Archive forMarch, 2013

Bank of Spain views economy moving deeper into recession

Bank of Spain forecasted the economy to contract 1.5% in 2013 following a 1.4% decline last year. However, it estimates the economy to come out of recession and record a 0.6% expansion in 2014. Unemployment is expected to reach 27.1% by the end of 2013 from the current 26%, while public deficit would reach 6% of GDP vis-à-vis Eurozone’s target of 4.5%.

A battle for hearts and minds

Yet again, the S&P 500 Index came within a whisker of achieving a new all-time high at the 1,567 level yesterday. Relief that a bailout deal had been achieved for Cyprus propelled the market to gain by 0.5% as it appeared to head for the blue skies beyond. However, misjudged comments from Dutch Finance Minister, Jeroen Dijsselbloem, Chairman of the group of Eurozone Ministers, that the approach applied to the Cyprus rescue – that is, confiscation of bank deposits, cancellation of senior debt and Capital Controls – should be regarded as a template for any other future bailouts in the Eurozone spooked markets and the S&P 500 Index dropped sharply to be down almost 0.7% at one stage before closing 0.3% lower on the day.

BoJ Governor targets longer dated bonds

Haruhiko Kuroda, Governor of Bank of Japan, said the central bank would buy longer-dated government bonds, thereby pushing down the yield curve in an effort to achieve its 2% inflation target. He also said the bank would consider buying more riskier assets and getting rid of its banknote rule, which mandates that the value of central bank bond holdings be less than the value of banknotes outstanding.

So, that’s Cyprus sorted?

So, just in time for the start of the week, high-pressure negotiations with the Troika and Eurozone Finance Ministers have yielded a result in the Cyprus Crisis. Of the two main Cyprus banks, Laiki or the Popular Bank of Cyprus has proved not to be popular enough and is to be closed as it assumes the role of ‘bad’ bank. The other, Bank of Cyprus will survive in the role of ‘good’ bank. Customers of both banks with deposits of up to €100,000 will be protected from the ‘haircut’ of up to 40% which will be removed from larger deposits to be used to clear Laiki’s debts and to recapitalise the Bank of Cyprus. Furthermore, it is expected that senior bondholders of Laiki will lose out completely while those of the Bank of Cyprus will be obliged to incur some loss.

Euro finance chiefs agree on Cyprus bailout

The deal between Cyprus and international lenders in Brussels was approved by 17 Eurozone finance ministers in the early morning hours today. Ministers agreed on the €10-bn (US$13 bn) bailout deal to avoid a collapse in the country’s banking system and retain it within the Eurozone. The agreement scraped the highly controversial proposal of levying taxes on all bank deposits. However, it is said to include a levy on large bank account holders, with deposits of more than €100,000. As per Klaus Regling, head of the Eurozone bailout fund, Cyprus would receive the first tranche in early May.

Cyprus – 20 degrees but burning

The uncompromising tone of yesterday’s statement from the European Central Bank concerning Cyprus that emergency funding would not be extended beyond next Monday 25th March unless a joint-European Union/International Monetary Fund programme was in place to ensure the solvency of the banks in difficulty has raised the stakes and the temperature. The Cyprus Government is to vote again on the situation today.

Italy lowers economic growth forecasts, hikes deficit

Italy’s Economy Minister Vittorio Grilli said the economy would shrink 1.3% in 2013 compared to the earlier forecast of a 0.2% contraction. He added that the fiscal deficit would come in at 2.9% of GDP this year, much higher than the previous target of 1.8% and the government would raise debt of €40bn over the next two years to inject the much-needed liquidity into the economy.

Governments struggling for traction

A read-through of the U.K. Budget leaves a sense that many of the potentially stimulative measures such as tax cuts and increased allowances will not come in until 2014, 2015 or even later. It’s almost as if time has stood still and, perhaps, that is precisely what has happened as sluggish economic growth – now halved for 2013 in the estimate from the Office for Budget Responsibility (OBR) from 1.2% made last December to 0.6% – forces everyone’s plans onto hold, seemingly indefinitely. Welcome, however, are more immediate measures intended to stimulate home ownership through Government-backed mortgages and, in turn, the construction sector through increased housebuilding.

China PMI indicates the country is on track for a recovery

China’s manufacturing sector showed signs of growth. Due to an increase in new orders, including export orders, the latest HSBC Flash Purchasing Managers Index (PMI) rose to 51.7 in March from 50.4 in February. This also confirms the weak reading in February was due to the week-long Lunar New Year holiday.

Budget 2013: Highlights for the private investor

It was not unexpected that the Government is sticking to its austerity plans, despite the weak economy. A big surprise was the NIC changes for small enterprises. As with a fiscal neutral budget the chancellor moved to alter the Bank’s remit and focus on inflation and growth. The BoE can now use unconventional tools and employ forward-looking guidance to influence interest rate expectations.


It’s quite difficult to ignore the drama unfolding in Cyprus even with competition for investors’ attention from today’s U.K. Budget and a strong performance in the Shanghai equity market (+2.66%). Following the complete failure yesterday of the Cyprus Government to garner any votes in favour of the E.U. bailout proposal, the options now on offer look uncomfortably bleak, including even ‘Cyprexit’ from the Eurozone.

EU reaches deal to allow ECB supervisory powers

The EU yesterday sealed an accord to allow the ECB to police Eurozone banks from mid-2014, taking its first step towards a real banking union. As per the deal, banks with assets of €30bn, or more than one-fifth of their country’s economic output, will be overseen by the ECB rather than national supervisors.

Eyes down for more gruel in the Budget

So Cyprus is not only the tail that wags the Eurozone dog, it also has a bite. We were thrown back into the realms of extreme polarity again yesterday as markets were torn between shrugging off Cyprus as irrelevant to discounting a return to full-blown contagion across the Eurozone and beyond. Little wonder that it was the banking sector was the weakest constituent of the 0.5% fall in S&P 500 Index, in part on concerns of potential international exposure.

Cyprus to decide structure of bank levy – ECB

The ECB said the decision to revise the structure of levy on depositors rests with the Cyprus government, but its contribution to the bailout must be €5.8bn. The government is working out a proposal to reduce the impact on smaller depositors and seek additional tax from those with deposits greater than €100,000.

Cyprus, the tail wagging the Eurozone dog

The weekend news that depositors in Cyprus banks are to be ‘taxed’ by up to 9.9% on savings balances has established a worrying precedent for Eurozone depositors elsewhere. The fact that European Union accounts are supposed to have protection up to €100,000 has gone out of the window for savers in Cyprus, subject to parliamentary debate scheduled for today. One argument is that, because Cyprus’s banking system is virtually bust, it wouldn’t have the money to bail out depositors anyway. Hence the sleight of hand which may unsettle depositors in other E.U. countries in financial difficulty.

China’s new home prices rise in February

China’s new home prices rose 2.1% m-o-m in February after increasing 0.8% y-o-y in January, as per the National Bureau of Statistics (NBS). Home prices increased 1.1% during the month, up in 66 of 70 major cities monitored by NBS. New home prices in Beijing and Shanghai climbed 5.9% y-o-y and 3.4% y-o-y from 3.3% and 1.3% annual growth, respectively.

Whither Wall Street?

Dateline Brussels – a line of gleaming black limousines and the prospect of a group photograph. Yes, it’s another European Summit, complete with crowds of anti-austerity demonstrators. Even though, according to the German Finance Minister, it is not on the agenda, the need to sort out a bailout for Cyprus may be difficult to ignore. It is intriguing to see how circumstances have contrived over time to make Cyprus attractive as a centre for money-laundering and, understandably, Eurozone members such as Germany are far from keen to bail out these groups in the course of any financial rehabilitation of the island state.

German institutes raise forecasts for economic growth

Germany’s GDP will grow 0.6% in 2013 driven by higher investments amid low interest rates, IfW think tank said yesterday, doubling its previous forecast. According to IfW estimates, the economy would grow 1.5% in 2014, while the unemployment rate would fall to 6.7% in 2013. The Halle-based IWH institute also nearly doubled its 2013 estimate for German growth to 1.3% from 0.7% in December.

Time for the bulls, papal or otherwise

So, in Rome at least, the ‘fumata bianca’ has finally emerged, signifying the election of a new Pope for the Roman Catholic Church. For those market indices such as the S&P 500 hovering, seemingly indecisively, just below their all-time highs, it is still a case of ‘fumata nera’ although the outlook is not wholly black, except perhaps among some of the European economies.

European Parliament rejects EU budget deal

The European Parliament rejected the EU bloc’s €960bn seven-year budget deal and demanded significant changes. Among them was the legal review of the budget after the EU elections in 2014 which could reverse spending cuts if Europe’s economy improved during the period. Another demand was for governments to fill an expected budget shortfall for 2013, to ensure the deficit was not carried over to the new spending cycle. It also called for more spending in growth-oriented areas such as innovation, research and education.

So near, yet so far

As if to demonstrate in spades the comments here exactly a week ago about the Dow Jones Industrial Average Index hitting new all-time highs and the shortcomings of its composition and calculation compared with the S&P 500 index, last night’s Wall Street close saw the Dow hit a new high at 14,450 while the S&P went into sharp reverse, losing 0.2% to 1,552 to leave it now 1.5% below the all-time high of October 2007. It appears that the S&P Index needs to consolidate a little more before it can resume its upward push.

UK economy shrank in the three months to February

UK’s economic output contracted 0.1% in the three months to February, after a revised 0.2% decline in the three months to January, the National Institute of Economic and Social Research (NIESR) said yesterday. The think-tank had previously estimated a flat output in the three months to January.

Attaining the heights

Rather like massed Roman legions marking time in camp ahead of the next battle, the hint of a lull in activity gives a sense that markets are preparing for the next assault on previous highs. According to Bloomberg data, the PER on the S&P 500 Index at 1,556 based on 2012 earnings stands at 15.4x (current) falling to 14.1 prospective for the 2013 and the historic yield is 2.1%. At 31st December 2007, around the time of the previous all-time high, the corresponding numbers coming out at the top of the earnings cycle were more demanding at 17.3x (current), 14.9x (prospective) and 2.0%.

Italian GDP shrinks on weak domestic demand

The Italian economy shrank 0.9% in Q4 2012, matching the preliminary estimate; GDP was down a revised 2.8% y-o-y, the national statistics institute, ISTAT, said yesterday. Also, Italy could miss its April deadline to put forward its annual reforms and fiscal consolidation programme, an Italian diplomat close to the government said yesterday.

Italy struggles with the Silvio and Fitch Show

As flurries of snowflakes surround the London office and temperatures drop, we must accept that Spring has yet to arrive in its entirety. A similar chill is running throughout Italy – and not just in the snowy North – as an alleged judicial/political plot attempts to put Mr Silvio Berlusconi behind bars for two years and further complicates resolution of the economic challenges there. Of course, silver-tongued Silvio is having none of it and he probably won’t. Ever.

Chinese economic data shows uneven recovery

China’s annual industrial production grew 9.9% for January and February combined, the lowest since October 2012. Fixed asset investment was up 21.2% in the first two months of 2013, while retail sales rose 12.3% y-o-y.

Chinese exports surge; Japan crawls out of recession

China’s exports soared 21.8% y-o-y in February, much faster than the forecasted 8.1% increase, and slightly below January’s 25% growth, Customs data showed today. However, imports declined 15.2% y-o-y, reversing the 28.8% growth recorded in January. The trade surplus stood at US$15.25bn in February, contrary to expectations of a US$6.9bn deficit. Separately, Japan’s GDP came in flat in Q4 2012, revised upwards from the initial estimate of a 0.1% contraction.

US economy grows modestly in Jan-Feb: Beige Book

The US economy grew at a moderate pace in January and early February, as consumer spending picked up and the housing market witnessed a gradual recovery, the Fed’s Beige Book indicated. Retail sales fell in several districts. Separately, the US added 198,000 private sector jobs in February, well ahead of the expected 170,000 increase, ADP data revealed.

How the Dow stacks up

As the Dow Jones Industrial Average of thirty shares, assisted by a following wind of Government cash which U.S. taxpayers haven’t even earned yet, hits an all-time high amid much fanfare, bells and whistles, it is perhaps worth questioning how much this genuinely reflects what is going on in the underlying economy. That the index has done this is not entirely surprising given the amount of liquidity that has been pumped into the system to make ‘riskier’ assets look more attractive to stimulate economic activity and reduce unemployment.

We’re Advocating a Shift Toward Equities – Bloomberg “The Pulse” Interview 13/02/13

Mike Franklin, Head of Investment Strategy at Beaufort International, speaks about the time horizon for the move out of bonds into equities and why you should be cautious on investing in the United States. He speaks on Bloomberg Television’s “The Pulse.”