How is the US election affecting markets? Well, it seems that investors expect re-election for President Barack Obama, and their degree of confidence about this has increased remarkably in the last week. Mitt Romney’s bad stretch, as far as the markets are concerned, seems to have finished him off. That is the subject of today’s Note video, with Gideon Rachman.
Those of a bearish inclination have been having a hard time this summer in the west, but China is a whole ‘nother thing. The Shanghai Composite is at another three and a half year low, and has been falling, on and off, since its post-crisis peak in August 2009.
Another way of looking at China is to say it is suffering from the effects of an outrageous policy-induced bubble, which was partially reinflated by the government during the crisis.
This chart shows the Shanghai index against the Nasdaq during the dotcom bubble, both rebased. In green is the S&P 500. The wild swings in China and pure-play dotcoms make the booms and busts of the S&P look tame – but still left those investors able to get their money into Chinese onshore shares (protected by capital controls) better off, at least for the moment.
It took just two months of Standard & Poor’s control of Dow Jones Indexes (CME sold it in return for a stake in the new and larger S&P DJ Indices group) for S&P to start thinking about how to reform the venerable Dow Jones Industrial Average, the second-oldest index still going.
It desperately needs reform: three of the US’s 10 largest companies are excluded, and it is calculated by averaging share prices, a daft approach better suited to the days of slide rules. This video explains – charts after the break show how the Dow has performed, and discuss how investors should respond:
Investors in luxury goods producers tend to spend a lot of time following what’s going on in China, for good reason. China’s legions of corrupt officials have a penchant for bling (as well as luxury cars and gambling), and plenty of ability to garner the cash needed for fancy western watches and handbags. Lately they’ve been cutting back, as the slowing economy and rising scrutiny from bloggers and the public makes open diplays of wealth less acceptable.
It might be easier simply to focus on what is going on in the US. Are households finding their share portfolios rising faster than their house prices? Shares are easier to cash in to fund that oh-so-desirable Cartier watch, although most people would have to sell their house to afford a £1.2m handbag. Read more
The S&P 500 has almost completed its round trip, and done so remarkably quickly. It only has about 5 per cent to go before it reaches its all-time high from 2007. Today’s video guest, the ever-interesting David Ranson, suggests that this was predictable, because asset markets reliably follow an exponential recovery path after a big fall.
Certainly, that pattern fits this recovery remarkably well: Read more
The currency wars are under way again and Brazilian Finance Minister Guido Mantega, who coined the term, is miffed.
Mr Mantega is worried that QE3 will do what QE2 did and lead to an “avalanche” of dollars hitting emerging markets, driving up prices and currencies, helping US exports and creating troubling inflation. If it prompts the Brazilian Real to strengthen, he warned of action – although he did not say what the Brazilians might do this time:
This is going to force the Brazilian government to adopt additional measures to prevent the Real being overvalued.
Brazil imposed a series of taxes and restrictions on foreign inflows over the past three years in an effort to stop speculative cash pushing up the currency, but relaxed many of them after the renewed eurozone crisis led the Real to plunge.
Still, it isn’t obvious that Brazil is losing the currency war, as these charts show: Read more
As predicted, there is more to say about the London housing market. It is widely known that the buying pressure on prime London properties is coming from overseas. The eurozone crisis and the creation of fortunes by the commodities boom have helped push lots of money into the nicer neighbourhoods of central and west London.
But I had not previously grasped that foreign demand was also driving segments of the market below the true “prime” postcodes, and that that foreign demand is not primarily European or Middle Eastern but rather from Hong Kong, Singapore and Malaysia. That is the strong message from this extraordinary chart from Jones Lang LaSalle, shared by Ed Hammond, our property correspondent, in the latest Note video: Read more
Being widely hated is one thing, but being widely hated and poor is even worse. This fate almost befell Europe’s bankers earlier this summer. Share prices have soared in the past two months, so all the bankers now have to worry about is mobs with pitchforks.
Seriously, though, European banking seems to be returning to what passes for normal nowadays: money markets have stabilised, bond markets reopened and Americans are even willing (at a price) to put dollars back into French banks, as I discuss in today’s Short View video:
The result has been that eurozone bank shares were one of the smartest investments of the year – as long as you avoided the trouble periphery. This chart shows the split in returns from buying eurozone core or eurozone periphery banks. Read more
The Bank of Japan has surprised the markets by printing another Y10tn ($126bn) as it fights deflation, a weak economy and the currency wars.
The yen is the most important factor for investors, and its behaviour has been odd, as discussed in this morning’s Short View video. Read more
Today’s Note video is on Frontier Markets. In theory, they should be exciting, offering the chance of real upside for the bold that Emerging Markets once did. In practice, FM equities have been mediocre over the last few years, while spreads on FM debt has tightened so sharply as to raise questions about how discriminating the buyers have been. The video, with Robin Wigglesworth, is here:
Is it more accurate to refer to QE∞ instead of QE3? Unlike the previous doses of US QE, this campaign of asset purchases has no official limit, and will carry on until the unemployment rate has improved “substantially” – a word that the Federal Reserve can define, and redefine, as it sees fit over the years ahead.
I have already argued that this should be regarded as stunningly aggressive. In the latest Note video, Gavyn Davies, a fellow FT blogger, agrees. The key point, he suggests, is that over the last year the Fed’s reaction function has changed. It is not just that the employment situation has worsened but also that, for whatever reason, it has decided to give the full employment part of its mandate greater emphasis than before. There are plenty of possible reasons for this, which we discuss in the video: Read more
The Federal Reserve has given the markets all it hoped for and more: unlimited quantitative easing (QE3), in the form of $40bn a month of mortgage bond purchases, an extension into 2015 of the zero-rate forecast, and a change in the reaction function to say the Fed won’t raise rates until an economic recovery is well under way.
Is this Ben Bernanke’s final shot? His own words suggest not. Here’s a handy checklist of what he’s done so far, and what could be to come, as set out in his 2002 speech on how to fight deflation. These are in the order he set them out in the speech, rather than the order in which they’ve been tried so far. Read more
What should we believe about China? That is the topic of today’s Note video with James Kynge, principal of the FT’s China research service, China Confidential. Uncertainty currently roils both China’s economics and its politics.
Plainly it is hard to spin the abrupt and unexplained disappearance of prospective premier Xi Jinping in any way that is positive. He is supposedly about to become the world’s second most powerful man – we still do not even know the date for the Congress that will approve that appointment, but it is due next month – and yet he has suddenly disappeared from public life. The news overnight (after we recorded the video) that he was named in a list of dignitaries expressing condolences to the family of a deceased , removes some of the more alarming explanations for his absence, but speculation about his health continues. The continued refusal to provide any official explanation for his absence is a classic example of Chinese opacity. Read more
Judging by the response to my Monday column, a lot of people are interested in central London property. As that has been followed by news that a London house is on sale with an asking price of more than £100m, in Hampstead, it’s easy to see why. One of many requests was for more granular data.
Thankfully, I can oblige. London, obviously, cannot and should not be treated as one market. In particular, “prime” central London, because of its appeal to international buyers, seems to follow very different dynamics from the rest of the capital. That appeal varies according to area. The following chart, provided by Hometrack, plots every Greater London broad postcode on two scales – their performance since the overall market first peaked five years ago, and their actual price. Read more
Marc Chandler of Brown Brothers Harriman is always interesting. His take on the QE3 debate, ahead of the FOMC’s next decision, might startle many in the US: the US economy is in an enviable position – why is there any need for dramatic new exceptional measures?
Evidently many Americans do not feel as though they are much to be envied, and unemployment has dragged on at levels that are politically unacceptable. But America’s post-Lehman economic trajectory, with the recovery looking ever more firmly founded, should certainly be the envy of western Europe and Japan. Read more
Whether it likes it or not, the Federal Reserve has been pulled into the political thickets. The demand is for it to “do something”. Whatever it does at its meeting this week will have political ramifications, and you do not need to belong to the Ron Paul faction to question whether further QE of any kind is necessary at this stage.
As James Mackintosh pointed out in the Short View, inflation expectations and asset prices are both rising now, rather than falling as they were before QE1 and QE2. This Fed has a philosophical aversion to deflation, but there appears to be no imminent danger of that. Read more
The most profitable way to be wrong over the past five years was to bet that frantic printing of money by central banks would create inflation – so buy gold. Since the start of 2007 gold has risen at an annualised 19 per cent, a tasty return, particularly when compared to equities.
Yet, there’s been no sign of consumer price inflation, even as the US Federal Reserve explicitly targets asset price inflation (Fed jargon calls this the “portfolio channel” for monetary transmission of quantitative easing; in English that translates as rigging the market). Read more
Mario Draghi has at the very least pulled off a great coup of expectations management. On Thursday he said exactly what everyone expected him to say. Markets had already rallied in hope for more than a month ahead of his announcement. This might usually be the cue for a sell-off, but instead the euro held steady, while peripheral bond and stock markets went to the races.
Spain’s 10-year yield is now below 6 per cent, while the buying opportunity when this risk-on wave started now looks to have been immense. Spanish shares (as measured by the Ibex) are up by a third in the two months, while Eurozone bank stocks (as measured by the FTSE Eurofirst index) have gained more than 50 per cent. I discussed all of this with Jamie Chisholm in the first of the new series of Authers’ Notes:
The larger questions are whether this can continue, and if there is any way to time the risk-on and risk-off waves. Read more
The argument for gold is very simple: it is hard money at a time when every other major currency is being watered down by central bank money printing.
On that basis, Europeans should have been panic-buying gold this summer as the European Central Bank prepared its plan to hoover up peripheral country bonds (although it will try to “sterilise” the plan, taking in deposits in some form to keep net money issuance stable, even as its balance sheet expands). Read more
John Authers, my predecessor as Short View writer and co-author of this blog, published some interesting graphs this week about London property, as he worries about a bubble.
I don’t often disagree with him, but on property I think he’s missing a trick. He pointed out that Miami’s housing bubble was far worse than London’s, but that London’s price rise is now approaching where Miami was:
But these prices (rebased to January 2000) were in local currency terms. And London’s property market is so important to the country, and its buyers so international, that it makes more sense to compare these prices in constant-currency terms.
That’s easily done by converting London prices to dollars and then rebasing:
So from an international perspective the boom in London prices was every bit as big as in Miami; they just peaked slightly later. The bust was of the same magnitude, and even more extreme, since it took place through the collapse of sterling rather than the somewhat less rapid fall in property prices. Read more