There’s a basic formula for trading Abenomics:
NKY ≈ SPX x JPY
When the European Central Bank governing council meets on Thursday in Frankfurt, sushi is unlikely to be on the menu. But officials should have a concern: is the eurozone turning Japanese?
This chart shows headline inflation (in Japan the measure excludes fresh food) for Japan since its bubble turned to bust in 1990, heralding a slide into deflation. Radical action by its central bank is just beginning to return price rises, as the far right hand side shows. Read more
How much is a £20 coin worth? The Royal Mint seems to have created a risk-free arbitrage, thanks to its decision to sell the first silver £20 coin for £20, with free postage (hat tip to Elroy Dimson). It is legal tender, so there’s no risk of it being worth less than £20 (and it could always be paid into a bank account or swapped at the Bank of England if you feared it might be).
Yet, on ebay demand is such that the coins are selling for £30 or more – and some chancers are listing the coins for as much as £65, plus postage. Presumably these prices are being paid by collectors attracted by scarcity value. It certainly has nothing to do with the intrinsic value, as the silver content of the coins is worth only about £6.33. Read more
Everyone from the US Treasury to the European Commission to our very own Martin Wolf is upset about Germany’s export-driven growth model – as I said on Saturday, it’s acting as a parasite on the rest of the world.
The blame can be laid on Germany’s savers – they just refuse to go on the sort of debt-fuelled spending binges Brits and Americans love so much – as well as on the German government for not encouraging them to spend more, or stepping in to spend in their stead.
But the blame should also be put on the euro. If Germany still had the Deutschmark, the country’s current account surplus would have led to some natural rebalancing, with the currency strengthening to make BMWs and other German exports more expensive, and so less competitive. The euro has risen a bit, but not nearly enough.
This chart shows exactly how competitive Germany has become, thanks to the Hartz reforms of the labour market of 2003-2005, and self-imposed austerity.
Okay, not quite. But the current account tells you most of what you need to know. Since May, emerging countries which need to attract international capital – those with current account deficits – have seen their currencies and share prices slide and their bond yields jump. Those with a surplus have been hit much less hard.
John Authers has put up a nice chart from HSBC showing this for equities already. This chart from Keith Fray (usually on the FT Data blog) shows the close link between rising yields and a current account deficit (the outlier in the bottom left is Chile, running a current account deficit but a massive government surplus). Read more
Ben Bernanke can move markets, and sometimes his words are too strong for his own good. That may have been true of his press conference last month, when he announced that he planned to start tapering off QE bond purchases later this year, and end them altogether by next summer. That drove a dramatic rise in Treasury yields, and in the dollar.
For a further classic example, look at the speed with which currency markets responded late on Wednesday and early on Thursday to a speech he made in Massachusetts, and to the minutes from last month’s meeting of the Federal Open Market Committee, published on Wednesday. The euro gained 4.5 cents against the dollar in a matter of minutes, while the pound gained almost 4 cents (or about 2.6 per cent). Read more
After its disastrous banking and property bubble and bust, house prices have been growing strongly again, and are within a whisker of their 2008 highs – in stark contrast to Ireland and Spain. All three (with two different measures of Spanish housing) are shown in this chart, and Iceland’s break from the Irish/Spanish pattern is clear:
This, just like the country’s return to economic growth, looks like another justification for Iceland’s decision to refuse to bail out its banks, unlike most of the rest of the world.
Now, I’m no friend of bank bailouts, and would much rather see middle-class bank creditors take losses than taxes rise on the poor to subsidise those creditors.
But things aren’t quite as simple as the housing chart shows. As well as cleaning up its banking system through a gigantic default, in large part on foreigners, Iceland’s krona has collapsed.
When measured in foreign currencies, the people of the island are far poorer than they were, something which really matters for a place which imports virtually everything it needs other than fish and electricity.
One example is the import of cars: for the four years since 2008, the total tonnage of cars (I know, funny measure, but that’s how Iceland provides it) imported is lower than for the single year of 2006. And this isn’t only because of the extremes of the bubble: last year, even as Iceland began to recover and imports picked up, saw fewer cars imported than in any year from 1999 to the collapse.
Adjusting Icelandic house prices into euros, then, allows a fairer comparison with Spain and Ireland’s outcomes (although not a way Icelandic residents will think about it, of course). And it tells quite a different story:
Now, this doesn’t matter to Icelandic homeowners paid in krona. But it does put a bit of a damper on the idea that Iceland is having a strong recovery.
Measuring in krona, even Spanish house prices have started to rise, as you see in this next chart: Read more
Mario Draghi managed on Thursday to talk down the euro – the latest volley in the cover ‘currency wars’. Ralph Atkins, capital markets editor, analyses the president of the European Bank’s verbal game theory.
Today’s the deadline for European banks that want to repay early the emergency three-year loans from the European Central Bank. James Mackintosh, investment editor, consider the implications for the ECB and the currency wars.
The US is about to get a new Treasury secretary, assuming the White House can steer Jack Lew through the painful nomination process in Congress.
One question that’s sure to come up: is he in favour of a strong dollar? Read more
Reasons to be fearful are everywhere: Greece, triple-dip Japan and the looming fiscal cliff in the US. Yet, as James Mackintosh, investment editor, points out, share, bond and currency volatility are all extremely low. Is this complacency or have central banks disconnected the volatility sensors?
Japan brought the world quantitative easing, but by today’s standards it would be rated QE-lite. Now political pressure on the Bank of Japan to weaken the yen is rising, encouraging speculation on QE max. James Mackintosh, investment editor, says there are good reasons for caution
Market outlooks for the US election were clear: an Obama victory would be bad for shares and good for bonds, as the incumbent president would have less chance of cutting a deal with an intransigent Congress than his challenger.
Barack Obama would also be bad for the dollar, as there would be no pressure on the Federal Reserve from a hawkish Republican to tighten monetary policy, meaning the easiest monetary policy ever would remain in place. 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
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
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
Short View explored the lost-half decade and the returns on leading asset classes since the credit crunch began on August 9, 2007 (including the surprise that high-yield bonds did so well).
Deutsche Bank has produced a more comprehensive look across pretty much all tradeable assets, adjusted (in line with the Short View approach) into dollar terms to remove currency changes.
Given the attention that is paid to nominal (local currency) returns, I thought it might be worth an explanation of why it makes sense to look in constant currency terms. Read more
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