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The EUR is undergoing a difficult period, as uncertainty reigns regarding the restructuring of Greek, Irish and Portuguese sovereign debt. The ECB has refrained recently from purchasing such debt, partly to push governments to greater efforts to restore confidence, and partly in fear of a populist political backlash against bail-out programmes. The US economy is supposed to be recovering ahead of the overall EUR bloc, and has lower inflationary pressure, so should the EUR therefore not be falling against the USD? |
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Since the opposite is actually happening, the US must be in an even worse state. Geithner still issues assurances about a strong dollar being the US policy, yet even as he speaks, the USD is reaching new lows. The Fed is still saying that the supply of cheap money must remain until the economy shows itself to be on a path of sustainable recovery. Low interest rates, continued recycling into T-Bonds of debt held by the Fed, plus, in our view, a serious possibility of QE3, all point to further dollar weakness. Again, despite Geithner’s assurances to the contrary, it certainly looks like a policy of driving recovery via exports, rather than through growing domestic demand. |
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We actually think that moderate domestic consumption, and higher exports through a weaker dollar, makes sense, but somehow no US politician will admit this, despite it being reflected in the steady decline of household purchasing power (-1% over the last year). |
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If there are reasons to doubt the strength of the euro, and even more to justify the weakness of the dollar, where are the safe havens ? The most obvious answers are gold, silver and the Swiss Franc. The less obvious answer is the Chinese Renminbi. The world is going through a massive shift in its monetary system, with the emergence of the RMB as a reserve currency alongside the USD and EUR. The Chinese authorities are playing a long game. They are still supporting the USD, or perhaps more accurately, managing its decline, and they are supporting the EUR. The latter is evidenced by their investments in Spanish savings banks and purchases of government debt. |
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One element of RMB internationalisation is China’s growing participation in the corporate bond market. The supply of RMB-denominated corporate bonds in Hong Kong (“dim sum”) has greatly increased this year (to around RMB 20 billion thus far), already more than in 2010, but still far short of demand. There are, for example, over RMB 400 billion on deposit in Hong Kong looking for a bond home (source: FT). |
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Is the West experiencing a full-blown monetary crisis? The term seems too strong, yet is not totally inappropriate. There is clearly a loss of confidence in fiat (or “paper”) money, but some sort of return to a gold standard cannot solve the problem, as international trade requires so much liquidity. The world is undergoing a massive change in its monetary system, but it is by stealth, with China being the central player. This makes Geithner’s remarks about a strong dollar seem totally beside the point. |
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The Fed’s own comments and actions are difficult to decipher. Quite how the policy of paying interest on banks deposits at the Fed, inhibiting their ability to lend to corporate customers, is supposed to encourage a sustainable recovery, we cannot begin to guess? |
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For fixed-income investors, the dominant themes, beyond choice of currency, are nascent inflation and the likelihood of steepening yield curves. Our own analysis of corporate yields implies that prices are not out of line, with, perhaps paradoxically from a fundamental standpoint, better value in EUR than in USD when one factors in the potential for further dollar weakness. |
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Market Focus |
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- US: leading indicators increased for a ninth month in March, although home prices fell 5.7% in February from a year earlier. The high yield default rate contracted further in Q1. At 1.1% it was the lowest since Q4 2007. The practice of paying interest on bank reserves is reckoned by the Fed to encourage banks to hold money on deposit with the themselves, rather than lending it out and stoking inflation
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- EU: Euro-area debt reached a record in 2010, with a rise in all 16 countries that were using the Euro last year, lifting the average to 85.1% of GDP from 79.3% in 2009. Yields on government securities from Greece, Ireland and Portugal reached record levels
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- Spain: a Chinese foreign ministry spokesman announced that China is in discussions to invest in the restructuring of Spain’s savings banks. Chinese Premier Wen Jiabao told the Spanish prime minister that China will continue to buy Spanish national debt
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- Germany: business confidence fell for a second month in April, the IFO survey dropping from 111.1 in March to 110.4
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- UK: GDP expanded by 0.5% in Q1, as expected. Factory orders fell in April while increasing cost pressures raised manufacturers’ price expectations to the highest in two decades. Mortgage lending fell from £9.2 bln in February to £9 bln in March. Retail sales rose 0.2% after the February decline of 0.9%. Britain’s budget deficit narrowed in March from £19.8 bln a year earlier to £18.6 bln, remaining within the Chancellor’s borrowing plans for the year
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- Switzerland: exports rose in Q1 by 6.1% over Q4 as demand from Asia and the U.S. climbed. The Government has asked lawmakers to approve proposals to limit risk-taking by the country’s biggest banks
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- US Bond Markets: companies are launching debut issues in the junk-bond market at the fastest pace since 1998, taking advantage of borrowing costs. According to Moody’s, there were a record 513 newcomers in the 12 months ended in March
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- Global stocks: first-quarter earnings have beaten forecasts so far. To April 11, 71% of MCSI World Index members reporting results have beaten analysts’ estimates for earnings per share
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