- "World environment: challenges ahead for a sustained recovery."
- "Domestic demand in the eurozone was subdued. Strong exports supported for the strength of the industrial sector.""
- "The first steps of the recovery are still modest."
- "The sovereign bond crisis, the lack of restructuring in the financial sector and the end of temporary stimulus will put a break on the recovery of domestic demand, but world trade growth and euro depreciation will partly compensate for it."
- "The outlook for 2010 and 2011 presents a very slow recovery, and heterogeneous across member states, while uncertainties increase."
- "Monetary policy to remain adequately accommodative until at least the end of 2011."
- "The fiscal consolidation challenge ahead is important, but the risk of a large negative effect on growth is small."
BBVA Europe Economic Outlook June2010
Italy Monitor: A good start of the year, what now?
- "The breakdown of Italy’s GDP for 1Q 2010 revealed that net exports provided the largest contribution, while a positive note came from capex. The inventory cycle seems to have run much of its course, while government consumption has entered a declining trend."
- "Despite some encouraging signs, labor market remains in a very early phase of recovery. In 1Q 2010, employment increased slightly, and the rise in unemployment rate was relatively contained. Still, labor input in terms of full time workers keeps falling."
- "Bank of Italy’s data show a stabilization of bank lending to households and non-financial corporations in April. The yearly rate of growth confirmed a moderate increase of 1.0%, declining only slightly with respect to March."
- "In May, the upward trend in inflation came to a halt, following a drop in the transport component, which in turn was prompted by a sharp plunge in air tariffs. Among other core components, after a year in positive territory, the yoy change in communication prices turned negative again."
- "In the Focus section we show that evidence of a co-movement between public and private wages seems well-entrenched. Thus, following the measures included in the budgetary correction, some spillover seems likely in term of wage moderation from the public to the private sector."
Unicredit Italy Monitor June2010
- "Despite some encouraging signs, labor market remains in a very early phase of recovery. In 1Q 2010, employment increased slightly, and the rise in unemployment rate was relatively contained. Still, labor input in terms of full time workers keeps falling."
- "Bank of Italy’s data show a stabilization of bank lending to households and non-financial corporations in April. The yearly rate of growth confirmed a moderate increase of 1.0%, declining only slightly with respect to March."
- "In May, the upward trend in inflation came to a halt, following a drop in the transport component, which in turn was prompted by a sharp plunge in air tariffs. Among other core components, after a year in positive territory, the yoy change in communication prices turned negative again."
- "In the Focus section we show that evidence of a co-movement between public and private wages seems well-entrenched. Thus, following the measures included in the budgetary correction, some spillover seems likely in term of wage moderation from the public to the private sector."
Unicredit Italy Monitor June2010
Weekly Focus: Fear of a major slowdown is mounting
- Market Movers ahead
• ECB meeting on Thursday – questions are expected to centre around additional liquidity measures and the ECB’s asset purchases.
• Developments in Euroland bond markets and news out of southern Europe.
• US non-manufacturing ISM – will it hold up better than its manufacturing sibling?
• Monetary policy meeting at the Bank of England is not expected to bring any changes.
• Swedish industrial data and the government’s net borrowing needs.
• Norwegian CPI.
Global Update
• Global PMI’s have fallen – fundamentals suggest a slowdown, but the European debt crisis has likely accelerated the decline.
• The Riksbank hiked rates by 25bp, as expected, and the repo path was revised slightly higher in 2010 and 2011, but lower in 2012-13.
• The expiry of the one-year LTRO has brought the duration of Euroland money market liquidity lower, which has put upward pressure on short-term rates.
• The G-20 summit highlighted the change in policy focus from coordinated global growth support to a more diverse agenda. In Europe, focus is on public finances and in Asia attention has turned to inflation fighting.
Focus
• The combination of general pressure on the euro and the SNB ceasing to intervene in the FX market has opened the door to the downside in EUR/CHF.
• We see a high probability of further support for the Swiss franc in the coming months. However, if the market’s faith in the euro improves, profit-taking could lead to a sharp upward correction in EUR/CHF – a key risk to our forecast.
DenDanske Weekly Focus 20100702
• ECB meeting on Thursday – questions are expected to centre around additional liquidity measures and the ECB’s asset purchases.
• Developments in Euroland bond markets and news out of southern Europe.
• US non-manufacturing ISM – will it hold up better than its manufacturing sibling?
• Monetary policy meeting at the Bank of England is not expected to bring any changes.
• Swedish industrial data and the government’s net borrowing needs.
• Norwegian CPI.
Global Update
• Global PMI’s have fallen – fundamentals suggest a slowdown, but the European debt crisis has likely accelerated the decline.
• The Riksbank hiked rates by 25bp, as expected, and the repo path was revised slightly higher in 2010 and 2011, but lower in 2012-13.
• The expiry of the one-year LTRO has brought the duration of Euroland money market liquidity lower, which has put upward pressure on short-term rates.
• The G-20 summit highlighted the change in policy focus from coordinated global growth support to a more diverse agenda. In Europe, focus is on public finances and in Asia attention has turned to inflation fighting.
Focus
• The combination of general pressure on the euro and the SNB ceasing to intervene in the FX market has opened the door to the downside in EUR/CHF.
• We see a high probability of further support for the Swiss franc in the coming months. However, if the market’s faith in the euro improves, profit-taking could lead to a sharp upward correction in EUR/CHF – a key risk to our forecast.
DenDanske Weekly Focus 20100702
EMEA Weekly: Be careful with the rand
- Market movers ahead: Turkish inflation and Hungarian Minutes
"On Monday, we will get Turkish inflation statistics for June. In our view, the figures will confirm that inflationary pressures remain elevated in Turkey and that CPI-inflation has moved back to double-digit numbers. Hence, we put Turkish inflation (CPI) at exactly 10.0% y/y for June."
"On Wednesday, we will get the minutes from the latest Monetary Council meeting in Hungary. The meeting was held just as volatility in the Hungarian markets was spiking. It will be interesting to read how the Monetary Council members viewed the market turmoil and the reasons for the turmoil."
- FX Outlook: Rand could be heading for trouble
"The World Cup apparently has helped support the South African rand in the past couple of months and the continued strengthening of USD has probably also helped the rand outperform its Central and Eastern European peers. However, we think that we could be heading for a larger correction in the rand as the World Cup draws to an end. Furthermore, it is pretty clear from our EMEA FX Scorecard that both short- and longterm indicators point in the direction of a weaker rand going forward. All the sub scores are negative for the rand – weak macro, carry erosion, negative impact from global conditions (rising risk aversion), a fundamentally overvalued currency and negative technical picture. In fact, the only two factors playing in favour of the ZAR are the World Cup (but that will soon end) and high gold prices (which also have been losing some steam in recent days)."
"We would therefore recommend investors be short in the rand going into next week as we could soon be heading for a large negative correction in the rand."
- Komorowski versus Kaczyński
"On Sunday, Poles will have the opportunity to vote in the second round of the country’s presidential elections. Opinion polls indicate that it will be a close race between the liberal-conservative acting president Bronisław Komorowski and the social-conservative Jarosław Kaczyński. However, most opinion polls indicate that Komorowski will win on Sunday. We believe this result would be positive for the markets and could help push the zloty (slightly) higher going into next week but nothing is given and the possibility of Kaczyński winning does exist. His victory would probably trigger a negative reaction in the Polish markets."
- Scorecard trade of the week : Buy CZK/ZAR
"Last week, we recommended buying PLN/HUF based on our EMEA FX Scorecard. That trade was more or less flat over the week. This week, the Czech koruna is the highest scoring currency while the South African rand is the lowest. We therefore recommend - based on the EMEA FX Scorecard - to buy CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100702
"On Monday, we will get Turkish inflation statistics for June. In our view, the figures will confirm that inflationary pressures remain elevated in Turkey and that CPI-inflation has moved back to double-digit numbers. Hence, we put Turkish inflation (CPI) at exactly 10.0% y/y for June."
"On Wednesday, we will get the minutes from the latest Monetary Council meeting in Hungary. The meeting was held just as volatility in the Hungarian markets was spiking. It will be interesting to read how the Monetary Council members viewed the market turmoil and the reasons for the turmoil."
- FX Outlook: Rand could be heading for trouble
"The World Cup apparently has helped support the South African rand in the past couple of months and the continued strengthening of USD has probably also helped the rand outperform its Central and Eastern European peers. However, we think that we could be heading for a larger correction in the rand as the World Cup draws to an end. Furthermore, it is pretty clear from our EMEA FX Scorecard that both short- and longterm indicators point in the direction of a weaker rand going forward. All the sub scores are negative for the rand – weak macro, carry erosion, negative impact from global conditions (rising risk aversion), a fundamentally overvalued currency and negative technical picture. In fact, the only two factors playing in favour of the ZAR are the World Cup (but that will soon end) and high gold prices (which also have been losing some steam in recent days)."
"We would therefore recommend investors be short in the rand going into next week as we could soon be heading for a large negative correction in the rand."
- Komorowski versus Kaczyński
"On Sunday, Poles will have the opportunity to vote in the second round of the country’s presidential elections. Opinion polls indicate that it will be a close race between the liberal-conservative acting president Bronisław Komorowski and the social-conservative Jarosław Kaczyński. However, most opinion polls indicate that Komorowski will win on Sunday. We believe this result would be positive for the markets and could help push the zloty (slightly) higher going into next week but nothing is given and the possibility of Kaczyński winning does exist. His victory would probably trigger a negative reaction in the Polish markets."
- Scorecard trade of the week : Buy CZK/ZAR
"Last week, we recommended buying PLN/HUF based on our EMEA FX Scorecard. That trade was more or less flat over the week. This week, the Czech koruna is the highest scoring currency while the South African rand is the lowest. We therefore recommend - based on the EMEA FX Scorecard - to buy CZK/ZAR going into next week."
DenDanske EMEA Weekly 20100702
Weekly Credit Update
- "Credit indices have been volatile during the week"
- "Still activity in the primary market"
DenDanske Weekly Credit Update 20100702
- "Still activity in the primary market"
DenDanske Weekly Credit Update 20100702
Readings
China's New Focus on Africa - Time
Wall Street Hiring Jumps Most Since 2008 as Guarantees Return - Bloomberg
Interest rates may need to rise, warns BIS - Financial Times
We May Be Reaching the Limits of Economics - Real Clear Markets
A deeper look at China's currency reform - Market Watch
The G-20 Blues - Forbes
Greece's best option is an orderly default - Financial Times
In Ireland, a picture of the high cost of austerity - New York Times
Wall Street Hiring Jumps Most Since 2008 as Guarantees Return - Bloomberg
Interest rates may need to rise, warns BIS - Financial Times
We May Be Reaching the Limits of Economics - Real Clear Markets
A deeper look at China's currency reform - Market Watch
The G-20 Blues - Forbes
Greece's best option is an orderly default - Financial Times
In Ireland, a picture of the high cost of austerity - New York Times
CEE quarterly outlook
- "The EEMEA region has weathered the European sovereign debt crisis relatively well to date, as growth indicators continued to improve during 2Q."
- "Over the coming months, we believe a lot of attention will focus on the likelihood of a global double dip and its negative implications on capital flows."
- "The Eurozone debt problem ought to have limited effect on CEE markets in the near term as long as core Eurozone performs and EUR weakens in an orderly way."
- "Inflation has remained off the agenda for a good number of months, apart from that we see increasing upside risks in the next few months."
- "CEE public debt is lower than Eurozone but many countries had to address fiscal problems during the last few months, leading to austerity programs."
Unicredit CEE Quarterly 2010Q3
- "Over the coming months, we believe a lot of attention will focus on the likelihood of a global double dip and its negative implications on capital flows."
- "The Eurozone debt problem ought to have limited effect on CEE markets in the near term as long as core Eurozone performs and EUR weakens in an orderly way."
- "Inflation has remained off the agenda for a good number of months, apart from that we see increasing upside risks in the next few months."
- "CEE public debt is lower than Eurozone but many countries had to address fiscal problems during the last few months, leading to austerity programs."
Unicredit CEE Quarterly 2010Q3
New price floors materialising
- "Commodity prices appear to be finding new price floors after the massive spring sell-off. Notably, cost curves may now be catching up with oil and metals prices alike."
- "We have made few changes to our price forecasts. US demand is now clearly improving and we still look for the strength of the OECD recovery to surprise the market."
- "China remains a crucial factor and we argue that the Chinese economy sees good chances of a soft landing."
- "We see oil prices averaging USD81 this year and USD90 in 2010 with future supply concerns a new supportive factor."
- "Copper currently lags aluminium on the demand side but we continue to see the former outperform in the longer term."
DenDanske Commodities Monthly 20100630
- "We have made few changes to our price forecasts. US demand is now clearly improving and we still look for the strength of the OECD recovery to surprise the market."
- "China remains a crucial factor and we argue that the Chinese economy sees good chances of a soft landing."
- "We see oil prices averaging USD81 this year and USD90 in 2010 with future supply concerns a new supportive factor."
- "Copper currently lags aluminium on the demand side but we continue to see the former outperform in the longer term."
DenDanske Commodities Monthly 20100630
Patents and trade policy in the era of climate change
- "Calls for patent-free green technologies on the one hand and for trade barriers on the other highlight the deep rift between developing and industrial countries:"
- "In the debate about climate protection, there have recently been calls for the abolition of patent protection for climate-friendly technologies to allow faster dissemination of these technologies among the world’s poorer countries."
- "However, in an economic system based on private property, patent protection is seen as an important precondition for innovation and should therefore not be considered for abolition in this field of technology either."
- "Similarly, demands by a number of industrial countries that climate tariffs or similar barriers to trade should be introduced for countries with less ambitious climate policies must be rejected. Such barriers would probably trigger countermeasures and dampen these countries’ climate protection efforts."
- "There are possible solutions to both the issue of patent protection and trade policy which would yield better results than the calls for patent-free green tech and/or climate tariffs. Technology transfer could be financed via climate funds replenished by the industrial countries. To avoid competitive distortions and shifts in production to countries without ambitious climate policies, (temporary) exceptions to climate regulation could be a sensible alternative for certain sectors of the economy."
DeutscheBank Economics&Politics 20100630
- "In the debate about climate protection, there have recently been calls for the abolition of patent protection for climate-friendly technologies to allow faster dissemination of these technologies among the world’s poorer countries."
- "However, in an economic system based on private property, patent protection is seen as an important precondition for innovation and should therefore not be considered for abolition in this field of technology either."
- "Similarly, demands by a number of industrial countries that climate tariffs or similar barriers to trade should be introduced for countries with less ambitious climate policies must be rejected. Such barriers would probably trigger countermeasures and dampen these countries’ climate protection efforts."
- "There are possible solutions to both the issue of patent protection and trade policy which would yield better results than the calls for patent-free green tech and/or climate tariffs. Technology transfer could be financed via climate funds replenished by the industrial countries. To avoid competitive distortions and shifts in production to countries without ambitious climate policies, (temporary) exceptions to climate regulation could be a sensible alternative for certain sectors of the economy."
DeutscheBank Economics&Politics 20100630
A long-term assessment of world trade
- "The fall of the Iron Curtain was followed in the early 1990s by a surge in globalisation that sent global exports rising sharply. World trade rose from USD 5.4 tr in 1990 (equivalent to some 16% of global GDP at 2009 prices) to its all-time high of USD 15.5 tr in 2008 (24.4%). The global downturn triggered by the financial crisis reduced global trade to around USD 10.1 tr in 2009. Developments since then have varied widely in the individual countries and regions. Analysing bilateral trade flows is therefore a worthwhile way of tackling economic issues, such as how global imbalances materialise."
DeutscheBank Talking Point 20100630
DeutscheBank Talking Point 20100630
Homo economicus – or more like Homer Simpson?
- "The final judgement has not yet been passed on what prompted the recent financial market crisis. The Fed‟s loose monetary policy, regulatory and supervisory shortcomings, the banks‟ unbridled pursuit of profit, and systemic complexity, not to mention non-rational behaviour by economic agents, have all been advanced as explanations. As a result, the homo economicus model still common in economic theory, which effectively forms the microeconomic basis for market efficiency, has once again come under hefty criticism."
- "In this paper the assumptions of the homo economicus model are compared with the results of psychological experiments. It clearly emerges that in real life people do not always make rational decisions based on established preferences and complete information. In many ways their behaviour thus contradicts the homo economicus model. Much of the behaviour observed is caused through people trying to cope with the complexity of the world around them by approximating, because collating and evaluating all the factors of relevance to a decision overtaxes their mental processing capacity. As a rule these approximation methods deliver serviceable results, but they often also lead to distorted perceptions and systematic flaws."
- "These psychologically driven inadequacies also occur with investment decisions. Distortions arise due to information availability, errors of judgement about how representative such information is, loss aversion, the search for confirmation, isolation and endowment effects, status quo bias and – particularly on the financial markets – the misinterpretation of patterns."
- "Investors and investment advisors should be aware of these effects when assessing financial products, when estimating future factors of relevance to the success of an investment decision and their own appetite for risk, and when considering their own investment behaviour – especially since they are dealing with typically non-linear processes in conjunction with long maturities for some financial investments."
- "Making allowance for these effects in investment decisions can help avoid wrong decisions – but it is still no guarantee of above-average performance."
DeutscheBank International Topics 20100629
- "In this paper the assumptions of the homo economicus model are compared with the results of psychological experiments. It clearly emerges that in real life people do not always make rational decisions based on established preferences and complete information. In many ways their behaviour thus contradicts the homo economicus model. Much of the behaviour observed is caused through people trying to cope with the complexity of the world around them by approximating, because collating and evaluating all the factors of relevance to a decision overtaxes their mental processing capacity. As a rule these approximation methods deliver serviceable results, but they often also lead to distorted perceptions and systematic flaws."
- "These psychologically driven inadequacies also occur with investment decisions. Distortions arise due to information availability, errors of judgement about how representative such information is, loss aversion, the search for confirmation, isolation and endowment effects, status quo bias and – particularly on the financial markets – the misinterpretation of patterns."
- "Investors and investment advisors should be aware of these effects when assessing financial products, when estimating future factors of relevance to the success of an investment decision and their own appetite for risk, and when considering their own investment behaviour – especially since they are dealing with typically non-linear processes in conjunction with long maturities for some financial investments."
- "Making allowance for these effects in investment decisions can help avoid wrong decisions – but it is still no guarantee of above-average performance."
DeutscheBank International Topics 20100629
Derivatives reform: Evolution, not revolution
- "The Dodd-Frank Wall Street Reform and Consumer Protection Act stands to be the most sweeping overhaul of US financial regulation in decades. In this article, we focus primarily on those provisions in the legislation that deal with the regulation of OTC interest rate derivatives markets."
• "Almost all OTC derivatives, including those for interest rate swaps, swaptions and credit default swaps will be affected by the legislation. However, we expect the bill to lead to a continued evolution of the interest rate derivatives market – we do not foresee any immediate changes to market structure."
• "Central clearing is likely to be beneficial to the market, reducing systemic risk and improving market transparency, as long as the number of clearinghouses is not allowed to proliferate (as this reduces the benefit of multilateral netting)."
• "Clearing in itself should not impose a very heavy collateral or cost burden on large banks. The burden may actually be larger for users with higher funding costs."
• "Considering the potential systemic impact of the failure of a clearinghouse, it is crucial to ensure that margining methods and capital requirements across clearinghouses are consistent. We see a risk that clearinghouses could become the new GSEs: “too big to fail”, yet run for private profit."
• "Of all the provisions in the legislation, we view the requirement that trades be publicly reported as having the greatest impact on the liquidity of derivative markets. These requirements should lead to greater transparency around pricing and tighter bid-ask spreads for smaller market participants."
• "However, if real-time reporting is implemented in illiquid products that involve a small number of large trades among sophisticated investors, it may reduce the incentive for dealers to make markets, and significantly reduce depth."
• "For plain vanilla swaps, existing electronic platforms may be able to transition into swap execution facilities without too many impediments, as long as certain requirements are met."
• "However, for more illiquid products, the best possible outcome for investors would be the evolution of facilities where most trading is done via “block trades” with reporting delays as this could retain the benefits of bilateral trading."
• "Standardization of even plain vanilla products is non-trivial. We discuss the surprising challenges involved and their ancillary impact on accounting practices."
Barclays Interest Rate Strategy 20100630
• "Almost all OTC derivatives, including those for interest rate swaps, swaptions and credit default swaps will be affected by the legislation. However, we expect the bill to lead to a continued evolution of the interest rate derivatives market – we do not foresee any immediate changes to market structure."
• "Central clearing is likely to be beneficial to the market, reducing systemic risk and improving market transparency, as long as the number of clearinghouses is not allowed to proliferate (as this reduces the benefit of multilateral netting)."
• "Clearing in itself should not impose a very heavy collateral or cost burden on large banks. The burden may actually be larger for users with higher funding costs."
• "Considering the potential systemic impact of the failure of a clearinghouse, it is crucial to ensure that margining methods and capital requirements across clearinghouses are consistent. We see a risk that clearinghouses could become the new GSEs: “too big to fail”, yet run for private profit."
• "Of all the provisions in the legislation, we view the requirement that trades be publicly reported as having the greatest impact on the liquidity of derivative markets. These requirements should lead to greater transparency around pricing and tighter bid-ask spreads for smaller market participants."
• "However, if real-time reporting is implemented in illiquid products that involve a small number of large trades among sophisticated investors, it may reduce the incentive for dealers to make markets, and significantly reduce depth."
• "For plain vanilla swaps, existing electronic platforms may be able to transition into swap execution facilities without too many impediments, as long as certain requirements are met."
• "However, for more illiquid products, the best possible outcome for investors would be the evolution of facilities where most trading is done via “block trades” with reporting delays as this could retain the benefits of bilateral trading."
• "Standardization of even plain vanilla products is non-trivial. We discuss the surprising challenges involved and their ancillary impact on accounting practices."
Barclays Interest Rate Strategy 20100630
Baltic Sea economies expand again – but to remain competitive, more reforms are needed
- "We expect GDP in the Baltic Sea region, after shrinking by almost 6% last year, to grow by 2.6% in 2010 and 3.1% in 2011. The European sovereign debt crisis, with lower demand and financial turbulence as possible consequences, poses major forecast risks."
- "Russia and Ukraine show the strongest growth over the forecast horizon (2010 and 2011), following substantial declines last year and with the support of higher commodity prices. However, without a more ambitious reform agenda, growth will not be sustainable. Russia (4.5) and Ukraine (4.1) also score the lowest in the region in our new Baltic Sea index (BSI) on business conditions, in which the average for the region is 7 (out of a possible 10)."
- "Poland has avoided a recession and is set to grow by a moderate 3% per year, as domestic demand growth will slow when budget consolidation takes off. Also, Poland has room for improvement on structural reforms, scoring 5.8 in our BSI. The goal to join EMU remains, but entry is not likely to be before 2015."
- "Estonia, on the other hand, is set to join EMU in 2011. Latvia and Lithuania plan to follow in 2014 if their budget consolidation processes continue. The Baltic countries will grow by 3-4½% next year and have already started to recover slowly after the recession. Estonia (7.3) scores above the BSI average (high on foreign trade, governance, and education), while Lithuania (6.5) and Latvia (6.3) must accelerate structural reforms to catch up."
- "The Nordic countries score the highest in the region on the BSI and are, at 8.5-8.8, among the 15% most competitive countries in the world. GDP in Sweden and Norway (2 ½-3% per year) will grow faster than GDP in Denmark and Finland (1-2% per year), but all four countries must boost labour supply as competition and demography remain major challenges."
- "Germany is projected to grow by 1½-2%, with exports recovering. As fiscal consolidation starts next year, there is a risk that domestic demand will slow. As for all countries undertaking fiscal consolidation, the negative effects on demand must be compensated for by economic reforms that create room for higher medium- and long-term growth. Germany, scoring 8 on our BSI, is doing well, but there is room for improvements, especially with regard to labour markets and tax policy."
Swedbank Baltic Sea Report 20100630
- "Russia and Ukraine show the strongest growth over the forecast horizon (2010 and 2011), following substantial declines last year and with the support of higher commodity prices. However, without a more ambitious reform agenda, growth will not be sustainable. Russia (4.5) and Ukraine (4.1) also score the lowest in the region in our new Baltic Sea index (BSI) on business conditions, in which the average for the region is 7 (out of a possible 10)."
- "Poland has avoided a recession and is set to grow by a moderate 3% per year, as domestic demand growth will slow when budget consolidation takes off. Also, Poland has room for improvement on structural reforms, scoring 5.8 in our BSI. The goal to join EMU remains, but entry is not likely to be before 2015."
- "Estonia, on the other hand, is set to join EMU in 2011. Latvia and Lithuania plan to follow in 2014 if their budget consolidation processes continue. The Baltic countries will grow by 3-4½% next year and have already started to recover slowly after the recession. Estonia (7.3) scores above the BSI average (high on foreign trade, governance, and education), while Lithuania (6.5) and Latvia (6.3) must accelerate structural reforms to catch up."
- "The Nordic countries score the highest in the region on the BSI and are, at 8.5-8.8, among the 15% most competitive countries in the world. GDP in Sweden and Norway (2 ½-3% per year) will grow faster than GDP in Denmark and Finland (1-2% per year), but all four countries must boost labour supply as competition and demography remain major challenges."
- "Germany is projected to grow by 1½-2%, with exports recovering. As fiscal consolidation starts next year, there is a risk that domestic demand will slow. As for all countries undertaking fiscal consolidation, the negative effects on demand must be compensated for by economic reforms that create room for higher medium- and long-term growth. Germany, scoring 8 on our BSI, is doing well, but there is room for improvements, especially with regard to labour markets and tax policy."
Swedbank Baltic Sea Report 20100630
Equity Strategy: A Mid-Year 2010 Perspective
- "The first half of the year reflected earnings strength and then slowing momentum. Better-than-expected 4Q09 results initially buoyed skeptical investors and the robust trends were further confirmed with 1Q10 earnings. But, typical slowing economic momentum following a reflexive bounce off of the anomalous early 2009 trough has generated a new sense of unease about the future which has been further complicated by government austerity and unanticipated FX swings. To some extent, the pattern was partially predictable, as investors had become trend followers rather than forecasters."
- "Powerful 1Q10 EPS growth was unsustainable, with margin pressures mounting. As noted in mid-April, the rapid acceleration in earnings growth projections reflected both increased executive confidence and a catch-up element. Upward EPS estimate revisions climbing above the 70% threshold was a clear indicator that the data was getting too virtuous and was unsustainable. The impressive margin rebound was due to incredible cost containment and a moderate revenue uptick, but maintaining such elevated profitability needs to be questioned."
- "Sentiment shifted from panic to complacency but now is back in panic mode. In early 2010, there was deep anxiety that the recovery rally from March 2009 had come too far given Greek debt fears, Chinese monetary policy tightening moves and perceived unfavorable policies out of Washington. By early February, the Panic/Euphoria Model had slipped back into panic territory. Yet, after 15%-20% appreciation in equity indices, this proprietary sentiment gauge advanced into complacency in April, leaving markets vulnerable to a pullback. In the past weeks, the model has collapsed back into panic, suggesting a high probability that the S&P 500 climbs in six months, supporting out 1,175 year-end 2010 target."
- "Uncertainty about 2011 trends is likely to cap any major summer rally efforts. While some may look for guidance out of the 2Q10 reporting season, which begins next month, it seems doubtful that issues including tax policies, government spending programs, housing trends, unemployment, trade disputes and currency trends will be settled that quickly. Ambiguity around capex is being resolved, but 2011 clarity is likely to be found later in the year rather than over the summer."
- "A late 3Q10/early 4Q10 market surge seems most likely driven by several catalysts. The start for a renewed rally appears probable in the September/October time period with the midterm elections, the bipartisan commission’s report on US deficit reduction and a better sense of how the Bush tax cuts expire all contributing to some increased clarity for 2011. In addition, there may be greater visibility regarding the impact of the European austerity initiatives relative to stronger economies such as Germany’s. Thus, the slowing economic momentum can be seen as settling in for more normal global growth rather than the traditional initial cyclical bounce."
Citigroup Equity Strategy 20100629
- "Powerful 1Q10 EPS growth was unsustainable, with margin pressures mounting. As noted in mid-April, the rapid acceleration in earnings growth projections reflected both increased executive confidence and a catch-up element. Upward EPS estimate revisions climbing above the 70% threshold was a clear indicator that the data was getting too virtuous and was unsustainable. The impressive margin rebound was due to incredible cost containment and a moderate revenue uptick, but maintaining such elevated profitability needs to be questioned."
- "Sentiment shifted from panic to complacency but now is back in panic mode. In early 2010, there was deep anxiety that the recovery rally from March 2009 had come too far given Greek debt fears, Chinese monetary policy tightening moves and perceived unfavorable policies out of Washington. By early February, the Panic/Euphoria Model had slipped back into panic territory. Yet, after 15%-20% appreciation in equity indices, this proprietary sentiment gauge advanced into complacency in April, leaving markets vulnerable to a pullback. In the past weeks, the model has collapsed back into panic, suggesting a high probability that the S&P 500 climbs in six months, supporting out 1,175 year-end 2010 target."
- "Uncertainty about 2011 trends is likely to cap any major summer rally efforts. While some may look for guidance out of the 2Q10 reporting season, which begins next month, it seems doubtful that issues including tax policies, government spending programs, housing trends, unemployment, trade disputes and currency trends will be settled that quickly. Ambiguity around capex is being resolved, but 2011 clarity is likely to be found later in the year rather than over the summer."
- "A late 3Q10/early 4Q10 market surge seems most likely driven by several catalysts. The start for a renewed rally appears probable in the September/October time period with the midterm elections, the bipartisan commission’s report on US deficit reduction and a better sense of how the Bush tax cuts expire all contributing to some increased clarity for 2011. In addition, there may be greater visibility regarding the impact of the European austerity initiatives relative to stronger economies such as Germany’s. Thus, the slowing economic momentum can be seen as settling in for more normal global growth rather than the traditional initial cyclical bounce."
Citigroup Equity Strategy 20100629
Readings
Europe's fiscal dystopia: the "New Austerity" road - Counterpunch
Employment report preview - Calculated Risk
Is monetary policy too expansionary or not expansionary enough? - FT Wolfexchange
RBS tells clients to prepare for 'monster' money-printing by the Fed - Telegraph
Parenteau: Marching to Austeria* and Other Neolib Fibs - Naked Capitalism
Wall Street's New Reality - Daily Beast
The risk of recession - Credit Writedowns
Study: Nearly One in Five Mortgage Defaults Are ‘Strategic’ - WSJ
How Far Underwater Do Borrowers Sink Before Walking Away? - WSJ
UK banks’ funding fun has just begun - FT Alphaville
Quantifying the ECB overdraft - FT Alphaville
Whoa. Look at the Yield on the 10-Year - Wall Street Journal
Owning the Banking System - New Deal 2.0
Three debts: A view from emerging Europe - Vox EU
Employment report preview - Calculated Risk
Is monetary policy too expansionary or not expansionary enough? - FT Wolfexchange
RBS tells clients to prepare for 'monster' money-printing by the Fed - Telegraph
Parenteau: Marching to Austeria* and Other Neolib Fibs - Naked Capitalism
Wall Street's New Reality - Daily Beast
The risk of recession - Credit Writedowns
Study: Nearly One in Five Mortgage Defaults Are ‘Strategic’ - WSJ
How Far Underwater Do Borrowers Sink Before Walking Away? - WSJ
UK banks’ funding fun has just begun - FT Alphaville
Quantifying the ECB overdraft - FT Alphaville
Whoa. Look at the Yield on the 10-Year - Wall Street Journal
Owning the Banking System - New Deal 2.0
Three debts: A view from emerging Europe - Vox EU
Germans and fiscal deficits, monetisation of public debt, inflation
- "Remembering the traumatic experience of the 1920s and '30s, the great majority of Germans sincerely believe that it is absolutely essential to prevent:
• fiscal deficits, which can result in forced monetisation, and which divert savings to the detriment of companies;
• the monetisation of public debt (monetary creation), which inevitably leads to spiralling inflation;
• Inflation, which is destructive for society by despoiling savers."
- "One can therefore understand Germans' reservations regarding:
• the euro zone if there are no strict budgetary rules; without such rules, countries other than Germany could have excessive fiscal deficits that the ECB would in the end have to monetise; Germans' savings would be used to finance the fiscal deficits of the other countries;
• the monetisation of public debt by the ECB;
• the loss of competitiveness of the other countries which could, at fixed exchange rates, push up inflation in Germany."
- "The need to prevent the destruction of the euro zone (in particular due to sovereign defaults) and the need to accept different productive specialisations in the other countries therefore face resistance in Germany, because they force it to accept developments (monetisation of public debt, divergence of wage costs and trade balances) that it normally rejects."
Natixis Flash Economics 324 20100623
• fiscal deficits, which can result in forced monetisation, and which divert savings to the detriment of companies;
• the monetisation of public debt (monetary creation), which inevitably leads to spiralling inflation;
• Inflation, which is destructive for society by despoiling savers."
- "One can therefore understand Germans' reservations regarding:
• the euro zone if there are no strict budgetary rules; without such rules, countries other than Germany could have excessive fiscal deficits that the ECB would in the end have to monetise; Germans' savings would be used to finance the fiscal deficits of the other countries;
• the monetisation of public debt by the ECB;
• the loss of competitiveness of the other countries which could, at fixed exchange rates, push up inflation in Germany."
- "The need to prevent the destruction of the euro zone (in particular due to sovereign defaults) and the need to accept different productive specialisations in the other countries therefore face resistance in Germany, because they force it to accept developments (monetisation of public debt, divergence of wage costs and trade balances) that it normally rejects."
Natixis Flash Economics 324 20100623
Towards a "Japanese" model in the euro zone?
- "There is currently a clear economic recovery in Asia, Latin America, the large Central European countries, Europe apart from the zone euro, Japan, India, oil-exporting countries and even in the United States, despite the deterioration in households’ financial situation, Canada and Australia. The euro zone is an exception, and we actually expect sluggish growth in domestic demand in the euro zone due to:
• the slowdown in wages,
• the rise in household savings,
• offshoring,
• the reduction in fiscal deficits;"
- "The euro zone could therefore evolve towards the "Japanese model": weak wage incomes and household demand, growth due to exports and associated investments."
- "This new model would be a major trend break for many countries, would be favourable only in countries that have kept a large industry and exports and would also raise the question whether the distortion of income sharing at the expense of wage earners can be accepted."
Natixis Flash Economics 323 20100623
• the slowdown in wages,
• the rise in household savings,
• offshoring,
• the reduction in fiscal deficits;"
- "The euro zone could therefore evolve towards the "Japanese model": weak wage incomes and household demand, growth due to exports and associated investments."
- "This new model would be a major trend break for many countries, would be favourable only in countries that have kept a large industry and exports and would also raise the question whether the distortion of income sharing at the expense of wage earners can be accepted."
Natixis Flash Economics 323 20100623
Local regulation in global markets?
- "The last couple of weeks brought about some breathtaking developments. Who would have imagined a few months ago that center-left governments in Greece, Spain and Portugal would come up with draconian fiscal belt-tightening, while a center-right government in Germany implemented drastic regulatory tightening? Both factors have (potentially negative) implications for credit markets. However, while the deleveraging of sovereign balance sheets seems to be inevitable, an improved regulatory framework should address the formation of a bubble rather than preventing tools to hedge against a bubble."
• Macro Outlook: "Financial markets play an essential role in the economy as intermediaries. However, asymmetric information, moral hazard and adverse selection make regulatory intervention indispensable for efficient functioning."
• Micro Fundamentals: "Regulation has managed to become the main concern of investors due to poor political response to the capital markets shake-up in May. Tighter credit conditions could be one implication that negatively affects borrowers."
• Debt-Equity-Linkage: "The new regulation measures will potentially impact the link
between debt and equity financial instruments, not only reducing liquidity in these markets but also disturbing the relative pricing of debt and equity instruments."
• Credit Quality Trend: "Increasing the credit quality of banks is the ultimate goal of regulators to improve systemic stability. The easiest way would be to increase bank capital, but this has negative implications for the economy, as it would increase the cost of credit."
• Market Technicals: "The sovereign debt crisis impacts primary markets. With the risk of a substantial repricing of credits in the cards, investors are not ready to add credit exposure."
• Valuation & Timing: "Markets will behave less jumpy but spread widening pressure will persist."
• Other Credit Markets: Credit Derivatives: "The actual usefulness of the German short-selling ban on CDS remains a mystery. EEMEA Credits: Accelerating inflation, surging housing prices and economic growth reaching almost 12% have increased pressure on Chinese authorities to undertake steps preventing a hard landing, with potentially negative implications for EEMEA credits. Regulation overkill in securitization illustrated by two new rules, i.e., CESR money market regulation, US-SEC Rule 17g-5."
• Allocation: "Having missed the opportunity to cut our exposure to the more cyclical basic resources sector on time, we are also reluctant to implement this reversal during a panic phase. Nevertheless, amid mounting evidence of slower economic activity in China, we plan to reduce our exposure in the next few weeks. The rest of the portfolio remains unchanged as it already reflects our defensive stance."
• Model Portfolio: "Our financials portfolio underperformed the benchmark by -67bp, while the non-financials portfolio underperformed by -32bp due to our exposure to basic resources."
Unicredit Euro Credit Pilot June2010
• Macro Outlook: "Financial markets play an essential role in the economy as intermediaries. However, asymmetric information, moral hazard and adverse selection make regulatory intervention indispensable for efficient functioning."
• Micro Fundamentals: "Regulation has managed to become the main concern of investors due to poor political response to the capital markets shake-up in May. Tighter credit conditions could be one implication that negatively affects borrowers."
• Debt-Equity-Linkage: "The new regulation measures will potentially impact the link
between debt and equity financial instruments, not only reducing liquidity in these markets but also disturbing the relative pricing of debt and equity instruments."
• Credit Quality Trend: "Increasing the credit quality of banks is the ultimate goal of regulators to improve systemic stability. The easiest way would be to increase bank capital, but this has negative implications for the economy, as it would increase the cost of credit."
• Market Technicals: "The sovereign debt crisis impacts primary markets. With the risk of a substantial repricing of credits in the cards, investors are not ready to add credit exposure."
• Valuation & Timing: "Markets will behave less jumpy but spread widening pressure will persist."
• Other Credit Markets: Credit Derivatives: "The actual usefulness of the German short-selling ban on CDS remains a mystery. EEMEA Credits: Accelerating inflation, surging housing prices and economic growth reaching almost 12% have increased pressure on Chinese authorities to undertake steps preventing a hard landing, with potentially negative implications for EEMEA credits. Regulation overkill in securitization illustrated by two new rules, i.e., CESR money market regulation, US-SEC Rule 17g-5."
• Allocation: "Having missed the opportunity to cut our exposure to the more cyclical basic resources sector on time, we are also reluctant to implement this reversal during a panic phase. Nevertheless, amid mounting evidence of slower economic activity in China, we plan to reduce our exposure in the next few weeks. The rest of the portfolio remains unchanged as it already reflects our defensive stance."
• Model Portfolio: "Our financials portfolio underperformed the benchmark by -67bp, while the non-financials portfolio underperformed by -32bp due to our exposure to basic resources."
Unicredit Euro Credit Pilot June2010
Get ready for the 12M LTRO expiry
- FI Strategizer: "Weak US data along with uncertainty ahead of the 12M LTRO expiry should create a favorable environment for Bunds and UST. Pressure on periphery should stay high in the coming days."
- EU Portfolio Strategy: "We stay long duration: the G-20 over this weekend and next week’s US data should not change much the positive mood for FI."
- 12M LTRO: "Next week, the 12M LTRO held in June last year will mature. The amount to be rolled over will send an important signal about the health of European banks, will affect excess liquidity in the Eurosystem and will be crucial for the dynamics of MM rates."
- German Q4 funding: "Due to a decline in its deficit, Germany cut bond supply by EUR 2bn in 3Q vs. what was previously planned, an overall modest amount. We expect a more sizeable cut (ca. EUR 10bn) in 4Q."
- UK Budget: "This week, the UK released its emergency budget, which contained strong measures to cut the deficit. As a result, this year Gilt supply may be 28% lower than last year."
- MM: "Bids at the 1W MRO reached EUR 151bn. Data released by the CB of Portugal showed that Portuguese banks bid EUR 35bn of liquidity in May at the ECB, almost twice as much as in April."
- Supply Corner: "Next week, there will be ca. EUR 20bn of redemptions and EUR 14bn in coupons (from Germany), while gross supply should be EUR 18/20bn. Net supply should be slightly negative (EUR 0/-2.6bn)."
-FX Strategizer: "Choppy trading on FX majors should continue also in the aftermath of the G-20 meeting. Resuming global risk aversion should remain the key driver ahead of a sluggish US employment report on Friday, favoring both the JPY and the CHF."
- EUR: "Although the euro held the line despite falling stock markets and widening yield spreads & CDS across the eurozone, EUR-USD should face more downward pressure due to the renewed clouded risk picture."
- JPY: "Market euphoria for Beijing’s decision to allow the yuan greater flexibility has faded, but the JPY should stay firm as risk aversion persists: we wouldn’t rule out EUR-JPY to slide again towards 108, also helped by a stronger BoJ Tankan report."
- CHF: "Jordan’s explicit remarks that the SNB has no need to intervene in the FX market were clearly taken as a “green light” for more intense EUR-CHF sales: the full break of also the 1.35 wall is approaching fast."
- GBP: "The UK Emergency Budget proved to be tough enough to boost sterling. Cable should definitively break through 1.50 and move towards 1.51, while EUR-GBP should fall below 0.82 if EMU woes persist."
- Pacific Rim & CAD: "While resuming risk aversion may weigh further on the three commodity units, political uncertainty may represent a unique source of volatility for the Aussie dollar, after Gillard became the new PM and debate on the mining tax abruptly returned to the spotlight."
- Nordics: "The SEK and NOK trends may diverge for the time being due to monetary policy at home. The Norges Bank sounded cautious on more intense tightening, while the Riksbank should hike rates next Thursday."
Unicredit Curves&Crosses 20100625
- EU Portfolio Strategy: "We stay long duration: the G-20 over this weekend and next week’s US data should not change much the positive mood for FI."
- 12M LTRO: "Next week, the 12M LTRO held in June last year will mature. The amount to be rolled over will send an important signal about the health of European banks, will affect excess liquidity in the Eurosystem and will be crucial for the dynamics of MM rates."
- German Q4 funding: "Due to a decline in its deficit, Germany cut bond supply by EUR 2bn in 3Q vs. what was previously planned, an overall modest amount. We expect a more sizeable cut (ca. EUR 10bn) in 4Q."
- UK Budget: "This week, the UK released its emergency budget, which contained strong measures to cut the deficit. As a result, this year Gilt supply may be 28% lower than last year."
- MM: "Bids at the 1W MRO reached EUR 151bn. Data released by the CB of Portugal showed that Portuguese banks bid EUR 35bn of liquidity in May at the ECB, almost twice as much as in April."
- Supply Corner: "Next week, there will be ca. EUR 20bn of redemptions and EUR 14bn in coupons (from Germany), while gross supply should be EUR 18/20bn. Net supply should be slightly negative (EUR 0/-2.6bn)."
-FX Strategizer: "Choppy trading on FX majors should continue also in the aftermath of the G-20 meeting. Resuming global risk aversion should remain the key driver ahead of a sluggish US employment report on Friday, favoring both the JPY and the CHF."
- EUR: "Although the euro held the line despite falling stock markets and widening yield spreads & CDS across the eurozone, EUR-USD should face more downward pressure due to the renewed clouded risk picture."
- JPY: "Market euphoria for Beijing’s decision to allow the yuan greater flexibility has faded, but the JPY should stay firm as risk aversion persists: we wouldn’t rule out EUR-JPY to slide again towards 108, also helped by a stronger BoJ Tankan report."
- CHF: "Jordan’s explicit remarks that the SNB has no need to intervene in the FX market were clearly taken as a “green light” for more intense EUR-CHF sales: the full break of also the 1.35 wall is approaching fast."
- GBP: "The UK Emergency Budget proved to be tough enough to boost sterling. Cable should definitively break through 1.50 and move towards 1.51, while EUR-GBP should fall below 0.82 if EMU woes persist."
- Pacific Rim & CAD: "While resuming risk aversion may weigh further on the three commodity units, political uncertainty may represent a unique source of volatility for the Aussie dollar, after Gillard became the new PM and debate on the mining tax abruptly returned to the spotlight."
- Nordics: "The SEK and NOK trends may diverge for the time being due to monetary policy at home. The Norges Bank sounded cautious on more intense tightening, while the Riksbank should hike rates next Thursday."
Unicredit Curves&Crosses 20100625
How fragile are debt holdings in EMU?
- "74% of Euro debt, issued by EMU residents, is held inside the Euro area and underlines that debt portfolio shifts are predominantly an intra-EMU story."
- "Intra-EMU non-resident debt holdings are a source of financial fragility for the periphery as rollover is likely to prove tough, especially in private sector debt."
- "Divestment risk from US and Japanese holders of € debt is interesting but ownership of the periphery is rather limited, tough illiquidity amplifies market impacts."
- "A dearth of data makes assessment of reserve manager shifts out of periphery paper hard to forecast, but this looks to be the trend. Caution on some core EGB names can rise but reserve managers are likely to increase exposure to the likes of Germany."
- "There little reason to think Bunds face a systematic risk of non-resident selling, unless the crisis envelops Germany to the point of much higher default risk."
RBS European Rates Strategy 20100625
- "Intra-EMU non-resident debt holdings are a source of financial fragility for the periphery as rollover is likely to prove tough, especially in private sector debt."
- "Divestment risk from US and Japanese holders of € debt is interesting but ownership of the periphery is rather limited, tough illiquidity amplifies market impacts."
- "A dearth of data makes assessment of reserve manager shifts out of periphery paper hard to forecast, but this looks to be the trend. Caution on some core EGB names can rise but reserve managers are likely to increase exposure to the likes of Germany."
- "There little reason to think Bunds face a systematic risk of non-resident selling, unless the crisis envelops Germany to the point of much higher default risk."
RBS European Rates Strategy 20100625
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