The Friday that the market has been waiting for has churned out dissappointing NFP numbers for July. Total non-farm payrolls fell 131,000 against expectations of a 65,000 decline. Private jobs rose less than expected and the acceleration in the improvement of the job markets turned to a pessimistic picture where a risk of the Fed moving to ease policies became closer to reality.
Markets are expecting a policy of further quantitative easing from the Fed via purchase of US Treasuries or mortgaged backed securities to be announced during next week's meeting. This led to a sharp weakening of the dollar against a basket of curencies. Dollar versus Yen declined to 85.03 which triggered market scares of a Japanese central bank tightening, however, against other currencies, the Yen has not strengthened significantly, hence I believe these scares are over-rated (besides in purchasing power terms,the Yen is not considered massively over valued - an entire topic to be discussed in coming weeks)
Financial sector weakened on Friday, but I believe this is the excuse the market has been looking for to catch a breather, and also the chance for funds who missed the last couple of weeks run to put some money into the market next week. Over the rest of August, the risk is to the upside as equities drift up, abeit on low volumes (an interesting article in the FT on Thursday 5-Aug was dedicated to how the move up in Jul and Aug was on low volumes i.e. based on the opinion of a small group of investors).
The next checkpoint will be the September PMIs, the indicator which could be the turning point for the markets as most of Europe return from it's holidays.
Eric Tan,
London
Sunday 8 August 2010
Monday 31 May 2010
Sell in May and go away. Markets for the week ending 27-May-10.
Investors seemed to have heeded the old adage "Sell in May and go away".
US stocks on Dow Jones Industrial Average fell below 10,000 for the first time since Feb-2010 as sovereign debt woes continue to unsettle global stock markets compounded by last Friday's announcement by Fitch to downgrade Spain's sovereign debt rating by one notch to AA+ becuase of the country's sluggish outlook for economic growth.
May's slump in risk assets were also excerbated by geopolitical risks in the north Korean peninsula and China tightening of monetary policies.
This month, we have also seen the consensus over a Chinese reminbi revaluation crumble apart as analysts and traders changed their forecasts for a modest Chinese revaluation to none at all for the next 12 months. This is largely prompted by the sharp fall in the euro against the dollar driven by the euro crisis. In euro terms, the renminbi has risen 13% against the euro so far this year, threatening profit margins of many chinese companies who export to Europe.
So, any further speculation of revaluation on the renminbi is going to be closely tied to outlook of the European debt crisis and whether euro/dollar will plunge further.
Eric Tan,
London
US stocks on Dow Jones Industrial Average fell below 10,000 for the first time since Feb-2010 as sovereign debt woes continue to unsettle global stock markets compounded by last Friday's announcement by Fitch to downgrade Spain's sovereign debt rating by one notch to AA+ becuase of the country's sluggish outlook for economic growth.
May's slump in risk assets were also excerbated by geopolitical risks in the north Korean peninsula and China tightening of monetary policies.
This month, we have also seen the consensus over a Chinese reminbi revaluation crumble apart as analysts and traders changed their forecasts for a modest Chinese revaluation to none at all for the next 12 months. This is largely prompted by the sharp fall in the euro against the dollar driven by the euro crisis. In euro terms, the renminbi has risen 13% against the euro so far this year, threatening profit margins of many chinese companies who export to Europe.
So, any further speculation of revaluation on the renminbi is going to be closely tied to outlook of the European debt crisis and whether euro/dollar will plunge further.
Eric Tan,
London
Saturday 15 May 2010
The week European policy makers unveiled a $1 trillion loan package
Market took a beating on Friday with DJ Eurostoxx 50 down -4.7% and Spanish IBEX taking one of the largest Eurozone hit of -6.64%.
Fears that the eurozone economy is heading for a death spiral of falling prices and plunging output threw global markets into a tailspin. This was the unlikely story the same week Eurozone policy makers unveiled its $1 trillion loan package to help struggling countries with their debt. But the doubts about ECB's independance and strains amongst partners are becoming clear as the market digests news of the rescue package one and a half times the size of the US TARP.
Analysts have been working through the week to assess if Spain's problems could be too big to bailed out and market rumours that Spain could need a 280 billion euro loan raised alarm bells on Friday.
Essentially, what the European policy makers are trying to do is to treat a solvency problem as if it was a liquidity problem, however such an expansionary policy will simply just buy Eurozone more time but real improvements still needs to be made to reduce government deficits and promote growth in the "more-abled" Eurozone countries.
As the Euro trades for the fourth week lower against the USD, we are likely to continue to see downside pressure and test the key level of $1.165 before the year end.
Eric Tan,
London
Fears that the eurozone economy is heading for a death spiral of falling prices and plunging output threw global markets into a tailspin. This was the unlikely story the same week Eurozone policy makers unveiled its $1 trillion loan package to help struggling countries with their debt. But the doubts about ECB's independance and strains amongst partners are becoming clear as the market digests news of the rescue package one and a half times the size of the US TARP.
Analysts have been working through the week to assess if Spain's problems could be too big to bailed out and market rumours that Spain could need a 280 billion euro loan raised alarm bells on Friday.
Essentially, what the European policy makers are trying to do is to treat a solvency problem as if it was a liquidity problem, however such an expansionary policy will simply just buy Eurozone more time but real improvements still needs to be made to reduce government deficits and promote growth in the "more-abled" Eurozone countries.
As the Euro trades for the fourth week lower against the USD, we are likely to continue to see downside pressure and test the key level of $1.165 before the year end.
Eric Tan,
London
Saturday 6 March 2010
Understanding the Japanese Debt-ridden Economy
- OECD estimates that Japan's debt to GDP ratio is expected to rise to twice it's economy this year, significantly higher than Greece's 123 percent
- The Finance ministry estimates that Japan's public debt is expected to swell to 973.2 trillion yen by next year
- On 26 Jan 2010, S&P lowered it's outlook on Japan's debt to negative from stable and issued a warning that it was concerned with the large deficit and sluggish growth outlook of the Japanese economy, which currently ranks 2nd in the world economies.
Qn: Is Tokyo's fiscal foundations really shakier than those of Athens?
Optimists have insisted that it is wrong to focus on Japan's gross debt, since in net terms, the state only owes the equivalent of slightly over 100 percent of its GDP. This is because Japan is the holder of more than 100 trillion yen in foreign exchange reserves and also holds a large portion of it's own debt.
So in net debt terms, it puts Japan's debt burden in the same category as Italy, but its ability to attract local buyers (domestic savings and institutional investors)for its debt have been the key to the low JGB yields. Investors this week have snapped up an offering of 10-year Japanese government bonds carrying a coupon yield of 1.4 per cent.
However, institutional purchases by Japan Post Bank and Japan Post Insurance peaked at 29 per cent of market share in 2008 and have since been declining as they suffer from a structural decline in deposits and seek to diverisfy from holding JGBs.
Currently, the main buyers of JGBs are private Japanese banks and insurance companies. Banks are buying to meet new liquidity rules, because they lack alternatives in deflationary Japan and as they have excess deposits due to a lack of demand for corporate loans. Meanwhile insurers are buying JGBs to better match liabilities that they will have to mark to market from 2013.
In recent months, the government's ability to raise revenues have been called into question. Nanto Kan, the finance minister, and his colleagues are trying to draw up plans for fiscal sustainability to be implemented once economic growth strengthens, but their ability to reassure markets in the meantime will only mean more volatilty for the Yen till then.
Eric Tan, London
- The Finance ministry estimates that Japan's public debt is expected to swell to 973.2 trillion yen by next year
- On 26 Jan 2010, S&P lowered it's outlook on Japan's debt to negative from stable and issued a warning that it was concerned with the large deficit and sluggish growth outlook of the Japanese economy, which currently ranks 2nd in the world economies.
Qn: Is Tokyo's fiscal foundations really shakier than those of Athens?
Optimists have insisted that it is wrong to focus on Japan's gross debt, since in net terms, the state only owes the equivalent of slightly over 100 percent of its GDP. This is because Japan is the holder of more than 100 trillion yen in foreign exchange reserves and also holds a large portion of it's own debt.
So in net debt terms, it puts Japan's debt burden in the same category as Italy, but its ability to attract local buyers (domestic savings and institutional investors)for its debt have been the key to the low JGB yields. Investors this week have snapped up an offering of 10-year Japanese government bonds carrying a coupon yield of 1.4 per cent.
However, institutional purchases by Japan Post Bank and Japan Post Insurance peaked at 29 per cent of market share in 2008 and have since been declining as they suffer from a structural decline in deposits and seek to diverisfy from holding JGBs.
Currently, the main buyers of JGBs are private Japanese banks and insurance companies. Banks are buying to meet new liquidity rules, because they lack alternatives in deflationary Japan and as they have excess deposits due to a lack of demand for corporate loans. Meanwhile insurers are buying JGBs to better match liabilities that they will have to mark to market from 2013.
In recent months, the government's ability to raise revenues have been called into question. Nanto Kan, the finance minister, and his colleagues are trying to draw up plans for fiscal sustainability to be implemented once economic growth strengthens, but their ability to reassure markets in the meantime will only mean more volatilty for the Yen till then.
Eric Tan, London
Tuesday 23 February 2010
Greek options. Markets for the week ending 7-Feb-10
As the markets brace itself an escalating EU crisis, I wonder what options are available realistically to Greece..
1) Go-it-alone fiscal adjustment
This is the most probable approach that the Greek government will take to convince the markets and other European nations that it will be able to handle it's own domestic affairs, at least for the time being. It's a polite way of handling its problems but the feasibility is low. This will take a lot of support from the nation as it prepares to slash government budgets and halt pay increases for the government sector.
FEASIBILITY RATING: LOW
2) EU Bail-out
The main issue of an EU-led bail-out is the moral hazard attached. A modern Trojan Horse tale of how the Greek army invaded the city of Troy (in this case Germany and France) and opened the gates for Spanish, Irish and Italian armies could be written in the books of modern finance history. However, if the EU can agree on how the bail-out can be structured it could be feasible. I'm in favour of loan guarantees or short-term bridging loans, with strict conditions attached of course.
FEASIBILITY RATING: MEDIUM
3) Default or Debt restructuring
This could give temporary relief to Greece as it writes down its debt but will have a large cascading effect on other eurozone economies. We have already witnessed how Portugese CDS spreads have widened since the Greek crisis began and a default would make it costly for it's neighbours to raise debt.
FEASIBILITY RATING: LOW
4) Go NUCLEAR!
A full blown default and devaluation in Argentinean-style is what the markets fear most. Greece will have to leave the EU and this will have significant domino effect on the world economy as the Euro collaspes. The Greek GDP may fall as much as 10% and having most of it's debt denominated in Euros, it will be a long time until Greece recovers from its post-crisis trauma. However, markets have short memory and it may not be long before they start buying Greek debt again
FEASIBILITY RATING: VERY LOW
Eric Tan,
London
1) Go-it-alone fiscal adjustment
This is the most probable approach that the Greek government will take to convince the markets and other European nations that it will be able to handle it's own domestic affairs, at least for the time being. It's a polite way of handling its problems but the feasibility is low. This will take a lot of support from the nation as it prepares to slash government budgets and halt pay increases for the government sector.
FEASIBILITY RATING: LOW
2) EU Bail-out
The main issue of an EU-led bail-out is the moral hazard attached. A modern Trojan Horse tale of how the Greek army invaded the city of Troy (in this case Germany and France) and opened the gates for Spanish, Irish and Italian armies could be written in the books of modern finance history. However, if the EU can agree on how the bail-out can be structured it could be feasible. I'm in favour of loan guarantees or short-term bridging loans, with strict conditions attached of course.
FEASIBILITY RATING: MEDIUM
3) Default or Debt restructuring
This could give temporary relief to Greece as it writes down its debt but will have a large cascading effect on other eurozone economies. We have already witnessed how Portugese CDS spreads have widened since the Greek crisis began and a default would make it costly for it's neighbours to raise debt.
FEASIBILITY RATING: LOW
4) Go NUCLEAR!
A full blown default and devaluation in Argentinean-style is what the markets fear most. Greece will have to leave the EU and this will have significant domino effect on the world economy as the Euro collaspes. The Greek GDP may fall as much as 10% and having most of it's debt denominated in Euros, it will be a long time until Greece recovers from its post-crisis trauma. However, markets have short memory and it may not be long before they start buying Greek debt again
FEASIBILITY RATING: VERY LOW
Eric Tan,
London
Sunday 17 January 2010
A Chinese Bubble? Markets for the week ending 23-Jan-09
As the Chinese government made moves to suppress escalating lending growth driven by excess liquidity, it's worth comparing the similarities with the Japanese experience during it's boom years.
1) At its 2007 peak, the Shanghai A shares traded at more than 7 times book value. Japan's Nikkei index in 1989 peaked at 5 times. Chinese stocks has since halved in value
2) Price to earnings ratio of Chinese stocks using past 10 year average earnings (Graham and Dodds PE ratio) is 50X compared to about 15x in US
3) Residential real estate of Chinese cities is at a multiple of 15-20 times household income versus 12-15 times during Japan's real estate boom
4) Fixed asset investment as a proportion of GDP in China is currently 50% and Japan had similar growth rates then with 30-35% GDP
Finally a thought to hold:
A decrease to 10 year ago investment-to-GDP rates for China would have a disasterous effect on all emerging economies and countries exporting to China.
Eric Tan,
London
1) At its 2007 peak, the Shanghai A shares traded at more than 7 times book value. Japan's Nikkei index in 1989 peaked at 5 times. Chinese stocks has since halved in value
2) Price to earnings ratio of Chinese stocks using past 10 year average earnings (Graham and Dodds PE ratio) is 50X compared to about 15x in US
3) Residential real estate of Chinese cities is at a multiple of 15-20 times household income versus 12-15 times during Japan's real estate boom
4) Fixed asset investment as a proportion of GDP in China is currently 50% and Japan had similar growth rates then with 30-35% GDP
Finally a thought to hold:
A decrease to 10 year ago investment-to-GDP rates for China would have a disasterous effect on all emerging economies and countries exporting to China.
Eric Tan,
London
Factors affecting soverign default risks. Markets for the week ending 15-Jan-09
Given recent statements made by senior central bankers in Europe with regards to a further deterioration in the Greek bond markets, what are some of the factors that markets should be concerned about in terms of soverign default risks:
1) Debt servicing costs are set to soar as a proportion of GDP in Europe and US as the government debt issuance over the last 18 months to rescue the economy was one of the largest in recorded history
2) Structural deficits from a drop in tax revenue (from certain sectors) over the recessionary period experienced in the last 18 months may become a permanent feature that countries will have to come to face with
3) Weak and unstable economic outlook makes it difficult for governments to time and put in place their plans for fiscal tightening
4) Age related and social services spending are starting to rise and may alter the status quo and result in significant under-budgeting
5) High levels of capital mobility can complicate debt management and credit agencies are becoming very quick to issue concerns and downgrades
The only way out for governments is to come up with creditble details for financial stabilisation and plans for structural reforms to convince the investors that they will be able to address these demographic issues, such as raising pensionable age and look for new growth sectors to replace the sectors affected by the crisis. Strong political leadership is necessary to push through the changes necessary.
Eric Tan,
London
1) Debt servicing costs are set to soar as a proportion of GDP in Europe and US as the government debt issuance over the last 18 months to rescue the economy was one of the largest in recorded history
2) Structural deficits from a drop in tax revenue (from certain sectors) over the recessionary period experienced in the last 18 months may become a permanent feature that countries will have to come to face with
3) Weak and unstable economic outlook makes it difficult for governments to time and put in place their plans for fiscal tightening
4) Age related and social services spending are starting to rise and may alter the status quo and result in significant under-budgeting
5) High levels of capital mobility can complicate debt management and credit agencies are becoming very quick to issue concerns and downgrades
The only way out for governments is to come up with creditble details for financial stabilisation and plans for structural reforms to convince the investors that they will be able to address these demographic issues, such as raising pensionable age and look for new growth sectors to replace the sectors affected by the crisis. Strong political leadership is necessary to push through the changes necessary.
Eric Tan,
London
Sunday 10 January 2010
Hold on tight. Markets for the week ending 8-Jan-10
The financial world was almost at a standstill this week as market observers waited for the December US non-farm payroll numbers to be announced on Friday.
And to the nasty surprise of the markets, the 85,000 drop in non-farm payrolls served as a timely reminder that the US economy is not completely out of the trough yet. As we begin 2010, it is not a bad idea to remind ourselves that despite the stock market recovery experienced in the last 3 quarters of 2009, the new year is likely to bring more volatility. On many metrics, the S&P500 valuation is probably close to +/- 20% fair value, which means, unless there are more positive market data or economic indicators, the market has already priced in the restocking cycle and increase in demand from US consumers as property values stop falling.
On closer inspection of payroll numbers, we should also note that as much as 660k people chose to leave the labour force and stop looking for work, hence the adjusted headline rate of unemployment would should really be 10.4% instead of 10%.
Eric Tan,
London
And to the nasty surprise of the markets, the 85,000 drop in non-farm payrolls served as a timely reminder that the US economy is not completely out of the trough yet. As we begin 2010, it is not a bad idea to remind ourselves that despite the stock market recovery experienced in the last 3 quarters of 2009, the new year is likely to bring more volatility. On many metrics, the S&P500 valuation is probably close to +/- 20% fair value, which means, unless there are more positive market data or economic indicators, the market has already priced in the restocking cycle and increase in demand from US consumers as property values stop falling.
On closer inspection of payroll numbers, we should also note that as much as 660k people chose to leave the labour force and stop looking for work, hence the adjusted headline rate of unemployment would should really be 10.4% instead of 10%.
Eric Tan,
London
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