This week’s thought-provokers for investors:
Posted on: 28 Sep 2012 by James Farmer

Stocks decreased during the week due to profit taking, resulting in slightly lower index levels whereas German and US bonds gained in the same period.

Gold increased further, now trading at USD1780/oz which is slightly below its high of the year at the end of February. Crude oil is trading almost unchanged at USD92/bbl. The USD increased a little against the euro and is currently trading at 1.29.

German business confidence unexpectedly fell to the lowest level in more than two and a half years in September, with the Ifo Institute’s business climate index dropping for the fifth consecutive month to 101.4 from 102.3 in August. Ifo’s measure of executives’ expectations declined to 93.2 from 94.2, now reaching the lowest reading since May 2009. German companies remain sceptical about the economic impact of the ECB’s provisions to contain the eurozone crisis, knowing that the necessary structural adjustments will take time and might be delayed further amid social unrest and political instability.
September’s fall in the German Ifo business survey is a reminder that all European countries are suffering from a serious economic downturn in the region. Moreover, the eurozone’s problems go well beyond uncomfortably high government borrowing costs in only a few of the peripheral economies.

September’s European Commission business and consumer survey underlines eurozone’s deeper problems, with the headline Economic Sentiment Indicator (ESI) dropping to 85.0 from 86.1 in August, now reaching its lowest level since August 2009. Confidence dropped across all main sectors of the economy and the further fall in consumer confidence suggested further contraction in household spending.
September’s European Commission business and consumer survey is another warning that the eurozone economy is sinking further into recession. In addition it shows, that the ECB’s recent pledges of more decisive policy action have not (yet) improved sentiment towards the broader economy.

Latest monetary data for the eurozone provide only a little hope for rapid improvements in the outlook, as lending to the private sector has continued to fall and the boost to banks’ lending to governments, generated by the ECB’s earlier LTROs, has faded. The eurozone monetary base has remained near a record high in August and ECB loans to commercial banks have seen little change, with a massive EUR1.1trn still outstanding at longer maturities thanks to earlier one and three-year longer-term refinancing operations. Banks did use some of the funds from the LTROs to lend to governments, particularly in the region’s periphery, but this boost now seems to be fading. Credits to governments in the eurozone as a whole fell slightly in August as Spanish and Italian banks both reduced their holdings of government debt in August. Overall, the latest monetary data adds to the pressure on the ECB to do more to support both, governments and the private sector.
The ECB was always clear in stating that it would take time for its LTRO loans to feed through to the wider economy. However, nine months after its first three-year operation, the question arises whether this boost will ever seriously materialise.

The United States reported that Q2 GDP was revised down to 1.3% on an annualised basis, coming in significantly lower than the former reading of 1.7%. According to the Bureau of Economic Analysis, the 0.4 percentage point, or USD16.0bn, lower estimate of the second-quarter percentage change in real GDP, is primarily reflecting downward revisions to private inventory investment, personal consumption expenditures and exports.
Although at a lower rate, the increase in U.S. real GDP in the second quarter reflected positive contributions from personal consumption expenditures, exports, and non-residential as well as residential fixed investment. As a result, the overall picture for the US economy appears less gloomy compared to the one for Europe.

The People’s Bank of China (PBOC) injected record amounts of liquidity into the financial system this weekvia CNY365bn (USD57.9bn) of reverse repos. This is the biggest liquidity injection through open market operations by the Chinese central bank on record. The PBOC might have cut interest rates twice, but it seems that the PBOC is not willing to ease more although inflation concerns and real estate market resilience are slowing economic growth. At the same time, there seems to be some kind of a liquidity issue due to persistent money outflows and FX accumulation, which automatically tightens the liquidity in the Chinese banking system.
This week’s massive liquidity injection can be seen as a step to fend off the consequences of the quantitative tightening that the PBOC is currently performing against its own will.

 

by Stefan Angele, Head of Investment Management, Swiss & Global Asset Management.

Tags: business climate | business confidence | business survey | climate index | commission business | consumer confidence | consumer survey | contraction | ecb | economic downturn | economic sentiment | german business | german companies | household spending | index levels | political instability | sectors of the economy | social unrest | two and a half years | us bonds