Broadgate: Weekly Briefing
22 December 2011
Global – Stocks climbed to a one-week high on Wednesday, as the euro strengthened amid speculation the global economic recovery will be sustained and before the European Central Bank (ECB) prepares to give euro-region banks unlimited three year loans, with preferential repayment rates.
“What we’re seeing at the moment is a lot of hope around the cheap money auction in the day ahead from the ECB, so that’s led to a contraction in yields,” Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors Ltd., said. “With better economic data coming out the U.S. (housing start ups) and Europe (confidence polls), that’s also helped push up share markets around the world.”
Spain/Europe – Spain’s borrowing costs on short-term bonds have fallen sharply, a sign of easing tension in the eurozone sovereign debt markets.
Spain raised EUR5.6bn from six and three-month bonds, EUR1bn more than planned.
Interest rates on the six-month bonds were 2.4percent, down from 5.2percent the country paid in a similar auction last month.
U.K. – Ratings agency Moody’s has given the U.K. high scores for economic governance but warns the country it faces “formidable and rising challenges”.
In its annual guidance for investors, Moody’s says the U.K. has “significant structural strengths” and deserves its top AAA rating.
But it says weakness in the eurozone could hold back growth and weaken the government’s debt-cutting plans.
Rating agency opinion affects the cost of borrowing. Moody’s, along with Standard & Poor’s and Fitch, are the most influential agencies and a downgrade by one or all of them can drive up a country’s borrowing costs.
Germany – German business sentiment has risen for the second month in a row, according to the ‘Ifo’ economic think tank.
The closely-watched Ifo Business Climate Index rose to 107.2 in December, up from 106.6 in the previous month. The climb was the biggest rise in the index since February.
The results coincide with the forward-looking GfK index which predicted that German consumer confidence will hold steady in January.
“Business expectations improved for the second time in succession. The German economy seems to be successfully countering the downturn in Western Europe,” said Ifo president Hans-Werner Sinn in a statement.
Europe – The AAA rating of European Financial Stability Facility (EFSF) debt “largely depends” on France maintaining its own top credit status, according to Fitch Ratings.
Last week, the agency cut the outlook on France’s AAA credit rating and the ratings of six other European countries from stable to negative. The move was prompted by the heightened risk of government liabilities in light of the eurozone debt crisis.
The latest statement from Fitch confirms that the credit rating of debt issued by the EFSF bailout vehicle is tied to those of France and Germany.
Fitch commented: “We affirmed France’s AAA status but warned that that there is a slightly greater than 50percent chance of a downgrade within the next year or two. This is therefore also the case for the AAA ratings assigned to the EFSF’s debt issues, unless additional credit enhancement mechanisms are introduced.”
Italy – The Italian economy contracted in the third quarter, signalling the country may have entered its fifth recession since 2001, as the government adopts new austerity measures that will further weigh on growth.
Gross domestic product (GDP) dropped 0.2percent from the second quarter, when it grew 0.3percent, Rome-based national statistics institute ‘Istat’ said in its final GDP report. It was the first contraction since the final three months of 2009.
“The problem is not about the measures already decided, it is about the implementation of those measures and how many social hurdles the government will find from unions and people in general, and also how much economic growth will be lost,” said Nicola Marinelli, who oversees USD153mn at Glendevon King Asset Management in London.
China – Chinese Premier, Wen Jiabao said slowing growth and elevated prices are adding to the difficulties the government faces in helping manage the world’s second-biggest economy.
The nation will keep its export policies such as tax rebates “basically stable” next year and the government will mainly use fiscal spending to support “structural tax cuts” and to improve people’s lives, Wen was cited as saying. “The current economic growth momentum is generally sound, but we are also facing many new situations and problems,” Wen said.
“This is a sign of policy initiatives to support growth next year as the external environment remains weak while domestic demand may suffer from slowing housing construction,” said Dariusz Kowalczyk, a senior economist at Credit Agricole CIB in Hong Kong. “China seems to be preparing for a prolonged downturn in the U.S. and the eurozone by boosting domestic demand and focusing on exposure to emerging markets.”
Spotlight on: Investor sentiment into the New Year
Investor sentiment resembles that of the “credit crunch months of early 2009”, according to December’s fund manager survey from Bank of America Merrill Lynch (BofA ML).
Managers are bracing themselves for a year of low growth and inflation in 2012, as they enter the new year with high cash weightings and a majority favouring further stimulative monetary policy.
Equity ratings are at a historic low, with 50percent of participants describing U.S. equities as the most favourable. Despite this, 48percent predict a sovereign downgrade of the U.S. in 2012.
The U.S. was the only region in which equity positions were increased.
The tail risk presented by a U.S. downgrade was identified as a minimal one, especially compared to that of a Chinese “hard landing” or the issue of E.U. sovereign debt funding.
A record 72percent of participants have identified Europe as presenting the worst outlook for corporate profits in 2012, as the gap between U.S. and E.U. profit expectations widens to record levels.
Although the ongoing sovereign debt crisis presents the greatest risk to investors, nearly half of participants remain confident that there will be no member state departure from the eurozone in the foreseeable future.
Perceptions of a descent into recession have slowed since September but there is still a strong sense of continued progression towards such a scenario.
The global economy is rapidly approaching the same position in the economic cycle as it stood in August 2008 (i.e. major economies facing stagflation, record unemployment and increasing personal debt), managers agree.
Investors are consequently consolidating defensive positions in equities and are increasing weightings to pharmaceuticals and consumer staples.
Oil and gas remains the most popular sector among managers and the retail sector has now displaced banks as the least popular.
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