Tag Archives: austerity measures

The Markets Need a Good Jobs Report in March

3 Mar

The markets have seen positive overall returns off of some very dubious data. So can the markets extend their position and see further growth or are we now prime for a market pull-back and a decline is on the cards? The February employment report could carry a double whammy for markets and the economy unless it meets high expectations .

The next jobs reports are due in next few weeks, with the US on Friday and UK normally mid-month. Good results are necessary to take the markets higher.

The direction of oil and energy prices are another big factor for the markets. Oil in the past week rose above $110 per barrel, but slipped back down to under $107 on Friday. Developments related to Iran, and a meeting on Monday between President Barack Obama and Israeli Prime Minister Benjamin Netanyahu, could have serious implications.

economists and strategists suggest there is a strong link between employment and the consumer’s ability to cope with rising fuel prices, which have been racing higher since December 2011. . 

 

Outlook

Europe stays in the headlines as markets watch whether private investors decide to accept Greece’s debt restructuring terms by Thursday. Greece’s bailout hinges on the decision, and there is speculation it could result in default.

The fact there may be a credit event in Greece should not come as a big surprise. There is a serious risk that Greece may default, triggering a credit event, but that the impact is unclear and is dependent is markets fear a contagion or chain-reaction through other Eurozone countries but it’s expected.

The European Central Bank’s liquidity program is likely to keep pressure on interest rates. The positive effect of the liquidity program on the euro has taken place and now we get the actual negative impact of lowering interest rates through the euro zone.

The U.S. economic data was conflicted with slightly weaker durable goods and ISM manufacturing data, a further round of Quantitive Easing (QE) is unlikely, Fed Chairman Ben Bernanke’s Congressional testimony on Wednesday and Thursday highlighted continued concern about the economy and no reference or indication of QE.

A key for the week is whether we see good employment figures, say 200,000 plus (non-farm) and if concerns diminish on oil and energy prices (a drop here would help)..

 

The Iran Situation

The US has warned Iran to stop developing a nuclear bomb and warned if such a development was underway the United States would attack and terminate such developments. This is ahead of the meeting with Israeli Prime Minister Benjamin Netanyahu, Barak Obama has warned Israel against a pre-emptive strike on Iran.

One of the biggest worries in the markets is that the Iran situation will fan oil prices higher, which threatens to undermine a fragile global recovery.

Big in the energy world this coming week is the annual five-day CERA Week Energy Conference, which starts Monday in Houston..

 

What Else to Watch

  • Investors will also be focused on the Super Tuesday primary elections in 10 US States, which may help identify a clear front-runner for the Republican (GOP – Good Old Party) nominee to challenge President Obama.
  • Polling was held Friday in Iran’s first national vote since the 2009 elections, that led to protests against President Mahmoud Ahmadinejad.
  • Vladimir Putin was expected to win back the presidency of Russia, despite an active opposition. .

Time to Invest in The Eurozone?

2 Mar

It is fair to say, that compared to the state of the Eurozone  since the Recession there are many redeeming features, which have led some to call – now is the time to invest.

Some key points :-

  • The threat of the Eurozone imploding has faded. 
  • The fear of the immediate demise of the Eurozone has subsided.
  • The European Central Banks’ Long-Term Refinancing Operation (LTRO) may be a turning point because it removed the tail-end risk.
  • Since December, the ECB has lent to European banks more than 1 trillion euros at low interest rates, and those funds don’t have to be paid back for three years.

This refinancing operation is likely to help calm worries about the Eurozone Debt Crisis, at least short-term and may lead to European stockmarkets rallying and the bond yields on at least some Eurozone countries falling this year. Trading volumes are relatively low and the long-term effects of the LTRO and its impact on the real economy are unknown.

Is Europe able to stimulate more, and are they willing? The answer I think is YES to both, although further liquidity operations in Europe and the US will be needed.

I think banking in the future will look completely different and the golden age of finance is now over. I just doubt that the banks accept this fact as yet.

Investing is all about being careful but not too careful.

The question you must answer is – if you don’t take risk now with everything that has happened, when is it right to take risk?

Any questions my email is welshmoneywiz@virginmedia.com

The Risk of a Sharp Global Slow-down Has Eased?

2 Mar

 

In a report to the G20 Finance Ministers in Mexico over the weekend, the International Monetary Fund (IMF) confirmed :-

  • the probability of a sharp global slowdown has eased due to recent policy measures adopted in the Eurozone to tackle its debt crisis
  • the Eurozone still needs to act decisively on multiple fronts to successfully resolve its sovereign debt crisis
  • The European Central Bank (ECB) needs to continue injecting liquidity and stay fully engaged in securities purchases to help shore up financial stability
  • the ECB Monetary Policy should focus on ensuring price stability
  • in the United States, Britain and Japan, central banks should stand ready to expand unconventional measures if the outlook worsens
  • in emerging markets, growth had slowed more than expected
  • in emerging countries with high inflation and public debt, including India and some economies in the Middle East, a “cautious stance” to policy easing is needed
  • higher oil prices are a risk to global growth and repeated that the impact of an oil supply shock in the Middle East “could be large” if supplies were not increased elsewhere.

Saudi Arabia assured G20 finance ministers over the weekend it was prepared to release more oil if necessary to make up for supply disruptions.

 

So What for The Markets?

This is all positive news but the message is clear, there is a definite improvement in the situation but this does not mean the issues are resolved. It means we are working towards resolving the issues and the measures taken and are being taken are having a positive effect.

The question we do not have an answer for, is will this lead to a successful resolution or just a short-term blip. Personally, I am optimistic for the future but think short-term this optimism is over-played.

So depending on your time horizon, attitude to investment risk and outlook, you make your investment decisions. I would suggest that you think carefully, act prudently and “tread carefully”.

My style of investing is to be careful, minimise losses and make the best out of opportunities as they arise. I invest based on market outlook, fundamentals, asset allocation and opportunities created by the market. Look to both markets in favour and those out of favour to develop an effective strategy. Finally, don’t be spooked by short-term panics and don’t hold onto failing holdings; look to the future and only make rational decisions on avoid emotive decisions.

Any questions contact me. Email welshmoneywiz@virginmedia.com

Another Round of QE (Quantative Easing) May Not Be Necessary?

1 Mar

Ben Bernanke (Fed Chairman ) surprised markets on Wednesday with his comments during the first of two days of Congressional testimony. This suggested that further QE may not be necessary as US GDP improved.

The statement, or lack of further stimulus helped send stocks lower, the dollar higher and precious metals to their worst day in more than two months.

Getty Images
 

 Traders were concerned by what Ben Bernanke didn’t say. The fact QE3 was absent in his testimony, indicates a possible change in thinking. The Fed had been expected by many to embark on a third round of quantitative easing.

Comments also came from the Bank of England (BoE), saying there isn’t a case for more stimulus after the BoE’s current round of bond purchases is complete, adding that rising energy costs threaten to bring inflation.

Bernanke also raised the concern of an increase in inflation from rising fuel prices. The Fed has made it clear that if inflation were to become a factor, the likelihood of QE diminishes.

 

The two factors that would push the Fed to ease were high unemployment and tight lending. Unemployment has started to trend down slowly and is currently below the Fed’s expectations (last reported at 8.3%). Although the job market is still far from normal. In addition, the last three-quarters lending in the US has improved. Ben Bernanke reiterated that he stayed cautious on the economy and said the recovery was uneven and modest.

Europe’s Second Cash Injection of Cheap Money

29 Feb

In December 2011, the first mass injection of cheap money into the European banking system from the European Central Bank was seen as a major success. This helped fuel the market rally at the end of 2011 into 2012; and the markets have opened higher on the expectation that the results from the second installment will be successful again.

Estonia Using Euro

 
 

 

 

 

 

 

 

The first time around, the market did not initially appreciate how popular this three-year term refinancing operation (LTRO) would be .

With the second round, there are a several central questions to be answered:-

  • How Big Will It Be? The estimates suggest 400 Billion Euros and this would be seen positively by the markets
  • How Much of the Total Sum Is Actual “New Money”? Analysts are predicting up to 300 billion will be new liquidity.
  • How Will It Affect Markets? Immediately after the LTRO, a large takeup by European banks should help boost the recent risk rally in stock markets, which is hoped could help bolster the recovery around the world, in the longer term.
  • How much of this money makes it into the Real Economy? If banks choose to lend it, or to buy sovereign bonds, they could help struggling Eurozone economies and bolster the productivity of SMEs (Small and Medium Sized Enterprises). Otherwise, I fear it will merely postpone the Eurozone’s troubles but for how long? 

Finally, a Greek Deal: What Next for Markets? (Article by catherine Boyle in CNBC on 21.02.2012)

21 Feb

The second Greek bailout deal was finally clinched in the early hours of Tuesday morning.

LdF | Vetta | Getty Images
 

European markets and the euro were initially expected to rally after the market open – but a troika report leaked to the Financial Times could exacerbate fears in the market that Greece may not be able to hit its bailout targets and drive markets down again.

“Short term you’re still in the vagaries of what politicians do day-to-day. This is still a sentiment-driven market,” Ian Harnett, European Strategist, Absolute Strategy Research, told CNBC.“The big message has got to be that the European governments want to keep the euro together and that will lead to a weaker euro.”

A weaker euro (EUR=X 1.32   -0.0045 (-0.34%)) could help countries in the single currency bloc in the medium term.

“The key for us is fundamental monetary policy. The exchange rate has to do the work,” Harnett said.

The euro is expected to move upwards on the news in the short term. “A break of 1.3350 in EUR/USD looks necessary to trigger the next round of stops, which could then see a move into the high 1.30s,” currency strategists at Lloyds wrote in a research note.

The lack of the opportunity for devaluation, which was used to help solve the Asian crisis of late 1990s, will limit opportunities for growth, Jonathan Tepper, Partner at Variant Perception, told CNBC.

The “internal devaluation” provided by austerity measures such as wage cuts will not provide the necessary medicine, he believes. While Latvia and Ireland have achieved some relative success using these methods, he argues that their rising emigration levels shows that they have not been entirely successful.

“The idea that somehow Greece and Portugal will be able to restore competitiveness or that the imbalances between the core and periphery will be able to solve themselves is slightly ridiculous,” he said.

Concerns about the other peripheral economies still remain, and bond yields are set to rise again, Harnett believes, as “governments will have to pay for this in some way.” Rising bond yields led to Portugal, Ireland and Greece seeking bailouts earlier in the crisis.

“Portugal is next in line. You don’t need to have anything more than fourth grade math to understand that the wedge becomes further out when you’re borrowing at 14 percent and you’re contracting,” said Tepper.

“Greece will have to restructure their debt, Portugal will have to, Ireland will if they’re smart.”

And Greece’s own problems are far from solved. Large-scale privatizations of state-backed assets still haven’t begun.

“The best-case scenario for Greece put forward is still a 120 percent debt to GDP (gross domestic product) ratio. Clearly getting the private sector involved will get Greece an enormous debt burden that it can’t service,” he said.

Its economic problems include soaring unemployment, a current account deficit of around 10 percent and exports which are still not at pre-crisis levels.

“Greece still doesn’t have a proper growth model, and that’s really the main source of worry,” Guntram Wolff, Deputy Director, Bruegel, told CNBC.

Surprise as BoE ups inflation forecast (Article by Will Roberts in Mortgage Solutions on 15.02.2012)

15 Feb

The Bank of England has raised its inflation forecast for two years’ time to around 1.8%, more than some economists had predicted.

Its quarterly inflation report will likely dampen expectations of further quantitative easing (QE).

Before Wednesday’s report, a number of economists had forecast a further extension of QE in May, and on average had seen inflation at around 1.6%, up from 1.3% from November’s report.

Last week the Bank’s Monetary Policy Committee voted for another £50bn of quantitative easing over the next three months, taking the total to £325bn.

The Bank said growth will be sluggish in the short term with the eurozone crisis posing the biggest threat to Britain’s economic recovery.

Inflation hit a three-year high of 5.2% in September, but by last month it had eased to 3.6% after a hike in VAT at the start of last year fell out of the annual comparison.

Greece and The Greek Debt Crisis

10 Feb

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Greece’s deadline of Monday 6th February 11am came and went, the requirement  was to have sorted out its agreement with private bondholders. In the agreement had to be a new set of austerity measures in order to trigger the release of the next phase of bailout funds. Given the progress of EU politics, this ‘deadline’ passed by and Greece hasn’t defaulted  as yet, markets haven’t collapsed and world events continue.

Monday’s deadline’ passed with the usual posturing by leaders from Germany and France. The gist from both were broadly the same as spoken last time. The negotiators from the Greek government and its creditors  let a deadline pass.

There is, however, a real deadline looming. On 20th March 2012, Greece has to repay a large chunk of debt to those holders of its sovereign debt. It cannot pay this debt off without the next tranche of bailout money from the European Union and IMF.

The European Union is looking for Greece to enact several severe budgetary cuts. This is to show it’s intent about getting the framework, structure and plan for its finance in place to achive a resolution to its debt crisis. Greek politicians are nervous about agreeing to policies that they fear won’t work and could ignite social tensions. Some of these tensions have overflowed in recent days.

European Union leaders are becoming more impatient with Greece. Although, it’s not a one-sided debate where Germany and France can pressurise Greece into action. Consider this statement made by the leader of the Eurogroup leader and Luxembourg Prime Minister Jean-Claude Juncker:

“If we force them out or push them so much that they resign, we would still be forced to support Greece and would today have to invest unimaginable sums. That would be at least as expensive as the now virtual costs of the aid credits up to now.”

The Greek government knows that the European Union would have no choice but to pay for a huge bill if it forces Greece out of the Euro. This situation is expected to continue until both sides are satisfied.

“Time is running out,” says Chancellor Merkel. This may be true but the real deadline that matters to investors is 20th March, where despite all posturing debt will have to be repaid and the money must be available to meet that payment.