- Macro viewpoint: Doubting deflation "While deflation, which we define as a YoY decline in prices, is a possibility, what is needed to trigger a policy response and more relevant to the broader economy is the prospect of a general and sustained deflation. General in that the decline in prices is widespread, and sustained in that these declines persist for a protracted
period of time. If the economy evolves roughly according to our expectations, the risk of a sustained price deflation remains unlikely."
- Fed watch: Avant le déluge "Next week’s semiannual testimony by Fed Chairman Bernanke should address a number of issues raised by the June FOMC minutes."
- The week ahead: Housing to remain weak "The housing market takes center stage next week: builder sentiment, housing starts and existing home sales are all released. With the homebuyer tax credit pulling sales forward into the spring, we expect the general tone of the data to be weak. While the data calendar is light, the Fed calendar heats up. Chairman
Bernanke heads to Capitol Hill to deliver his semi-annual monetary policy report to both houses of Congress. On Wednesday, he testifies before the Senate and on Thursday before the House."
Merrill Lynch US Economic Weekly 20100716
US Rate & MBS Strategy Weekly
- Treasuries decouple from risk assets: "Over the past six weeks treasury yields have declined sharply even as risk conditions improved, reflecting a growth slowdown even as tail risks recede."
- Neutral on Duration: "Lingering concerns around the Euro area and talk of unconventional easing should keep Treasuries rich to macro-fundamentals."
- QE Redux or QE Unwind: "Implications of the Fed’s gradual portfolio unwind."
- Primary Dealers are Becoming Less Active in Treasury Auctions: "Direct bidder
participation is on the rise. As customer flows through dealers decrease, primary dealers will demand higher yields at auctions to compensate for this increased uncertainty."
- Wait to go long 1y10y vol: "We recommend turning neutral to those that are currently long. We look to go long in the 95-100bp/annum area."
- Stay in up-in-coupon and Ginnie/Fannie MBS: "supply, convexity, investor demand, and carry remain favorable in higher coupons and Ginnies"
- Agency Debt: "We recommend extending from 2-yr to 3-yr bullets to pick up yield and return. 3-mo options look unattractive given high negative convexity."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.0% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100716
- Neutral on Duration: "Lingering concerns around the Euro area and talk of unconventional easing should keep Treasuries rich to macro-fundamentals."
- QE Redux or QE Unwind: "Implications of the Fed’s gradual portfolio unwind."
- Primary Dealers are Becoming Less Active in Treasury Auctions: "Direct bidder
participation is on the rise. As customer flows through dealers decrease, primary dealers will demand higher yields at auctions to compensate for this increased uncertainty."
- Wait to go long 1y10y vol: "We recommend turning neutral to those that are currently long. We look to go long in the 95-100bp/annum area."
- Stay in up-in-coupon and Ginnie/Fannie MBS: "supply, convexity, investor demand, and carry remain favorable in higher coupons and Ginnies"
- Agency Debt: "We recommend extending from 2-yr to 3-yr bullets to pick up yield and return. 3-mo options look unattractive given high negative convexity."
- US Rate Strategy Model Portfolio: "The portfolio is up 1.0% month-to-date."
Citigroup US Rate MBS Strategy Weekly 20100716
Asia: the coal reality
- "When in June this year President Obama used the Gulf of Mexico oil spill to champion a “national mission” to wean the US off fossil fuels, taking it into a new era of clean, secure energy supplies, he acknowledged that the task was Herculean, but claimed that, if a country like China could commit itself to changing its energy habits, then so could his own. Citing the world’s fastestgrowing economy as a model for the global energy revolution may not, however, have been his smartest move. Set aside China’s pledges to curb its fossil fuel consumption and create a powerful economy based on renewable energy, and the reality remains that it will continue for many years to devour ‘dirty’ energy at a startling rate."
ABNAmro Energy Monthly July2010
ABNAmro Energy Monthly July2010
The return of resource nationalism?
- "Australia’s mining tax tornado has raised a number of questions about the
direction of mining regimes worldwide, the possible return of resource nationalism and the power of the mining giants to respond to sovereign risk. These risks put enormous stress on the success or failure of mineral exploration and development, not least because the profitability of any given present or planned mining operation is affected but also because credit facilities in the first instance will be that much harder to obtain. Australia’s recent mining tax fiasco is a case in point."
ABNAmro Metals Monthly July2010
direction of mining regimes worldwide, the possible return of resource nationalism and the power of the mining giants to respond to sovereign risk. These risks put enormous stress on the success or failure of mineral exploration and development, not least because the profitability of any given present or planned mining operation is affected but also because credit facilities in the first instance will be that much harder to obtain. Australia’s recent mining tax fiasco is a case in point."
ABNAmro Metals Monthly July2010
The shifting focus of fixed income investors
- Overview: "With the relationship between risk assets and fixed income weakening, we take a cautious stance on duration risk and return to neutral. - "We continue to favour owning euro government bonds over US Treasuries and UK Gilts."
- "We expect 2s10s curves to retain a strong directionality and re-steepen on higher yields. We note the recent breakdown in directionality in 10s30s in the US and Europe but do not expect this pattern to persist."
- US Rates Strategy: "We examine the reasons behind the Treasury market’s seeming lack of response to the rally in risk assets."
- Euro Rates Strategy: "Yield curves continue to display significant directionality. Conditional 2s-10s bearish steepeners offer a low-cost vehicle for positioning for a reversal of the recent bullish flattening dynamic."
- EMU spreads: "Investors in European bonds have been extending duration in recent weeks. With fundamentals taking a back seat as risk appetite recovers relative cash flow holds the key to explaining recent demand."
- Sterling Rates Strategy: "We examine the challenges facing investors from the fiscal headwinds to growth and the risk of “sticky” inflation. We think the steepness in the mid-part of the curve provides the solution."
- APAC Rates Strategy: "Pay JPY 2yr fwd 3yr against 5yr fwd 5yr. Long AUD/USD
bills/Libor basis in the >5yr sector. Buy NZGB Dec-17s, pay maturity matched swap."
- Global Inflation Strategy: "The prominence of cyclical concerns has made break-evens (BE) more directional. In the UK, the shift to CPI from RPI pension indexation does not deter us from our long front-end BEs view. We also find 10yr IL gilts cheap on an ASW basis, whereas euro linkers are relatively rich."
- USD and EUR flow analysis: "Investors in European bonds do not seem to be afraid to increase positions and extend duration. In EMU spreads, differentiation on the basis of fundamentals appears to have taken a back seat. In the US, we saw good buying of 10yr Treasuries and receiving of 2yr swaps."
Citigroup International Interest Rate Strategist 20100715
- "We expect 2s10s curves to retain a strong directionality and re-steepen on higher yields. We note the recent breakdown in directionality in 10s30s in the US and Europe but do not expect this pattern to persist."
- US Rates Strategy: "We examine the reasons behind the Treasury market’s seeming lack of response to the rally in risk assets."
- Euro Rates Strategy: "Yield curves continue to display significant directionality. Conditional 2s-10s bearish steepeners offer a low-cost vehicle for positioning for a reversal of the recent bullish flattening dynamic."
- EMU spreads: "Investors in European bonds have been extending duration in recent weeks. With fundamentals taking a back seat as risk appetite recovers relative cash flow holds the key to explaining recent demand."
- Sterling Rates Strategy: "We examine the challenges facing investors from the fiscal headwinds to growth and the risk of “sticky” inflation. We think the steepness in the mid-part of the curve provides the solution."
- APAC Rates Strategy: "Pay JPY 2yr fwd 3yr against 5yr fwd 5yr. Long AUD/USD
bills/Libor basis in the >5yr sector. Buy NZGB Dec-17s, pay maturity matched swap."
- Global Inflation Strategy: "The prominence of cyclical concerns has made break-evens (BE) more directional. In the UK, the shift to CPI from RPI pension indexation does not deter us from our long front-end BEs view. We also find 10yr IL gilts cheap on an ASW basis, whereas euro linkers are relatively rich."
- USD and EUR flow analysis: "Investors in European bonds do not seem to be afraid to increase positions and extend duration. In EMU spreads, differentiation on the basis of fundamentals appears to have taken a back seat. In the US, we saw good buying of 10yr Treasuries and receiving of 2yr swaps."
Citigroup International Interest Rate Strategist 20100715
Will central banks soon be faced with a conflict of objectives?
- "Central banks (in the United States, the United Kingdom and the euro zone) have to maintain expansionary monetary policies because the economies are still weak, because the financial situation of some economic agents (households, banks in some countries) is still poor, and to make it easier to finance fiscal deficits."
- "Other central banks (Switzerland) are trying to prevent an appreciation of their currency. Liquidity will therefore remain very abundant, and the holders of liquidity (banks, other investors) will probably be tempted to use it to buy more profitable assets in the future."
- "We believe that:
• this will not include assets whose prices are weakened by the anaemic growth in OECD countries (equities, corporate bonds, commodities);
• it may include emerging-country assets, but these assets are not very attractive in periods of high risk aversion;
• more probably, we will see (can already see?) a property price bubble arising, as real estate returns are currently attractive in many countries, given that real estate is perceived as a hedge against future inflation, even in the long term."
- "Central banks may therefore be faced with a conflict of objectives, i.e. between the need to shore up economies, banks and countries, and the renewed appearance of property price bubbles."
Natixis Flash Economics 358 20100713
- "Other central banks (Switzerland) are trying to prevent an appreciation of their currency. Liquidity will therefore remain very abundant, and the holders of liquidity (banks, other investors) will probably be tempted to use it to buy more profitable assets in the future."
- "We believe that:
• this will not include assets whose prices are weakened by the anaemic growth in OECD countries (equities, corporate bonds, commodities);
• it may include emerging-country assets, but these assets are not very attractive in periods of high risk aversion;
• more probably, we will see (can already see?) a property price bubble arising, as real estate returns are currently attractive in many countries, given that real estate is perceived as a hedge against future inflation, even in the long term."
- "Central banks may therefore be faced with a conflict of objectives, i.e. between the need to shore up economies, banks and countries, and the renewed appearance of property price bubbles."
Natixis Flash Economics 358 20100713
China Banks: The myth and reality of banks' trust products in China
- Bank trust product market size: "We estimate the outstanding trust product market to be slightly over Rmb3T as of June 10, split evenly between loan-related products and other products in other financial assets. Gross new sales were Rmb2.9T in 1H10 vs. Rmb1.7T in all of 2009. Trust loan sales are estimated at Rmb1.3T in 1H10. The balance, however, may
decline as many products will mature during the year. The net increase in trust loans is also less than Rmb1.3T."
- What is the market worried about? "Loan-related trust products effectively represent credit in the system, and hence aggregate credit growth in 1H 10 would be 13.5% hoh (vs. 11.6% hoh stated); the CBRC recently asked banks to suspend sales of trust loan products to ensure adherence to loan quotas. This has given rise to the following concerns. (1) Will a lack of liquidity result in accelerating NPL formation? (2) While these products are not contractually guaranteed, do banks have an implicit obligation, similar to structured products sold in HK/Singapore? (3) What is the implication for banks’ earnings?"
- Addressing market concerns: "(1) Liquidity: The cessation of trust product sales is likely to boost sales of banks’ own WM products or deposits, which still mean ample system liquidity. However, a lower flow of credit may add challenges to system credit quality, although we believe they are very manageable. (2) Defacto guarantees: Unlike structured products sold in HK/Singapore that resulted in claim liabilities, loan-related trust products
have generally been low-risk loans, are collateralized, and/or third-party guaranteed (see pages 5-8), and importantly do not involve derivatives. Historically these loan-related trust products had exceptional track record on asset quality. (3) Revenues: Banks will likely lose some fees partially offset through deposit spreads (200-300bp fee vs. 150bp deposit spread recouped)."
- Background on trust products: "In existence since late 2002, trust products typically target the mass affluent segments (ticket size of Rmb100,000+) seeking yield enhancements. Most of these products (some 10,000 bank trust products have been sold in last five years, 6,000 of which were trust loan products) are low-risk, low yield, with relatively short maturities (typically six months). Collateralized, often third-party-guaranteed, these products
have delivered robust asset quality with no single case of known credit losses. We believe banks are aware of reputational risks and hence have adopted strict credit controls; this is not a channel for risky asset disposal."
- Our sector stance remains positive: "While regulatory measures, effectively designed to reduce cyclicality (through coverage build-up, higher capital requirements, and controlling credit flow), somewhat reduced near-term earnings visibility slightly, earnings changes are likely to be modest. Sector valuations are not only attractive, but appear to be affected by “rolling worries” on asset quality, which we see as premature. Our top stock picks are BOC-H, BoCom-H and Citic-H."
JPMorgan China Banks 20100716
decline as many products will mature during the year. The net increase in trust loans is also less than Rmb1.3T."
- What is the market worried about? "Loan-related trust products effectively represent credit in the system, and hence aggregate credit growth in 1H 10 would be 13.5% hoh (vs. 11.6% hoh stated); the CBRC recently asked banks to suspend sales of trust loan products to ensure adherence to loan quotas. This has given rise to the following concerns. (1) Will a lack of liquidity result in accelerating NPL formation? (2) While these products are not contractually guaranteed, do banks have an implicit obligation, similar to structured products sold in HK/Singapore? (3) What is the implication for banks’ earnings?"
- Addressing market concerns: "(1) Liquidity: The cessation of trust product sales is likely to boost sales of banks’ own WM products or deposits, which still mean ample system liquidity. However, a lower flow of credit may add challenges to system credit quality, although we believe they are very manageable. (2) Defacto guarantees: Unlike structured products sold in HK/Singapore that resulted in claim liabilities, loan-related trust products
have generally been low-risk loans, are collateralized, and/or third-party guaranteed (see pages 5-8), and importantly do not involve derivatives. Historically these loan-related trust products had exceptional track record on asset quality. (3) Revenues: Banks will likely lose some fees partially offset through deposit spreads (200-300bp fee vs. 150bp deposit spread recouped)."
- Background on trust products: "In existence since late 2002, trust products typically target the mass affluent segments (ticket size of Rmb100,000+) seeking yield enhancements. Most of these products (some 10,000 bank trust products have been sold in last five years, 6,000 of which were trust loan products) are low-risk, low yield, with relatively short maturities (typically six months). Collateralized, often third-party-guaranteed, these products
have delivered robust asset quality with no single case of known credit losses. We believe banks are aware of reputational risks and hence have adopted strict credit controls; this is not a channel for risky asset disposal."
- Our sector stance remains positive: "While regulatory measures, effectively designed to reduce cyclicality (through coverage build-up, higher capital requirements, and controlling credit flow), somewhat reduced near-term earnings visibility slightly, earnings changes are likely to be modest. Sector valuations are not only attractive, but appear to be affected by “rolling worries” on asset quality, which we see as premature. Our top stock picks are BOC-H, BoCom-H and Citic-H."
JPMorgan China Banks 20100716
2Q 2010 earnings season analysis: Past, Present, and Future
- "We expect 2Q earnings will positively surprise relative to consensus expectations. However, investors are more worried about the trajectory of US economic growth in 2H 2010 and the possibility of a double dip recession in 2011. Our S&P 500 EPS forecasts of $78 in 2010 and $93 in 2011 imply 4% negative revision potential to consensus estimates."
GoldmanSachs US Equity Views 20100716
GoldmanSachs US Equity Views 20100716
Emerging Markets Briefer
- FX: PLN and CZK rebound
• "With market concerns shifting slightly from Europe to the US, the downtrend in EUR/USD seems to have been halted for now, which has given some support to the EUR-sensitive EM currencies over the past month. Most notable have been the rebounds in PLN, CZK and HUF and we think that especially PLN and CZK could see further gains. On the negative side have been the USD-sensitive currencies like MXN, KZT, EGP, INR and ILS. It is also notable that the Asian currencies have not performed especially well despite continued talk about Chinese revaluation."
- Stock markets: Chinese stocks continue to underperform
• "The past month has been relatively good for the EM stock markets. A notable exception is the Chinese stock market that continues to slide on concerns about how sharp the expected slowdown in the Chinese economy will be."
DenDanske Emerging Markets Briefer 20100716
• "With market concerns shifting slightly from Europe to the US, the downtrend in EUR/USD seems to have been halted for now, which has given some support to the EUR-sensitive EM currencies over the past month. Most notable have been the rebounds in PLN, CZK and HUF and we think that especially PLN and CZK could see further gains. On the negative side have been the USD-sensitive currencies like MXN, KZT, EGP, INR and ILS. It is also notable that the Asian currencies have not performed especially well despite continued talk about Chinese revaluation."
- Stock markets: Chinese stocks continue to underperform
• "The past month has been relatively good for the EM stock markets. A notable exception is the Chinese stock market that continues to slide on concerns about how sharp the expected slowdown in the Chinese economy will be."
DenDanske Emerging Markets Briefer 20100716
Readings
Double-Dip Days - Project Syndicate
More powerful than you think - Free Exchange
Cities and the Offshoring of Work - The Atlantic
It is time to face down the threat of deflation - Financial Times
Is the SEC Settlement Really a Win for Goldman? - Naked Capitalism
Beijing starts gating, locking migrant villages - Associated Press
China Starts Looking Beyond Its Era of Breakneck Growth - Wall Street Journal
Republicans don't give a damn about the deficit - Guardian
Why Ricardian Equivalence Is Nonsense - Credit Writedowns
Deficits of Mass Destruction - The Nation
Companies pile up cash but remain hesitant to add jobs - Washington Post
Did Wall Street get rich while starving poor people? - Here and Now
Baltic dries up - Economist
Shanghai port container throughput up 19% in 1H - People's Daily
Signs of Risky Lending Emerge - Wall Street Journal
Bank mortgage securities desks in hiring spree - Financial Times
Economy suffers from a shortage of safe assets - Financial Times
Europe vs. U.S.: The Post-Recession Productivity Divide - Real Time Economics
How to Tell a Nation Is at Risk - New York Times
The folly of common currencies - Asia Times
Goldman's Grand Delusions Finally Hit Reality - Bloomberg
Skating closer to deflation - Los Angeles Times
IMF and EU suspend talks with Hungary - Reuters
Bangladesh, With Low Pay, Moves In on China - New York Times
More powerful than you think - Free Exchange
Cities and the Offshoring of Work - The Atlantic
It is time to face down the threat of deflation - Financial Times
Is the SEC Settlement Really a Win for Goldman? - Naked Capitalism
Beijing starts gating, locking migrant villages - Associated Press
China Starts Looking Beyond Its Era of Breakneck Growth - Wall Street Journal
Republicans don't give a damn about the deficit - Guardian
Why Ricardian Equivalence Is Nonsense - Credit Writedowns
Deficits of Mass Destruction - The Nation
Companies pile up cash but remain hesitant to add jobs - Washington Post
Did Wall Street get rich while starving poor people? - Here and Now
Baltic dries up - Economist
Shanghai port container throughput up 19% in 1H - People's Daily
Signs of Risky Lending Emerge - Wall Street Journal
Bank mortgage securities desks in hiring spree - Financial Times
Economy suffers from a shortage of safe assets - Financial Times
Europe vs. U.S.: The Post-Recession Productivity Divide - Real Time Economics
How to Tell a Nation Is at Risk - New York Times
The folly of common currencies - Asia Times
Goldman's Grand Delusions Finally Hit Reality - Bloomberg
Skating closer to deflation - Los Angeles Times
IMF and EU suspend talks with Hungary - Reuters
Bangladesh, With Low Pay, Moves In on China - New York Times
Deflation risk overrated
- "The recent downtrend in core inflation has been troublesome, but we find empirical evidence to support the view that so long as the economy continues to recover, even at a sluggish pace, inflation could soon bottom and begin moving higher."
- "Our analysis finds that the relationship between economic slack and core inflation, which had weakened substantially in the 1990s, has strengthened again in recent years. However, it also appears to have changed, with “speed” effects now becoming a good deal more important than “gap” effects. That is, the positive effect on inflation of diminishing slack is apparently now more important than the negative effect of the high level of slack itself. That is, inflation will begin to rise again as unemployment trends lower."
- "This means the Fed’s “low for long” policy could well be abbreviated as soon as the pace of economic recovery begins to show clear signs of picking up sustainably."
DeutscheBank Global Economic Perspectives 20100714
- "Our analysis finds that the relationship between economic slack and core inflation, which had weakened substantially in the 1990s, has strengthened again in recent years. However, it also appears to have changed, with “speed” effects now becoming a good deal more important than “gap” effects. That is, the positive effect on inflation of diminishing slack is apparently now more important than the negative effect of the high level of slack itself. That is, inflation will begin to rise again as unemployment trends lower."
- "This means the Fed’s “low for long” policy could well be abbreviated as soon as the pace of economic recovery begins to show clear signs of picking up sustainably."
DeutscheBank Global Economic Perspectives 20100714
Japan: Slight revisions to our growth forecasts for 2H 2010 and onwards
- Slight revisions to our growth forecasts for 2H 2010 and onwards
• Reflecting the recent weaker-than-expected job market data, we have slightly downgraded our forecast for private consumption • In the meantime, we have revised up our capex forecast as we anticipate corporate income growing at a somewhat faster pace
• We have downgraded our GDP deflator forecast as a delayed recovery in wages is likely to weigh on consumer prices
• Our annual real GDP growth rate forecasts are unchanged at 2.9% and 1.0% respectively for CY2010 and CY2011
- Improvement in consumer sentiment slows down
• Consumer sentiment index rose for the sixth consecutive month by 0.7pts mom to 43.5 in June; improvement pace has slowed down
• Consumer perception of “the value of property (asset) growth” also worsened for the second consecutive month
• Industrial production was revised up 0.2pts to +0.1% mom in May. Manufacturing sector capital utilization also rose 0.8% mom to 72.5%
- Demand for funds remains weak
• The year-on-year growth in M2 in June slowed down for the first time in three months.
• The year-on-year decline in the balance of bank loans by city banks expanded further in June.
CreditSuisse Japan Economics Weekly 20100715
• Reflecting the recent weaker-than-expected job market data, we have slightly downgraded our forecast for private consumption • In the meantime, we have revised up our capex forecast as we anticipate corporate income growing at a somewhat faster pace
• We have downgraded our GDP deflator forecast as a delayed recovery in wages is likely to weigh on consumer prices
• Our annual real GDP growth rate forecasts are unchanged at 2.9% and 1.0% respectively for CY2010 and CY2011
- Improvement in consumer sentiment slows down
• Consumer sentiment index rose for the sixth consecutive month by 0.7pts mom to 43.5 in June; improvement pace has slowed down
• Consumer perception of “the value of property (asset) growth” also worsened for the second consecutive month
• Industrial production was revised up 0.2pts to +0.1% mom in May. Manufacturing sector capital utilization also rose 0.8% mom to 72.5%
- Demand for funds remains weak
• The year-on-year growth in M2 in June slowed down for the first time in three months.
• The year-on-year decline in the balance of bank loans by city banks expanded further in June.
CreditSuisse Japan Economics Weekly 20100715
EcoWeek
- Overview "A slight improvement for the eurozone’s peripheral"
- Germany: Fiscal consolidation measures "The general deficit will continue to widen in 2010 and will likely rise to circa 4.5% of GDP from 3.1% in 2009. The government announced, in early June, measures aimed at cutting the structural deficit by nearly EUR 28 billion between 2010 and 2014, lowering it from 2.2% to 1.0% of GDP during the period. The general deficit could thus drop back to 3% of GDP by 2012 and 2% in 2013. It remains low in comparison with other euro-zone countries and Germany will benefit from the economic upturn in 2010 to a greater extent than many other euro-zone countries."
- United States: Never again? Financial reform is passed "Congress has passed the financial reform act promoted by the Obama administration. The bill is designed to reduce systemic risk, better regulate financial players and products and provide better protection for consumers and investors. Regulators will have to iron out many of the details of the mechanisms approved by Congress. Practical implementation of the reform will make it more or less drastic, and will inevitably take time."
BNPParibas_EcoWeek_20100716
- Germany: Fiscal consolidation measures "The general deficit will continue to widen in 2010 and will likely rise to circa 4.5% of GDP from 3.1% in 2009. The government announced, in early June, measures aimed at cutting the structural deficit by nearly EUR 28 billion between 2010 and 2014, lowering it from 2.2% to 1.0% of GDP during the period. The general deficit could thus drop back to 3% of GDP by 2012 and 2% in 2013. It remains low in comparison with other euro-zone countries and Germany will benefit from the economic upturn in 2010 to a greater extent than many other euro-zone countries."
- United States: Never again? Financial reform is passed "Congress has passed the financial reform act promoted by the Obama administration. The bill is designed to reduce systemic risk, better regulate financial players and products and provide better protection for consumers and investors. Regulators will have to iron out many of the details of the mechanisms approved by Congress. Practical implementation of the reform will make it more or less drastic, and will inevitably take time."
BNPParibas_EcoWeek_20100716
Germany: Moderate austerity measures
- Consolidation. "The German government has finalized its austerity package. It intends to reduce spending by a total of EUR 81.6bn or just over 3% of GDP – albeit spread over four years. Furthermore, the government raised mandatory social security contributions."
- Structure. "At just over EUR 30bn, a large part of the cuts are to the welfare budget. Business (incl. banks and the nuclear power industry) is to contribute close to EUR 20bn. Administrative spending should be reduced by EUR 13bn, while subsidy cuts total roughly EUR 10bn."
- Assessment. "The German austerity package is quite balanced. It should be enough to successively lower the current record-high deficit and over the medium term help the government to comply with the ambitious debt rule anchored in the Basic Law. On the other hand, it is moderate enough, above all in the critical coming year, not to stifle the recovery of
domestic demand (pages 4-6 & chart below)."
- Forecast. "Nevertheless, German economic growth will lose momentum. Next year, real GDP will expand by only 1.5% (2010: +2% unadjusted). That is, however, primarily attributable to the phasing-out of the inventory cycle as well as the fiscal stimulus program. The global economic slowdown will also be a burden."
- Criticism. "The Achilles Heel of the consolidation is the questionable implementation of some of the measures, like the bank levy, as well as the heightened economic risks and the possible liabilities stemming from domestic & international guarantees. In any case, the government could have been much more courageous in slashing subsidies."
Unicredit Friday Notes 20100716
- Structure. "At just over EUR 30bn, a large part of the cuts are to the welfare budget. Business (incl. banks and the nuclear power industry) is to contribute close to EUR 20bn. Administrative spending should be reduced by EUR 13bn, while subsidy cuts total roughly EUR 10bn."
- Assessment. "The German austerity package is quite balanced. It should be enough to successively lower the current record-high deficit and over the medium term help the government to comply with the ambitious debt rule anchored in the Basic Law. On the other hand, it is moderate enough, above all in the critical coming year, not to stifle the recovery of
domestic demand (pages 4-6 & chart below)."
- Forecast. "Nevertheless, German economic growth will lose momentum. Next year, real GDP will expand by only 1.5% (2010: +2% unadjusted). That is, however, primarily attributable to the phasing-out of the inventory cycle as well as the fiscal stimulus program. The global economic slowdown will also be a burden."
- Criticism. "The Achilles Heel of the consolidation is the questionable implementation of some of the measures, like the bank levy, as well as the heightened economic risks and the possible liabilities stemming from domestic & international guarantees. In any case, the government could have been much more courageous in slashing subsidies."
Unicredit Friday Notes 20100716
Comeback kid
- "The Euro has staged a remarkable comeback over the last month, recovering from below 1.20 to the dollar to nearly 1.30. What has been driving it? Will it strengthen further, consolidate, or reverse trend? And should its appreciation be welcomed? There are several factors at work. The first is a paradoxical situation where, while the recovery is clearly more robust in the US than in the eurozone, the Fed sounds more dovish and seems to be toying with the idea of a renewed wave of quantitative easing, whereas the ECB sounds cautiously more optimistic and short term market rates have tentatively begun to edge up. Moreover, investors are
gradually gaining a measure of confidence from the policy actions of individual eurozone governments: nothing earth-shattering so far, but enough to raise hopes that policymakers have perhaps accepted the need to launch long-overdue fiscal and structural reforms. Spain is probably the best example. Most encouragingly, it seems that Asian investors, having done their homework over the last nine months, now feel more comfortable in assessing and taking on individual sovereign credit risk within the eurozone: demand at recent Spanish auctions is a case in point, and if this trend is sustained it would mean that risks of a systemic regional
debt crisis have substantially diminished. The make-or-break challenge ahead is the release of the stress tests, which begins in a week’s time. We should not get our hopes too high, as the very fact that we will initially get only the aggregate results for individual countries rather than individual banks tells us the first best is already off the table. Hopefully, however, the exercise will be handled professionally enough to avoid a major accident, in which case EUR/USD will remain stable in the coming months, to the satisfaction of both parties involved."
Unicredit Market Sense 20100716
gradually gaining a measure of confidence from the policy actions of individual eurozone governments: nothing earth-shattering so far, but enough to raise hopes that policymakers have perhaps accepted the need to launch long-overdue fiscal and structural reforms. Spain is probably the best example. Most encouragingly, it seems that Asian investors, having done their homework over the last nine months, now feel more comfortable in assessing and taking on individual sovereign credit risk within the eurozone: demand at recent Spanish auctions is a case in point, and if this trend is sustained it would mean that risks of a systemic regional
debt crisis have substantially diminished. The make-or-break challenge ahead is the release of the stress tests, which begins in a week’s time. We should not get our hopes too high, as the very fact that we will initially get only the aggregate results for individual countries rather than individual banks tells us the first best is already off the table. Hopefully, however, the exercise will be handled professionally enough to avoid a major accident, in which case EUR/USD will remain stable in the coming months, to the satisfaction of both parties involved."
Unicredit Market Sense 20100716
Pan-European:Under or Over - UK:Sector Changes
- Pan-European — Under or Over
• Recovery — Global GDP is above previous peaks. European earnings are not. Industrials and Staples have the most robust forecasts, all above trend.
• Believer or sceptic? — The market is backing sectors delivering earnings, even if above trend and de-rating those that fail to deliver. International over domestic.
- UK — Sector Changes
• Recovery biased — Our economists’ forecasts remain for an economic recovery. This should underpin earnings expectations and makes valuations supportive.
• Sector weightings — We downgrade Pharma to Underweight from Overweight and move Industrials up to Overweight. Mobile and Construction up to Neutral.
Citigroup European Portfolio Strategist 20100715
• Recovery — Global GDP is above previous peaks. European earnings are not. Industrials and Staples have the most robust forecasts, all above trend.
• Believer or sceptic? — The market is backing sectors delivering earnings, even if above trend and de-rating those that fail to deliver. International over domestic.
- UK — Sector Changes
• Recovery biased — Our economists’ forecasts remain for an economic recovery. This should underpin earnings expectations and makes valuations supportive.
• Sector weightings — We downgrade Pharma to Underweight from Overweight and move Industrials up to Overweight. Mobile and Construction up to Neutral.
Citigroup European Portfolio Strategist 20100715
The Japanese model cannot be exported to all countries
- "The Japanese economic and financial model has not been changed by the crisis:
• high corporate profitability, despite the weakness of household demand,
achieved via a squeezing of wages;
• weakness of household demand and negative inflation (deflation) due to the fall in wages;
• decent growth overall, thanks to exports and the related investments;
• low interest rates due to negative inflation, while savers accept these low interest rates, which therefore makes it easy to finance the high public debt caused by sluggish growth."
- "We can see this model trying to spread to many other countries in the wake of
the crisis. But it cannot be exported to all countries, as it requires:
• significant export capacity, in particular to countries enjoying rapid growth (only Germany and Japan);
• that the fall in wages and the distortion of income sharing be accepted;
• capacity to finance the economy with domestic savings;
• savers who accept very low returns on their capital."
- "Moreover, this model seems to be unfavourable for stock markets."
Natixis Flash Economics 357 20100713
• high corporate profitability, despite the weakness of household demand,
achieved via a squeezing of wages;
• weakness of household demand and negative inflation (deflation) due to the fall in wages;
• decent growth overall, thanks to exports and the related investments;
• low interest rates due to negative inflation, while savers accept these low interest rates, which therefore makes it easy to finance the high public debt caused by sluggish growth."
- "We can see this model trying to spread to many other countries in the wake of
the crisis. But it cannot be exported to all countries, as it requires:
• significant export capacity, in particular to countries enjoying rapid growth (only Germany and Japan);
• that the fall in wages and the distortion of income sharing be accepted;
• capacity to finance the economy with domestic savings;
• savers who accept very low returns on their capital."
- "Moreover, this model seems to be unfavourable for stock markets."
Natixis Flash Economics 357 20100713
UK impact from EMU break-up: Double dip or depression?
- "In our recent note, “EMU Break-up: Quantifying the Unthinkable, 7 July 2010”, we looked at the global impact of a break-up of the Eurozone. In this report we discuss the potential impact of such a scenario on the UK. Given the level of trade and financial linkages, a major adverse reaction is inevitable. Should complete break-up occur, the economic and financial impact will be far greater than seen in the recent recession. Output might fall by 8% relative to our base case within the first two years. Under this scenario, talk of depression could quickly reignite."
INGBank Financial Markets Research 20100715
INGBank Financial Markets Research 20100715
Declining US Activity and European Fiscal Risk Premia
- "Weaker US growth, reasonably solid Euro-zone macro data and less political/fiscal disruptions than feared have been a feature of the past few weeks, and have motivated another forecast change to reflect more broad USD weakness than before. We now project EUR/$ at 1.35 and 1.38 in 6 and 12 months to reflect the fundamental outlook. However, it is too early to sound the ‘all clear’ on the Euro in the near term as political stress could intensify again. Many European governments are still facing low approval ratings and the post-holiday period may be critical. We therefore keep the 3-month forecast at 1.22. Projected Yen strength is linked to US rate differentials and a reduced likelihood of Japanese interventions in light of the new managed $/CNY float. Our new $/JPY forecasts stand at 85, 83 and 90. We also discuss the impact of Renminbi appreciation in more detail. Lastly, developments in Europe and Switzerland suggest EUR/CHF can continue to depreciate, despite the move already seen. Our new forecasts see a temporary move below 1.30."
GoldmanSachs Global Viewpoint 20100714
GoldmanSachs Global Viewpoint 20100714
Banks: No stress... but no growth either
- Stress tests helpful but do not change the medium-term outlook "We remain Neutral on the Banks sector in Europe overall and continue to recommend a long position in our Global Retail Banks basket (GSSBBKGL). The upcoming Stress tests should increase clarity, especially for the nonlisted sector, and are also likely to move concern away from the large Spanish banks (which in our view are well financed). Furthermore discussions to soften regulation – pushing out the time to implement Basel III and softening the requirements – would also be supportive in our view."
- Expect slow loan growth in Europe "However, despite the crisis financials still make up 24% of the market cap in Europe; only fractionally below the long-term average of 25%. The large near-term uplift in expected earnings for banks is driven by provisioning rather than loan growth. Declining provisions is obviously helpful (and provides a high level of viability) but beyond this we see weak loan growth especially for banks with domestic exposure."
- Valuation case for Banks is not compelling "Banks trade at a P/E relative of 67% (2012E) compared with an historical average of 75% – a small discount to where it has typically traded. But given the risks to the sector, uncertainty regarding pending regulatory
reform and that Greek sovereign debt fears have not fallen away, the sector should arguably be on more of a discount. Furthermore, it is not yielding more than other low growth sectors such as telecoms or utilities."
- We are long Global Banks versus short Domestic Banks "We continue to prefer banks with global exposure. Our European Global Retail Banks basket (GSSBBKGL) has outperformed Domestic European Banks (GSSBBKDE) by 12% since March 2010 and would have done better if BBVA and Santander were not in the basket. Our Banks team argues that
the Stress tests should move the focus away from Spanish banks where funding appears secure."
GoldmanSachs Europe Portfolio Strategy 20100713
- Expect slow loan growth in Europe "However, despite the crisis financials still make up 24% of the market cap in Europe; only fractionally below the long-term average of 25%. The large near-term uplift in expected earnings for banks is driven by provisioning rather than loan growth. Declining provisions is obviously helpful (and provides a high level of viability) but beyond this we see weak loan growth especially for banks with domestic exposure."
- Valuation case for Banks is not compelling "Banks trade at a P/E relative of 67% (2012E) compared with an historical average of 75% – a small discount to where it has typically traded. But given the risks to the sector, uncertainty regarding pending regulatory
reform and that Greek sovereign debt fears have not fallen away, the sector should arguably be on more of a discount. Furthermore, it is not yielding more than other low growth sectors such as telecoms or utilities."
- We are long Global Banks versus short Domestic Banks "We continue to prefer banks with global exposure. Our European Global Retail Banks basket (GSSBBKGL) has outperformed Domestic European Banks (GSSBBKDE) by 12% since March 2010 and would have done better if BBVA and Santander were not in the basket. Our Banks team argues that
the Stress tests should move the focus away from Spanish banks where funding appears secure."
GoldmanSachs Europe Portfolio Strategy 20100713
EMEA Weekly: We remain worried about ZAR and HUF
- Market movers ahead: Will the SARB cut again? "Rate decisions in Hungary and South Africa are the main events to watch next week. In Hungary we expect the Hungarian central bank to stay on hold keeping the key policy rate at 5.25% as the recent sell-off in forint and the increased uncertainty outlook for fiscal policy probably mean that easing cycle has come to an end. South African rate decision will undoubtedly prove interesting to follow as the uncertainty about the outcome is fairly high. While consensus expect the South African central bank (SARB) to stay on hold we see a chance of yet another 50bp rate cut. That would bring the key policy rate to 6.00% in South Africa. For the rate reduction argues recent dovish comments from the SARB governor Gill Marcus, inflation development but also recent data from the economy, which mostly surprised on the downside signalling that economic recovery is losing steam."
- FX Outlook: CZK back on the top spot "Last week our EMEA FX Scorecard overall send relatively bearish signals. The bearish signals are not quite as strong now, but nonetheless the Scorecard is still overall negative and we would therefore overall continue to expect some pressure on the EMEA currencies going forward in next 1-3 months. That said the signal is certainly not a “massive sell” signal and the Scorecard is in fact positive on three out of the seven currencies in the Scorecard – CZK, PLN and TRY. The Czech koruna is now back as the top scorer and CZK also remain the currency with the strong potential for strengthening over the longer term due to attractive valuation. Therefore we feel pretty confident in recommending investors to continue to be long the Czech currency both against its region peers and USD and EUR. This week we updated our FX forecasts. Read more in the July version of the Emerging Markets Briefer."
- Scorecard-based trade of the week Buy CZK/ZAR "Last week we recommended buying RON/ZAR based on our EMEA FX Scorecard. That trade is up a bit over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Czech koruna now is the highest scoring currency in the Scorecard. We therefore recommend buying CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100716
- FX Outlook: CZK back on the top spot "Last week our EMEA FX Scorecard overall send relatively bearish signals. The bearish signals are not quite as strong now, but nonetheless the Scorecard is still overall negative and we would therefore overall continue to expect some pressure on the EMEA currencies going forward in next 1-3 months. That said the signal is certainly not a “massive sell” signal and the Scorecard is in fact positive on three out of the seven currencies in the Scorecard – CZK, PLN and TRY. The Czech koruna is now back as the top scorer and CZK also remain the currency with the strong potential for strengthening over the longer term due to attractive valuation. Therefore we feel pretty confident in recommending investors to continue to be long the Czech currency both against its region peers and USD and EUR. This week we updated our FX forecasts. Read more in the July version of the Emerging Markets Briefer."
- Scorecard-based trade of the week Buy CZK/ZAR "Last week we recommended buying RON/ZAR based on our EMEA FX Scorecard. That trade is up a bit over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Czech koruna now is the highest scoring currency in the Scorecard. We therefore recommend buying CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100716
Weekly Credit Update
- "Modest primary activity and indices trading sideways"
- "Scandi reporting season kicking off"
- "Financial bill approved in US"
DenDanske Weekly Credit Update 20100716
- "Scandi reporting season kicking off"
- "Financial bill approved in US"
DenDanske Weekly Credit Update 20100716
Market Implications of Growth Deceleration
- "Concern about a slowdown in global economic growth in the second half of 2010 has been one of the distinguishing features of the recent weakness in global markets. These concerns have been sparked by a softer patch of macro data, most notably from the US, but also a moderation in survey data across the world."
- "A 2010H2 slowdown is embedded in our economic forecasts, but it is important to be clear: in several parts of the world, such as China, and indeed globally, economic growth in the first half was running at above-trend levels, so a degree of slowing is both likely and desirable. We estimate that on a qoq annualised basis global growth will slow from an average of about 4.8% in the first half of 2010 to about 3.8% in the second half."
- "Even if one were confident about the better growth prospects ahead, this deceleration in growth momentum is likely to involve a fairly choppy period in asset markets. We find that currently both equity returns and bond yields are tracking at the lower end of the historical distribution of outcomes from previous instances of growth deceleration (that do not end in recessions)."
- "Given the scars from the acute financial and housing crash that preceded this recovery, and that policy is likely to be much more constrained if growth slows much further, it is possible to explain such a performance. And, although we find that a wide range of outcomes are consistent with the kind of growth deceleration that we have in our forecast, this poor starting point suggests that—absent a serious valuation overhang—a move to worse economic outcomes would normally be required for markets to deteriorate significantly."
GoldmanSachs Global Economics Weekly 20100714
- "A 2010H2 slowdown is embedded in our economic forecasts, but it is important to be clear: in several parts of the world, such as China, and indeed globally, economic growth in the first half was running at above-trend levels, so a degree of slowing is both likely and desirable. We estimate that on a qoq annualised basis global growth will slow from an average of about 4.8% in the first half of 2010 to about 3.8% in the second half."
- "Even if one were confident about the better growth prospects ahead, this deceleration in growth momentum is likely to involve a fairly choppy period in asset markets. We find that currently both equity returns and bond yields are tracking at the lower end of the historical distribution of outcomes from previous instances of growth deceleration (that do not end in recessions)."
- "Given the scars from the acute financial and housing crash that preceded this recovery, and that policy is likely to be much more constrained if growth slows much further, it is possible to explain such a performance. And, although we find that a wide range of outcomes are consistent with the kind of growth deceleration that we have in our forecast, this poor starting point suggests that—absent a serious valuation overhang—a move to worse economic outcomes would normally be required for markets to deteriorate significantly."
GoldmanSachs Global Economics Weekly 20100714
European bank stress tests: A preview
- "We view the upcoming release of the European banks stress test results as a potentially important inflection point for the market. The experience in the US last year suggests that properly executed stress tests can greatly improve confidence in the stability of the financial system. In Europe, they may ease concerns by ensuring that the sovereign crisis and a likely slowdown in euro area growth will not result in widespread bank failures."
- "We have a bias to be long risk as the results of the stress tests are released. First, the capital needs we estimate are not insurmountable, particularly given the programs already in place to address them: FROB in Spain, the SoFFin in Germany, and the Financial Stability Fund in Greece. In each case, the total needs are within the potential scope of the programs. Even if some programs have difficulty funding, it is possible that the European Financial Stability Facility (EFSF) would provide a backstop, given the relatively small size of the needs. Second, although pessimism has retreated somewhat as markets have rallied over the past two weeks, many investors are still very sceptical of the stress tests, suggesting room for upside surprises. Finally, for the majority of banks, transparency alone may succeed in restoring confidence. Any market stabilization due to the stress tests would be beneficial to banks, particularly if it allowed them to issue term debt at lower spreads and move away from covered bonds and ECB funding that they have been forced to use recently."
- "To achieve this, the tests must: create transparency and/or stress balance sheets with respect to loans to corporates and individuals, as well as sovereigns; differentiate
between strong and weak banks using a sufficiently high minimum core T1 capital
hurdle; and force recapitalization of failing banks, with governments positioned to
backstop institutions that are unlisted/unable to raise capital privately."
- "In our view, the institutions most likely to “fail” the stress tests – meaning be forced to raise new capital – are Spanish cajas, German Landesbanks, and Greek banks. Based on some simple assumptions using the information available from the European regulatory authorities, supplemented with the methodology used in the US stress tests, we estimate capital needs of EUR36bn for Spanish cajas, EUR34bn for German Landesbanks, and EUR8.6bn for Greek banks. Importantly, these estimates are based on a number of assumptions and are designed more to compare the potential capital needs with the programs in place to address them than to predict the exact results of the tests."
- "There are admittedly a number of risks to a long bias going into the release of the
results. According to our estimates, FROB may have to issue EUR34bn. Although this
could be spread out over time, difficulties in issuing cannot be ruled out while Spain
itself remains under scrutiny. Regulators may fail to create the transparency needed or
to set sufficiently aggressive loss assumptions. Capital hurdles may be set too low by
looking at T1 capital instead of core T1 capital. Bank books may be treated too lightly.
Finally, spreads have rallied over the past two weeks, suggesting the bar is no longer set so low that any disclosure whatsoever will cause a rally."
Barclays Credit Research 20100714
- "We have a bias to be long risk as the results of the stress tests are released. First, the capital needs we estimate are not insurmountable, particularly given the programs already in place to address them: FROB in Spain, the SoFFin in Germany, and the Financial Stability Fund in Greece. In each case, the total needs are within the potential scope of the programs. Even if some programs have difficulty funding, it is possible that the European Financial Stability Facility (EFSF) would provide a backstop, given the relatively small size of the needs. Second, although pessimism has retreated somewhat as markets have rallied over the past two weeks, many investors are still very sceptical of the stress tests, suggesting room for upside surprises. Finally, for the majority of banks, transparency alone may succeed in restoring confidence. Any market stabilization due to the stress tests would be beneficial to banks, particularly if it allowed them to issue term debt at lower spreads and move away from covered bonds and ECB funding that they have been forced to use recently."
- "To achieve this, the tests must: create transparency and/or stress balance sheets with respect to loans to corporates and individuals, as well as sovereigns; differentiate
between strong and weak banks using a sufficiently high minimum core T1 capital
hurdle; and force recapitalization of failing banks, with governments positioned to
backstop institutions that are unlisted/unable to raise capital privately."
- "In our view, the institutions most likely to “fail” the stress tests – meaning be forced to raise new capital – are Spanish cajas, German Landesbanks, and Greek banks. Based on some simple assumptions using the information available from the European regulatory authorities, supplemented with the methodology used in the US stress tests, we estimate capital needs of EUR36bn for Spanish cajas, EUR34bn for German Landesbanks, and EUR8.6bn for Greek banks. Importantly, these estimates are based on a number of assumptions and are designed more to compare the potential capital needs with the programs in place to address them than to predict the exact results of the tests."
- "There are admittedly a number of risks to a long bias going into the release of the
results. According to our estimates, FROB may have to issue EUR34bn. Although this
could be spread out over time, difficulties in issuing cannot be ruled out while Spain
itself remains under scrutiny. Regulators may fail to create the transparency needed or
to set sufficiently aggressive loss assumptions. Capital hurdles may be set too low by
looking at T1 capital instead of core T1 capital. Bank books may be treated too lightly.
Finally, spreads have rallied over the past two weeks, suggesting the bar is no longer set so low that any disclosure whatsoever will cause a rally."
Barclays Credit Research 20100714
The 5 best things about the Flash Crash
- "On May 6 2010, major U.S. market indices dropped by over 9%, with a 7% decline within one 15-minute span, temporarily evaporating $1 trillion in market capitalization, before recovering. The SEC has not yet determined what caused this event. In their examinations, the SEC is dealing with a world that has changed a lot from the traditional floor-based outcry model; the percentage of total volumes executed by floor brokers and specialists fell from 52% in 1999 to 7.5% as of 2007."
- "That’s why the Flash Crash discussion includes a focus on high-frequency trading. Market research estimates that HFT has grown in the U.S. to 70% of all trades (50%-60% of shares traded). In Japan, HFT is roughly 30% of all trading, and in Europe, 40%. The broad category of HFT includes funds that employ algorithms to arbitrage away market variances (e.g., between exchange traded funds and their component stocks), a benign and helpful function for markets. Other HFTs track the order flow of other participants to both influence and benefit from it, which engenders a lot more debate."
JPMorgan Eye on the Market 20100713
- "That’s why the Flash Crash discussion includes a focus on high-frequency trading. Market research estimates that HFT has grown in the U.S. to 70% of all trades (50%-60% of shares traded). In Japan, HFT is roughly 30% of all trading, and in Europe, 40%. The broad category of HFT includes funds that employ algorithms to arbitrage away market variances (e.g., between exchange traded funds and their component stocks), a benign and helpful function for markets. Other HFTs track the order flow of other participants to both influence and benefit from it, which engenders a lot more debate."
JPMorgan Eye on the Market 20100713
Where do stock market prices not follow earnings per share over a long period, and why?
- "We look at the situations of the United States, the euro zone, the United Kingdom and Japan and we compare trends in share prices and EPS (earnings per share). A significant difference in these developments can result from:
• marked changes in the determinants of PER (and therefore of long-term interest rates and growth);
• "parasitic" influences on stock market prices; for example sluggish growth in consumption can depress demand for stocks and stock market prices, even if EPS are on the rise."
- "The elasticity of stock market indices to EPS is too low, and above all in Japan where it is virtually zero. We show that in all likelihood:
• the changes in the determinants of PER do not explain the bias between stock market indices and PER;
• the trend in household consumption explains stock market indices better than EPS, and the slowdown in consumption plays a part in the weakness of the elasticity of indices to EPS, especially in Japan."
Natixis Special Report 20100709
• marked changes in the determinants of PER (and therefore of long-term interest rates and growth);
• "parasitic" influences on stock market prices; for example sluggish growth in consumption can depress demand for stocks and stock market prices, even if EPS are on the rise."
- "The elasticity of stock market indices to EPS is too low, and above all in Japan where it is virtually zero. We show that in all likelihood:
• the changes in the determinants of PER do not explain the bias between stock market indices and PER;
• the trend in household consumption explains stock market indices better than EPS, and the slowdown in consumption plays a part in the weakness of the elasticity of indices to EPS, especially in Japan."
Natixis Special Report 20100709
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