PIIGS fears fuelling risk aversion

January 29, 2010 — Mitul Kotecha

Risk aversion has come back with a vengeance over the last 10 days driven by a host of concerns that continue to damage market sentiment. As has been evident over the past year the USD and JPY remain the best currency plays against the background of rising risk aversion and both currencies look well supported.

Market concerns are not going away quickly but some of the fears plaguing markets have at least receded especially on the US political front, with Obama’s State of the Union address, Geithner’s testimony on AIG and Bernanke’s reappointment all passing without too much incident, at least from a market perspective. I still believe that market fears are overblown but it is clearly evident that the market is not in the mood to concur. More pain is likely in the weeks ahead.

Euro-sovereign spreads continue to suffer from the ongoing Greek saga whilst the other major fear remains further monetary tightening in China. Rumours that China is about to imminently revalue the CNY are also running rife. The bigger than expected hike in the reserve ratio in India reflects the fact that Asia is on a faster track to tighten policy than Western economies.

As regular readers probably noticed, my articles on econometer.org have been sporadic recently. This is due to the fact that I have been on the road for the last two weeks giving client seminars across several countries in Asia. Without giving too much away it is evident that pessimism is pervasive and most investors I polled are looking for a “W” or “double dip” profile for economic growth in the G7 economies over coming months. Hardly anyone looked for a “V”.

The other casualty emanating from Greece’s woes, as well as worries that other European PIIGS (Portugal, Italy, Ireland, Greece, Spain) face ratings downgrades, is the EUR. EUR/USD slipped below the psychologically important level of 1.40 this week and is showing no sign of turning around. Warnings by S&P ratings that Portugal faces challenges on the fiscal front show that these sovereign concerns will be with us for a long while yet.

After letting investors believe that the European Commission would offer no support for Greece, there appears to be a growing realization that Greece is not simply a local problem but a Euro wide problem, as noted by European Commission President Barroso. Whilst this may be good for Greek debt the path to recovery is still likely to be a massively painful one, and the EUR may gain little support from this news.

The UK has not escaped the clutches of ratings agencies and warnings by S&P that UK banks are no longer among the “most stable and low-risk” in the world highlights the headwinds faced by GBP at present. The weaker than expected out-turn for Q4 GDP (0.1%) highlights the fact that UK economic recovery is fragile, which in turn plays negatively for the banking sector. This news has put a break on GBP but there appears to be plenty of demand for GBP above 1.600 vs USD.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, emerging markets, Europe, Financial crisis, Fiscal/Budget, FX, Greece, India, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Ratings Concerns Hit Euro

December 9, 2009 — Mitul Kotecha

Post payrolls euphoria has faded quickly this week. Fed Chairman Bernanke’s cautious comments about growth had weighed on US markets earlier but it is now eurozone concerns that have come to the forefront. Markets were faced with a further reality check following a sharp drop in German industrial production and news that S&P put Greece on watch for a downgrade, with Fitch going a step further and downgrading Greece’s ratings to BBB+ with a negative outlook.

Greece with a budget deficit of 12.7% of GDP was picked on by the ratings agencies but sovereign debt / fiscal concerns apply to several countries across the eurozone. Indeed, since the recent Dubai shock, which continues to weigh on markets following a report today about an accelerated payment clause on $2 billion debt issued by the Emirates utilities provider, concerns have moved quickly to the health of government balance sheets. The potential for more European ratings cuts will keep sentiment towards eurozone markets cautious.

The UK should not be ignored in this respect and attention will turn to the UK pre-budget report though it’s difficult to see what Chancellor Darling can say that will help GBP. Other economic news has been disappointing with Australia registering a bigger than expected trade deficit in October and Japan recording a sharp downward revision to Q3 GDP, all of which will act to contribute to the “risk off” tone to markets today.

Although the direct brunt of the ratings downgrade was felt on Greek bonds the EUR has come under strong selling pressure registering a further sharp move lower from the 1.5141 high printed last week. Capitulation at the failure to break above recent highs led to some selling and this was exacerbated by the negative data and ratings news. EUR/USD is likely to have further to go on the downside but sovereign interest and bargain hunting will likely prevent a more severe decline. EUR/USD technical support is seen around 1.4623.

Posted in Bond markets, central banks, Currencies, Economics, Economy, Europe, FX, Middle East, US. Tags: , , , , , , , , , , , , , , , , . 1 Comment »

Renewed caution

December 8, 2009 — Mitul Kotecha

Risk appetite is struggling to make any headway, with equities losing ground overnight. The positive impact on markets and adjustment to growth expectations following the US jobs report has given way to renewed concerns. Caution increased as Fed Chairman Bernanke introduced a dose of reality to markets talking about “formidable headwinds” to growth. As a result, bonds gained some lost ground and markets pared back expectations of interest rate hikes, leaving the USD vulnerable.

Eurozone risk factors continue to dampen market enthusiasm too, with ECB President Trichet warning of further bank writedowns and S&P downgrading the outlook for Greece and Portugal. The release of German factory orders data revealing a sharp 2.1% fall in October fed into concerns and played against strengthening recovery hopes in the region. EUR/USD failed to close below 1.4820 suggesting some alleviation of downside pressure. FX markets are likely eye stocks for further direction, with various EUR negative specific factors set to limit the upside.

The delayed release of additional stimulus measures in Japan will be the main focus of attention in Japanese markets assuming that an agreement is reached within the coalition. In the meantime markets will digest news that the current account surplus narrowed in October but was still up 51.4% from a year earlier. Additionally loan growth continued to slow, for the 11th straight month in November, adding further evidence that the injections of liquidity into banks are not finding their way into the economy.

GBP has come under growing pressure over recent days and bulls will be disappointed by the BRC retail sales data. The 1.8% YoY rise in like-for-like sales according will come as another disappointment for GBP. The gain was the slowest since August and below forecasts and as noted by the BRC looks even weaker when considering that the year ago figure was very weak. The sales data may fuel concerns about the recovery in consumer spending, especially going into the all important Christmas season. Attention will turn to the release of November Halifax house price data and October industrial production data later today and the pre-budget report tomorrow. GBP/USD looks likely to track EUR/USD for now and looks supported above 1.6390.

Although the USD has slipped as markets pare back expectations of rate hikes, the currency appears to be in a win-win situation and will likely see limited downside as risk aversion creeps back. Lingering concerns about Dubai as well as short covering towards year as well as other factors pushing risk aversion higher will likely see the USD retaining some support into the end of the week ahead of the US retail sales and Michigan confidence data

Posted in central banks, Currencies, Economics, Economy, equity markets, Europe, FX, Interest rates, Monetary Policy, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , . Leave a Comment »

Chinese stocks enter bear market

August 19, 2009 — Mitul Kotecha

Markets can only be described as fickle as they gyrate back and forth depending on the latest news or earnings report and as a result direction is changing not just daily but also intra-day.  Investors in most asset classes will continue to focus on stocks especially the recently underperforming Chinese equity market (Shanghai A share index) which officially moved into bearish territory after falling by over 20% from its early August high. 

Various reasons for the drop can be cited including regulator’s curbs on the stock market, high valuations, absence of new fund launches, limits on institutional buying,  high level of new accounts adding to volatility, tighter regulations on real estate, etc, but whatever the reason the direction has been clearly downwards and the impact is being felt across markets.

The turnaround in equity markets during Wednesday’s sessions was dramatic and was led by the turnaround in Chinese stocks which dragged other Asian bourses down with it.   This outweighed any positive sentiment from Market positives so far this week including a strong reading for the German August ZEW survey which surpassed forecasts by a large margin.  This followed the extension of the TALF by the Fed, and a jump in the US Empire manufacturing survey at the beginning of the week.  

Aside from weaker equities the usual FX beneficiaries including the dollar and yen strengthened on the back of the Chinese stock rout.   S&P’s affirmation of China’s credit ratings and positive comments from China’s stats office about the economic outlook in the months ahead  failed to support sentiment.  This would have been expected to provide a positive backdrop for Asian markets but Chinese stock market jitters provided a strong headwind to local markets. 

Overall most measures of risk have seen a substantial improvement over the past few months but there is no doubt that nerves are creeping back into the market.   This time the nervousness is coming from China and worryingly it is swamping the effect of any good news on the global economy and earnings.   This may prove to be a blip on the long road to recovery in risk appetite but it is difficult to ignore such a sharp fall in Chinese stocks without looking at the potential contagion to other equity markets.  

On the FX front those currencies that are most correlated with risk aversion such as the Australian dollar, New Zealand dollar, South African rand, Indonesian rupiah, Brazilian real and Mexican peso will gyrate in relation to the moves in risk appetite.   These currencies have had the highest correlations with risk aversion over the past month and in the current environment will come under some pressure at least until risk sentiment changes again, which in this market could happen at any moment and without warning.

Posted in Asia, Bond markets, central banks, China, Currencies, Economics, Economy, equity markets, India, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 2 Comments »
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