectors: "Financials are stabilizing; ahead of the stress tests we are upgrading Banks and Financial Services from underweight to neutral. At the same time, we are downgrading Travel & Leisure from overweight to neutral, and Construction & Materials from neutral to underweight."
Unicredit Market Outlook 20100708