All aboard QE2

- Cross Sector "The Fed’s decision to reinvest Agency paydowns into Treasuries is a shift toward a more accommodative monetary policy that defers its eventual exit strategy further. We now expect the Fed to stay on hold until 2Q12. The search for carry will likely stay the dominant theme. Look for further declines in intermediate yields. Stay overweight credit. Turn overweight MBS."
- Governments "The quest for carry continues, and is likely to progress further out the curve—look for the 2s/10s curve to flatten further in coming months, and continue to anchor belly-richening trades in the 10-year sector. Buy 3% Feb 17s versus TYZ, as Feb 17s are cheap and the Fed holds almost none. Buy 3.375% Nov 19s versus selling 2.625% Aug 20s and 4.75% Aug 17s. Overweight MBS versus Agency debt."
- Interest Rate Derivatives "We remain tactically neutral on spreads. Look for bull flattening to be increasingly concentrated outside the 5-year point of the curve; pay in 1Yx5Y versus a weighted barbell. Stay short volatility with a bias to longer expiries."
- MBS and CMBS "Move to an overweight on the mortgage basis, based on more attractive
fundamentals. Begin to add premium and IO exposure. Low nominal yields will motivate CMBS investors to reach for spread and duration in search of higher returns; look for AM prices to gravitate toward par."
- ABS and CDOs "Stay overweight subordinate Bankcard, Prime Auto Loan, and FFELP. Our top picks in AAA ABS are AMOT, WFNMT, and COMNI."
- Investment-Grade Corporates "An extremely strong technical backdrop and solid credit fundamentals will limit the magnitude of any spread widening. Thirty-year bonds are attractive vs. 10s."
- High Yield "The strong rotation of retail money into the high yield asset class remains intact; this week’s inflow was the fifth consecutive for a total of $4.9bn."
- Short-Term Fixed Income "Funding markets have improved so fast that LIBOR levels for the BBA panel banks are now lower than they were in March. However, funding pressures may re-emerge as over $150bn of EU bank debt still needs to be refinanced."
- Municipals "QE is supportive of further inflows into longer-term mutual funds at the expense of money funds. But, look for ratios versus Treasuries to move higher."
- Emerging Markets "Robust inflows to EM should continue to benefit assets, and we keep a year-end 250bp spread forecast."
- Special Topic: The JPM Agency Prepayment Model "Our agency involuntary prepayment models have been updated to take into account new efficiencies in GSE delinquent loan buyouts, a new primary/secondary spread mortgage model, and other factors. The model generates wider OAS and longer durations."

JPMorgan US Fixed Income Markets Weekly 20100813

US deflation would likely imply higher USD

- Deflation is a potential scenario for currency markets "We take a very preliminary stab at considering the possible FX implications of such a scenario for G10 currencies. Risks on the deflation side have clearly been growing and our US economics team would characterize the odds of a return to QE in the next year as 35%, which is a substantial risk of such a bad outcome."
- We consider two different deflation scenarios "We consider two possible scenarios for the US in such a deflation environment: the “recoupling” scenario where deflation becomes widespread outside of the US, and the “decoupling” one where deflation starts and stays in the US. But our base case is that if deflation starts in the US, it will not stay limited to the US."
- Our base case deflation scenario: recoupling "Unlike Japan, which has been in deflation on its own, the US would wind up pulling the developed world into similar deflationary straits. Intuitively, this scenario feels like the most likely deflationary scenario for the US, in our opinion, given the central importance of the American economy to both the global growth picture and global financial markets."
- US-specific deflation could be quite USD-negative "The Fed would be implementing another massive round of quantitative easing as other banks either stand pat or normalize their own rates. Interest rate differentials would wind up tilted against the USD. In this state, the dollar would be viewed as the chief funding currency, replaying the great yen carry trade of 2005-2007."
- One commonality in both of our scenarios: more QE "In either case, there would likely be additional action out of the Federal Reserve for additional quantitative easing. Short term reaction depends crucially on policy: re-emergence of QE could mean a frenetic but short term USD sell-off, similar to what to December 2008. It is hard to overlook such an event given how frantic and powerful such moves can be; the move from 1.24 to 1.44 in that December 2008 episode was both stunning and deeply concerning. However, the persistence of such a move depends on the scenario."
- Limited currency lessons from Japan "While Japan has been in deflation, essentially by themselves, nominal JPY has bounced around a fair amount. But since the rest of the world joined Japan in financial, macro and banking dysfunction, deflation has become more entrenched and the risk properties more enhanced. There has also been a stronger JPY in both nominal and real terms."

Merrill Lynch FX Spotlight 20100813

The Fed Re-enters Treasuries

- Flying too High: "We recommend selling 5yr Treasuries versus 2yr and 10yr Treasuries. Recent strong performance is beyond what is justified by Fed actions."
- Fed Treasury purchases will have an average duration of 6 years: "The Fed is likely to distribute Treasury purchases across maturities similar to what it did in 2009 with a slightly longer duration. The SOMA 35% limits should not be a binding constraint."
- Buy Vol: "Buy 5y10y swaption straddles to express the view that vol is cheap."
- Treasury Auctions were Strong: "All three auctions this week had a Citi Strength Indicator of greater than 50%."
- Flow: "Strong demand for the US fixed income in the week before the FOMC statement. Duration is still being extended."
- Unbalanced market re-pricing of MBS refi spike risk: "although a low probability in our view, a government engineered refi spike should bring with it a surge of production in MBS; in this scenario production coupon MBS spreads should widen."
- Agency Debt: "GSE reform hearings commence on August 17th and despite an additional two sessions after that we expect only modest spread volatility. The continued decline in agency debt supply should help to offset spread widening."
- US Rate Strategy Model Portfolio: "The portfolio is up 0.1% month-to-date."

Citigroup US Rate MBS Strategy 20100813

China Social Housing: Lackluster Growth or Quantum Jump?

- What's the Issue: "The social housing program has attracted a lot of attention from market observers of late. Many market observers had doubts about the progress being made so far and the prospect of fulfilling the social housing construction plan by the end of this year. At the same time, a dearth of timely and reliable data on this front makes it very difficult to evaluate and track the progress along the way."
- Our view: "We revisit and reaffirm our calls that: 1) the austere measures regarding property speculation will not cause a hard landing in fixed-asset investment growth in general and real estate investment growth in particular; and 2) the social housing program is on track and will constitute an important cushion for any potential slowdown in private market-based residential property construction and thus help ensure a soft landing in fixedasset investment growth. Moreover, we highlight a scenario featuring a potential “quantum jump” in construction of social housing in the latter part of the year that could tilt the balance of risks to the upside for fixed-asset investment growth. In this context, a potentially strong performance from a social housing program in 2010 would make the authorities’ pledge to “solve the housing problem for 15.4 million of low-income households by end of 2012” a lot more credible."
- Where we differ: "We take a hard look at the structure of real estate construction activity in China. By presenting our analysis in a flow chart format, we help clarify the relative importance of market-based private residential property construction vs. non-market-based residential property construction and, in that context, highlight the critical role of the social housing program in shaping the potential outlook for investment growth. We also compile a comprehensive set of data to help bridge an important information gap for monitoring the progress of the social housing program."

Morgan Stanley China Economics 20100813

Evaluating FX vol relative to interest rate volatility

- "We evaluate FX volatility using interest rate volatility. The relationship with the vol of associated interest rate spreads is persistent and has been especially strong in the past few years. Current valuations point to G10 FX vol being rich vs interest rates and EM FX vol appearing cheap by the same metric. With developed-economy policymakers increasingly expected to leave interest rate policy unchanged for a substantial period and growth prospects in G10 expected to be on average sluggish, we recommend selling G10 FX vol. Against this, to make the trade more relative-value in nature, we recommend buying EM FX vol – specifically a basket of TRY, ZAR and BRL vs USD."

Nomura Macro Insights 20100812

First signs of progress towards “Japanese corporate revival”

- "We expect Japan's economic growth to ease slightly through 2011 H1 as export growth slows and the impact of government measures wears off. It is difficult to be optimistic regarding the operating environment facing Japanese companies over this period. However, Japanese companies have already gone a long way towards eliminating the negative after-effects of Japan's bubble period, such as excessive debt, and have been steadily improving productivity and efficiency. We think it will become increasingly clear that the Japanese economy is likely to avoid a double-dip and that growth will probably start to pick up again from mid-2011. If Japanese companies step up their efforts to tap into demand in Asia and their medium-term growth expectations improve, that could lead to greater dynamism for Japanese companies and the Japanese economy through growth in capital investment and employment."

Nomura Japan Economic Overview 20100812

Why does a crisis last for a long time?

- "We seek to ascertain what explains the difference between a short recession, followed fairly quickly by a recovery, and an enduring crisis, in which the recession is followed by a long period of low growth."-
- "We believe that the explanation lies in the need to correct households' balance-sheet structure. Companies can fairly easily improve their balancesheet situation, especially in the United States, by distorting income sharing in their favour and by sharply scaling back their investments (as in the early 2000s), something that households cannot do."
- "Households must very gradually reduce their indebtedness and restore their wealth by saving more and reducing their housing investment; this process is all the more difficult in that, because household spending is sluggish, growth (in GDP and household income) is slower. This is what occurred in Japan and it is what will probably occur now in the United States and Europe."

Natixis Flash Economics 392 20100806

Sovereign CDS and fiscal solvency

- "The hierarchy of sovereign CDS displays several apparent anomalies:
• between OECD countries (for example, is the risk on the United States, Japan and the United Kingdom so low?)
• between OECD countries and emerging countries, in one direction (very low perceived risk for some emerging countries: for instance Slovakia, Slovenia and the Czech Republic) or in the other direction (well-managed emerging countries still perceived as risky: for instance South Korea, Poland and Brazil)."
- "We seek to ascertain whether these apparent anomalies can be explained by looking at the situation of these countries’ public indebtedness and fiscal solvency, or whether they are real anomalies that can be expected to correct."
- "We show that:
• the countries where the return to fiscal solvency will require the greatest reduction in the fiscal deficit are the United Kingdom, France, Spain and the United States,
• the hierarchy of the CDS of OECD countries seems irrational, since it does not take into account the public debt ratio or the differential between the fiscal deficit and the deficit that would ensure fiscal solvency,
• the CDS of emerging countries can be partly explained by the public debt ratio."

Natixis Flash Economics 391 20100805

Could Germany's exports to emerging countries save the euro zone?

- "Domestic demand in euro-zone countries will very likely remain weak, due to the slowdown in wage growth, sluggish investment, the increase in household savings and fiscal consolidation."
- "But there is at present a sharp increase in exports, especially in Germany's exports, due to the rapid pickup in demand in emerging countries (and also the United States). Could the euro zone enjoy growth driven by exports (from Germany)?"
- "For this to happen:
• demand from emerging countries must not weaken too much;
• the euro zone's exports to emerging countries must be sufficiently large to drive the euro-zone economy (directly, or through the knock-on effects on the other euro-zone countries of a recovery in Germany due to its exports), and the import content of these exports must not be too high."
- "Emerging countries' imports (and activity) are clearly slowing down significantly by comparison with the start of 2010, but emerging-country growth is likely to remain fairly robust. Most strikingly, the import content of the euro zone's exports to the emerging and oil-exporting countries seems extremely high. All in all, it is therefore likely that exports to emerging countries will have only a modest effect on euro-zone value added."

Natixis Flash Economics 390 20100804

JPY positioning indicates little belief in BoJ intervention

- "The latest IMM data covers the week from 3 August to 10 August."
- "The collapse in US interest rates has driven USD/JPY to a new cyclical low of 84.73 and brought renewed speculation about the potential for intervention by the Bank of Japan (BoJ). However, non-commercial positioning does not indicate that the market is placing that much confidence in the probability of a scenario of imminent and successful intervention. Rather net long JPY positions were built further to reach 38% of open interest – the highest level since December last year when net longs peaked at 39%."
- "Despite the dollar beginning to recover by 10 August, non-commercial investors added further to net short US dollar positions – which reached USD18.7bn. Recent strong dollar performance is likely to have seen part of the dollar shorts being unwound, although we continue to view risks as skewed to the upside for the dollar should further position squaring be triggered."
- "Speculative positions remain neutral in EUR/USD leaving limited positioning risk on the air at present."
- "Recent underperformance by the NZD, seeing AUD/NZD trade back above 1.26, has coincided with speculative investors trimming long NZD positions. Even so, positioning remains stretched in the commodity currencies AUD, CAD and NZ."

DenDanske IMM Positioning 20100816

Fear of a double dip keeps yields low

- "The ECB unlikely to be in a hurry to tighten monetary conditions. The first rate hike is seen in late H2 2011."
- "Danish short bond yields – such as F1 floating-rate bonds – should remain low for a long time, but the risk of an independent hike of CD rates has increased."
- "Our forecast for German bond yields has been revised slightly lower for the coming three months. However, we still expect yields in Germany to move up slowly from current low levels in the medium term."
- "Weaker data and a dovish Fed cause us to postpone the first rate hike from the Fed until Q4 2011."
- "Long US bond yields should decline further in the next few months. In the medium term we expect the US yield curve to move higher."
- "The US and German yield curves are expected to continue to flatten in the coming months."

DenDanske New Yield Forecast 20100813

Readings

US econ growth gauge rises to 9 week high, ECRI - Reuters
Paralysis at the Fed - New York Times
Why Bernanke Isn't Doing More to Boost the Economy - Time
Negative TIPS Yields Provide Some Tips On The Economy - BondSquawk
Treasury's New Idea for Laggard Banks: We'll Sit in at Your Meeting - WSJ
Irish Banks Rattling Nerves - Wall Street Journal
Fiscal fundamentalists - Economist
Summer Employment All About Demand - Tim Duy's Fed Watch
Is Deflation Really Bad for the Economy? - Mises Institute

India: The liquidity outlook and its implications

- "The Reserve Bank of India (RBI) was one of the earliest central banks to start exiting from its accommodative monetary policy stance – not just in adjusting interest rates, but also in mopping up systemic liquidity. The overall liquidity position – defined as the sum of the liquidity adjustment facility, the market stabilisation scheme and the central government’s surplus at the RBI – has fallen from a peak of INR2.2trn in August 2009 to about INR200bn in July."
- "This tightening in liquidity owes its origin to both the endogenous policy-induced hike in the cash reserve ratio (CRR) as well as exogenous factors, such as one-off telecom payments and a larger-than-normal rise in currency in circulation. With inflation running at double-digits, transaction demand for money has picked up, increasing currency in circulation and adding to systemic liquidity tightness. The timing could hardly be better for the RBI, which is battling high inflation. At its 27 July policy meeting, the RBI officially announced a change in the rate corridor, indirectly targeting the overnight rate at repo rate rather than reserve repo rate - an effective tightening in overnight rates by 150bp, in addition to the 100bp of hikes in the repo rate since March. Short-term rates have risen by 150-230bp since end-May and this rise in the cost of funding should reinforce the monetary policy transmission."

Nomura Asia Economic Weekly 20100813

Fear of a slump

- Market Movers ahead
• "US Senior Loan Officer survey with details on credit conditions and demand for loans will be released on Monday. Local business surveys are expected to show some strengthening while housing starts and building permits are expected to fall."
• "The Euro area is facing a calm week in terms of macro data. ZEW expectations are likely to decline as market sentiment has turned more sour."
• "In Asia focus turns to Japanese GDP data for Q2. Consensus is for 0.6% q/q GDP growth but we see some downside risk to that forecast. USD/JPY has declined to a new low and speculation is rising over potential intervention from the Bank of Japan."
• "In Scandinavia attention will be on Norwegian Q2 GDP figures. We expect moderate growth."
- Global Update
• "Financial markets have become increasingly concerned about the risk of a slump with long-lasting repercussions. Data has turned softer in both Asia and the US."
• "The Fed decided to bring its exit to a halt and as a result we have postponed our expectations for a first Fed hike until Q4 11."
• "Euro area growth was strong in Q2, pulled up by Germany. Declining industrial production in June has raised concerns about growth in Europe too."
• "European government bond spreads widened. On Thursday the ECB was seen purchasing government bonds in the market and spreads began to narrow."
- Focus
• "Wheat prices have rallied since early July. We assess the fundamental situation in the grains market and conclude that the recent rally is overdone and that a global food crisis is not imminent. In an alternative ‘agflation’ scenario, the impact on inflation is notable – in particular in emerging markets."

DenDanske Weekly Focus 20100813

Oil market chartbook

- "Crude oil prices have dipped on growth concerns over the last couple of days, tracking equity markets lower. After a week-long rally above USD 80 per barrel (bbl) NYMEX WTI today dipped back below this level. While supplies are ample, we continue to expect macroeconomic sentiment to drive prices and for a continued close correlation between crude oil and equity markets. Weak macroeconomic sentiment was reinforced by a bearish set of weekly oil data from the US Energy Information Administration (EIA)."

StanChart Energy Weekly 20100811

The Fed gives a nod to the market

- Overview: "The Fed’s action should serve to pin Treasury yields below our expectations of fair value for a while longer. However, we doubt that bond markets can continue to rally off this news alone unless this is the first step in a series of additional QE measures."
- US Rates Strategy: "The Federal Reserve will begin purchasing Treasuries to offset the paydowns and maturities in the agency MBS and agency debt portfolio. We review the details and assess the implications."
- Euro Rates Strategy: "While peripheral swap spreads are currently broadly in line with their fundamentals, analysis of countries’ debt trajectories points to the increasing vulnerability of Ireland, Portugal and Spain and the improving outlook for Germany, Finland and the Netherlands."
- Sterling Rates Strategy: "We still believe the gilt curve is too steep versus fundamentals, but the severity of recent price action clearly needs respecting. It seems prudent to keep risk light during this whippy summer trading, but we will remain vigilant to opportunities to buy the long-end if sentiment improves."
- Global Inflation Strategy: "We continue to favour short positions in 5yr, 5yr forward TIPS break-evens, despite the modest extra stimulus from the Fed. In euro, we recommend selling BPTei19 versus OATei20 in a break-even inflation box to capture the relative value and position for upcoming supply."
- JGB Rates Strategy: "We see three sources of deflationary pressure which could impact long-term rates. We recommend adding to long 10yr JGB positions above 1%."
- Global Flow: "Strong demand for both Europe and the US in the week before the FOMC statement. Duration is still being extended."
- New Appendix: "We provide a schedule of coupons and redemptions for each of the EMU-11 countries for 2010-2015. This is in addition to the usual detailed analysis of upcoming coupons, redemptions, supply and net cash flows."

Citigroup International Interest Rate Strategist 20100812

Wheat scare unwarranted as stocks remain huge

- "Global wheat prices have rallied on weather-related supply concerns. We view the recent price surge as overdone, however, as the global wheat market remains well-supplied. The risk of a new global food crisis is small in our view."
- "Things to look out for include: further trade restrictions, contagion to other soft commodities and speculative flows."
- "On the whole, we look for Matif prices to retreat to EUR175 per ton before year end and see current levels as attractive for producers to lock in wheat prices."

DenDanske Commodities 20100812

UK versus Europe ex-UK

- "We think the UK market’s recent outperformance relative to Europe ex-UK has probably run its course."
- "The UK has benefited from “safe haven” status during the euro area’s sovereign crisis, while also enjoying better earnings momentum. An unwinding of a large speculative short position against sterling has also helped it rise against the euro."
- "All of these factors have now reversed, in our view. The euro area economy has proved to be more resilient than many had believe, while the impact of the UK’s fiscal consolidation has yet to be felt. There are signs of a slowdown in the UK housing market too."
- "Above all though, it is the shift in earnings momentum in favour of continental Europe that suggests to us that investors should now be overweighting continental European equities relative to the UK, in both local and common currency terms."

Nomura European Strategy Weekly 20100813

Bracing for the Fall of 2010

- "VIX is now trading in the low 20s as the SPX has rallied over the past six weeks despite a slew of weak macroeconomic data. Despite this headline normalization, under the hood, derivatives markets remain stressed across various metrics like skew, correlation and term structure. Indeed, Barclays U.S. equity strategist team believes that the summer rally in U.S. equity is ending and that the next significant move is more likely to be a return to early July lows rather than to April highs." - "Given this state of affairs, in our view, a somewhat bearish stance is warranted over the next few months. However, since a moderate pull back appears to some extent already priced in, we believe an outright short position is not advisable and we think put-spreads are a better instrument of choice."- "While put-spreads on SPX are an obvious liquid alternative, in this report, we attempt to quantitatively determine if other assets offer a better risk reward. Specifically, we make an assumption that various equity ETFs will return to their lows, reached in May or June 2010. We then compare the returns for a put spread position in each underlying asset to its cost to determine which one offers the best payout ratio."

Barclays Index Volatility Weekly 20100809

Wheat a minute

- "Recent increases in global wheat prices have reignited concerns about the economic impacts of high food prices. This article describes the economic channels through which rising wheat prices (and food prices more generally) can affect EEMEA economies, and highlights what we think will be relatively minimal short-term implications requiring limited policy response in most countries. In this context, we analyze sensitivities of inflation, balance of payments, and fiscal accounts to food price changes, particularly should the current wheat price spike translate into a broader increase in food prices."
- "We conclude that the policy responses are likely to be strongest in countries with significant economic sensitivities, relatively high poverty rates, and/or institutional challenges (Egypt, Ukraine, Kazakhstan and Russia). For the rest of EEMEA, the impact will likely be meaningfully felt only if policy-makers deem the price increases permanent, for example as a result of global structural shifts in the balance of food supply and demand."

Nomura Region View 20100812

To QE or not to QE, that is the question

- Macro viewpoint: To QE or not to QE, that is the question "The Fed has moved back into the spotlight. Here we address a number of the “frequently asked questions” about Fed policy."
- Fed watch: And now the hard part "While the Fed has not stated what would prompt renewed quantitative easing (QE), we expect it will act on sustained signs of weakness, and not just a couple of bad numbers. Hence we think the probability of a move at the next two meetings is low, but over the year ahead we see a 35 percent chance of QE."
- The week ahead: Softening manufacturing surveys "Sentiment takes center stage next week in the manufacturing and housing sectors. The Empire State and Philadelphia Fed manufacturing surveys will give an early indication of conditions in August. With the inventory cycle fading and the economy softening more generally, we expect both to paint of picture of slowdown but not outright contraction. Indeed, the industrial production report should show that manufacturing production continued to increase in July. In contrast, the housing data released this week is likely to be weak, with a decline in housing starts in July and depressed NAHB housing index. Homebuilders have kept construction at a feeble pace amid weak home sales and an uncertain economic outlook."

Merrill Lynch US Economic Weekly 20100813

Your 5-minute investment guide for Chinese equity markets: Aug 9 – 13

- "Chinese equities pulled back this past week, with MSCI China falling by 3% and CSI 300 by 1.5%. Market worries stemmed from slightly below expectation July macro releases and CBRC policy changes on moving trust instruments on-balance sheet, which is an incremental tightening move. Defensive sectors like consumer staples performed well onshore and offshore, while energy, financials, industrials suffered."

GoldmanSachs China Weekly Kickstart 20100813

Currency Converter - Rhapsody in Blue

Pan-European — Currency Converter
- Risk on — "European equities and the Euro have rallied c10% in recent months. Post Euro rallies, equities are usually weak, suggesting short-term caution."
- History suggests — "Cyclical sectors tend to outperform during periods of Euro strength while Tech, Health Care and Personal Goods more likely to underperform."
UK — Rhapsody in Blue
- Summertime — "Risk on has seen the market and Sterling rally 10%+ since April. Post previous Sterling rallies, short term equity performance has been weak."
- Dips and Rallies — "Ongoing economic recovery should support earnings growth in 2011. We continue to see this as a 'buy the dips, sell the rally' year."

Citigroup European Portfolio Strategist 20100812

Easing bias in EMEA monetary policy is back

- Market movers ahead: Turkish rate decision and Polish labour market data in focus "The Turkish rate decision is undoubtedly the key event next week. We don’t expect any change in the interest rate setting next week and the key borrowing rate should stay unchanged at 6.50%. We furthermore think that the Turkish central bank will stick to its dovish stance. In today’s EMEA Weekly we introduce the EMEA Monetary Policy Tracker (MPT) with focus on Turkish monetary policy outlook this week."
- Fixed Income Outlook: Return to monetary easing bias "As mentioned above, today we introduce the EMEA Monetary Policy Tracker (MPT), which is designed to give a signal on the direction or bias in monetary policy in the EMEA region. The message from our MPT is clear - in many EMEA countries the central banks should continue their monetary easing. In fact, our MPT now points towards further monetary easing in the Czech Republic, Israel, South Africa and Turkey. That is not to say that the central banks in these countries will in fact cut rates, but we now think that there is a higher likelihood that we will see cuts rather than hikes in these countries in the coming 9-12 months. We especially stress the downside risks to rates in Israel and Turkey where the markets are still priced for hikes. We would therefore recommend being positioned for lower rates and yields in the short end of the curve in the Czech Republic, Israel, Turkey but for higher rates in Hungary. Neutral in Poland."
- FX Outlook: Risk aversion is back "After a couple of weeks of budding improvements the signals from our EMEA FX Scorecard turned significantly more negative this week. The total score for the entire EMEA region has dropped to -0.3 from -0.1 last week as the global score plummets. This is usually a good indication that risk aversion is on the rise, which is negative for the EMEA currencies."
- Scorecard-based trade of the week: Buy CZK/ZAR "For the fifth week in a row the Scorecard-based trade of the week is buying CZK/ZAR with the Czech koruna still the highest scoring currency on our EMEA FX Scorecard and the South African rand the lowest."

DenDanske EMEA Weekly 20100813

Are economies destabilised by the effect of stock market and property wealth on real activity?

- "Changes in stock market and property wealth have had increasingly pronounced effects on demand and real activity in OECD countries over time, which can be ascribed to:
• the growing market value of equities and real estate;
• the growing importance of market valuation in companies’ choices;
• the link between capacity to run up debt and wealth (above all in Anglo-Saxon countries)."
- "This has created the risk of a destabilising process: a decline in wealth reduces growth, which in turn reduces wealth. How could wealth and demand for goods and services be decorrelated?
• by analysing borrower solvency based on their income and not their wealth, a development that is definitely under way;
• in countries with funded pensions schemes, by trying to obtain a lower variability in the value of pension funds’ assets;
• by having more investors with a genuinely long-term horizon who would bring stock market valuation closer to the fundamental value of companies."

Natixis Flash Economics 389 20100804

Can an even more expansionary monetary policy in the United States or the euro zone be efficient in the present situation?

- "The persistent problems of the US economy have led Ben Bernanke to talk about implementing a fresh monetary stimulus in the United States (further purchases of assets or even loan portfolios by the Federal Reserve?). The ECB, on the other hand, seems rather inclined to normalise its monetary policy (elimination of 1-year repos, and virtual halt to the government bond purchase programme). In order to ascertain whether it is the Federal Reserve or the ECB that is going in the right direction, we have to determine whether a more expansionary monetary policy can be efficient in terms of boosting growth in the present situation."
- "That is the case if:
• households or companies have the capacity and the will to run up more debt; which seems to be the case only in a few countries (France, Italy);
• the expansionary monetary policy enables banks to lend more (in countries where credit demand is sufficient); it does not seem that the banks are rationing credit; they are above all concerned about their additional capital needs;
• or if the expansionary monetary policy drives some asset prices upwards, which will trigger a positive wealth effect."
- "This is perhaps the case with property prices in a few countries (United States, France); but is it really desirable to jump-start the economies by triggering a fresh real estate bubble?"
- "All in all, we believe a changeover to an even more expansionary monetary policy implies risks (how will the excess liquidity thus created be used?) without any guarantee of a positive effect on real activity."

Natixis Flash Economics 388 20100803

Why companies in OECD countries will be taken over by companies from emerging countries

- "We believe that companies from emerging countries will increasingly make acquisitions in OECD countries."
- "The reasons are as follows:
• emerging countries have high savings and large reserves that are often invested poorly, while OECD countries have low savings that will, moreover, be consumed to finance fiscal deficits for many years:
• corporate valuations are higher in emerging countries, due both to the demand for equities and the growth outlook;
• emerging-country currencies should, in the long run, appreciate against the currencies of OECD countries."
- "The changing nature of capital flows from emerging countries to OECD countries should gradually lead to a rise in long-term interest rates and share prices in OECD countries."

Natixis Flash Economics 387 20100730