ECB dissent in the collateral/cover/credit rating ranks - FT Alphaville
From Disinflation to Deflation? - Econbrowser
Debt and growth revisited - VoxEu
Reinhart And Rogoff Are Confusing Me - Paul Krugman
Irish debt under fire on fresh bank jitters - Telegraph
Trade Gap Expands As Economy Underperforms Low Expectations - Planet Money
Fed Inaction - Modeled Behavior
Structural unemployment is a new problem, needing new solutions - Gavyn Davies
Chinese consumption and the Japanese “sorpasso” - China Financial Markets
No Russian wheat (inflation) exports
- Export ban contains inflation impact in Russia "We expect a smaller inflation impact of the wheat shortage than widely believed. The export ban more than offsets the 25% shortfall in the harvest. Moreover, the government is tapping into its reserves, while producers will be nudged to absorb some of the price increases. We revise our inflation forecast up by only 0.8ppts for end-year (to 7.8%) and 0.7ppts for the 2010 average (to 6.7%). However, we still think this will prevent the further rate cuts we had expected until now."
- CEE floods do not change our dovish bias "Also in Hungary and Poland, where floods have been severe, and harvests are expected to be 7-15% down relative to 2009, we maintain our dovish bias. In both cases, food price inflation is very low, and core inflation remains (or is expected to come soon) under control. Pricing power remains weak—clearly in Hungary but also in Poland where productivity is growing well in excess of wages. We expect inflation to remain within the target corridor despite the food price shock in Poland and to return to close to the target in Hungary. We recommend receiving 1y IRS in Hungary and see the risk to our 25bp hike in Poland this year to the downside."
- Another reason for Turkey linkers; Egypt’s budget hit hard "Ironically, Turkey linkers may be the best way to position for higher wheat prices in Russia, in our view. Yes, Turkey is a net exporter of wheat, but higher world prices will likely affect domestic prices. And Turkey is most prone to second round effects, with inflation expectations above target and credit and wage growth also pointing towards higher inflation. Egypt, in turn, will be hit hard fiscally due to the wheat subsidies; these, however, should contain the inflationary impact."
- The week behind & week ahead "July CPI surprised to the downside in Russia and Turkey, but food price inflation is around the corner the former, while the upcoming Ramadan effects together with solid domestic demand look set to exert upward pressure for the latter. Meanwhile, the CNB kept rates steady but struck a dovish tone. The central bank explicitly warned of possible actions (ie, intervention or rate cuts) should the rapid pace of CZK appreciation continue. Still, EUR-CZK only moved 0.3% higher. A busy data calendar in the week ahead with a slew of data on inflation and output. The base effects should subtract from inflation in Hungary, Poland and possibly Egypt, but are less supportive for the Czech R. In Romania, the VAT hike will likely see a spike in inflation last month. Meanwhile, GDP growth likely accelerated in Q2 across CEE (Czech R, Hungary, Romania), driven mainly by external demand – downside risks from here though. In Russia, we also expect GDP growth to accelerate in Q2 on the back improving domestic demand and net exports. Separately, we expect IP growth to slow in Turkey and South Africa."
- CEE floods do not change our dovish bias "Also in Hungary and Poland, where floods have been severe, and harvests are expected to be 7-15% down relative to 2009, we maintain our dovish bias. In both cases, food price inflation is very low, and core inflation remains (or is expected to come soon) under control. Pricing power remains weak—clearly in Hungary but also in Poland where productivity is growing well in excess of wages. We expect inflation to remain within the target corridor despite the food price shock in Poland and to return to close to the target in Hungary. We recommend receiving 1y IRS in Hungary and see the risk to our 25bp hike in Poland this year to the downside."
- Another reason for Turkey linkers; Egypt’s budget hit hard "Ironically, Turkey linkers may be the best way to position for higher wheat prices in Russia, in our view. Yes, Turkey is a net exporter of wheat, but higher world prices will likely affect domestic prices. And Turkey is most prone to second round effects, with inflation expectations above target and credit and wage growth also pointing towards higher inflation. Egypt, in turn, will be hit hard fiscally due to the wheat subsidies; these, however, should contain the inflationary impact."
- The week behind & week ahead "July CPI surprised to the downside in Russia and Turkey, but food price inflation is around the corner the former, while the upcoming Ramadan effects together with solid domestic demand look set to exert upward pressure for the latter. Meanwhile, the CNB kept rates steady but struck a dovish tone. The central bank explicitly warned of possible actions (ie, intervention or rate cuts) should the rapid pace of CZK appreciation continue. Still, EUR-CZK only moved 0.3% higher. A busy data calendar in the week ahead with a slew of data on inflation and output. The base effects should subtract from inflation in Hungary, Poland and possibly Egypt, but are less supportive for the Czech R. In Romania, the VAT hike will likely see a spike in inflation last month. Meanwhile, GDP growth likely accelerated in Q2 across CEE (Czech R, Hungary, Romania), driven mainly by external demand – downside risks from here though. In Russia, we also expect GDP growth to accelerate in Q2 on the back improving domestic demand and net exports. Separately, we expect IP growth to slow in Turkey and South Africa."
Merrill Lynch Emerging EMEA Macro Weekly 20100806
Getting stressed out
- Stress testing 60% drop in home prices – negative for banks "Media reported that the Chinese banking regulator has required banks to stress test for 60% property price drop. While the magnitude of correction sounds quite unlikely, it has nonetheless caused lots of concerns and confusion among investors. People are asking “why another round of stress test”, “why 60%”, and “what is the outcome”. In our view, either from a political posturing or real earnings impact perspective, this is negative for the banks. It reinforced our cautious stance on the bank sector this year."
- Our interpretation of regulators’ intention "1. Signaling continued tightening: the regulators are determined to deflate the property price bubble. In light of the market speculation of policy loosening, PBOC recently reiterated the differentiated mortgage policies, and CBRC Beijing also banned mortgages to 3rd homes again. This may be another political posture. 2. A real concern: regulators may believe the tightening policies so far have been ineffective. Second hand market prices are higher than April levels in many cases, and mortgage loan volume remained strong in June. Regulators may see the property prices bubble lasting longer than expected, and are truly concerned that the correction, when it comes, will be deeper than expected. 3. An excuse to push for more provisions: LGFV and property are the top two concerns for CBRC. The regulators have been pushing banks to “front-load the pains”, downgrade loans, and increase provisions, but have encountered strong resistance from banks. This may be another effort to raise the sense of urgency for provisioning and “counter-cycle management” while earnings growth is strong."
- Why 60%? – it’s needed for a true “stress” scenario "Mortgage loan-value ratio is around 60% at sector level (without MTM), based on our estimation, and ~50% at large banks, according to management. Thus, most loans are still in positive equity when the price drop 30%. Banks only expect ~2.2ppt rise in property NPLs in such a scenario, even taking into consideration 108bp of rate hikes. However, as we highlighted in the May report, “the rise in property loan NPL will be exponential as property prices fall”. To find out a true “stress” scenario, a >50% correction is warranted."
- The result and impact on banks "We would downplay any outcome of such stress tests, because: 1) there is no precedence to refer to, and 2) default is influenced by a lot of "soft" factors other than the home prices (eg confidence in job security, confidence in long term property prices, the “cost” of default, etc). We reiterate our view that any sharp correction in property prices may lead to significant earnings hit on banks, but the impact on balance sheet and book value is limited (unless it turns into a broadbased economic crisis). Among the H-share banks, CMB and MSB are more vulnerable due to their relatively high exposure to mortgage and developer loans."
- Our interpretation of regulators’ intention "1. Signaling continued tightening: the regulators are determined to deflate the property price bubble. In light of the market speculation of policy loosening, PBOC recently reiterated the differentiated mortgage policies, and CBRC Beijing also banned mortgages to 3rd homes again. This may be another political posture. 2. A real concern: regulators may believe the tightening policies so far have been ineffective. Second hand market prices are higher than April levels in many cases, and mortgage loan volume remained strong in June. Regulators may see the property prices bubble lasting longer than expected, and are truly concerned that the correction, when it comes, will be deeper than expected. 3. An excuse to push for more provisions: LGFV and property are the top two concerns for CBRC. The regulators have been pushing banks to “front-load the pains”, downgrade loans, and increase provisions, but have encountered strong resistance from banks. This may be another effort to raise the sense of urgency for provisioning and “counter-cycle management” while earnings growth is strong."
- Why 60%? – it’s needed for a true “stress” scenario "Mortgage loan-value ratio is around 60% at sector level (without MTM), based on our estimation, and ~50% at large banks, according to management. Thus, most loans are still in positive equity when the price drop 30%. Banks only expect ~2.2ppt rise in property NPLs in such a scenario, even taking into consideration 108bp of rate hikes. However, as we highlighted in the May report, “the rise in property loan NPL will be exponential as property prices fall”. To find out a true “stress” scenario, a >50% correction is warranted."
- The result and impact on banks "We would downplay any outcome of such stress tests, because: 1) there is no precedence to refer to, and 2) default is influenced by a lot of "soft" factors other than the home prices (eg confidence in job security, confidence in long term property prices, the “cost” of default, etc). We reiterate our view that any sharp correction in property prices may lead to significant earnings hit on banks, but the impact on balance sheet and book value is limited (unless it turns into a broadbased economic crisis). Among the H-share banks, CMB and MSB are more vulnerable due to their relatively high exposure to mortgage and developer loans."
Merrill Lynch Banks China 20100805
Out of office: Gone to the beach!
- "The summer holiday season is upon us and many investors will recover from peripheryrelated stress on periphery beaches. Chances are good that during this summer investors can safely enjoy some relaxing days without being concerned about short-term risks too much. Major sources of potential headline risks – the stress test and the 2Q10 earnings season – are already behind us (or will end soon). While macroeconomic risk factors are on the horizon, we do not see catalysts in the short term that could trigger a change in the current more positive market perception. Nevertheless, many investors might still have the "summer lull 2008" in mind, which brought a major catalyst for a downturn – the Lehman default. Hence, we provide our priority list of "things that shouldn't happen in order not to spoil your summer holidays"."
- Macro Outlook: "While the bank stress test results led to some relief in the valuation of eurozone financials' risk, latest macroeconomic data suggest a deceleration of economic activity in the major economies may lead to more soberness in credit markets."
- Micro Fundamentals: "The European earnings season – consistent with the one in the US – currently fuels the positive momentum in equity markets as well as in credit spreads."
- Debt-Equity-Linkage: "Stock markets performed well during July, posting their strongest gains in a single month since July 2009. Credit markets rallied even stronger, to the tightest levels since May 2010. Hence it is worthwhile assessing where we stand in terms of valuations."
- Credit Quality Trend: "As authorities implement new rules for credit rating agencies (CRA) we assess their new role in light of changed regulation."
- Market Technicals: "Primary markets are already in summer lull mode."
- Valuation & Timing: "The end of the banking crisis. Sounds pathetic, but it isn't. While pressure from the slowdown will persist, what will be different is the role of the banks: Instead of being the major culprit during a crisis, they will rather become a victim during a crisis."
- Other Credit Markets: "Credit derivatives at the crossroads – an update on central clearing of CDS. Securitization: News on the new ECB haircuts for repo-collateral posted by banks in order to obtain liquidity. EEMEA Credits: Chinese banks back in the limelight."
- Allocation: "We upgrade the financials sector to MW from UW, while non-financials remain UW. Within the financials sector, we put bank and insurance senior on UW (from OW), LT2 on MW (from OW), and all other sub categories on OW (from UW), as we think that subs will outperform seniors."
- Model Portfolio: "Our financials portfolio outperformed the benchmark by 100bp, while the non-financials portfolio outperformed by 9bp."
- Macro Outlook: "While the bank stress test results led to some relief in the valuation of eurozone financials' risk, latest macroeconomic data suggest a deceleration of economic activity in the major economies may lead to more soberness in credit markets."
- Micro Fundamentals: "The European earnings season – consistent with the one in the US – currently fuels the positive momentum in equity markets as well as in credit spreads."
- Debt-Equity-Linkage: "Stock markets performed well during July, posting their strongest gains in a single month since July 2009. Credit markets rallied even stronger, to the tightest levels since May 2010. Hence it is worthwhile assessing where we stand in terms of valuations."
- Credit Quality Trend: "As authorities implement new rules for credit rating agencies (CRA) we assess their new role in light of changed regulation."
- Market Technicals: "Primary markets are already in summer lull mode."
- Valuation & Timing: "The end of the banking crisis. Sounds pathetic, but it isn't. While pressure from the slowdown will persist, what will be different is the role of the banks: Instead of being the major culprit during a crisis, they will rather become a victim during a crisis."
- Other Credit Markets: "Credit derivatives at the crossroads – an update on central clearing of CDS. Securitization: News on the new ECB haircuts for repo-collateral posted by banks in order to obtain liquidity. EEMEA Credits: Chinese banks back in the limelight."
- Allocation: "We upgrade the financials sector to MW from UW, while non-financials remain UW. Within the financials sector, we put bank and insurance senior on UW (from OW), LT2 on MW (from OW), and all other sub categories on OW (from UW), as we think that subs will outperform seniors."
- Model Portfolio: "Our financials portfolio outperformed the benchmark by 100bp, while the non-financials portfolio outperformed by 9bp."
Unicredit Euro Credit Pilot Aug2010
The Services Story
- A big opportunity — "The number of middle income consumers will increase by over 800 million by 2030, according to World Bank projections. Half of these new consumers will be located in China and India."
- Changing consumer behavior — "As income levels increase, spending patterns will also shift. In China and India, consumers are increasingly shifting consumption from basic food and clothing to other goods and services."
- The services story — "The share of services consumption in GDP is relatively low in China and India, and should rise significantly. This growth has implications for financial services companies, healthcare providers, and education companies."
- Investment implications — "We highlight 29 emerging and developed market companies that are well-positioned to benefit from the services story in China and India. These companies are forecast to grow EPS by 47% in 2010 and 27% in 2011. They are trading on a 2011 P/E multiple of 19x."
- Changing consumer behavior — "As income levels increase, spending patterns will also shift. In China and India, consumers are increasingly shifting consumption from basic food and clothing to other goods and services."
- The services story — "The share of services consumption in GDP is relatively low in China and India, and should rise significantly. This growth has implications for financial services companies, healthcare providers, and education companies."
- Investment implications — "We highlight 29 emerging and developed market companies that are well-positioned to benefit from the services story in China and India. These companies are forecast to grow EPS by 47% in 2010 and 27% in 2011. They are trading on a 2011 P/E multiple of 19x."
Citigroup Emerging Market Consumerism 20100804
What growth rate meets the balance of payments constraint?
- "Growth in certain euro-zone countries is currently limited by the current account deficit. The remedy they are forced to use is to reduce their external borrowing requirement, and therefore to save and curb growth. But to what extent must growth slow down for the external balance to improve? The answer depends not only on the elasticity of imports to domestic growth, but also on the elasticity of exports and the vigour of foreign demand."
- "We therefore calculate the critical threshold of growth for which a country’s current-account balance does not deteriorate, given its specialisation and growth among the main trading partners (Thirlwall model):
• in Greece, Ireland, Finland, Slovakia and Slovenia, domestic growth may be twice as high or even more in comparison to growth of their main trading partners;
• in the Netherlands, Belgium, Austria and Spain, growth must be proportional;
• in Germany, France, Portugal, but above all in Italy, domestic growth must be markedly lower than that of the main partners to meet the balance of payments-constrained growth rate."
- "Over the past fifteen years, this growth threshold was 6.3% annually for Ireland, 4.8% for Greece, 2.6% for Spain, 2% for Germany, 1.8% for France and 0.9% for Italy."
- "Currently, the growth regime suggests that the external borrowing requirements are increasing further - slightly - only in France and Belgium."
- "By applying this model to our growth forecasts, we conclude that the differentials in current-account balances between EMU countries will tend to shrink by 2011. The euro zone’s external position will improve as a whole, which points to a fundamental appreciation of the euro."
- "We therefore calculate the critical threshold of growth for which a country’s current-account balance does not deteriorate, given its specialisation and growth among the main trading partners (Thirlwall model):
• in Greece, Ireland, Finland, Slovakia and Slovenia, domestic growth may be twice as high or even more in comparison to growth of their main trading partners;
• in the Netherlands, Belgium, Austria and Spain, growth must be proportional;
• in Germany, France, Portugal, but above all in Italy, domestic growth must be markedly lower than that of the main partners to meet the balance of payments-constrained growth rate."
- "Over the past fifteen years, this growth threshold was 6.3% annually for Ireland, 4.8% for Greece, 2.6% for Spain, 2% for Germany, 1.8% for France and 0.9% for Italy."
- "Currently, the growth regime suggests that the external borrowing requirements are increasing further - slightly - only in France and Belgium."
- "By applying this model to our growth forecasts, we conclude that the differentials in current-account balances between EMU countries will tend to shrink by 2011. The euro zone’s external position will improve as a whole, which points to a fundamental appreciation of the euro."
Natixis Flash Economics 383 20100728
The "Anglo-Saxon" view of the euro zone is deeply mistaken
- "For several months, investors have been inundated with research from London and New York, explaining them that:
1) the peripheral euro-zone countries will default on their public debts;
2) the euro will disappear, as some countries want to regain their monetary freedom."
- "These arguments may seem rational:
1) some euro-zone countries’ debt ratios will be stabilised at very high levels, hence the need for large primary budget surpluses, which are detrimental for the economy. A partial default would prevent this;
2) some countries will have anaemic growth, or have worsened their industrial competitiveness significantly. A depreciation of their currency thus could be attractive;
3) the countries’ productive specialisations are very different, and this makes their membership of a currency area difficult in the absence of federalism."
- "However, the proponents of these arguments forget:
1) the Europeans’ political will to prevent a default and any development that would threaten the euro’s credibility and stability;
2) the massive costs that would be associated with
• any type of country pulling out of the euro;
• a sovereign debt default, given the structure of holding of these debts and the risk of contagion."
- "The "Anglo-Saxons" view of the euro is not sufficiently political and pragmatic to be correct."
1) the peripheral euro-zone countries will default on their public debts;
2) the euro will disappear, as some countries want to regain their monetary freedom."
- "These arguments may seem rational:
1) some euro-zone countries’ debt ratios will be stabilised at very high levels, hence the need for large primary budget surpluses, which are detrimental for the economy. A partial default would prevent this;
2) some countries will have anaemic growth, or have worsened their industrial competitiveness significantly. A depreciation of their currency thus could be attractive;
3) the countries’ productive specialisations are very different, and this makes their membership of a currency area difficult in the absence of federalism."
- "However, the proponents of these arguments forget:
1) the Europeans’ political will to prevent a default and any development that would threaten the euro’s credibility and stability;
2) the massive costs that would be associated with
• any type of country pulling out of the euro;
• a sovereign debt default, given the structure of holding of these debts and the risk of contagion."
- "The "Anglo-Saxons" view of the euro is not sufficiently political and pragmatic to be correct."
Natixis Flash Economics 382 20100727
China's choice of exchange rate regime: What is in the interest of the euro zone?
- "China has a choice between several exchange rate regimes for the renminbi:
• pegged to the dollar, as before the summer of 2005 and between the summer of 2008 and the spring of 2010;
• with managed appreciation against the dollar alone, as between the summer of 2005 and the summer of 2008;
• pegged to a currency basket (dollar, euro, possibly also the yen), as has probably been the case since May 2010;
• with managed appreciation against a currency basket;
• much later, given the under-development of China's financial markets and the need to remove currency controls, flexibility."
- "We seek to determine which system is most in the interest of the euro zone:
• a fixed RMB/USD exchange rate leads the People’s Bank of China to buy dollars to prevent an appreciation of the renminbi, which pushes up the dollar against the euro and is favourable to the euro zone;
• a managed appreciation of the renminbi against the dollar is disastrous for the euro zone, because it causes China to stop buying dollars, thus resulting in an appreciation of the euro against the dollar;
• a fixed exchange rate between the renminbi and a currency basket normally results in China buying the currencies in the basket to prevent the renminbi from appreciating against the basket. If the basket is weak relative to the renminbi, there is buying of dollars and euros, which does not prevent a depreciation of the dollar against the euro, unlike in the case of the peg against the dollar alone;
• if the renminbi appreciates against a basket, China will stop buying dollars and euros, which does not cause a fall in the dollar against the euro, unlike in the case of a gradual appreciation against the dollar."
- "From a perspective of gradual appreciation of the renminbi against the currencies of OECD countries, it is therefore in the interest of the euro zone to ask that China take a currency basket as reference."
- "Moreover, in the near term, if this basket includes other currencies (yen), the fact that China starts to buy the other currencies will drive down the euro against those currencies."
- "The question of the renminbi becoming a trade currency (which the Chinese government is trying to promote in Asia) may also arise. If the renminbi is substituted for the dollar, the demand for dollars will decrease, which is bad for the euro zone."
• pegged to the dollar, as before the summer of 2005 and between the summer of 2008 and the spring of 2010;
• with managed appreciation against the dollar alone, as between the summer of 2005 and the summer of 2008;
• pegged to a currency basket (dollar, euro, possibly also the yen), as has probably been the case since May 2010;
• with managed appreciation against a currency basket;
• much later, given the under-development of China's financial markets and the need to remove currency controls, flexibility."
- "We seek to determine which system is most in the interest of the euro zone:
• a fixed RMB/USD exchange rate leads the People’s Bank of China to buy dollars to prevent an appreciation of the renminbi, which pushes up the dollar against the euro and is favourable to the euro zone;
• a managed appreciation of the renminbi against the dollar is disastrous for the euro zone, because it causes China to stop buying dollars, thus resulting in an appreciation of the euro against the dollar;
• a fixed exchange rate between the renminbi and a currency basket normally results in China buying the currencies in the basket to prevent the renminbi from appreciating against the basket. If the basket is weak relative to the renminbi, there is buying of dollars and euros, which does not prevent a depreciation of the dollar against the euro, unlike in the case of the peg against the dollar alone;
• if the renminbi appreciates against a basket, China will stop buying dollars and euros, which does not cause a fall in the dollar against the euro, unlike in the case of a gradual appreciation against the dollar."
- "From a perspective of gradual appreciation of the renminbi against the currencies of OECD countries, it is therefore in the interest of the euro zone to ask that China take a currency basket as reference."
- "Moreover, in the near term, if this basket includes other currencies (yen), the fact that China starts to buy the other currencies will drive down the euro against those currencies."
- "The question of the renminbi becoming a trade currency (which the Chinese government is trying to promote in Asia) may also arise. If the renminbi is substituted for the dollar, the demand for dollars will decrease, which is bad for the euro zone."
Natixis Flash Economics 381 20100727
China Property: Grey income-who benefits if the wealth gap narrows?
- "Based on the grey income research sponsored by Credit Suisse, we conclude that China will not only increase wages, but also optimise its tax system – developers that focus on mass market products and high asset turns, such as China Vanke, should stand to win."
- Grey income improved affordability, but only for the rich: "The wealth gap skews housing affordability more significantly than indicated by the official data."
- Wealth gap led to a housing mix mismatch in major cities – time to change: "In metropolitan areas such as Hong Kong, the widening wealth gap has created social issues. However, public housing took up around 45% of Hong Kong’s total housing stock, and only less than 6% in China. Therefore, we expect the government to use tax, among other things, to improve affordability, and continue to suppress investment-purpose housing demand."
- Asset turns will become more important for developers: "We expect that the pace of land price appreciation will slow in China, and that the prevailing business model of land hoarding for developers will no longer work. China Vanke, COLI, and KWG remain our top picks in the sector."
- Grey income improved affordability, but only for the rich: "The wealth gap skews housing affordability more significantly than indicated by the official data."
- Wealth gap led to a housing mix mismatch in major cities – time to change: "In metropolitan areas such as Hong Kong, the widening wealth gap has created social issues. However, public housing took up around 45% of Hong Kong’s total housing stock, and only less than 6% in China. Therefore, we expect the government to use tax, among other things, to improve affordability, and continue to suppress investment-purpose housing demand."
- Asset turns will become more important for developers: "We expect that the pace of land price appreciation will slow in China, and that the prevailing business model of land hoarding for developers will no longer work. China Vanke, COLI, and KWG remain our top picks in the sector."
CreditSuisse China Property Policy Outlook 20100810
China port sector: July throughput beat expectations
- "China’s container throughput gained further ground in June, 6% ahead of our expectations, though leading indicators are pointing to softer growth ahead: June’s throughput growth further advanced to 23% Y/Y, possibly driven by inventory re-stocking. With an average run rate of 371K TEUs per day, the month’s volume was 8% above the run rate in 1H10 and 15% above 2H09. Key highlights: 1) By region, PRD recorded the strongest gains, +28% Y/Y. 2) Among the top 8 ports, Shenzhen surged the most on a sequential basis, +9% M/M. On the other hand, new order growth momentum under China PMI continued softening, possibly pointing to softer growth ahead."
JPMorgan China Port Sector 20100810
Is patience a virtue?
- No FOMC action expected, but statement should express shift in risk bias
- BoE leaves QE door open as UK expansion lags Western European lift
- BoJ unlikely to act to try and stem upward pressure on yen
- After strong first quarter, global consumer spending gains moderate
- Brazilian soft patch prompts dovish shift from COPOM
- BoE leaves QE door open as UK expansion lags Western European lift
- BoJ unlikely to act to try and stem upward pressure on yen
- After strong first quarter, global consumer spending gains moderate
- Brazilian soft patch prompts dovish shift from COPOM
China: Implications of rising wages (Part II)
- Capital – labor substitution to accelerate "Rising wages should lead firms to to substitute labor for capital over time."
- Migration of investment to inland will intensify "Some manufacturers will choose to diversify their production across Asia as labor costs in China increase."
- Migration of investment to inland will intensify "Some manufacturers will choose to diversify their production across Asia as labor costs in China increase."
DBS Economics 20100804
China Property: Precautious Measures Good for Sustainable Recovery
- Speculation on new wave of tightening measures led to recent mini sell-off —
"Given improving sales performance and expected lower policy risk, the China property sector had recorded a strong share price rally since mid-June. However, this week caution has returned due to recent speculation the government may introduce a new wave of tightening targeting: 1) development schedules, 2) crack down on land hoarding, and 3) further tightening of mortgage loans for third-unit purchase. Moreover, it has been reported by the local press that China banks have been asked to stress-test for a 60% home-price fall. The above news got a lot of market attention, resulting in a mini sell-off in the China property sector, though most of the news has not yet been made official."
- Policy side neutral, precaution is good for sustainable recovery — "As for recent
speculation of new tightening, we don’t think it is likely, instead believing that in 2H the Central Government will mainly focus on the implementation of existing tightening measures. Moreover, it should shift more focus onto the construction of social welfare housing and monitoring developers’ construction schedule, to prevent a potential construction slippage. The Central Government must balance property market tightening with overall economic growth. However, relative to the recent strong volume rebound and significant improvement in market sentiment, we view the Central Government is wise to introduce precaution measures before property/land prices revert to an upward trend. For us, these kinds of precautions are positive for a sustainable recovery of the China property market outlook."
- Leading developers’ life is not so tough, likely become market consolidators —
"The leading developers have seen sales improving significantly in 3Q given better brand names, product quality, and flexible pricing strategies. We estimate profitability would still be decent (GP>30%) even if they cut prices by c.20% from the peak. In June/July, the land market overshot the property market significantly, with achieved land price down 30% from the peak vs. property price only mildly correcting by 10% in key cities. As for leading developers, if they can use the opportunity to replenish prime land reserves at a reasonable price, this should be positive for sustainable growth. This has led to leading developers hungry for capital raisings, which are unrelated to concerns on their own financial positions. We prefer low cost capital raisings, such as share placement, syndicated loan etc."
- Selectively focus on beta – Shimao and Agile — "If we expect the physical market
turning point to emerge in 1Q2011, a further opportunity to buy into the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. Moreover, second tier market developers – such as our top picks Shimao and Agile – offer defensive valuations. We believe these names not only have higher beta but also have specific catalysts that could result in outperformance."
"Given improving sales performance and expected lower policy risk, the China property sector had recorded a strong share price rally since mid-June. However, this week caution has returned due to recent speculation the government may introduce a new wave of tightening targeting: 1) development schedules, 2) crack down on land hoarding, and 3) further tightening of mortgage loans for third-unit purchase. Moreover, it has been reported by the local press that China banks have been asked to stress-test for a 60% home-price fall. The above news got a lot of market attention, resulting in a mini sell-off in the China property sector, though most of the news has not yet been made official."
- Policy side neutral, precaution is good for sustainable recovery — "As for recent
speculation of new tightening, we don’t think it is likely, instead believing that in 2H the Central Government will mainly focus on the implementation of existing tightening measures. Moreover, it should shift more focus onto the construction of social welfare housing and monitoring developers’ construction schedule, to prevent a potential construction slippage. The Central Government must balance property market tightening with overall economic growth. However, relative to the recent strong volume rebound and significant improvement in market sentiment, we view the Central Government is wise to introduce precaution measures before property/land prices revert to an upward trend. For us, these kinds of precautions are positive for a sustainable recovery of the China property market outlook."
- Leading developers’ life is not so tough, likely become market consolidators —
"The leading developers have seen sales improving significantly in 3Q given better brand names, product quality, and flexible pricing strategies. We estimate profitability would still be decent (GP>30%) even if they cut prices by c.20% from the peak. In June/July, the land market overshot the property market significantly, with achieved land price down 30% from the peak vs. property price only mildly correcting by 10% in key cities. As for leading developers, if they can use the opportunity to replenish prime land reserves at a reasonable price, this should be positive for sustainable growth. This has led to leading developers hungry for capital raisings, which are unrelated to concerns on their own financial positions. We prefer low cost capital raisings, such as share placement, syndicated loan etc."
- Selectively focus on beta – Shimao and Agile — "If we expect the physical market
turning point to emerge in 1Q2011, a further opportunity to buy into the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. Moreover, second tier market developers – such as our top picks Shimao and Agile – offer defensive valuations. We believe these names not only have higher beta but also have specific catalysts that could result in outperformance."
Citigroup China Property 20100806
UK: British upswing running out of steam
- "British GDP has advanced for three consecutive quarters after plummeting in 2008-09. However, OECD's leading indicator for UK has fallen in the past two months, indicating that the economic upswing is losing steam."
- "Perception of the overall economic situation is also worsening. The output gap has not been closed and spare capacity remains."
- "Retail sales are getting weaker, trend in disposable income is declining. Consumer sentiment is
deteriorating, business confidence is fading."
- "We expect only a slow recovery, the robust Q2 numbers were a one-off affair. Exports, private consumption and investments remain well below trend. In our view, economic growth will undershoot government projections."
- "Perception of the overall economic situation is also worsening. The output gap has not been closed and spare capacity remains."
- "Retail sales are getting weaker, trend in disposable income is declining. Consumer sentiment is
deteriorating, business confidence is fading."
- "We expect only a slow recovery, the robust Q2 numbers were a one-off affair. Exports, private consumption and investments remain well below trend. In our view, economic growth will undershoot government projections."
DenDanske UK Outlook 20100806
China banks: We expect solid interim results and stable operating trend in 2H10
- Expect solid 2Q10/1H10 profits. "We expect the 10 banks under our coverage to post 5% q/q (and 28% y/y) profit growth during 2Q10. We expect their aggregate net income in 1H10 to grow 30% y/y and 38% h/h, thanks to strong balance sheet growth, NIM recovery, robust fees as well as improving asset quality. Our forecasts are about 5% above consensus."
- Solid operating performance continues so far into 3Q10. "1) NIM further expanded in 2Q10 despite rising competition for deposits and pressure to lower L/D ratios at some medium-sized banks. We expect stable NIM in 2H10. 2) Fees were robust on the back of strong corporate bills/paper issuance and bank wealth management sales. We however
expect fee growth to soften to 30% for FY10. 3) Solid asset quality improvement. Likely NPL formation may only pick up in 4Q10."
- Our model assumes NPL formation pick-up in 2H10. "The market may focus predominantly on policies and trend in LGFV asset quality, as well as the property market. In our current model, we factor in about Rmb78bn gross new NPLs in 2H10, enough to include 1-1.5% of outstanding LGFV and property development loans to be downgraded to NPL during 2H10. We believe LGFV NPL ratios should stay at 1% or below. Meanwhile, our
models also reflect some dynamic provisioning in 2010."
- Modest earnings revisions: "We now factor in fewer rate hikes, leading to a modest cut in NIM assumptions, particularly in 2011-2012E. Except for a 6-7% downward earnings revision for Citic in 2010-2012E, our earnings cuts are in general insignificant for 2010 and modest at 3-4% in 2011-2012E. Our estimates however remain above consensus mean estimates."
- Undemanding valuations. "We believe the sector may continue to enjoy some re-rating. We still expect 30% earnings growth for FY10E, and 20% plus CAGR growth in 2011-2012E. At 1.75x forward PB and 9x forward PE, valuations appear undemanding. Top pick in H-share remains Citic-H, BOC-H and to less extent BoComm-H. In A-share, we upgrade Minsheng-
A to OW. In A-shares, although big state-owned banks are better value, we prefer Minsheng-A and CMB-A."
- Solid operating performance continues so far into 3Q10. "1) NIM further expanded in 2Q10 despite rising competition for deposits and pressure to lower L/D ratios at some medium-sized banks. We expect stable NIM in 2H10. 2) Fees were robust on the back of strong corporate bills/paper issuance and bank wealth management sales. We however
expect fee growth to soften to 30% for FY10. 3) Solid asset quality improvement. Likely NPL formation may only pick up in 4Q10."
- Our model assumes NPL formation pick-up in 2H10. "The market may focus predominantly on policies and trend in LGFV asset quality, as well as the property market. In our current model, we factor in about Rmb78bn gross new NPLs in 2H10, enough to include 1-1.5% of outstanding LGFV and property development loans to be downgraded to NPL during 2H10. We believe LGFV NPL ratios should stay at 1% or below. Meanwhile, our
models also reflect some dynamic provisioning in 2010."
- Modest earnings revisions: "We now factor in fewer rate hikes, leading to a modest cut in NIM assumptions, particularly in 2011-2012E. Except for a 6-7% downward earnings revision for Citic in 2010-2012E, our earnings cuts are in general insignificant for 2010 and modest at 3-4% in 2011-2012E. Our estimates however remain above consensus mean estimates."
- Undemanding valuations. "We believe the sector may continue to enjoy some re-rating. We still expect 30% earnings growth for FY10E, and 20% plus CAGR growth in 2011-2012E. At 1.75x forward PB and 9x forward PE, valuations appear undemanding. Top pick in H-share remains Citic-H, BOC-H and to less extent BoComm-H. In A-share, we upgrade Minsheng-
A to OW. In A-shares, although big state-owned banks are better value, we prefer Minsheng-A and CMB-A."
JPMorgan China Banks 20100808
A very important point: Is it possible that the crisis has changed potential growth in some countries?
- "Actual growth in certain countries may have been changed by the crisis, while potential growth has not: the halt in indebtedness, in the real estate boom and in immigration, as well as the rise in unemployment, have led to a halt in actual growth, which has been very impressive for instance in Spain."
- "But the question is whether potential growth may have been changed by the crisis. We start off from potential growth to assess the quality of the countries’ growth, their capacity to stabilise their public and private debt ratios, to cope with ageing, to have sufficient return on capital to attract savings, etc."
- "Now, one may think that potential growth is affected by the crisis; if there is for instance a change in the investment rate, in the sectoral structure of the economy, or in taxes or government expenditure that have an effect on the supply of goods and services."
- "When looking at the large OECD countries, we believe that these developments can be seen everywhere, and seemingly to a great extent in certain Southern European countries (Spain, Portugal)."
- "But the question is whether potential growth may have been changed by the crisis. We start off from potential growth to assess the quality of the countries’ growth, their capacity to stabilise their public and private debt ratios, to cope with ageing, to have sufficient return on capital to attract savings, etc."
- "Now, one may think that potential growth is affected by the crisis; if there is for instance a change in the investment rate, in the sectoral structure of the economy, or in taxes or government expenditure that have an effect on the supply of goods and services."
- "When looking at the large OECD countries, we believe that these developments can be seen everywhere, and seemingly to a great extent in certain Southern European countries (Spain, Portugal)."
Natixis Flash Economics 380 20100727
Does stock market valuation take into account the international diversification of listed companies?
- "Large companies have diversified their turnover internationally. We seek to ascertain whether investors associate these companies too closely with the countries where they are quoted. This would create an abnormally close link between the trend in these companies’ share prices and changes in the macroeconomic situation of the countries where they are quoted, while stock
market prices ought to react far more to the international macroeconomic situation."
- "We show:
• that the financial markets do not take into account the geographical structure of the turnover of listed companies;
• but that they give significant weight to the trend in the country’s exchange rate compared with these markets of listed companies."
market prices ought to react far more to the international macroeconomic situation."
- "We show:
• that the financial markets do not take into account the geographical structure of the turnover of listed companies;
• but that they give significant weight to the trend in the country’s exchange rate compared with these markets of listed companies."
Natixis Flash Economics 379 20100727
Europe’s problem today: Economic policies should reduce neither demand nor supply
- "European countries (euro zone, United Kingdom) have decided to rapidly trim their fiscal deficits. This is being done in a situation where the balance sheet adjustment is not completed, and where private demand accordingly is sluggish."
- "It therefore seems logical to avoid reducing private demand by reducing fiscal deficits, which would lead to even more pronounced underemployment."
- "But the key problem for most European countries is weak long-term (potential) growth, due to population ageing and low productivity gains. So the countries must also avoid a negative impact on supply (of goods and labour) when reducing their fiscal deficits."
• "They must therefore be able to reduce their fiscal deficits without reducing demand and without reducing supply; which leaves them with only two options:
• cutting useless government expenditure;
• taxing saved incomes, as these savings are not used to finance useful investments (but rather speculative investments)."
- "It therefore seems logical to avoid reducing private demand by reducing fiscal deficits, which would lead to even more pronounced underemployment."
- "But the key problem for most European countries is weak long-term (potential) growth, due to population ageing and low productivity gains. So the countries must also avoid a negative impact on supply (of goods and labour) when reducing their fiscal deficits."
• "They must therefore be able to reduce their fiscal deficits without reducing demand and without reducing supply; which leaves them with only two options:
• cutting useless government expenditure;
• taxing saved incomes, as these savings are not used to finance useful investments (but rather speculative investments)."
Natixis Flash Economics 378 20100727
QE2?
- "We have had a lot of questions recently on the possibility of renewed quantitative easing – and, in particular, on:
■ When the Fed will restart QE 2;
■ Whether it would work;
■ How the market would react – and what should investors buy if QE is restarted."
■ When the Fed will restart QE 2;
■ Whether it would work;
■ How the market would react – and what should investors buy if QE is restarted."
CreditSuisse Global Equity Strategy 20100809
FX Strategy Weekly
- "Dollar weakness continues to characterise G10 fx markets as doubts over the US economy multiply and all-time lows for US yields boost the attractiveness of carry. With the Fed running out of policy options and evidence of macro economic decoupling in the G10 prevailing, we look for the AUD to remain a desirable G10 destination. A test of 85.0 in USD/JPY now looks probable. Though next week will be dominated by the FOMC, all eyes in the UK will be on the latest BoE Inflation Report (QIR) on Wednesday. The QIR has proved a hurdle for GBP in the past and could again prove the proverbial ‘bridge too far’ that forces GBP/USD bulls to rein in their exuberance. Special notes on GBP/USD and AUD/ZAR are included in this week’s publication."
- "GBP/USD closed up 1.7% at 1.5962 and just fell short of 1.60. GBP lost 0.04% vs the EUR as EUR/USD (+1.7%) kept track of GBP/USD. GBP/CAD burst through the 1.64 level (1.65 target) after a shock 139,000 drop in Canadian employment in July. The MPC left Bank Rate on hold at 0.50% and the APF at £200bln, but suspense is set to stay elevated over the next two weeks and leaves GBP vulnerable to possible profit taking after a stellar run. Elsewhere, we note the gains for the JPY and the fall in USD/JPY blow 0.8550. A test of the Nov-09 low now looms, prompting possible intervention to weaken the yen."
- "US payrolls dropped 131,000 in July, double the consensus estimate. Data for June was revised down to -221,000 from -125,000. The unemployment rate held unchanged at 9.5%. UK data highlights were the 4.3pt drop in the construction PMI in July, and smaller falls in the manufacturing (-0.2pts) and services (-1.3pts) PMIs. The three PMIs have now declined simultaneously for two consecutive months, pointing to a slower rate of expansion in Q3. The NIESR reported a rise in GDP of 0.9% in the three months to July vs 1.1% in June. The ECB left its interest rate on hold at 1.0% but reined in optimism over the economy and declared no recovery victory. Strong Q2 GDP data are expected from Germany next week."
- "Backed by bullish seasonals and weaker macro data, gilts logged an impressive week with yields dropping markedly across the curve, but with the long end outperforming. 10y yields descended below 3.25% to a 3.23% close. Support for a further decline towards 3% could be on the cards. 5y swaps dropped 7bp to 2.35% and the 10y closed 11bp down at 3.27%, causing the 2y/10y spread to flatten below 190bp. The 2y/10y gilts spread tightened below 250bp and closed the week at 245bp. The 3mth Libor/Ois spread held steady at 25bp. The 10y swap spread was also unchanged at 5bp. The 5y gilt auction drew solid demand and was covered 1.99 times (0.7bp tail)."
- "GBP/USD closed up 1.7% at 1.5962 and just fell short of 1.60. GBP lost 0.04% vs the EUR as EUR/USD (+1.7%) kept track of GBP/USD. GBP/CAD burst through the 1.64 level (1.65 target) after a shock 139,000 drop in Canadian employment in July. The MPC left Bank Rate on hold at 0.50% and the APF at £200bln, but suspense is set to stay elevated over the next two weeks and leaves GBP vulnerable to possible profit taking after a stellar run. Elsewhere, we note the gains for the JPY and the fall in USD/JPY blow 0.8550. A test of the Nov-09 low now looms, prompting possible intervention to weaken the yen."
- "US payrolls dropped 131,000 in July, double the consensus estimate. Data for June was revised down to -221,000 from -125,000. The unemployment rate held unchanged at 9.5%. UK data highlights were the 4.3pt drop in the construction PMI in July, and smaller falls in the manufacturing (-0.2pts) and services (-1.3pts) PMIs. The three PMIs have now declined simultaneously for two consecutive months, pointing to a slower rate of expansion in Q3. The NIESR reported a rise in GDP of 0.9% in the three months to July vs 1.1% in June. The ECB left its interest rate on hold at 1.0% but reined in optimism over the economy and declared no recovery victory. Strong Q2 GDP data are expected from Germany next week."
- "Backed by bullish seasonals and weaker macro data, gilts logged an impressive week with yields dropping markedly across the curve, but with the long end outperforming. 10y yields descended below 3.25% to a 3.23% close. Support for a further decline towards 3% could be on the cards. 5y swaps dropped 7bp to 2.35% and the 10y closed 11bp down at 3.27%, causing the 2y/10y spread to flatten below 190bp. The 2y/10y gilts spread tightened below 250bp and closed the week at 245bp. The 3mth Libor/Ois spread held steady at 25bp. The 10y swap spread was also unchanged at 5bp. The 5y gilt auction drew solid demand and was covered 1.99 times (0.7bp tail)."
LLoydsTSB FX Strategy Weekly 20100806
Subscribe to:
Posts (Atom)
