This week’s thought-provokers for investors:
Posted on:
13
Jan
2012
by James Cholmondley Farmer
A choppy but positive week for risky assets, with all equity markets in positive territory. European markets maintained their positive momentum and outperformed the US. Yields for safe government bonds increased slightly, while peripheral yields (e.g. Italy) dropped substantially. Crude oil fell below USD100/bbl, and gold moved back above USD1640/oz. After the resignation of Mr. Hildebrand as head of the Swiss National Bank, the Swiss franc came under some pressure, but remained above 1.21 against the euro.
Deposits held at the European Central Bank set a new record this week, as banks continue to hold cash and avoid lending to peers that they perceive as too risky. Euro area banks deposited EUR490 billion at the institution, while borrowing EUR1.49 billion from the ECB’s marginal lending facility (both as of 13 January 2012).
It’s obvious that European banks still mistrust one another. It’s less obvious what could materially change this any time soon.
Investors paid Germany to “borrow” money at a EUR3.9bn auction of 6-month bills this week with an interest rate of -0.0122%. Essentially, this means that Germany is a bank where the depositor pays to warehouse money.
This shows how desperate investors currently are for a safe haven. But it only makes sense if you’re worried that no other institution will stay solvent during that time. How realistic is this, or, asked differently: How should other assets be valued to be consistent?
Germany’s economy contracted in the fourth quarter of 2011, with GDP falling by around 0.25%, according to the government’s statistics office. For the year as a whole, German GDP still increased by 3.0%, 70 basis points below the expansion rate of 3.7% in 2010.
Another one or two quarters of contraction are quite possible. But the German economy should show moderate growth of around 1% in 2012 if there is no major escalation of the eurozone crisis.
German exports grew by 8.3% while imports increased by 6.7% in November. But on a seasonally-adjusted basis, exports and imports showed divergent month-on-month developments: While exports increased by 2.5% after a decline in October, imports decreased by 0.4%. The country’s statistics office, Destatis, reported that total exports rose to EUR94.9 billion, pushing the trade surplus to EUR16.2 billion after a EUR13.9 billion surplus one year ago. Commodities amounting to EUR37.7 billion (+7.7% compared to November 2010) were dispatched to the euro area countries in November 2011. Meanwhile, the value of the commodities received from those countries was EUR35.1 billion (+8.8% versus a year earlier).
Germany is still exporting more goods to the eurozone member states than it imports from them, but the gap has narrowed. However, it is in the best interest of Germany to help avoid a collapse of the region, which accounts for 40% of the country’s total exports.
China’s trade surplus widened to USD16.5 billion, as import growth decelerated sharply in December. Imports rose by 11.8% over a year ago, down from a 22.1% gain in November. Exports rose 13.4%, down only marginally from the previous month’s rate.
This shows that rapid domestic economic growth in the world’s second-largest economy still continues to slow. The government tightened lending to prevent overheating but later reversed course among a slump in global demand for Chinese goods.
Lending and money supply growth in China exceeded expectations, as new loans topped 640 billion yuan (USD101bn) in December. The People’s Bank of China said it must be prepared for possible shocks from the US and Europe, signalling that monetary conditions may be easing and reserve requirements for lenders may be reduced.
Unlike others, China still has a lot of room for policy stimulus after the recent tightening cycle. Especially as formerly rampant inflation cooled down in December to a 15-month low of 4.1%.
Indian industrial production increased by an impressive 5.9% in November, beating analyst expectations and reverting a 4.7% contraction in October. This rebound can be largely attributed to a strong 13.1% upswing in consumer goods production, preparing for a revival of consumer demand during India’s holiday season.
Asia’s third largest economy recently struggled with slowing growth coupled with high inflation. Also, the Reserve Bank of India has been aggressively raising rates to counter inflation. Therefore, positive output data comes as a relief as the industrial growth outlook does not seem to be exceptionally bright in the near term.
Tags: IFA
