- Market movers ahead: Inflation across the CEE and Turkish rate decision "Even though Turkish inflation continues to be well-above the Turkish central bank’s (TCMB) official inflation target of 6.5% and the recovery in the Turkish economy appears to be quite robust, the TCMB continues to keep its relatively dovish stance. Hence, the Turkish central bank will keep its wait-and-see stance in monetary policy keeping rates unchanged next week with the key policy rate at 6.5% at its next week’s MPC meeting. Inflation for June is due for release across the CEE region. See page 7, where we take closer look at the inflation outlook in the EMEA region."
- FX Outlook: Will the summer calm hold... likely not "The total score in the Scorecard – adding up the individual score for all of the currencies in the Scorecard – has during this week been the most negative since February 2009 – and it is of course well-known that that indication correctly forecast a major sell-off in the EMEA currencies in Q1 09. Hence, the fact that the overall score is now so negative is a clear signal to us that that investors should take off risk in the EMEA FX markets and we would be looking for some kind of overall correction to hit the EMEA FX markets sooner rather than later. The South African rand remains the lowest scoring currency in the EMEA FX Scorecard. It is notable that the rand not only scores poorly overall, but that all the sub scores look quite weak. Therefore we continue to recommend investors to be short in this currency."
- Scorecard-based trade of the week Buy RON/ZAR "Last week we recommend buying CZK/ZAR based on our EMEA FX Scorecard. That trade is up marginally over the week. This week the rand is still the lowest scoring currency in the EMEA FX Scorecard, while the Romanian leu is now the highest scoring currency in the Scorecard. We therefore recommend buying RON/ZAR going into next week."
DenDanske EMEA Weekly 20100709
Weekly Credit Update
- "Credit indices have traded tighter during the week"
- "Strong activity in the primary market despite the holiday season"
DenDanske Weekly Credit Update 20100709
- "Strong activity in the primary market despite the holiday season"
DenDanske Weekly Credit Update 20100709
Readings
Austerity is not the only option - Financial Times
An Interesting Ratio - Early Warning
China won't dump U.S. Treasuries or pile into gold - Reuters
To Fix Sour Property Deals, Lenders 'Extend and Pretend' - Wall Street Journal
Reserves and other early warning indicators work in crisis after all - Vox EU
Croatia: On The Brink of What? - Credit Writedowns
On Not Owning a Credit Card - New Deal 2.0
Federal Reserve weighs steps to offset slowdown in economic recovery - WaPo
Lumber - Financial Times
Toxic bank assets haven't gone away yet - CNN Money
The Rising Threat of Deflation - AEI Online
An Interesting Ratio - Early Warning
China won't dump U.S. Treasuries or pile into gold - Reuters
To Fix Sour Property Deals, Lenders 'Extend and Pretend' - Wall Street Journal
Reserves and other early warning indicators work in crisis after all - Vox EU
Croatia: On The Brink of What? - Credit Writedowns
On Not Owning a Credit Card - New Deal 2.0
Federal Reserve weighs steps to offset slowdown in economic recovery - WaPo
Lumber - Financial Times
Toxic bank assets haven't gone away yet - CNN Money
The Rising Threat of Deflation - AEI Online
European Banks: Who's testing who?
- "The Committee of European Banking Supervisors (CEBS) will be publishing its stress tests on July 23. Following on from our indicative stress test note (“Euro zone stress test”, 18 June), we have expanded our analysis to include the Landesbanks and Cajas."
- "The most important point to make is that although it is the banking sector that is formally being tested, the real test is of the official sector itself: Given the amount of information which is available already, it is not reasonable to suppose that the stress test will provide the bank funding market with important news about intrinsic creditworthiness. The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test - it is this, not the capital position of European banks, which is the subject of severe market uncertainty, in our opinion."
- "We assess the total bailout capacity of the European official sector as being potentially as much as €900bn, with €130bn available with reasonable availability and certainty:. We would regard the stress test as a “success” in so far as it demonstrates that the political, legal and administrative structures are available to provide an effective lender of last resort to the euro area banking system. Our best case would be one in which it was demonstrated that the resources of the EFSF were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding. In either case, our favoured stocks would be BNP Paribas and Santander."
CreditSuisse European Banks 20100708
- "The most important point to make is that although it is the banking sector that is formally being tested, the real test is of the official sector itself: Given the amount of information which is available already, it is not reasonable to suppose that the stress test will provide the bank funding market with important news about intrinsic creditworthiness. The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test - it is this, not the capital position of European banks, which is the subject of severe market uncertainty, in our opinion."
- "We assess the total bailout capacity of the European official sector as being potentially as much as €900bn, with €130bn available with reasonable availability and certainty:. We would regard the stress test as a “success” in so far as it demonstrates that the political, legal and administrative structures are available to provide an effective lender of last resort to the euro area banking system. Our best case would be one in which it was demonstrated that the resources of the EFSF were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding. In either case, our favoured stocks would be BNP Paribas and Santander."
CreditSuisse European Banks 20100708
Underestimated
- "“Do not underestimate the eurozone” was the message that Mr. Trichet sent in today’s press conference. It was a message carefully calibrated to instill confidence without sounding too optimistic, and it was exactly the right message to send at the current juncture."
- "Over the last couple of months, fears of a double-dip recession have at times escalated into needless scaremongering that risks undermining already fragile business and consumer confidence, as well as popular support for much needed fiscal and structural reforms."
- "Trichet noted that economic activity indicators in no way justify fears of a double-dip recession, and that if anything European growth is providing positive surprises compared to
excessively low expectations; he went on to stress the importance of fiscal sustainability and structural reforms to ensure robust sustainable growth in living standards. He also argued that many market participants had underestimated the ability of EU and national policymakers to take very difficult decisions, ranging from the EUR440bn stabilization fund to the national fiscal consolidation plans, and that confidence seems now to be gradually returning as investors price in the full import of these policy decisions. He underscored that bank stress tests should now be carried out in the right way and followed up with appropriate steps to strengthen banks balance sheets where needed, but overall sounded guardedly
optimistic that this would indeed happen."
- "I also believe that recent decisions by some individual governments suggest that they might
have acknowledged that courageous steps are needed—Spain is probably the most encouraging example. The next few months will tell us whether governments have the determination to push ahead with reforms. But the publication of the banks stress tests is now
the make-or-break challenge for the eurozone, a one-shot opportunity to clean up the banking system, bolstering balance sheets and investor confidence. If this is done right, Europe should
be able to dispel once and for all fears that a Japanese-style lost decade might lie ahead."
Unicredit Market Sense 20100708
- "Over the last couple of months, fears of a double-dip recession have at times escalated into needless scaremongering that risks undermining already fragile business and consumer confidence, as well as popular support for much needed fiscal and structural reforms."
- "Trichet noted that economic activity indicators in no way justify fears of a double-dip recession, and that if anything European growth is providing positive surprises compared to
excessively low expectations; he went on to stress the importance of fiscal sustainability and structural reforms to ensure robust sustainable growth in living standards. He also argued that many market participants had underestimated the ability of EU and national policymakers to take very difficult decisions, ranging from the EUR440bn stabilization fund to the national fiscal consolidation plans, and that confidence seems now to be gradually returning as investors price in the full import of these policy decisions. He underscored that bank stress tests should now be carried out in the right way and followed up with appropriate steps to strengthen banks balance sheets where needed, but overall sounded guardedly
optimistic that this would indeed happen."
- "I also believe that recent decisions by some individual governments suggest that they might
have acknowledged that courageous steps are needed—Spain is probably the most encouraging example. The next few months will tell us whether governments have the determination to push ahead with reforms. But the publication of the banks stress tests is now
the make-or-break challenge for the eurozone, a one-shot opportunity to clean up the banking system, bolstering balance sheets and investor confidence. If this is done right, Europe should
be able to dispel once and for all fears that a Japanese-style lost decade might lie ahead."
Unicredit Market Sense 20100708
A rather dangerous situation: Excess corporate savings
- "In several countries (United States, Japan, United Kingdom, and Germany prior to the crisis) companies have excess savings in the sense that their profits exceed their investment needs and they are accumulating financial assets."
- "These excess corporate savings reveal an abnormal income sharing at the expense of wage earners. They always generate macroeconomic imbalances:
• if they are offset by household indebtedness (the household savings rate is then low), they trigger a crisis linked to this indebtedness when it becomes excessive (United States, United Kingdom prior to the crisis);
• if they are not offset by household indebtedness (Germany, Japan), there are excess savings overall in the country, an external surplus and chronically sluggish domestic demand."
- "It would therefore be better if countries conducted income sharing policies leading to faster pay rises when corporate savings become excessive."
Natixis Flash Economics 343 20100701
- "These excess corporate savings reveal an abnormal income sharing at the expense of wage earners. They always generate macroeconomic imbalances:
• if they are offset by household indebtedness (the household savings rate is then low), they trigger a crisis linked to this indebtedness when it becomes excessive (United States, United Kingdom prior to the crisis);
• if they are not offset by household indebtedness (Germany, Japan), there are excess savings overall in the country, an external surplus and chronically sluggish domestic demand."
- "It would therefore be better if countries conducted income sharing policies leading to faster pay rises when corporate savings become excessive."
Natixis Flash Economics 343 20100701
How to prevent the euro zone from being stifled by debt (public and private): An unorthodox proposal (which has no chance of being accepted)
- "The euro-zone economy risks being stifled by debt (public and private) due to its low level of long-term nominal growth. A reduction in debt ratios therefore requires an effort of public and private savings and spending cuts which destroys growth (as was seen in Japan for private debt, whereas in the euro zone public debt is also likely to be involved and the situation is therefore likely to be worse than in Japan)."
- "To avoid this situation of asphyxiation by debt, the following (desperate) plan could be imagined:
• force through a 20% wage increase in all the euro-zone countries;
• give the ECB instructions not to react to inflation but to devalue the euro by 20%."
- "Price competitiveness would then be maintained and there would be a reduction in debt ratios due to negative real interest rates, while demand and investment would be stimulated."
- "Be reassured, this plan will never be applied."
Natixis Flash Economics 342 20100701
- "To avoid this situation of asphyxiation by debt, the following (desperate) plan could be imagined:
• force through a 20% wage increase in all the euro-zone countries;
• give the ECB instructions not to react to inflation but to devalue the euro by 20%."
- "Price competitiveness would then be maintained and there would be a reduction in debt ratios due to negative real interest rates, while demand and investment would be stimulated."
- "Be reassured, this plan will never be applied."
Natixis Flash Economics 342 20100701
Financial regulation: It is the incentive effects that count
- "Banking and financial regulation is often analysed in a superficial way. For instance, finance and banks must be taxed because profits in these sectors are high; financial intermediaries must hold more capital to reduce the risk of going bankrupt."
- "But in order to be effective, financial and banking regulation must be based on the incentives it generates for financial intermediaries. Let us take a few examples:
• taxing financial transactions is effective because it encourages holders of financial assets to hold on to them longer. A shortening of the holding period for assets actually generates a harmful variability, i.e. erratic capital flows to emerging countries, abnormal asset price volatility and discouragement of issuers and institutional investors;
• taxing banks based on their total assets is most often counterproductive. It probably does not discourage the banks from engaging in excessively risky activities - but it probably encourages them to reduce the size of their balance sheet, and therefore essentially to reduce lending;
• an increase in capital requirements for banks, not linked to the risk they take but a uniform increase (which is to a large extent the case with the changeover from Basel II to Basel III) does not lead banks to take less risk (which is the case when the additional capital is linked to the banks’ most risky activities), but either to reduce credit supply (to limit capital
consumption), or to take more risk (to obtain a return on the excessively large capital)."
- "It is therefore the specific incentive effects of financial regulation, and not its characteristics - which at first sight may seem suitable - that must be analysed."
Natixis Flash Economics 341 20100701
- "But in order to be effective, financial and banking regulation must be based on the incentives it generates for financial intermediaries. Let us take a few examples:
• taxing financial transactions is effective because it encourages holders of financial assets to hold on to them longer. A shortening of the holding period for assets actually generates a harmful variability, i.e. erratic capital flows to emerging countries, abnormal asset price volatility and discouragement of issuers and institutional investors;
• taxing banks based on their total assets is most often counterproductive. It probably does not discourage the banks from engaging in excessively risky activities - but it probably encourages them to reduce the size of their balance sheet, and therefore essentially to reduce lending;
• an increase in capital requirements for banks, not linked to the risk they take but a uniform increase (which is to a large extent the case with the changeover from Basel II to Basel III) does not lead banks to take less risk (which is the case when the additional capital is linked to the banks’ most risky activities), but either to reduce credit supply (to limit capital
consumption), or to take more risk (to obtain a return on the excessively large capital)."
- "It is therefore the specific incentive effects of financial regulation, and not its characteristics - which at first sight may seem suitable - that must be analysed."
Natixis Flash Economics 341 20100701
Readings
Office Vacancy Rate Keeps Climbing - Wall Street Journal
Who’s the bank with the golden swap? - FT Alphaville
The Swiss National Bank Makes A U-Turn..... - Immobilienblasen
Italy Is the Ticking Time Bomb: Economist - CNBC
Is End of Europe’s Debt Crisis Near? - WSJ MarketBeat
Expect lots of government layoffs at state, local level - USA Today
Demand shortfall casts doubt on early austerity - Financial Times
Modern monetary theory and inflation Part 1 - Billy Blog
Will abandoning the dollar peg help China rebalance its economy? - Vox EU
Who’s the bank with the golden swap? - FT Alphaville
The Swiss National Bank Makes A U-Turn..... - Immobilienblasen
Italy Is the Ticking Time Bomb: Economist - CNBC
Is End of Europe’s Debt Crisis Near? - WSJ MarketBeat
Expect lots of government layoffs at state, local level - USA Today
Demand shortfall casts doubt on early austerity - Financial Times
Modern monetary theory and inflation Part 1 - Billy Blog
Will abandoning the dollar peg help China rebalance its economy? - Vox EU
The Second-Half Slowdown Has Begun
- "The economic data have weakened noticeably over the past few weeks. This is
consistent with our long-standing forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This weakness was visible in both the ISM manufacturing index and the employment report for June—the two monthly releases that receive the maximum importance score of 5 in our US-MAP rating scale."
- "As the inventory cycle ends, we expect the ISM index to fall from a recent peak of just over 60 to around 50. The drop in June to 56.2 was probably the first significant step on this path."
- "The employment report also points to a slowdown in the manufacturing sector. While manufacturing payrolls logged another (small) increase, the manufacturing workweek fell by ½ hour, which is in the 4th percentile of month-to-month changes in a data series that stretches back seven decades."
- "More broadly, the employment report was substantially weaker than suggested by the roughly “in line with consensus” headlines. This was most visible in the household survey. The employment/population ratio showed the second consecutive drop to 58.5% and is now halfway back to the 25- year low of 58.2% seen last December."
- "For the most part, we view the recent weakening in the data as a confirmation of our view that growth is indeed slowing significantly in the second half. However, there is some downside risk to our forecast of a gradual reacceleration in 2011 (to about 3% on a Q4/Q4 basis). The main reason for this is not so much the economic indicators themselves, but the shift in the fiscal policy climate to increasing emphasis on consolidation at a time when the data would be calling for more stimulus."
GoldmanSachs US Economics Analyst 20100702
consistent with our long-standing forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This weakness was visible in both the ISM manufacturing index and the employment report for June—the two monthly releases that receive the maximum importance score of 5 in our US-MAP rating scale."
- "As the inventory cycle ends, we expect the ISM index to fall from a recent peak of just over 60 to around 50. The drop in June to 56.2 was probably the first significant step on this path."
- "The employment report also points to a slowdown in the manufacturing sector. While manufacturing payrolls logged another (small) increase, the manufacturing workweek fell by ½ hour, which is in the 4th percentile of month-to-month changes in a data series that stretches back seven decades."
- "More broadly, the employment report was substantially weaker than suggested by the roughly “in line with consensus” headlines. This was most visible in the household survey. The employment/population ratio showed the second consecutive drop to 58.5% and is now halfway back to the 25- year low of 58.2% seen last December."
- "For the most part, we view the recent weakening in the data as a confirmation of our view that growth is indeed slowing significantly in the second half. However, there is some downside risk to our forecast of a gradual reacceleration in 2011 (to about 3% on a Q4/Q4 basis). The main reason for this is not so much the economic indicators themselves, but the shift in the fiscal policy climate to increasing emphasis on consolidation at a time when the data would be calling for more stimulus."
GoldmanSachs US Economics Analyst 20100702
EMU Break-up: Quantifying the Unthinkable
- "Suddenly the unthinkable is thinkable. The possibility that one or more of the members of European Monetary Union (EMU) might leave is no longer being dismissed, even by Eurozone politicians. In this report, we discuss not the probability of this – readers will doubtless have their own views – but rather its potential economic and financial market impact. Complete break-up would have effects that dwarf the post Lehman Brothers collapse."
- "EMU was designed to be irreversible. The sovereign debt crisis has set the markets thinking that this may no longer be so. German politicians are talking openly of EMU exit being an option. But given the political dimension of decisions to leave EMU, there is no definitive way of assessing their probability, although this does not stop commentators debating it endlessly."
- "Our purpose in this report is rather different; we assess not the probability of EMU break-up, but its impact. Calibrating the impact is especially challenging, given the unprecedentedscale and ambition of EMU. Indeed, it might be said that this is trying to “quantify the unquantifiable”. Nevertheless, faced with this risk, investors need to take a view."
- "We evaluate two boundary cases: a Greek exit and a complete break-up. Although there are many permutations in between, our results should give some indication of their potential impact as well."
- "While the initial economic damage of a Greek exit is naturally focused on Greece itself, the effects elsewhere are non-trivial. While Greek output falls by 7½% relative to our base case, the remaining Eurozone economies could see their output fall by as much as 1%. Losses on Greek assets spread the pain across Europe and beyond."
- "By comparison, the impact of complete break-up is dramatic and traumatic. In the first year, output falls by between 5%and 9% across the various former member states, and asset prices plummet. With their new currencies falling by 50% or more, the peripheral economies such as Spain and Portugal see their inflation rates soar towards double-digits. Meanwhile, Germany and other core countries suffer a deflationary shock. Indeed, with the US dollar surging on safe haven flows to the equivalent of 0.85 EUR/USD, the US also suffers a bout of deflation."
- "As a result, the break-up scenario leads to massive divergence in both interest rates and bond yields. Ten year bond yields in Germany fall below 1% while those in the peripheral markets might soar into a 7-12% range."
- "Some argue that the current sovereign debt crisis has exposed EMU as not being what economists would call an optimal currency area. We do not address the potential long-term pros and cons of dismantling EMU here. However, the initial trauma outlined in this report is sufficiently grave to give pause for thought to those who blithely propose EMU exit as policy option."
INGBank Global Economics 20100707
- "EMU was designed to be irreversible. The sovereign debt crisis has set the markets thinking that this may no longer be so. German politicians are talking openly of EMU exit being an option. But given the political dimension of decisions to leave EMU, there is no definitive way of assessing their probability, although this does not stop commentators debating it endlessly."
- "Our purpose in this report is rather different; we assess not the probability of EMU break-up, but its impact. Calibrating the impact is especially challenging, given the unprecedentedscale and ambition of EMU. Indeed, it might be said that this is trying to “quantify the unquantifiable”. Nevertheless, faced with this risk, investors need to take a view."
- "We evaluate two boundary cases: a Greek exit and a complete break-up. Although there are many permutations in between, our results should give some indication of their potential impact as well."
- "While the initial economic damage of a Greek exit is naturally focused on Greece itself, the effects elsewhere are non-trivial. While Greek output falls by 7½% relative to our base case, the remaining Eurozone economies could see their output fall by as much as 1%. Losses on Greek assets spread the pain across Europe and beyond."
- "By comparison, the impact of complete break-up is dramatic and traumatic. In the first year, output falls by between 5%and 9% across the various former member states, and asset prices plummet. With their new currencies falling by 50% or more, the peripheral economies such as Spain and Portugal see their inflation rates soar towards double-digits. Meanwhile, Germany and other core countries suffer a deflationary shock. Indeed, with the US dollar surging on safe haven flows to the equivalent of 0.85 EUR/USD, the US also suffers a bout of deflation."
- "As a result, the break-up scenario leads to massive divergence in both interest rates and bond yields. Ten year bond yields in Germany fall below 1% while those in the peripheral markets might soar into a 7-12% range."
- "Some argue that the current sovereign debt crisis has exposed EMU as not being what economists would call an optimal currency area. We do not address the potential long-term pros and cons of dismantling EMU here. However, the initial trauma outlined in this report is sufficiently grave to give pause for thought to those who blithely propose EMU exit as policy option."
INGBank Global Economics 20100707
Spain: Solvent with risks
- "Spain has been a key focus of investor attention during the past few months. While its sovereign debt dynamics are somewhat challenging, the involvement of its banking system in the real estate sector has been the key source of uncertainty. Because of its size relative to other countries under investor scrutiny, the fate of Spain to a large extent may determine that of the euro area."
- "The Spanish banking sector is heavily exposed to the construction and developers sector (EUR445bn or 25% of total loans). We project losses net of provisions, profits and recoveries of about EUR46bn (ie, about 4.4% of GDP). The risks of bank exposures to residential real estate are limited, as LTV ratios for residential mortgages are moderate, household affordability levels remain contained, and provisions coverage and estimated recovery rates on collateral would be able to absorb expected losses."
- "Adding the quasi-fiscal costs for bank recapitalisation and other conservative assumptions (including lacklustre growth), the government needs a primary balance adjustment of about 12% of GDP over the next five years to stabilise the public debt-to-GDP ratio at around 80%. The government fiscal plan to cut the overall deficit to 6% of GDP by 2011 and to 3% by 2013 could be consistent with a sustainable debt path if the plan is extended beyond 2013."
- "While in principle Spain and its banking system are solvent, there is a series of key risks. First, any changes in ECB liquidity policy could put Spanish banks in a difficult position as, for the time being, they are heavily dependent on it. Second, by October a new budget will be presented by the government. Lack of support could precipitate a government crisis. Third, failure to implement the pension reform currently under discussion would cast solvency doubts."
- "Overall we do not want to downplay these implementation risks. Spain is certainly vulnerable to them as well as to an increase in global risk aversion. But at the same time, these risks are known and followed closely. Current problems are challenging but still manageable, in our view."
Barclays Economics Research 20100707
- "The Spanish banking sector is heavily exposed to the construction and developers sector (EUR445bn or 25% of total loans). We project losses net of provisions, profits and recoveries of about EUR46bn (ie, about 4.4% of GDP). The risks of bank exposures to residential real estate are limited, as LTV ratios for residential mortgages are moderate, household affordability levels remain contained, and provisions coverage and estimated recovery rates on collateral would be able to absorb expected losses."
- "Adding the quasi-fiscal costs for bank recapitalisation and other conservative assumptions (including lacklustre growth), the government needs a primary balance adjustment of about 12% of GDP over the next five years to stabilise the public debt-to-GDP ratio at around 80%. The government fiscal plan to cut the overall deficit to 6% of GDP by 2011 and to 3% by 2013 could be consistent with a sustainable debt path if the plan is extended beyond 2013."
- "While in principle Spain and its banking system are solvent, there is a series of key risks. First, any changes in ECB liquidity policy could put Spanish banks in a difficult position as, for the time being, they are heavily dependent on it. Second, by October a new budget will be presented by the government. Lack of support could precipitate a government crisis. Third, failure to implement the pension reform currently under discussion would cast solvency doubts."
- "Overall we do not want to downplay these implementation risks. Spain is certainly vulnerable to them as well as to an increase in global risk aversion. But at the same time, these risks are known and followed closely. Current problems are challenging but still manageable, in our view."
Barclays Economics Research 20100707
Eurozone: Q&A on the risk of a double-dip recession
- "We provide a brief assessment of the risk of double-dip recession in the eurozone. Neither the slowdown in global growth nor the fading of the boost from the inventory cycle should be enough to derail the (moderate) recovery. Fiscal tightening is likely to prove manageable as well."
- "Significant currency depreciation is acting as an automatic stabilizer and will help overcome some of the headwinds that the eurozone will face in the coming quarters. Disorderly moves in financial markets pose the most serious challenge to our moderate recovery story."
- "We see a 10% probability of a double-dip recession, which is the same probability that we assign to a best-case scenario of growth significantly exceeding our current GDP forecasts of 1% for 2010 and 1.3% for 2011. From a timing perspective, the risk of recession is highest between the end of this year and the beginning of 2011."
Unicredit Economics Special 20100707
- "Significant currency depreciation is acting as an automatic stabilizer and will help overcome some of the headwinds that the eurozone will face in the coming quarters. Disorderly moves in financial markets pose the most serious challenge to our moderate recovery story."
- "We see a 10% probability of a double-dip recession, which is the same probability that we assign to a best-case scenario of growth significantly exceeding our current GDP forecasts of 1% for 2010 and 1.3% for 2011. From a timing perspective, the risk of recession is highest between the end of this year and the beginning of 2011."
Unicredit Economics Special 20100707
Barclays: Breaking up’s not hard to do
- Initiating coverage with Outperform rating "We initiate coverage of Barclays with an Outperform rating and a Target Price of 399p. Barclays is not only a play on a robust recovery in earnings post the credit-crisis, but is also as a possible restructuring story."
- Trading at discount due to dominance of investment banking "Barclays is perceived as having emerged from the credit crisis as a winner, but trades at a meaningful discount to its peers. This is surely linked to the fact that in Q1 2010 investment banking generated 81% of pre-tax profits. In a bid to balance the business, Barclays has a goal of reducing the contribution of investment banking to 30% of earnings. This cannot be achieved through an organic growth strategy. Similarly, a large retail banking acquisition would carry substantial execution risks and meet with considerable regulatory and political opposition."
- A break-up could offer shareholders substantial upside "As a consequence, we think Barclays is evaluating a break-up of the bank Political considerations and commercial imperative would see investment/corporate banking and Barclays Wealth spun off into a NewCo, leaving the remaining Barclays business as a pure play on retail banking. Valuing the two businesses using peer group multiples, which are currently at depressed levels, suggests this could provide upside for shareholders of between 27% and 39%."
- Catalyst needed to unlock the fundamental valuation "Our sum-of-the-parts valuation of 399p reflects adjusted earnings enjoying a CAGR of 38% between 2009 and 2012, on the back of falling impairments (a decline from 164bps to 83bps) and harvesting the investment in Barclays Capital. In addition, our pro-forma 2011e Basel III Core Tier 1 ratio (base case) of 8% looks adequate and the sale of the Blackrock stake could add 100bps. The increasing prospect of a breakup should provide further support to these positive fundamentals."
Mediobanca Initiating Coverage 20100706
- Trading at discount due to dominance of investment banking "Barclays is perceived as having emerged from the credit crisis as a winner, but trades at a meaningful discount to its peers. This is surely linked to the fact that in Q1 2010 investment banking generated 81% of pre-tax profits. In a bid to balance the business, Barclays has a goal of reducing the contribution of investment banking to 30% of earnings. This cannot be achieved through an organic growth strategy. Similarly, a large retail banking acquisition would carry substantial execution risks and meet with considerable regulatory and political opposition."
- A break-up could offer shareholders substantial upside "As a consequence, we think Barclays is evaluating a break-up of the bank Political considerations and commercial imperative would see investment/corporate banking and Barclays Wealth spun off into a NewCo, leaving the remaining Barclays business as a pure play on retail banking. Valuing the two businesses using peer group multiples, which are currently at depressed levels, suggests this could provide upside for shareholders of between 27% and 39%."
- Catalyst needed to unlock the fundamental valuation "Our sum-of-the-parts valuation of 399p reflects adjusted earnings enjoying a CAGR of 38% between 2009 and 2012, on the back of falling impairments (a decline from 164bps to 83bps) and harvesting the investment in Barclays Capital. In addition, our pro-forma 2011e Basel III Core Tier 1 ratio (base case) of 8% looks adequate and the sale of the Blackrock stake could add 100bps. The increasing prospect of a breakup should provide further support to these positive fundamentals."
Mediobanca Initiating Coverage 20100706
Normal and efficient deindustrialisation or undesirable deindustrialisation?
- "Within a currency area, countries (regions) specialise in terms of production as they make use of their comparative advantages. The deindustrialisation of some countries is therefore perfectly normal and efficient in terms of wellbeing if it actually corresponds to comparative advantages leading them to become service economies."
- "By contrast, other countries may deindustrialise "by mistake", because of poor economic policies (labour market rules, taxes, ill-adapted corporate financing, loss of cost-competitiveness), while they ought to remain industrial given the education of the labour force, the investment and R&D drive, etc."
- "It is very important to draw a distinction between these two types of countries, to ascertain where reindustrialisation (and what it entails: control of wage costs, productive investment drive, government aid, cuts in payroll taxes) makes sense. We study euro-zone countries from this viewpoint. We show that deindustrialisation is "excessive" in France, Spain, Italy, Belgium and Finland; that it is "normal" in Greece and Ireland; and that it is low in Germany, the Netherlands, Austria and Portugal."
Natixis Flash Economics 340 20100701
- "By contrast, other countries may deindustrialise "by mistake", because of poor economic policies (labour market rules, taxes, ill-adapted corporate financing, loss of cost-competitiveness), while they ought to remain industrial given the education of the labour force, the investment and R&D drive, etc."
- "It is very important to draw a distinction between these two types of countries, to ascertain where reindustrialisation (and what it entails: control of wage costs, productive investment drive, government aid, cuts in payroll taxes) makes sense. We study euro-zone countries from this viewpoint. We show that deindustrialisation is "excessive" in France, Spain, Italy, Belgium and Finland; that it is "normal" in Greece and Ireland; and that it is low in Germany, the Netherlands, Austria and Portugal."
Natixis Flash Economics 340 20100701
Will Germany take advantage of its role as exporter to become the locomotive of the euro zone?
- "We shall compare Germany, France, Italy and Spain. The weight of exports, and especially exports to high-growth countries, is far higher in Germany than in the other three countries, a fact that should be favourable to Germany in the future."
- "However, will Germany become the locomotive of the euro zone given that the other countries are weakened by the fact that indebtedness is not increasing?"
- "To answer this question, we must take into account:
• outsourcing by German industry: exports can have a very large content of imports from emerging countries and not generate much value added in Germany, nor a large amount of additional exports from euro-zone countries to Germany;
• the ongoing wage squeeze policy, hence the sluggish demand from German households and therefore the sluggish activity in Germany."
- "All in all, given these features, one should not overestimate Germany's potential role as locomotive for the euro zone."
Natixis Flash Economics 336 20100630
- "However, will Germany become the locomotive of the euro zone given that the other countries are weakened by the fact that indebtedness is not increasing?"
- "To answer this question, we must take into account:
• outsourcing by German industry: exports can have a very large content of imports from emerging countries and not generate much value added in Germany, nor a large amount of additional exports from euro-zone countries to Germany;
• the ongoing wage squeeze policy, hence the sluggish demand from German households and therefore the sluggish activity in Germany."
- "All in all, given these features, one should not overestimate Germany's potential role as locomotive for the euro zone."
Natixis Flash Economics 336 20100630
Will central banks be able to simultaneously pursue their current multiple objectives?
- "Central banks have a traditional objective, i.e. price stability, but the economic crisis has added several other objectives:
• financing of banks (lender of last resort);
• maintaining liquidity in the financial markets (in particular those where banks finance themselves);
• financing of countries to prevent sovereign borrower defaults."
- "The analysis of pre-crisis developments has also led to an objective of stabilisation of credit (private-sector indebtedness) and asset prices."
- "Can central banks simultaneously have the following objectives: control of inflation, credit and asset prices, financial stability, absence of defaults among banks or countries, and financial market liquidity?"
- "We seek to ascertain whether:
• these objectives may clash;
• central banks have a sufficient number of instruments."
- "In fact, there should be two regimes:
• one regime for the normal functioning of the economy, where the main problem has become indebtedness and asset prices, and no longer inflation for a long time; in this regime central banks would need more instruments;
• a crisis regime, where the problem is defaults of banks and countries and financial market liquidity."
- "So the key problem for central banks is the transition from the second regime to the first, given the massive liquidity creation in the crisis regime."
Natixis Flash Economics 335 20100630
• financing of banks (lender of last resort);
• maintaining liquidity in the financial markets (in particular those where banks finance themselves);
• financing of countries to prevent sovereign borrower defaults."
- "The analysis of pre-crisis developments has also led to an objective of stabilisation of credit (private-sector indebtedness) and asset prices."
- "Can central banks simultaneously have the following objectives: control of inflation, credit and asset prices, financial stability, absence of defaults among banks or countries, and financial market liquidity?"
- "We seek to ascertain whether:
• these objectives may clash;
• central banks have a sufficient number of instruments."
- "In fact, there should be two regimes:
• one regime for the normal functioning of the economy, where the main problem has become indebtedness and asset prices, and no longer inflation for a long time; in this regime central banks would need more instruments;
• a crisis regime, where the problem is defaults of banks and countries and financial market liquidity."
- "So the key problem for central banks is the transition from the second regime to the first, given the massive liquidity creation in the crisis regime."
Natixis Flash Economics 335 20100630
Strategy Forum
- "Our basic call is more constructive than the consensus on the global outlook, and it hinges on three factors that we address today: prospects for the US economy, European banks, and China."
- "Looking at the US economy, David Greenlaw explains why he is not in the double-dip camp."
- "Then Huw van Steenis from our European banks team comments on the forthcoming stress tests."
- "And finally, our EM equity strategist Jonathan Garner explores his outlook for the Chinese economy and EM equity markets."
Morgan Stanley Strategy Forum 20100706
- "Looking at the US economy, David Greenlaw explains why he is not in the double-dip camp."
- "Then Huw van Steenis from our European banks team comments on the forthcoming stress tests."
- "And finally, our EM equity strategist Jonathan Garner explores his outlook for the Chinese economy and EM equity markets."
Morgan Stanley Strategy Forum 20100706
More Than One Way to Skin the Liquidity Cat
- Asia: Investors’ concerns about excessive equity issuance are overdone — "Even if all the currently planned equity is issued, it would represent a mere 2.6% of the region’s market cap (vs. historical high of 5.3%) or 1.7% of all bank deposits. Nor is equity issuance a reliable indicator of future market performance. Equity issuance is concentrated in China, Korea and India, and sector-wise, in banks, industrials and materials."
- Taiwan: ECFA Favors the Banks — "For the banks, while the profit impact from China would be 3-5 years, a capex recovery – partly catalyzed by ECFA – could generate improving margins and loan growth in the early years."
- Thailand: Entering A Virtuous Cycle — "Thailand looks to be entering a virtuous cycle with growth engines firing on all cylinders. This is not cyclical, in our view, but a multi-year secular growth story after years of disappointing politics."
- Fun with Flows: Flows weaken — "Inflows to all emerging market equity funds fell to US$949m last week vs. an average of US$2.3b/week in prior two weeks. While redemptions from LatAm funds tripled WoW, flows to EMEA funds turned negative for the first time in four weeks. Inflows to GEM funds, which were remarkably strong earlier, trailed Asian equity funds by 23%. As for developed markets, outflows from Global and Japan funds rose to the highest level in five weeks, totaling US$1.2b."
- Market Sentiment — "Sentiment has been mixed among Asian markets. Risk appetite in India has improved the most since mid June, while our sentiment indicators for Hong Kong, Korea and Singapore have hardly moved, suggesting that investors remain skeptical on the investment outlook. In Taiwan and Malaysia, risk tolerance levels are now below historical averages."
Citigroup Asia Investigator 20100706
- Taiwan: ECFA Favors the Banks — "For the banks, while the profit impact from China would be 3-5 years, a capex recovery – partly catalyzed by ECFA – could generate improving margins and loan growth in the early years."
- Thailand: Entering A Virtuous Cycle — "Thailand looks to be entering a virtuous cycle with growth engines firing on all cylinders. This is not cyclical, in our view, but a multi-year secular growth story after years of disappointing politics."
- Fun with Flows: Flows weaken — "Inflows to all emerging market equity funds fell to US$949m last week vs. an average of US$2.3b/week in prior two weeks. While redemptions from LatAm funds tripled WoW, flows to EMEA funds turned negative for the first time in four weeks. Inflows to GEM funds, which were remarkably strong earlier, trailed Asian equity funds by 23%. As for developed markets, outflows from Global and Japan funds rose to the highest level in five weeks, totaling US$1.2b."
- Market Sentiment — "Sentiment has been mixed among Asian markets. Risk appetite in India has improved the most since mid June, while our sentiment indicators for Hong Kong, Korea and Singapore have hardly moved, suggesting that investors remain skeptical on the investment outlook. In Taiwan and Malaysia, risk tolerance levels are now below historical averages."
Citigroup Asia Investigator 20100706
Double Dip Unlikely
- Rollover — "Recent falls in global economic lead indicators and analysts’ revision ratios have raised concerns of a double dip in the global economy. As a result, global equities fell 13% in 2Q10."
- Fears Overdone — "Our economists expect a sustained but uneven global recovery. A rollover in analysts’ net EPS revisions is normal for this point in the cycle. Fears of a global double-dip look overdone in our view."
- Global Equities Just 10x PE — "Cost-cutting and subsequent operational leverage means that we think bottom-up analysts’ forecasts of double-digit global EPS growth in 2011 are achievable. Global equities are currently trading on 10x 2011 EPS forecasts."
- Overweight Japan, UK and Emerging Markets — "Japan is our preferred recovery play. The UK looks cheap in our view, with decent earnings momentum. Premium economic growth means that we remain Overweight EM."
- Global Sector Strategy — "Our belief that double dip fears are overdone means that we Overweight the cyclical sectors where earnings momentum should remain healthy. We are Underweight defensive sectors."
Citigroup Global Equity Quarterly 20100706
- Fears Overdone — "Our economists expect a sustained but uneven global recovery. A rollover in analysts’ net EPS revisions is normal for this point in the cycle. Fears of a global double-dip look overdone in our view."
- Global Equities Just 10x PE — "Cost-cutting and subsequent operational leverage means that we think bottom-up analysts’ forecasts of double-digit global EPS growth in 2011 are achievable. Global equities are currently trading on 10x 2011 EPS forecasts."
- Overweight Japan, UK and Emerging Markets — "Japan is our preferred recovery play. The UK looks cheap in our view, with decent earnings momentum. Premium economic growth means that we remain Overweight EM."
- Global Sector Strategy — "Our belief that double dip fears are overdone means that we Overweight the cyclical sectors where earnings momentum should remain healthy. We are Underweight defensive sectors."
Citigroup Global Equity Quarterly 20100706
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