Another Eurozone Crisis Ahead?!

by Michael J. Howell11. February 2013 12:43
Both the ECB’s rhetoric and its actions are strangely out-of-step with the trends elsewhere. Eurozone is again heading for the buffers and the odds of another bout of market volatility have jumped according to our latest liquidity data. The ECBs monetary stance is strangely conventional at a time when more unconventional thinking is needed. Gross liquidity provision, which gives a better indication of support for Europe’s banks, slid back to E1.5 trillion in early February 2013 from E1.67 trillion last June, and the growth of base money has slowed sharply to pedestrian annual rates. More dramatically, our monthly index of ECB liquidity provision plunged to 6.3 (‘normal’ range 0-100) at end-January 2013 from a whopping 97.4 in June 2012. This has all the ‘fire-fighting’ hallmarks of the ECBs previous crisis responses: react to banking strains by throwing liquidity into markets and then progressively withdrawing it over following months as the crisis abates. Until the next time! We restate our end-2012 comment that, in our view, the risks in the Eurozone in 2013 far out-weight the potential rewards. This was not the case for 2012, where the reward/ risk ratio was extremely favourable and the chances of some ECB action high. The problem 12 months on is exacerbated by the recent Euro strength and notably the near 25% rally versus the Yen. Germany has been the rock that has supported fragile European business over the past year, but this latest loss of competitiveness will not help German export performance. Europe’s financial problems are all about lack funding rather than insolvency: a less active ECB and a declining pool of German savings will again heighten these problems.

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Dollar Strength?

by Michael J. Howell27. January 2013 15:59
Liquidity is unquestionably flowing but its mix points to US dollar strength and not dollar weakness as in QE1 and QE2 in 2009-11. A too strong US dollar is the major risk to our prediction of cyclical recovery this year, but some dollar strength in the second half of each cycle is normal. The Euro, despite recent rallies, looks to be in medium-term decline (as it must) by around 3-5% pa. What looks different is the behaviour of the Yen. Our latest research reports show BoJ activity and they make the point that BoJ easing in the face of Yen weakness is very unusual. In short, the Yen looks set to decline by around 5-10% pa. Adding this up the US dollar trade-weighted index may be set to appreciate by 3-5% pa. Not good news for gold in 2013 and a feature likely to restrain buoyant commodity prices.

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Has Gold Lost Its Glister?

by Michael J. Howell24. January 2013 18:58
Short answer: yes, temporarily. Three things are against gold in 2013; two things are are in its favour. We expect a cyclical business upturn, starting in the US and EM and touching (just) Europe this year. Risk on will be back in favour, so reducing the need to shelter in gold. Second, yield curves are set to steepen, forcing up yields and reducing the attractions of gold. Third, the huge build-up of private savings (much in the dollar area) versus the (surprising) slowness to print money, is rarely a bullish message for gold. For subscribers to our liquidity data this means high private sector liquidity (PSL) and relatively low Central Bank liquidity (CBL). Set against this are two big positives: first, gold is the reserve asset of choice, or at least number two following the Euro Crisis, for many EM Central Banks. This year like last year will see more bullion buying by them. Second,this debt crisis is not over. More, much more, monetization is needed and this will ultimately push gold towards our long-term target of US$3500/oz.

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Publication and Mid-Month Update

by Michael J. Howell24. January 2013 18:35
Latest Global Liquidity Update Report and First Quarter Outlook slide pack published today.... What have we seen so far in 2013? Weak Eurozone economic data; more evidence that ECB is cutting back its liquidity injections; announcement that Japan is moving to a 2% inflation target, alongside a record 2012 trade deficit, and decent US and China economic data, plus firmness in commodities and evidence from the breakout in the Dow Transportation Average that investors are moving back to cyclicals. Yield curves are inching upwards, gold is wobbly and the dollar is muscling forwards. To us this data confirms the view from liquidity data: hold your nose and buy cyclicals, especially EM; reduce gold; watch out for another Euro Crisis, and take a bet on structural change in Japan.

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Global Liquidity Update

Yessss! Latest Liquidity Data Release

by Michael J. Howell11. January 2013 18:25
Latest End-2012 data is released to clients today. Fed liquidity is now fast accelerating, and the month saw a big jump in BoJ liquidity injections. Both confirm our predictions. China's PBoC continues to ease and collectively EM policy-makers delivered another sizeable boost. Only the ECB is going into reverse, and ths largely because their promised bond operations have yet to start. But the biggest news on the month is the jump in overall US credit provision by banks and shadow banks by nearly US$200 billion. US credit growth is definitively rising: the lending mechanism is again working. The Fed have won! Expect positive economic surprises to continue. Watch out bonds! For the record our December GLI (Global Liquidity Index) hit a healthy 64.0 (range 0-100) from 52.3 in November.

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Abe-cadabra: Japan Is Changing

by Michael J. Howell7. January 2013 17:17

Latest weekly BoJ net liquidity injections jump to Y50.4 trillion, or up from Y42 trillion at end-November. This looks more than just year-end window-dressing. Abe is working his magic!

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Whoops?

by Michael J. Howell7. January 2013 17:06

Market sentiment has been hit by the latest FOMC minutes which indicated that several meeting participants urged the Fed to halt QE in 2013. At first sight this seemingly reverses Bernanke's recent statements and flies in the face of Fed insistance that there is no timeline, rather than policy remains conditional on economic outcomes. On reading the minutes, the offending concern is plain. But whoops, we had inadvertently picked up the Dec 2011 minutes not the 2012 ones! Therefore, a minority of the FOMC ALWAYS seems to demand an end to QE. So Dec 2012 was no different. In short, market sentiment should rebound, perhaps spurred by latest SOMA data indicating that the Fed balance sheet in early January may be close to a new peak. Implied monetary base growth is ahead by an annualised 16.5% over 3 months. QE continues Phew!

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US Dollar Yield Curve...Moving On Up

by Michael J. Howell3. January 2013 09:53

A recap of our recent fixed income market views: (1) QE policies steepen and do not flatten yield curves as the consensus apparently believes;(2) QE and Liquidity must be judged from the entire US Dollar Area; (3) the Fed has clearly changed policy from attacking inflation to attacking the jobless numbers. This is the most significant policy change since Volcker's in 1979. Yet the Fed's balance sheet has grown too slowly of late because of the long settlement times involved in MBS buying, but fact is it is buying. On the other hand, US Dollar Area liquidity is already rising because of China and EM expansionary policies. Conclusion: expect the US yield curve to steepen more and the 10-year bond to sell-off. The yield curve has already steepened from a July 2012 low of 85bp between 10 and 5 year Treasuries, to 108bp in early January 2013. On top, the 10 year yield is testing it's 1.9% break-out level. So far so bad for fixed income, but this is what QE does to 'low risk' assets. 2013 should be 'Risk On'.

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How to Understand 2013: Think 'M'

by Michael J. Howell2. January 2013 02:14

If like us you believe in the power and efficacy of Liquidity, then you should think about how liquidity moves? We maintain that it flows in a regular pattern that roughly traces out an M-shape over a decade long cycle. Liquidity leads by around year, but troughs are associated with banking crises and peaks with asset booms. The 'v' of the 'M' is typically shallow, giving approximately two asset booms per banking crisis. Banking crises occurred in 1966, 1974, 1982, 1990, 1998, 2007-08. The next is slated for sometime around 2016/17. Near enough to register, but too distant to worry about. Before then the next Liquidity peak is likely to be 2014, with 2013 a likely year (or should be) of rising liquidity. The last Liquidity peak was in 2010, and the recent 'v' lasted on cue from mid-2011 to late-2012, with liquidity drifting around its mid-levels. Thus, if we and our more prescient assistant history are correct, 2013 should see the monetary spigots open; yield curves steepen, paper currencies weaken, commodities jump and risk asset prices rise. This is our roadmap for 2013.

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The Big Event of 2013: 2012

by Michael J. Howell2. January 2013 01:51

We remain upbeat for this year, convinced the seeds for success were sown in 2012. Three 'liquidity' events proved critical: (1) Draghi at the ECB backstopped Eurozone risk with promises of extra cash; (2) Fed policy switched from attacking inflation to promoting employment. This message resonated among several other key Central Banks, so making it the most significant global policy change since Volcker took over the Fed in 1979, and (3) China's PBoC stepped up the pace of its liquidity injections from mid-year 2012. This halted domestic economic weakness; reversed the whopping outflow of foreign capital and promoted outperformance of EM equities from Q3. More of the same should be expected in 2013: paper currencies, notably the Yen, will remain fragile; commodity prices will pick-up; yield curves should steepen and rates start to rise, against the backdrop of still sluggish but better than expected economic activity. Above all EM equities will outperform: they are typically pro-cyclical and currently are out-of-favour with skeptical global investors, whose exposure remains a whopping two standard deviations below average.

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