Where should swap spreads be?

- Swap spreads: "We review several structural factors that should impact swap spreads in the coming years, and look at fair value in 10yr, 5yr, and 2yr spreads. The steep inversion in
the spread curve is currently between the 5-year and 10-year point—we think that inversion should be concentrated in the 2-year to 5-year segment."
- Zero rates: "Chairman Bernanke highlighted lowering interest on reserves as one of the
options for stimulating the economy. We think the most likely outcome is that a lower IOR
would do very little to increase economic activity, with the other outcome being a major
structural change to US markets that could severely hurt liquidity."
- Munis: "State economic indices measuring employment and earnings have been improving
in recent months. However, this trend may stall or perhaps change course somewhat, as
stimulus funds fade, census hiring ends, and state and local governments scale back payrolls."
- Treasuries: "We believe 2s, 3s, 5s and 7s will likely be reduced by another $1b in each of the next two months but from that point onward, all nominal coupons are likely to hold steady through at least the end of the year. More aggressive cuts in shorter maturities has pushed total issuance of 5s nearly on top of issuance of 2s, helping keep the average maturity of outstanding Treasuries at a relatively high level. However, we do not expect 2-year auction sizes will ever fall below 5-year auction sizes, limiting the scope for further extension of the average maturity of the debt."
RBC US Fixed Income Weekly 20100723

Japan: Credit demand has kept contracting

- Credit demand has kept contracting
• Pace of growth in money stock has been firming, while for bank loans it has decelerated
• Widening of the gap between the two is a reflection of weakened demand for loans by companies, savings of which are increasing
• We remain doubtful about a scenario in which the BoJ’s new fund supply scheme could boost bank lending
- 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 loans remains weak
According to the Senior Loan Officer Opinion Survey on Bank Lending Practice in July, the DI for demand for loans among firms worsened 7pts from the previous survey to -17
CreditSuisse Japan Economics Weekly 20100722

Fiscal consolidation won’t kill the recovery

- "Conventional economics inspired by the simple Keynes-Hicks IS-LM model assumes that cuts in government budget deficits, especially when they are achieved through government spending reductions, exert contractionary effects on aggregate demand and hence GDP. This
relationship has inspired a number of observers to warn that plans to start reining in deficits in major countries could jeopardise economic recovery and trigger a “double-dip” recession."
- "A closer look at the relationship between changes in the fiscal stance and economic activity raises serious doubts about the validity of the IS-LM model. Correlations between changes of cyclically adjusted primary budget balances and GDP growth for the US, Japan, and the euro area calculated over the last few decades are zero or positive, suggesting that improving structural balances (i.e., a contraction of the fiscal stance) are unrelated to growth or associated with rising growth."
- "Recent economic research offers an explanation for this seemingly counterintuitive result: positive confidence and interest rate effects on private demand triggered especially by government spending cuts can offset or even exceed the direct effect of lower government deficits on aggregate demand."
- "We expect the planned reduction in structural deficits in major countries to be measured. Moreover, fiscal adjustment on balance seems to rely more on reductions in government spending than on tax increases (which should be positive for growth). As a result, we do not expect the economic recovery to be jeopardised by the planned fiscal adjustment. To the contrary, we believe there is a good chance that fiscal adjustment may even bolster the recovery."
- How big is the “Greece premium” in US Treasuries "Uncertainty about the situation in Europe has generated a substantial flow of “safe haven” money into US Treasuries. In this piece we estimate a weekly and a quarterly model of 10-year treasuries and find that the “Greece premium” is between 60bps to 100bps. In other words, 10-year treasuries are 60bps to 100bps lower than what is predicted by short rates, the business cycle, the fiscal stance, and inflation expectations. As the worries about Europe start fading among global
investors – including later this week when the stress tests are released – we would expect the Greece premium in 10-year Treasuries to start shrinking."
DeutscheBank Global Economic Perspectives 20100721

Slowdown ahead

- Turning. "While global GDP growth accelerated up until recently, there is now mounting evidence pointing to a tangible slowdown. The OECD leading economic indicators, one of the most reliable and most forwardlooking yardsticks for the global economy, are already heading clearly south (cf. chart below). Their still high level does, however, argue against
a double-dip recession."
- US. "The slowdown is already evident in the hard numbers. Recent economic indicators were generally weaker than expected. In the second quarter, real GDP probably grew at an annual rate of only 2¼% (IV/09: +5.6%). For the first half of 2011, we expect only 2%."
- Fed. "The central bank is also becoming increasingly concerned about the economy, since the retarding effects of the inventory cycle and the expiring fiscal programs will soon be joined by the headwind from higher taxes. There is, therefore, a growing risk that the Fed will initiate its tightening cycle later than projected so far. It may possibly wait until summer next year."
- EMU. "In Europe, the spring quarter should have still been pretty good. That, however, is attributable solely to a technical reaction to the poor start to the year because of the cold winter weather and not to the recovery of final domestic demand. But GDP growth is set to slow down, although maybe not as pronounced or as early as projected given the recent upbeat readings of PMIs as well as the German Ifo climate index."
- ECB. "The retarding effects of the inventory cycle and fiscal policy measures are being joined by external strains. This is increasing the risk that the ECB will also have to postpone the first rate hike, especially if today's bank stress test results disappoint investors."
Unicredit Friday Notes 20100723

Four Wobbly Legs Beneath the Throne of Economic Growth

- "Public policy has elevated the goal of jobs (with economic growth) to the throne of the economic kingdom and the benchmark for political success in this election year. Yet, four issues among the business leaders at my presentation yesterday at Cornell’s School of Hotel Administration drove home the point that the support to the economy from these four wobbly legs remains uncertain at best. Our outlook is for a growth slowdown in the second half of this year even after go the stimulus and all those special programs have passed. Federal spending has been easy, but the real work of setting up conditions to move the economy forward has not been done. There has not been significant follow-through. Why?"
Wells Fargo Special Commentary 20100721

EMEA Weekly: Hungarian foot-in-mouth politics

- Market Movers ahead: South African inflation coming up "Next week is relatively light in terms of economic releases. A couple of interesting numbers are due out on Wednesday though. We are due for preliminary data on Lithuanian Q2 GDP growth. We expect the recovery of the Lithuanian economy to continue and forecast GDP to have contracted by 1.7% y/y in Q2. Also on Wednesday we are due for data on South African inflation in June. This number could get some attention following this week’s decision by the South African central bank to keep rates unchanged."
- Fixed Income Outlook: More Hungarian mess next week? "Looking into next week we have relatively little on the agenda in terms of macroeconomic data releases, so the markets could continue to focus on the Hungarian situation and we fear that we could be heading for more volatility in the Hungarian fixed income markets."
- FX Outlook: CZK stays on top "CZK continues to be the top performer in our EMEA FX Scorecard and the only real bright spot in the EMEA FX markets. The Scorecard remains relatively negative on the rest of the EMEA currencies and the most negative on the South African rand. The rand is the currency that we are the most worried about. It looks fundamentally overvalued and short-term indicators point toward a rand sell-off."
- Scorecard-based trade of the week Buy CZK/ZAR "Last week we recommended that investors Buy CZK/ZAR based on our EMEA FX Scorecard. We are happy to maintain this recommendation going into next week and the Czech koruna is still the high scoring currency in our EMEA FX Scorecard, while the rand remains the lowest scoring currency. Over the past week CZK/ZAR has been more or less flat."
DenDanske EMEA Weekly 20100723

Weekly Credit Update

- "Limited activity in the credit markets"
- "Moody’s harsh on Danish subordinated debt"
- "EU stress tests to be published tonight"
DenDanske Weekly Credit Update 20100723

Readings

Goldman hit by short equity volatility position - Risk
China rating agency condemns rivals - Financial Times
Roads to Ruin: Towns Rip Up the Pavement - Wall Street Journal
The United States of...China? - Fortune
Many in Japan Are Outsourcing Themselves - New York Times
Bond Sale? Don't Quote Us, Request Credit Firms - Wall Street Journal
Do Construction Jobs Have Further To Fall? - The Atlantic
Brazil beats the world, on real interest rates - FT Beyondbrics
China land prices - Econbrowser
Senate Passes Unemployment Benefits Extension - Washington Independent
Bernanke To Congress: The Economy Needs You To Keep Spending - Huffington Post
Statement on Evans’s Stimulus Letter from Davidson, Galbraith... - New Deal 2.0
Deficits Do Matter, But Not the Way You Think - New Deal 2.0
Long-Term Unemployed Put Less Pressure on Wage Inflation - Real Time Economics
Bernanke Post Mortem - Tim Duy's Fed Watch
A double dip is a price worth paying - Financial Times

Growth Slowdown, But No Double Dip

- Global "We are downgrading growth forecasts for several key countries, notably the U.S., China and Japan. Nevertheless, we believe a double dip is unlikely — a long period of sluggish industrial country growth coupled with emerging market outperformance is more likely. The Fed, ECB, BoE, PBOC and BoJ are all likely to keep rates on hold to the end of this year, whereas previously we expected the PBOC to hike once in H2 this year."
- United States "Near-term growth estimates continue to edge lower on weaker financial conditions and new signs of a hesitant consumer. Federal Reserve officials remain relatively upbeat but have acknowledged the possible need to reenergise accommodation efforts if the labour market relapses or inflation forecasts slow in an environment of less supportive financial conditions. Barring an unlikely breach in confidence, a healthy business sector and stabilising credit conditions should support continued moderate recovery with low interest rates well into 2011."
- Euro Area "Available data signal a stronger-than-earlier expected increase in 2Q GDP. However, the 2Q reading is overstated by temporary factors and we expect a slowdown in growth in 2H. Broader-based fiscal tightening partly is responsible for the growth moderation. With the reduction of liquidity, the ECB has started the “normalisation” of monetary policy. While we do not expect an increase in the policy rate before mid 2011, money market rates have already started to go up."
- China "The economy began to show more signs of weakness at the end of the second quarter, with lower growth and less threatening inflation. Policy could turn to a more neutral stance, while outright easing may still need to wait for a deeper downturn to materialise. We revise down our growth and inflation forecasts on much weaker momentum, and no longer expect the PBOC to hike rates again in the rest of this year."
- Japan "Economic policies including concrete discussions about a consumption tax hike will likely stagnate with political decision-making expected to become dysfunctional in the wake of a setback for the ruling coalition in the Upper House elections in July. In this context, speculation has increased that more burdens to support the economy will be on the Bank of Japan."
- United Kingdom "Inflation is likely to remain sticky and above target for a while, reflecting the lagged effects of the weak pound and rising capacity use. The fiscal deficit has started to fall versus year-ago levels and is likely to fall much faster than the consensus expects."
- Canada "Robust domestic demand and rising inflation expectations warrant further modest policy tightening nearterm. However, increasing uncertainty about global prospects and intensifying downside risks from abroad obscure the outlook. We maintain our expectation of a gradual unwind of extreme accommodation, but now anticipate a policy rate of 2.50% in 2Q 2011 followed by a lengthy pause."
- Australia "The economy continues to perform robustly but, given global uncertainties, and with lending rates already back to average levels, we expect only one further rate rise before year end."
- Emerging Asia (ex China) "Economic momentum seems to be peaking, with exports and investment upturn to taper off on global uncertainties. Inflation has remained manageable for most, but Asian central banks still generally surprised with their earlier-than-expected policy normalisation — as is the case in Taiwan, Korea and Thailand — while India and Malaysia continued on their series of hikes. Robust long-term growth prospects remain intact. We still think Asia’s REER appreciation will persist in the longer term."
- Latin America "The peak of growth rates probably lies behind us, as we expect a deceleration of growth in 2H 2010 in most countries in the region. We have nevertheless not changed our policy rate forecasts, although risks lie on the side of smaller hikes in the case of Brazil for the September meeting."
- CEEMEA "The 2H slowdown that we have been expecting is here and we leave our main forecasts the same as last month's save for some 'housekeeping' updates. Fiscal consolidation plans remain a risk in some key countries — Hungary, Ukraine, Poland, for example. We haven't changed our policy rates outlook, but in general it seems that central banks are probably now more keen to stay accommodative for a longer period."
Citigroup Global Economic Outlook Strategy July2010

A stronger JPY recently: the prelude of a competitiveness policy by China?

- "The Japanese yen has strengthened significantly in the last few weeks to the strongest level in the year against the USD."
- "Fundamentals in Japan remain conducive to strong JPY, due to structural current account surplus. The new situation of very low interest rates worldwide has de-facto annulled the possibility of strong carry trades, such as the ones that weakened the JPY between 2005 and 2007."
- "Against this already very conducive environment, the recent strengthening has been coincident with the announcement and implementation of the new CNY exchange regime."
- "In this paper we argue that today’s and tomorrow’s stronger JPY might be the
result of an economic policy strategy by the Chinese central bank (PBOC), which aims at preventing further loss in competitiveness for Chinese goods. If this is the case, there is a risk scenario on our central JPY forecast which would see the yen much stronger in FX markets against the USD and the CNY."
Natixis Flash Economics 366 20100716

Adjusting to the new regime

- Overview: "Additional Fed easing measures are likely to be required to tighten the UST-Bund spread further."
- "Scope for significant yield curve steepening may be limited by recent rises in Libor rates."
- US Rates: "With yields significantly below our fair value levels we look at ways to gain exposure to an upward correction; 2s10s steepeners in UST remain correlated to a short duration trade but carry better than outright shorts."
- Euro Rates Strategy: "We recommend taking off short peripheral and fundamental-based spread positions in the current environment of positive news, buoyant mood, and supportive technical factors. There are, however, some remaining relative value opportunities which we highlight."
- Sterling Rates Strategy: "Recent bull flattening of the 2s-10s gilt curve is consistent with anchored short rates, declining inflation and supply expectations and the ongoing grab for yield. We see both 2s-10s and 10s-30s as being close to fair value. However, going forward we expect to see the longend outperform. This should reflect in higher levels of yield curvature."
- Global Inflation Strategy: "The combination of positive cashflows and a large month-end extension should bring much needed relief to euro break-evens in the week ahead. UK real yields are under pressure ahead of supply."
- Index-linked Index Projections: "We project a duration increase of 0.43 in the EUR ILSI at the end of July. There have only been three bigger monthly increases in the last three years."
- APAC Rates: "In Japan, we like 2yr forward 5yr/15yr – 5yr/20yr curve flatteners in swaps or in conditional space."
- "In Australia/New Zealand we find little value in receive AUD versus pay NZD trades, unless the RBNZ hikes by more than 150bps relative to the RBA."
- End-July EGBI projections: "We expect only a small duration increase in the EGBI at the end of July. Projected index changes point to support for Germany, Spain, Italy and France."
Citigroup International Interest Rate Strategist 20100722

Pan-European:Growth Over Size - UK:Japanese Style

- Pan-European — Growth Over Size
• Size matters — Mega- has underperformed mid- and large-ex-mega-cap in both rising and falling markets. Growth concerns and lack of inflows have been a headwind.
• Mega appeal — We are happy to own mega-caps exposed to our key investment themes: (1) growth and (2) B/S strength & quality, e.g. BHP, Novartis & ABB.
- UK — Japanese Style
• Mega cap still underperforming — UK mega-caps lag again despite earnings, yield and balance sheet support. Liquidity favours mid- and large-ex-mega-caps.
• Give up or get even — With flows weak, the best chance of outperformance comes from either retiring mega-cap equity or breaking up the mega-caps.
Citigroup European Portfolio Strategist 20100722

Germany’s austerity package and the federal budget

- "Germany has presented a four-year consolidation package to reduce its structural deficit and bring cumulative budget relief of over EUR 80 bn (65% via spending cuts and 35% via revenue increases)."
- "Spending cuts (above all in the labour and social security budgets) will make up the lion’s share of the package, whereas tax hikes and subsidy reductions will play a smaller part. Taken together, the spending cuts and revenue increases foreseen for next year will amount to less than 0.5% of GDP. Moreover, the budgets for key growth areas such as education and research will remain unchanged."
- "The package will put larger burdens on airlines, energy utilities, banks and energy-intensive producers, with the proposals still needing to be detailed in draft legislation by the responsible ministries."
- "The government’s legislative proposals – presumably in the shape of a budget accompanying law – will not be tabled until autumn at the earliest, with the Bundestag probably also not voting on them until the budget debate. The cabinet’s recently adopted draft budget for 2011 and financial planning no doubt already at least specify the totals for revenue increases and expenditure cuts."
DeutscheBank Research Briefing 20100721

The Greek situation in the light of the Argentine 2001 crisis

- "Many observers and analysts have compared the Greek 2010 crisis to the Argentine 2001 crisis, in an attempt to evaluate the most probable outcome. As we know, the Argentine crisis led to the country’s default."
- "For example, it has recently been argued that as the scale of Greece’s deficits and imbalances (especially budget and foreign trade deficits and the public debt ratio) are much worse than Argentina’s situation in the early 2000s, the prospect of insolvency is much higher in Greece (N. Roubini, “It is time to face reality over Greece’s debt”, Financial times, 29/06/2010)."
- "This paper will examine the similarities and differences between the two sovereign crisis, to highlight the specific nature of the Greek crisis. We believe that the probability of a Greek debt default depends primarily on the recessive spiral in which the Greek economy is mired today. At the same time, the existing differences between the two crises may help to avoid the
probability of a Greek default. In fact, the specific nature of the Greek crisis and the probable consequences of a default on the European financial system are powerful incentives to avoid this occurrence through a much-better cooperative solution than in the Argentine case."
Natixis Flash Economics 365 20100715

If the objective is to reduce fiscal deficits, would it be better to hike taxes or cut public expenditure?

- "The euro-zone countries and the United Kingdom have undertaken to quickly reduce their fiscal deficits. Would it be better i f they did so primarily via a tax hike or via a cut in government expenditure?"
- "To answer this question, we must in our view start off from two observations:
· the reduction in fiscal deficits will seriously affect growth, unless households consume more; in the usual literature about Ricardian neutrality, this requires that only cuts in government expenditure are used; there is then a fall in expectations of future taxes and a rise in
consumption. In practice, the choices can be more complex: spending cuts that would give rise to precautionary savings must be avoided (reduction in the generosity of pension schemes and health insurance); and the same goes for tax hikes that would reduce consumption (VAT, welfare contributions paid by wage earners);
· the main problem for the European economy is the high level of structural unemployment and the sluggishness of potential growth. It is thus important to avoid tax hikes that would discourage employment (welfare contributions) or investment (welfare contributions, taxes on company earnings) in countries where companies have financial problems."
- "We are then left with the following approaches to reduce fiscal deficits:
· a higher taxation of unearned income, which is primarily saved;
· a reduction in nonessential welfare transfers (for example coverage of less serious diseases, whereas coverage for serious health risks must be maintained to prevent precautionary savings);
· higher taxes on inheritance, which would reduce the savings rate;
· raising the retirement age, which reduces the incentive to save."
Natixis Flash Economics 364 20100715

Stressed but not distressed

- "Eurozone GDP likely rose strongly in 2Q, by at least 0.6% qoq. The rebound mostly reflects an export-driven surge in IP, while construction activity bounced back after the cold winter. Private consumption remains the weak spot. GDP growth should slow substantially in 2H, probably to 1% annualized, but the risk of a double-dip recession is low."
- "While we await results of the stress test to be published on 23 July, we elaborate on recent dynamics of aggregated balance sheets of the eurozone banking system, highlighting some of the differences across national banking sectors. We show that the recent banking crisis has provided incentives to significantly improve the quality of banks’ balance sheets. However, the difficult heritage of the crisis in terms of credit losses and weak economic prospects will keep weighing on banks’ profitability in the coming two years. In this context, remnants of fears regarding the potential impact of the sovereign debt crisis could persist."
- "Since the beginning of the year, Greece has significantly squeezed primary and capital expenditure, exceeding the target for the general government deficit agreed with the EU/IMF. Against these resolute fiscal consolidation steps and persistent financial woes, it is not surprising that the domestic economy has been hit severely. Growth indicators suggest that the recession is indeed deepening, but the GDP contraction should not be more severe than projected by the IMF."
- "The June inflation slowdown should be short lived, and consumer prices will probably accelerate again in July. Energy remains the main source of volatility. Food prices, despite being up only 0.2% yoy, have entered a moderate upward trajectory that seems increasingly well established."
- "The recent upward trend in short-term rates doesn’t worry the ECB, given that the move is fully driven by a drop in excess liquidity as banks are bidding less funds than the ones expiring. We analyze two possible scenarios for interbank rates and the ECB strategy after the publication of the stress test results."
- "Growth momentum in the UK probably accelerated in 2Q, but this is likely to be a cyclical peak, as growth should decelerate in the second half of the year. The fiscal tightening will negatively affect GDP over the next few years, although it won’t derail the recovery. Against this backdrop, it is unlikely that the BoE will hike rates before the end of the year and we are postponing the start of the tightening cycle to 1Q 2011."
- FI: "The summer months are usually characterized by reduced activity and low traded volumes. Seasonality suggests that this is a good time to invest in FI but, with yields very low, statistical evidence should be taken with a pinch of salt. Also, stress test results will be a key driver affecting FI returns in the near term."
- FX: "Fears that the US recovery may prove more sluggish than expected offered the EUR-USD temporary relief, but the global risk picture remains cloudy and EMU woes have not disappeared. Hence, while EUR-USD may still hold the line during the rest of the summer, its medium-term prospects are still skewed to the downside, although room for a large drop has declined significantly."
Unicredit Euro Compass July2010

What should be done with fiscal deficits if growth becomes very weak in the euro zone?

- "It is possible that growth may become very weak in the euro zone in the
second half of 2010 and in 2011:
· if growth slows down in the United States, which may be feared based on recent figures;
· as a result of the drastic reduction in the fiscal deficit decided on in the United Kingdom;
· due to the decline in real wages and the rise in the household savings rate;
· due to the sharp reduction in fiscal deficits in those euro-zone countries which have no choice because they are under pressure from financial markets (Greece, Portugal, Ireland, Spain);
· as a consequence of offshoring, deindustrialisation and the low level of corporate investment."
- "The question that then arises concerns the attitude that should be adopted regarding their fiscal deficits by those countries that have no major obligation to reduce their deficits immediately: Germany, France, Italy, Netherlands, Belgium, Austria and Finland."
- "If euro-zone growth were to become very weak, it would of course be reasonable for them to put off a reduction in their fiscal deficits, but:
· will they want to do so (attitude of Germany)?
· will they be able to do so (possible negative investor reaction to a failure to reduce deficits)?"
Natixis Flash Economics 363 20100715

The wrong debate

- "While the European bank stress test is a pivotal moment, the issue of fiscal consolidation remains equally important—in fact it is fiscal concerns that brought us to the banks stress tests. Yet the austerity debate is mis-guided: the focus should be more on how to boost
sustainable growth, less on whether to prolong fiscal stimulus. The austerity debate is now not on whether fiscal tightening in advanced economies is necessary, but on when it should begin in earnest. Those who favor postponing adjustment argue that the recovery is still fragile, and premature fiscal tightening could trigger a double dip recession, particularly as there is little scope for a monetary policy reaction. On the other hand, delaying adjustment
where public debt dynamics seem unsustainable risks weakening market confidence, making funding costlier and harder, and undermines potential growth and living standards once debt
becomes too high (90% of GDP for advanced economies). So when is the right time to start tightening? US real GDP is now close to its pre-crisis peak, but unemployment is more than twice as high; European output is 4-4 ½% below peak, but the increase in unemployment has been overall less severe, albeit with wide crosscountry differences. Should we wait till both output and employment are back to pre-crisis levels? Just as credit growth in the run up to the crisis was excessive, so was GDP growth was unsustainably high; just as much of the financial wealth created was illusory, so a substantial share of “real” output growth was
unsustainable, at best borrowed from the future. What rates of growth and unemployment would have been “normal” without the credit bubble? How many of the jobs destroyed in the recession might be gone for good? These are the hard questions to answer, to lay the basis for the appropriate policy response. Meanwhile, fiscal consolidation plans have already been laid out in most countries, they are not dramatic, and there is no significant push to tighten them further. We should spend less time conjuring the confidencekilling ghost of a double-dip recession, more on debating what reforms countries need to ensure stronger sustainable growth— which will also serve to bolster market confidence."
Unicredit Market Sense 20100720

Could stock market prices in the euro zone fall as much as in Japan since 1990?

- "Since the early 1990s, Japanese stock market prices have been divided by four, despite the marked improvement in corporate profitability since the late 1990s."
- "This steady decline in the Japanese stock market can be ascribed to:
• the memory of the stock market collapse in the early 1990s;
• lacklustre growth, which diverts investors from the stock market- even if this is irrational ;
• the fact that domestic savings are used above all to finance fiscal deficits."
- "But similar developments are (or will in all likelihood be) witnessed in the euro zone: very sharp fluctuations in share prices, sluggish domestic demand, fiscal deficits that are difficult to reduce and that monopolise savings."
Natixis Flash Economics 362 20100715

A European Private Company: Is Europe’s single legal form for SMEs close to approval?

- "Small and medium-sized enterprises (SMEs) in Europe have long called for a matching legal form valid across the EU (similar to that of the European company (SE) for large firms)."
- "The main benefits would be the availability of uniform Europe-wide company structures, significant cost reductions for businesses and further integration of the internal market."
- "Given the differing national views regarding the concrete features of the new legal form there is currently no sign of an agreement being reached at the European level in the short term; however, it is possible that progress will be made in negotiations during the year."
- "The key issues being discussed in depth are company formation, transnationality and employee participation rights in the new European private company (SPE)."
DeutscheBank Research Briefing 20100719

Natural Gas: Lowering our price forecasts on the back of surging US production

- US natural gas production continues to surge forward, exceeding
our expectations… "US natural gas production continues to surge this year, driven by the shale gas revolution. As US production has exceeded our expectations, we are increasing our 2010 production by 3.0 bcf/d to 58.5 bcf/d on average for 2010. In addition, we are raising our 2011 production forecast by 3.7 bcf/d to 58.1 bcf/d. We still factor in a slightly declining production path over the rest of 2010, as we continue to expect some response to production from the lower conventional rig counts."
- … requiring reduced LNG production to balance the global market "We expect US LNG imports will need to remain low in order accommodate the increased US production. While we expect a tighter European market will be able to absorb a substantial portion of the LNG supply, we expect that global LNG production will need to remain restrained in order to keep the global gas market in balance. Consequently, we expect that global LNG production will likely be the price setting margin for gas in 2H10 and 2011."
- We are lowering our 2010 and 2011 forecasts as we expect lower prices will be required to restrain LNG production going forward "We are lowering our NYMEX natural gas prices forecasts to $4.63/mmBtu in 2H10 and $5.25/mmBtu in 2011, from $5.60 and $6.00 respectively. Further, while we expect stronger US production will put downward
pressure on UK NBP prices, we expect UK NBP prices will need to exceed US prices in order to direct LNG toward Europe. Net, we are lowering our UK NBP price forecast to $5.13/mmBtu (34.05 p/th) in 2H10 and to $5.75/mmBtu (35.20 p/th) in 2011, from $5.40/mmBtu (34.20 p/th) and $5.80/mmBtu (36.00 p/th), respectively. Should US production continue to
surprise to the upside, a return to more coal-to-gas substitution in power generation would likely be required to balance the market."
GoldmanSachs Commodities Natural Gas 20100716

What are the odds of a double-dip recession?

- "The waning budget stimulus and the probable end to restocking will considerably slow down growth in the second half of 2010. But the risk of a new violent business downturn, even in light of the budget austerity plans, is limited due to the ongoing effect of monetary stimulus and the profits trend."
- "This interpretation is backed by business cycle leading indicators. We can surmise from a study of both yield curves and confidence indicators that the probability of recession in developed countries within the next twelve months is very low."
- "The likelihood of the extreme scenario of a double dip recession occurring today requires a sharp surge in market rates due to a violent shock:
• from sovereign debt, but this source of risk is nil since central banks are buying government bonds.
• by a new bank crisis, but the constitution of reserves and asset writeoffs seem to have stabilized.
• by a forex crisis, but the probability of such a crisis occurring simultaneously in all developed economies is remote"
- "In the absence of any such shock (which must be exogenous), since inflation is not a risk, we should brace ourselves for the more probable odds of very feeble growth in the major developed economies."
Natixis Flash Economics 361 20100715

Beyond the recovery hump

- "For much of 2010, our strategy has been to position for the global cyclical recovery. A powerful recovery did occur with global manufacturing up 12% from its recession low. Economic data is past the recovery hump. The cyclical trade is now mature. Within EM countries, we are rotating back to domestic demand. Our OW in the cyclical sectors of technology and transportation is more modest than the large UW in commodities and energy."
- "We downgraded Mexico and South Africa from overweight to neutral and upgraded ASEAN to overweight on 15 July."
- "China’s economic growth is slowing. Real GDP growth eased to 7.2% QoQ in 2Q from 10.8% in 1Q10. China's PMI fell for the third consecutive month to 50.4. Policy clearly favors consumption over FAI. But the consumer sector is only 11% of MSCI China. Materials and
energy constitute 20% of the index. Policy risk and margin pressure due to national service are the key medium term drivers for our UW in China, but a policy relief rally is possible as evidence of the slowdown builds. Fast money may wish to be neutral in China in a commodity
correction."
JPMorgan Emerging Markets Equity Strategy 20100719

LatAm: a faster recovery

- "The recovery is gaining speed as the news arriving from the region continues to remain positive. Very significant are the raised debt rating for Argentina by Fitch, the take-up of Colombian bonds and good economic indicators in Colombia, Mexico and Peru. There are some signs of a slowdown in Brazil after high growth in the first quarter of this year. The official interest rate was increased in Chile, but continue to be very expansionary."
- "The equity markets are going up again, and we expect the same to happen in the foreign currency market. Most of the share indexes in the zone are reacting positively to the corporate results from the USA and of a reduction in the risk premium. Currencies reacted to factors in the cycle, which we expect to be corrected shortly."
BBVA Latin Weekly Observatory 20100716

Have the United States and Europe pulled out of the crisis?

- "Some economists believe there will be a gradual recovery in growth in OECD countries, as the causes of the crisis are disappearing (excess indebtedness, holding of "rotten" assets) and due to the economic recovery in emerging countries."
- "Others believe there will be a renewed slump in the economies due to the excessively rapid disappearance of the stimulus provided by economic policies (reduction in fiscal deficits, especially in Europe; gradual withdrawal of unconventional monetary policies)."
- "It is certain that fiscal and monetary policies will become more restrictive. To ascertain whether this development will lead to a second dip in the economies, we have to determine whether the balance sheets of economic agents have improved enough. The crisis is actually a result of the deterioration in the balance sheets of households, banks and companies in some countries."
- "What is the situation with regard to balance sheet improvement?
• There are few countries (France, Italy) where households’ balance sheets are good enough to enable household indebtedness to (slowly) pick up again;
• Companies continue to deleverage everywhere, due to their determination to reduce their dependency on external funding;
• The banks’ situation is difficult to assess, in the absence of transparency about the value of the assets held. In several countries (United States, United Kingdom, Spain) borrower defaults are at a very high level, which points to the conclusion that many banks are still facing problems. On top of this, there is the problem of European banks’ holding of public debt."
- "All in all, it seems that it is too early in the process of improving the balance
sheets of private economic agents to bring counter-cyclical policies back to
normal."
Natixis Flash Economics 360 20100713