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
Sunday, 17 January 2010
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
Sunday, 6 December 2009
A sigh of relieve. Markets for the week ending 4-Dec-09
This week, the world's financial markets started the week beset with concerns about the impact of Dubai World's debt, but took a twist for the better on Friday as U.S. job figures provided the optimism for recovery.
U.S unemployment rate fell from 10.2% to 10% and risk assets enjoyed strong gains on the last day of the week as investors were encouraged by the first drop in since jobless rate since April 2008.
The U.S. dollar rallied as interest rate expectations underwent a dramatic shift. Relative to the Japanese yen, the U.S. dollar rose more than 3.5% as investors focused on the impetus for the Federal Reserve to exit from its ultra loose monetary policy stance sooner than forecasted.
Eric Tan,
London
U.S unemployment rate fell from 10.2% to 10% and risk assets enjoyed strong gains on the last day of the week as investors were encouraged by the first drop in since jobless rate since April 2008.
The U.S. dollar rallied as interest rate expectations underwent a dramatic shift. Relative to the Japanese yen, the U.S. dollar rose more than 3.5% as investors focused on the impetus for the Federal Reserve to exit from its ultra loose monetary policy stance sooner than forecasted.
Eric Tan,
London
Wednesday, 2 December 2009
Dubai Inc - Markets for the week ending 27-Nov-09
Question: What is(are) the key lesson(s) from the Dubai World event?
a) A timely reminder that this is a too-quick-to-be-true recovery for the global economy
b) The decoupling story that emerging markets carries higher growth opportunities deserve to be charged higher risk premiums
c) Risky investments NPV-ed against implied state guarantees carries default risk that are typically underweighted by investors
Answer: All of the above.
Eric Tan,
Singapore
a) A timely reminder that this is a too-quick-to-be-true recovery for the global economy
b) The decoupling story that emerging markets carries higher growth opportunities deserve to be charged higher risk premiums
c) Risky investments NPV-ed against implied state guarantees carries default risk that are typically underweighted by investors
Answer: All of the above.
Eric Tan,
Singapore
Monday, 2 November 2009
How far will the USD carry trade go?
The combined efect of zero Fed funds rate, quantitative easing, credit easing and massive purchases of long term debt instruments by the US government is resulting in a boon for the USD carry trade and boosting highly leveraged global asset bubbles.
However, if the dollar reverse and start to appreciate, this popular leverage trade will result in a stampede of investors to close their risky asset positions across all global asset classes to cover the short USD position.
This can happen as a) the USD will have to stabilise at some point; b) Fed's asset purchase plan will have to end and volatility will rise; c) US GDP growth may start to accelerate leading to raising of interest rates; d) Global economic worsening resulting in flight to safety of the USD; and e) coordinated intervening of the USD depreciation by emerging economies.
Eric Tan,
London
However, if the dollar reverse and start to appreciate, this popular leverage trade will result in a stampede of investors to close their risky asset positions across all global asset classes to cover the short USD position.
This can happen as a) the USD will have to stabilise at some point; b) Fed's asset purchase plan will have to end and volatility will rise; c) US GDP growth may start to accelerate leading to raising of interest rates; d) Global economic worsening resulting in flight to safety of the USD; and e) coordinated intervening of the USD depreciation by emerging economies.
Eric Tan,
London
Wednesday, 28 October 2009
Domino effects. Markets for the week 30-Oct-09
In the last 3 days, global stock markets corrected with the announcement of ING's breakup. As Brussels set the stage for regulating banks which received massive government help during the crisis, other banking groups are reeling from investor's fright of a domino effect on the sector.
The lessons learnt from giant financial groups to the likes of AIG, Citigroup - too big to succeed, impossible to run and too big to fail are becoming the nightmares of regulators who are entrusted with the responsibility of maintaining market stability and preventing systemic risks.
At the height of the crisis, governments had to approve mega consolidations of banks such as Lloyds and HBOS or JPM and BearStearns. This is probably sowing the seeds of new crises unless regulation is revamped.
With poor economic data released this week, optimism for the future is low. So, investors will have to sit tight as it seems like the next few weeks will be a rough ride.
Eric Tan,
London
The lessons learnt from giant financial groups to the likes of AIG, Citigroup - too big to succeed, impossible to run and too big to fail are becoming the nightmares of regulators who are entrusted with the responsibility of maintaining market stability and preventing systemic risks.
At the height of the crisis, governments had to approve mega consolidations of banks such as Lloyds and HBOS or JPM and BearStearns. This is probably sowing the seeds of new crises unless regulation is revamped.
With poor economic data released this week, optimism for the future is low. So, investors will have to sit tight as it seems like the next few weeks will be a rough ride.
Eric Tan,
London
Sunday, 18 October 2009
At the end of the 1st week of Q3 earning reporting, we have seen the entire spectrum of what to expect in the forth coming weeks.
Goldman and JPMorgan announced stunning results to the world ($3.2b and $3.6b respectively), whereas Bank of America posted a $1b loss as continuing consumer credit hurt earnings. General Electric, the bellwether conglomerate of the US ecnonomy reported earnings falling 47% to $2.5b.
However, most of the attention went to the amount put aside as bonuses for Goldman employees, a whopping $16.7b so far for this year. Given the record unemployment number and poor consumer sentiment, this is going to be hard to swallow for the public, especially as recent as just a year ago, Goldman received help for the government to get it through the financial crisis.
Eric Tan,
London
Goldman and JPMorgan announced stunning results to the world ($3.2b and $3.6b respectively), whereas Bank of America posted a $1b loss as continuing consumer credit hurt earnings. General Electric, the bellwether conglomerate of the US ecnonomy reported earnings falling 47% to $2.5b.
However, most of the attention went to the amount put aside as bonuses for Goldman employees, a whopping $16.7b so far for this year. Given the record unemployment number and poor consumer sentiment, this is going to be hard to swallow for the public, especially as recent as just a year ago, Goldman received help for the government to get it through the financial crisis.
Eric Tan,
London
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