Beyond Bulls & Bears http://global.beyondbullsandbears.com Perspective From Franklin Templeton Investments Mon, 27 Apr 2015 16:11:22 +0000 en-US hourly 1 http://wordpress.org/?v=3.8.7 Notes From the Trading Desk – Europe http://global.beyondbullsandbears.com/2015/04/27/notes-trading-desk-europe-9/ http://global.beyondbullsandbears.com/2015/04/27/notes-trading-desk-europe-9/#comments Mon, 27 Apr 2015 15:58:13 +0000 http://global.beyondbullsandbears.com/?p=8291 Notes_from_the_Trading_Desk_FeatureFranklin Templeton’s Notes From The Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice. Monday, April 27, 2015 A positive week for global markets overall, as European markets recovered some of last week’s move lower. Meanwhile as Greece remains in the headlines, China and Japan continue to be driven by renewed stimulus speculation. And despite continued outflows, the general move higher of equities in the United States has continued unabated in recent days. Greece: Ongoing Stress, No New Panic After a long week of noise and rhetoric from both sides in the Greek saga, Friday’s Eurogroup meeting finally arrived. The outcome was in line with expectations and what we have come to expect: no agreement on reforms or the release of further bailout cash materialised. Meanwhile on Monday April 20, the Greek government had issued a decree requiring local governments to transfer all cash balances to the Central Bank, citing what it described as an “extremely urgent and unforeseen need”. This development, which we see as a scraping of the barrel, should tide the government over in the short-term, in our view, helping them to pay upcoming pensions and salaries as well as the €770 million International Monetary Fund (IMF) redemption due on May 12, 2015. At Friday’s meeting, the Greek finance minister Yanis Varoufakis was reported to have had a very hard time from European Union (EU) ministers. The Eurogroup President Jeroen Dijsselbloem appeared frustrated in his post-meeting press conference and commented on the ongoing differences between Greece and its creditors and emphasised once again the need for a comprehensive Greek list of reforms. With so much noise on the subject and the broad expectation of Friday’s lack of conclusion, none of the Greek headlines last week were particularly market moving. Greek bond yields didn’t move much and despite tightening slightly, they are yet to be knocked off their highs, suggesting ongoing stress, but no new panic. With a possible ad-hoc meeting later this week and the next scheduled Eurogroup meeting on May 11, the Greek situation is certainly something that we’ll be keeping a close eye on. Chinese Market Strength Continues on Stimulus Hopes Following on from last week’s reserve requirement ratio (RRR) cut in China, ongoing stimulus speculation appears to be continuing to drive markets in the country. Markets were again stronger today, after last week’s rally. The key catalysts seemed again to be focused on potential stimulus driven by the softer economic data of late. It is worth considering the context of Chinese imports from Europe when looking at the macroeconomic European data. Should we see a pickup in Chinese import data, we hope this could boost some macroeconomic data across Europe. Also adding fuel to the fire this morning was ongoing discussion of the potential for the Chinese government reducing further the number of state owned enterprise (SOE).     Europe In Europe, Italy, Spain, France, the United Kingdom and Germany all ultimately closed the week higher. Germany’s Bundesbank said that recent data suggest growth momentum in Germany is probably weaker than anticipated, though the economic expansion will continue to be “quite robust.”  The German government updated its economic forecasts, lifting its expectations for both 2015 and 2016 GDP growth, noting strong private consumption and high employment. It was a light week on the data front in the United Kingdom last week with the upcoming election a key highlight, although it is moving markets relatively little at the moment. Rhetoric and speculation is however stepping up and the majority of results from polls are tight. From a data point of view, March retail sales in the UK surprisingly missed expectations—by a wide margin—driven  almost entirely by petrol prices. However, the strong quarterly trend remains intact.  We also saw the Bank of England Monetary Policy Committee (MPC) minutes, which were effectively the last communication we’ll receive from the bank until mid-May, given the self-imposed black out period that lasts until after the UK General Election. The MPC’s next rate setting meeting is scheduled for just a few days after the election, on May 11. All members of the MPC agreed on keeping UK rates on hold, yet all were in agreement that the next move will see them move higher. The MPC has been unanimous since January, when Ian McCafferty and Martin Weale abandoned their call for higher rates. In Switzerland, the SNB was also active during the week, making moves designed to safeguard the Swiss franc and boost lending. SNB Chairman Thomas Jordan said in a speech that the Swiss franc is significantly ‘overvalued’, potentially signalling a need for the Central Bank to step into the foreign exchange markets to influence monetary conditions. His comments came after the SNB reduced the number of sight deposit holders exempt from negative interest rate earlier in the week. Looking at earnings as a whole out of Europe, we have seen strong growth from several corporates in the region, somewhat in contrast to their US counterparts as foreign exchange continues to be a tailwind in Europe and as QE momentum drives stocks higher. United States  Last week was the peak earnings season week of the first quarter with no surprises surrounding the higher-level themes, particularly in terms of the drag on both March quarter results and guidance from foreign exchange. However, this dynamic was not a consistent directional driver. With earnings season gathering apace, economic data took a back seat this week. The few reports we did get were from March, so provided little new information with regard to the timing of a potential interest rate lift-off announcement from the US Federal Reserve. Softer capital spending trends remained an area of concern as core durable goods...]]> Notes_from_the_Trading_Desk_Feature

Franklin Templeton’s Notes From The Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

Monday, April 27, 2015

A positive week for global markets overall, as European markets recovered some of last week’s move lower. Meanwhile as Greece remains in the headlines, China and Japan continue to be driven by renewed stimulus speculation. And despite continued outflows, the general move higher of equities in the United States has continued unabated in recent days.

The Digest

Greece: Ongoing Stress, No New Panic

Greece_Flag_Leading

After a long week of noise and rhetoric from both sides in the Greek saga, Friday’s Eurogroup meeting finally arrived. The outcome was in line with expectations and what we have come to expect: no agreement on reforms or the release of further bailout cash materialised.

Meanwhile on Monday April 20, the Greek government had issued a decree requiring local governments to transfer all cash balances to the Central Bank, citing what it described as an “extremely urgent and unforeseen need”.

This development, which we see as a scraping of the barrel, should tide the government over in the short-term, in our view, helping them to pay upcoming pensions and salaries as well as the €770 million International Monetary Fund (IMF) redemption due on May 12, 2015.

At Friday’s meeting, the Greek finance minister Yanis Varoufakis was reported to have had a very hard time from European Union (EU) ministers. The Eurogroup President Jeroen Dijsselbloem appeared frustrated in his post-meeting press conference and commented on the ongoing differences between Greece and its creditors and emphasised once again the need for a comprehensive Greek list of reforms.

With so much noise on the subject and the broad expectation of Friday’s lack of conclusion, none of the Greek headlines last week were particularly market moving. Greek bond yields didn’t move much and despite tightening slightly, they are yet to be knocked off their highs, suggesting ongoing stress, but no new panic. With a possible ad-hoc meeting later this week and the next scheduled Eurogroup meeting on May 11, the Greek situation is certainly something that we’ll be keeping a close eye on.

Chinese Market Strength Continues on Stimulus Hopes

China_LanternsFollowing on from last week’s reserve requirement ratio (RRR) cut in China, ongoing stimulus speculation appears to be continuing to drive markets in the country. Markets were again stronger today, after last week’s rally. The key catalysts seemed again to be focused on potential stimulus driven by the softer economic data of late. It is worth considering the context of Chinese imports from Europe when looking at the macroeconomic European data. Should we see a pickup in Chinese import data, we hope this could boost some macroeconomic data across Europe.

Also adding fuel to the fire this morning was ongoing discussion of the potential for the Chinese government reducing further the number of state owned enterprise (SOE).

 

Around The World

Around_the_World

 

Last Week

Europe

In Europe, Italy, Spain, France, the United Kingdom and Germany all ultimately closed the week higher.

Germany’s Bundesbank said that recent data suggest growth momentum in Germany is probably weaker than anticipated, though the economic expansion will continue to be “quite robust.”  The German government updated its economic forecasts, lifting its expectations for both 2015 and 2016 GDP growth, noting strong private consumption and high employment.

It was a light week on the data front in the United Kingdom last week with the upcoming election a key highlight, although it is moving markets relatively little at the moment. Rhetoric and speculation is however stepping up and the majority of results from polls are tight.

From a data point of view, March retail sales in the UK surprisingly missed expectations—by a wide margin—driven  almost entirely by petrol prices. However, the strong quarterly trend remains intact.  We also saw the Bank of England Monetary Policy Committee (MPC) minutes, which were effectively the last communication we’ll receive from the bank until mid-May, given the self-imposed black out period that lasts until after the UK General Election. The MPC’s next rate setting meeting is scheduled for just a few days after the election, on May 11. All members of the MPC agreed on keeping UK rates on hold, yet all were in agreement that the next move will see them move higher.

The MPC has been unanimous since January, when Ian McCafferty and Martin Weale abandoned their call for higher rates.

In Switzerland, the SNB was also active during the week, making moves designed to safeguard the Swiss franc and boost lending. SNB Chairman Thomas Jordan said in a speech that the Swiss franc is significantly ‘overvalued’, potentially signalling a need for the Central Bank to step into the foreign exchange markets to influence monetary conditions. His comments came after the SNB reduced the number of sight deposit holders exempt from negative interest rate earlier in the week.

Looking at earnings as a whole out of Europe, we have seen strong growth from several corporates in the region, somewhat in contrast to their US counterparts as foreign exchange continues to be a tailwind in Europe and as QE momentum drives stocks higher.

United States 

Last week was the peak earnings season week of the first quarter with no surprises surrounding the higher-level themes, particularly in terms of the drag on both March quarter results and guidance from foreign exchange. However, this dynamic was not a consistent directional driver.

With earnings season gathering apace, economic data took a back seat this week. The few reports we did get were from March, so provided little new information with regard to the timing of a potential interest rate lift-off announcement from the US Federal Reserve. Softer capital spending trends remained an area of concern as core durable goods orders fell 0.5% month-on-month in March marking the seventh straight monthly contraction after a decline in February, revised downwards to -2.2%. The machinery category remained under pressure, highlighting the fallout from the weaker commodity price environment.

Asia

The Peoples Bank of China (PBoC) started the week with a bang, cutting its Reserve Requirement Ratio (RRR) by 100 basis points to 18.5% – the largest rate move since 2008 – which appeared to ease some of the anxiety caused by new limits placed on margin trading last week. The decision suggests to us a more aggressive approach to monetary policy easing by the PBoC compared with the targeted measures in 2014 which focused on lowering borrowing costs only in selected sectors. The new approach also seems to us to go beyond replacing liquidity lost through recent capital outflows. Over recent weeks, China’s first quarter economic data has been weaker, although Chinese equities have barely reacted.

Chinese stock markets finished the week around multi-year highs, as comments from various PBoC and Chinese Government officials appeared to suggest more stimulus is likely, coupled with further market friendly news flow.

In Japan, meanwhile, despite apparent pressure from government ministers and advisers on the Bank of Japan to introduce further monetary easing measures , bank governor Haruhiko Kuroda continued to stick to his forecast of an improvement in the economic numbers in the second half of this year. He also continued to reiterate the need to continue easing until 2% inflation was stable.

 

Week Ahead

Many European markets are closed Friday, May 1 to celebrate May Day. United Kingdom markets are closed next Monday, May 4.

Monetary Policy:

The main central bank news this week will come from the Federal Open Market Committee (FOMC) meeting and Wednesday’s policy decision statement. FedSpeak has mostly been dovish for a while now and the outcome of the meeting starting tomorrow will likely be in line with this.

Thursday sees a policy meeting from the Bank of Japan. This is perhaps more important than usual, with speculation that further easing will be announced.

The ECB releases March M3 money supply growth rate data on Wednesday April 29 with the latest economic bulletin published on Thursday April 30. On the same day, there is an ECB non-monetary policy meeting where a further Emergency Liquidity Assistance (ELA) request from Greece will likely be considered/reviewed.

Economic Data:

On Tuesday, we have Japanese March retail sales.

The US first quarter employment cost data and core personal consumption expenditures (PCE) data will be of interest to rate-watchers and are both released on Thursday. Investors seem to have written off the first quarter for the United States and are now looking for signs of a second quarter rebound instead. We also get first quarter GDP growth data from the United Kingdom on Wednesday and Spain on Thursday. The euro area advance April consumer price index also comes out on Thursday.

US March retail sales data was weak and so the release of two consumer confidence reports as well as personal spending data—all on Thursday—should be important indicators of when consumption may pick up.

On Friday, we see the Japanese core CPI data for March.

Politics:

For Greece, the end of April is the new deadline for agreement on the required set of reform commitments and so expectations are high ahead of Thursday. A repayment of €200 million is due to the IMF on May 1, which should be covered by cash raised by last Monday’s government decree.

 

Views You Can Use

Insight From Our Investment Professionals

Significant Slip—or Just a Blip—in Emerging Markets’ Foreign Exchange Reserves?

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For those looking to invest in emerging markets, a steady growth in foreign exchange reserves—in many cases to higher levels than in most developed markets—has been a positive talking point for the past two decades. This reserve build-up has allowed emerging markets to be dominant buyers of US and European debt. However, a general decline in emerging market foreign reserves last year now has pundits pondering whether there is danger of more significant slippage with potentially ominous market implications. Read More

 

 

Meet Mark Mobius’ Team: Allan Lam

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Allan Lam was one of the original pioneers of Templeton Emerging Markets Group, joining Mark Mobius back in 1987 as his first analyst when Mark’s team had only a handful of emerging markets in which to invest. He is based in Hong Kong and today co-manages a number of our emerging market portfolios; his research responsibilities encompass the real estate and oil and gas sectors. Get to know this key member of the team through this brief interview with Allan. Read More

 

GEP_ImageGlobal Economic Perspectives – April 2015

In this month’s Global Economic Perspective, our Global Fixed Income team discusses the Federal Reserve grappling with mixed US data, the challenges facing the global economy and the degree to which the European recovery is broadening and strengthening. Read More

 

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Important Legal Information

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of April 27, 2015, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton Investments. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security.

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Global Economic Perspective: April http://global.beyondbullsandbears.com/2015/04/23/global-economic-perspective-april-2/ http://global.beyondbullsandbears.com/2015/04/23/global-economic-perspective-april-2/#comments Thu, 23 Apr 2015 17:02:56 +0000 http://global.beyondbullsandbears.com/?p=8237 GEP_Feature_ImagePerspective from the Franklin Templeton Fixed Income Group IN THIS ISSUE Federal Reserve Grapples with Mixed US Data Global Economy Facing Challenges European Recovery Broadens and Strengthens Federal Reserve Grapples with Mixed US Data The first quarter of this year brought its share of disappointments in terms of US economic indicators. Weak consumer spending, combined with slowing factory activity and housing starts, in the opening months of 2015 all pointed to the likelihood of a meaningful moderation in US economic growth in the first quarter. Observers pointed to severe weather in January and February to explain poor data. But March also saw a major downward shift in job creation and in manufacturing data. Industrial production posted its biggest drop in more than two-and-a-half years in March as oil and gas well drilling plummeted. Declining investment in energy projects can be expected to have dented gross domestic product (GDP) growth in the first quarter overall. In addition, US home construction rose much less than a Bloomberg survey of economists expected in March, in spite of more favorable weather. The question is whether this weakness will be prolonged, or whether we will witness a return to better growth trends, just as we saw in 2014, when growth shifted dramatically from an annualized rate of -2.1% in the first quarter to 4.6% in the second quarter. We think there remain grounds for cautious optimism on this score. Although deemed disappointing on some measures, retail sales did rise in March for the first time in four months as shoppers returned to stores after the winter cold snap. And although the overall trend during the past six months has remained decidedly mixed, we believe it is reasonable to expect that the substantial increase in new jobs over the past year, together with the significant decline in gasoline prices, should continue to boost consumer spending in the months ahead. On the corporate front, while industrial production figures have disappointed, expansion of the US services sector has continued apace, with the Institute for Supply Management’s Non-Manufacturing Index reading coming in at 56.5 in March, well above the 50 level that separates expansion from contraction. Just as significantly, lending both to businesses and to consumers has been picking up, showing there is demand in the economy. As energy prices have tended to stabilize, the upturn in demand has begun, finally, to be seen in some inflation figures, with producer prices in the United States rising in March for the first time in six months. But in financial markets, early signs that US growth might be firming have been obscured to some degree by the sluggish growth in corporate earnings, caused in part by the upward lurch in the value of the US dollar, by the downturn in the energy sector’s fortunes and by weak global growth. And, in our view, there can be little question that the spate of decidedly mixed economic data of recent weeks leaves the US Federal Reserve (Fed) facing a policy dilemma at a crucial juncture. The Fed noted in March that economic growth had “moderated somewhat,” an admission that indicates some hesitancy about the timing of interest-rate hikes. No doubt recent data disappointments will serve to cast some doubt on an initial rate hike occurring in June. In particular, the weak nonfarm payroll numbers for March (and downward revisions to figures for previous months) could be used as excuses for the Fed to sit on its hands for a while yet before moving to normalize monetary policy. Nonetheless, some senior Fed policymakers continue to believe that the “temporary factors” that hurt US economic growth in the first quarter are likely to quickly dissipate and that the economy should accelerate in the months to come. In a nutshell, the Fed seems to be wrestling with itself about the actual timing of rate increases. With the Fed’s dilemma potentially causing anguish among market participants, the central bank has been trying to communicate that rate increases, when they come, will be small and gradual, in keeping with its own reduced projections for economic growth up to the end of 2016. The Fed’s efforts to calm markets are laudable, and weak first-quarter data may suggest it can continue to be patient before making a move. At the same time, the Fed no doubt hopes that after six years of near-zero interest rates it can normalize policy sometime soon, with Fed Chair Janet Yellen stating on March 27 that the Fed might not even wait for healthier core inflation and wage growth before raising borrowing costs. Global Economy Facing Challenges In its latest World Economic Outlook (WEO), released in mid-April, the International Monetary Fund (IMF) said that global growth remains moderate, with “uneven prospects” across different countries and regions. Global growth, having come in at 3.4% in both 2013 and 2014, is now seen by the IMF as picking up only slightly to 3.5% in 2015,1 with modest improvements from the so-called advanced economies offset by weaker growth from emerging and developing economies, and with Russia and Brazil particularly weak. The IMF believes global growth should pick up further in 2016, to 3.8%.1 We think global growth moving up to 3.5% this year and showing signs of improvement should not be considered too bad a prognosis, and it would bring the world back in line with long-term trends for global economic expansion. Throughout the mid-1980s, and again in the mid-1990s, real GDP growth in the world also hovered around 3.5%, according to the IMF’s WEO data mapper,2 although we may currently be seeing a rebalancing of growth away from some developing markets toward some developed ones. Longer term, however, the issues of population aging, slowing investment and declining productivity gains are beginning to impact a number of emerging markets as much as they are advanced economies, pushing down potential growth rates in the eyes of some observers. The world’s second- and third-largest economies in particular face some nagging medium-term challenges. Japan is now well over two years into...]]> GEP_Feature_Image

Perspective from the Franklin Templeton Fixed Income Group

GEP_PMs_Fixed_Income_Group

IN THIS ISSUE

  • Federal Reserve Grapples with Mixed US Data
  • Global Economy Facing Challenges
  • European Recovery Broadens and Strengthens

Federal Reserve Grapples with Mixed US Data

The first quarter of this year brought its share of disappointments in terms of US economic indicators. Weak consumer spending, combined with slowing factory activity and housing starts, in the opening months of 2015 all pointed to the likelihood of a meaningful moderation in US economic growth in the first quarter. Observers pointed to severe weather in January and February to explain poor data. But March also saw a major downward shift in job creation and in manufacturing data. Industrial production posted its biggest drop in more than two-and-a-half years in March as oil and gas well drilling plummeted. Declining investment in energy projects can be expected to have dented gross domestic product (GDP) growth in the first quarter overall. In addition, US home construction rose much less than a Bloomberg survey of economists expected in March, in spite of more favorable weather.

The question is whether this weakness will be prolonged, or whether we will witness a return to better growth trends, just as we saw in 2014, when growth shifted dramatically from an annualized rate of -2.1% in the first quarter to 4.6% in the second quarter. We think there remain grounds for cautious optimism on this score. Although deemed disappointing on some measures, retail sales did rise in March for the first time in four months as shoppers returned to stores after the winter cold snap. And although the overall trend during the past six months has remained decidedly mixed, we believe it is reasonable to expect that the substantial increase in new jobs over the past year, together with the significant decline in gasoline prices, should continue to boost consumer spending in the months ahead. On the corporate front, while industrial production figures have disappointed, expansion of the US services sector has continued apace, with the Institute for Supply Management’s Non-Manufacturing Index reading coming in at 56.5 in March, well above the 50 level that separates expansion from contraction. Just as significantly, lending both to businesses and to consumers has been picking up, showing there is demand in the economy. As energy prices have tended to stabilize, the upturn in demand has begun, finally, to be seen in some inflation figures, with producer prices in the United States rising in March for the first time in six months.

But in financial markets, early signs that US growth might be firming have been obscured to some degree by the sluggish growth in corporate earnings, caused in part by the upward lurch in the value of the US dollar, by the downturn in the energy sector’s fortunes and by weak global growth.

And, in our view, there can be little question that the spate of decidedly mixed economic data of recent weeks leaves the US Federal Reserve (Fed) facing a policy dilemma at a crucial juncture. The Fed noted in March that economic growth had “moderated somewhat,” an admission that indicates some hesitancy about the timing of interest-rate hikes. No doubt recent data disappointments will serve to cast some doubt on an initial rate hike occurring in June. In particular, the weak nonfarm payroll numbers for March (and downward revisions to figures for previous months) could be used as excuses for the Fed to sit on its hands for a while yet before moving to normalize monetary policy. Nonetheless, some senior Fed policymakers continue to believe that the “temporary factors” that hurt US economic growth in the first quarter are likely to quickly dissipate and that the economy should accelerate in the months to come.

In a nutshell, the Fed seems to be wrestling with itself about the actual timing of rate increases. With the Fed’s dilemma potentially causing anguish among market participants, the central bank has been trying to communicate that rate increases, when they come, will be small and gradual, in keeping with its own reduced projections for economic growth up to the end of 2016. The Fed’s efforts to calm markets are laudable, and weak first-quarter data may suggest it can continue to be patient before making a move. At the same time, the Fed no doubt hopes that after six years of near-zero interest rates it can normalize policy sometime soon, with Fed Chair Janet Yellen stating on March 27 that the Fed might not even wait for healthier core inflation and wage growth before raising borrowing costs.

Global Economy Facing Challenges

In its latest World Economic Outlook (WEO), released in mid-April, the International Monetary Fund (IMF) said that global growth remains moderate, with “uneven prospects” across different countries and regions. Global growth, having come in at 3.4% in both 2013 and 2014, is now seen by the IMF as picking up only slightly to 3.5% in 2015,1 with modest improvements from the so-called advanced economies offset by weaker growth from emerging and developing economies, and with Russia and Brazil particularly weak. The IMF believes global growth should pick up further in 2016, to 3.8%.1 We think global growth moving up to 3.5% this year and showing signs of improvement should not be considered too bad a prognosis, and it would bring the world back in line with long-term trends for global economic expansion. Throughout the mid-1980s, and again in the mid-1990s, real GDP growth in the world also hovered around 3.5%, according to the IMF’s WEO data mapper,2 although we may currently be seeing a rebalancing of growth away from some developing markets toward some developed ones.

Longer term, however, the issues of population aging, slowing investment and declining productivity gains are beginning to impact a number of emerging markets as much as they are advanced economies, pushing down potential growth rates in the eyes of some observers. The world’s second- and third-largest economies in particular face some nagging medium-term challenges. Japan is now well over two years into “Abenomics,” a set of policies meant to combine fiscal expansion, monetary easing and structural reform in a bid to extract Japan from deflation. The results so far have been relatively disappointing, with the country falling into recession again in 2014. Although the decline in the value of the yen and cheap oil have lately helped boost economic data again, some structural reforms have been slow in coming, and it is not at all clear the long-term decline in the Japanese economy is over.

But whereas the world has grown used to Japanese stagnation, it is now having to come to terms with a slowdown in China as well. We would note that in absolute terms, 7% Chinese growth in 2015—the government’s official target—is worth more than growth of over 11% in 2005 since the Chinese economy is so much bigger than it was 10 years ago. And China has the fiscal and monetary flexibility to keep its ongoing shift to a more domestically driven growth model on track. However, “managing” slowing growth is hard, especially when the Chinese economy contains many imbalances (such as what many observers regard as huge, wasteful fixed income investments, debt-fuelled property speculation and a poorly regulated shadow banking sector, among others).

The global economy faces more immediate challenges as well. One in particular is the reaction of emerging markets to the possibility of the first base-rate rise in the United States in nine years. The jury is still out as to whether financial markets could see a repeat of the “taper tantrum” that provoked a sharp (but short-lived) selloff in late 2013 after the Fed hinted it would begin to curtail its monthly asset purchases. But talk of US rate hikes has fed into US-dollar strength, which has been pinching a number of countries that price public and private debt, as well as imports, in the American currency. However, at this stage, we think fears relating to US-dollar strength may well be exaggerated. Recent data disappointments in the United States may well serve to curtail any further substantial dollar strengthening, and the Fed itself has made it quite clear that any rate rises will be small and gradual. We also believe the global economy as a whole should continue to benefit from the ample liquidity being provided by the Bank of Japan and European Central Bank (ECB) through their quantitative easing (QE) programs even as the Fed moves to normalize policy.

European Recovery Broadens and Strengthens

Investors have continued to pour record amounts of money into eurozone assets over recent months, emboldened by the prospect of an economic recovery as the ECB’s QE policy has suppressed borrowing costs and cheapened the euro. Given the example set by US equity markets after the Fed stepped in to buy government debt in two successive QE programs, investors appear convinced that the rally in European financial markets has considerably longer to run, as the ECB program officially began only in March and the central bank has given no hint it will stop its asset purchases until the QE program is set to end in September 2016. At that point, the ECB may have poured an extra €1.1 trillion into financial markets.

The stellar performance of many US assets after the Fed stepped in to become the largest buyer of government debt between 2008 and 2014 seems to be on the minds of many investors. By early April, a considerable portion of eurozone government bonds were being issued at extra-low yields. The Spanish government recently managed to issue short-term debt at a negative yield, while outside the European Union, Switzerland became the first government in history to sell benchmark 10-year debt at a negative interest rate. This trend has created a powerful incentive for investors to own higher-risk assets such as corporate bonds and equities that pay a higher dividend. Although European bond yields might not look so aberrant in light of the region’s current low levels of inflation, it is unprecedented to see almost one-quarter of European government debt offer negative nominal yields. European growth is still less firmly established than in the United States, yet benchmark bonds there offer better yields than those offered by Italy and Spain—two countries that were at the center of the sovereign bond crisis just three years ago. Debt levels throughout the eurozone remain elevated, and, in spite of improvements, European banks remain highly leveraged. Yet European bond prices are clearly under the influence of ECB bond-buying that seems apt to compress bond yields until the QE program finishes. For many investors, the only alternative to accepting ultra-low government bond yields is therefore to move into riskier assets, which is likely what the ECB would favor.

Indeed, an increased appetite for risk is not only to be seen in higher asset prices, but also in the real economy, with substantial improvements in lending for the past two quarters, according to the ECB’s lending survey. Better demand for business loans in particular could translate into higher investment and job creation. The decline in the value of the euro since the middle of 2014 has also been providing a boost for eurozone companies that have foreign-based revenues.

All in all, currency and oil-price weakness has been feeding into early signs of a deepening recovery in the eurozone, as can be seen in a variety of data, including eurozone industrial production, consumer and business confidence measures, and retail spending. With the ECB’s bond-buying underpinning confidence, we believe this upturn in data could well be maintained for some time to come.

What could go wrong? Most obviously, the cheering that has greeted improving growth in the eurozone has to some extent drowned out concerns about the consequences of a possible Greek exit from the eurozone. The mainstream view seems to be that the rest of Europe can cope with “Grexit.” As the continuous slide in peripheral eurozone bond yields shows, there is certainly no contagion from Greece. The radical left government in Athens has pulled off the extraordinary feat of alienating pretty much every potential sympathizer among other eurozone governments, and the feeling is that a eurozone without Greece can prosper just fine. Greek debts have been ring-fenced, with the European financial sector’s exposure to Greece pared back considerably since the last sovereign crisis of 2010–2012. Yet, even as negotiations over extending further help to Greece go down to the wire, Greece’s government has run out of money and is unable to meet the substantial debt repayments it faces this year. With rumors swirling, there remains a possibility that the Greek situation could unravel very quickly, leading to the country’s chaotic exit from the eurozone that would only serve to underline the deep intrinsic flaws in the euro project.

Less dramatically, low interest rates and complacency about the recent upturn in growth could encourage governments to stave off structural reform. For example, in mid-April, France announced it was targeting lower structural budget cuts than those requested by the European Commission in Brussels. More generally, while the eurozone is being lifted by currency weakness for the moment, prospects could be dimmed by signs of a sustained slowdown in large emerging markets like China, as well as by any prolonging of the recent weakness seen in the United States. Alternatively, however unlikely it might seem, an unexpectedly sharp rise in inflation could bring the current low interest-rate environment into question. For the moment, however, we can expect, in the words of ECB President Mario Draghi, “the economic recovery to broaden and strengthen gradually.”

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The comments, opinions and analyses are the personal views expressed by the investment manager(s) and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region, market or investment.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

 


1. Source: International Monetary Fund, World Economic Outlook database, April 2015.

2. Ibid.

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Notes From the Trading Desk – Europe http://global.beyondbullsandbears.com/2015/04/20/notes-trading-desk-europe-8/ http://global.beyondbullsandbears.com/2015/04/20/notes-trading-desk-europe-8/#comments Mon, 20 Apr 2015 15:02:57 +0000 http://global.beyondbullsandbears.com/?p=8214 Notes_from_the_Trading_Desk_LeadingFranklin Templeton’s Notes From The Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice. Monday, April 20, 2015 We saw a mixed performance for global equity markets last week with concerns regarding the impasse between Greece and its creditors prompting profit taking in European equities. With that, US equities also drifted lower. In contrast, Chinese equities continued to outperform, as hopes of further fiscal stimulus appeared to drive further buying. Greek Crisis Remains in Stalemate Ahead of this week’s Eurogroup meeting of eurozone finance ministers on Friday, the stand-off between Greece and its creditors has increasingly impacted investor sentiment. The situation was brought into focus last week as Greece’s S&P credit rating was downgraded again. While we see this as a tangible indicator of the lack of confidence in a Greek recovery, Fitch had already dropped Greece’s rating on March 27 so, as the ratings tend to fall in line with one another, this was not a huge surprise to us. Still, the stakes are high ahead of Friday’s Eurogroup meeting. The Greek government needs cash to pay a reported €2.4 billion in pensions and civil service salaries this month and is due to repay €203 million to the International Monetary Fund (IMF) on May 1, with a further €770 million payment due on May 12, and another of €1.6 billion in June. In the event of a Greek default, we believe it’s likely that the European Central Bank (ECB) would be prepared to roll over its existing emergency liquidity assistance (ELA) loans while political discussion continued, but we think further extensions of ELA support would be kept to the minimum needed to keep the Greek banking sector afloat. Reports already suggest Germany is driving discussions around finding a way to keep Greece in the European Union (EU) if sovereign default becomes a reality. There is certainly a lot of rhetoric emerging from all sides on this issue and that seems to us to have negatively impacted markets over the last week.  European markets in general declined and unsurprisingly Athens was an underperformer. In addition, Greek bond yields are once again on the rise, with the 10-year recording a two-year high last week (although still a long way from 2012 levels). We believe the situation in Greece will be a key driver for equity markets this week as we approach the Eurogroup meeting on Friday.   China – Continued Focus on Fiscal Policy and Retail Buying China remained sharply in focus last week with the mainland Shanghai bourse closing the week at a seven-year high despite some macroeconomic data showing signs of deterioration. At the beginning of last week the Chinese trade balance missed estimates due to falling exports. Headline GDP figures were in-line with estimates and the government’s targets, but we then saw misses in the March industrial production data and retail sales. However, it seems that we are in “bad news is good news” territory and the weaker the data gets, the stronger the calls grow for increased stimulus measures from the Chinese authorities. Those hoping for stimulus were not disappointed as this weekend the PBOC cuts the reserve ratio requirement (RRR) for all banks by 100 basis points (bps) to 18.50% from 19.50%; which is the largest RRR cut since 2008. There was also a focus on the recent exuberance of Chinese equities, and the extent to which retail investors are fuelling the rally. With the extraordinary gains we have seen in Chinese equities, we believe it is realistic to expect sharp moves and volatility around any news flow on fiscal policy or possible restrictions on the margin lending and retail inflows that have driven the markets higher. ECB and Other Central Bank Speakers The most exciting part of the ECB’s press conference last week may have been when the bank’s President Mario Draghi encountered a confetti-wielding protester. After a brief display of panic, he remained unfazed and made reassuring comments on the progress of quantitative easing (QE) and the economy as a whole. It was stressed that the ECB “intends”, and not just “expects”, to continue the programme of easing until its proposed completion date of September 2016. Draghi was questioned on the possibility of an early cessation of QE and commented: “I’m quite surprised frankly by the attention that the possible early exit of the programme receives when we’ve been in this programme for only a month.” In news from US Federal Reserve speakers last week – what we term “Fedspeak”  – various hawks and doves spoke more or less in line with expectations. Federal Reserve Bank of Atlanta President Dennis Lockhart suggested that while a June hike in rates is still on the table, it is not his preference and he expects a more gradual pace of tightening. Along the same lines, Boston Fed President Eric Rosengren stated that the economy has not met the conditions for a rate rise, and predicted it would be several years before inflation hits its goal level. On the other hand, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond said he sees a “strong case” for raising interest rates this year as the economy improves, projecting growth of near 2.5% for 2015. Saudi Equity Market On Thursday, the Saudi authorities announced that the local market intends open up to international (non-Gulf Co-operation Council) investors from June 15, 2015. With most eyes on the geopolitical situation in the Middle East, we believe this to be a positive story to keep an eye on.   Europe European markets did make new highs in the middle of the week but eventually suffered a downturn as concerns about Greece’s liquidity returned.  This saw investors take risk...]]> Notes_from_the_Trading_Desk_Leading

Franklin Templeton’s Notes From The Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

Monday, April 20, 2015

We saw a mixed performance for global equity markets last week with concerns regarding the impasse between Greece and its creditors prompting profit taking in European equities. With that, US equities also drifted lower. In contrast, Chinese equities continued to outperform, as hopes of further fiscal stimulus appeared to drive further buying.

The Digest

Greek Crisis Remains in Stalemate

Greece_Flag_Leading

Ahead of this week’s Eurogroup meeting of eurozone finance ministers on Friday, the stand-off between Greece and its creditors has increasingly impacted investor sentiment.

The situation was brought into focus last week as Greece’s S&P credit rating was downgraded again. While we see this as a tangible indicator of the lack of confidence in a Greek recovery, Fitch had already dropped Greece’s rating on March 27 so, as the ratings tend to fall in line with one another, this was not a huge surprise to us.

Still, the stakes are high ahead of Friday’s Eurogroup meeting. The Greek government needs cash to pay a reported €2.4 billion in pensions and civil service salaries this month and is due to repay €203 million to the International Monetary Fund (IMF) on May 1, with a further €770 million payment due on May 12, and another of €1.6 billion in June.

In the event of a Greek default, we believe it’s likely that the European Central Bank (ECB) would be prepared to roll over its existing emergency liquidity assistance (ELA) loans while political discussion continued, but we think further extensions of ELA support would be kept to the minimum needed to keep the Greek banking sector afloat. Reports already suggest Germany is driving discussions around finding a way to keep Greece in the European Union (EU) if sovereign default becomes a reality.

There is certainly a lot of rhetoric emerging from all sides on this issue and that seems to us to have negatively impacted markets over the last week.  European markets in general declined and unsurprisingly Athens was an underperformer. In addition, Greek bond yields are once again on the rise, with the 10-year recording a two-year high last week (although still a long way from 2012 levels). We believe the situation in Greece will be a key driver for equity markets this week as we approach the Eurogroup meeting on Friday.

 

China – Continued Focus on Fiscal Policy and Retail Buying

China_Lanterns

China remained sharply in focus last week with the mainland Shanghai bourse closing the week at a seven-year high despite some macroeconomic data showing signs of deterioration. At the beginning of last week the Chinese trade balance missed estimates due to falling exports. Headline GDP figures were in-line with estimates and the government’s targets, but we then saw misses in the March industrial production data and retail sales.

However, it seems that we are in “bad news is good news” territory and the weaker the data gets, the stronger the calls grow for increased stimulus measures from the Chinese authorities. Those hoping for stimulus were not disappointed as this weekend the PBOC cuts the reserve ratio requirement (RRR) for all banks by 100 basis points (bps) to 18.50% from 19.50%; which is the largest RRR cut since 2008.

There was also a focus on the recent exuberance of Chinese equities, and the extent to which retail investors are fuelling the rally. With the extraordinary gains we have seen in Chinese equities, we believe it is realistic to expect sharp moves and volatility around any news flow on fiscal policy or possible restrictions on the margin lending and retail inflows that have driven the markets higher.

ECB and Other Central Bank Speakers

ECB_Leading

The most exciting part of the ECB’s press conference last week may have been when the bank’s President Mario Draghi encountered a confetti-wielding protester. After a brief display of panic, he remained unfazed and made reassuring comments on the progress of quantitative easing (QE) and the economy as a whole. It was stressed that the ECB “intends”, and not just “expects”, to continue the programme of easing until its proposed completion date of September 2016. Draghi was questioned on the possibility of an early cessation of QE and commented: “I’m quite surprised frankly by the attention that the possible early exit of the programme receives when we’ve been in this programme for only a month.”

In news from US Federal Reserve speakers last week – what we term “Fedspeak”  – various hawks and doves spoke more or less in line with expectations. Federal Reserve Bank of Atlanta President Dennis Lockhart suggested that while a June hike in rates is still on the table, it is not his preference and he expects a more gradual pace of tightening. Along the same lines, Boston Fed President Eric Rosengren stated that the economy has not met the conditions for a rate rise, and predicted it would be several years before inflation hits its goal level. On the other hand, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond said he sees a “strong case” for raising interest rates this year as the economy improves, projecting growth of near 2.5% for 2015.

Saudi Equity Market

On Thursday, the Saudi authorities announced that the local market intends open up to international (non-Gulf Co-operation Council) investors from June 15, 2015. With most eyes on the geopolitical situation in the Middle East, we believe this to be a positive story to keep an eye on.

Around The World

Around_the_World

 

Last Week

Europe

European markets did make new highs in the middle of the week but eventually suffered a downturn as concerns about Greece’s liquidity returned.  This saw investors take risk off in the so-called peripheral markets, with the increasing concern about a Greek exit from the eurozone (Grexit) that could spill over in to those countries. Interestingly, German equities were hit hard too. This market has outperformed so far this year, and with sentiment growing more cautious on Europe, we observed investors taking profits from names that had outperformed and also from liquid, “mega-cap” companies in Germany where it is traditionally easier to raise funds.

Energy and materials were the rare bright-spots: the former, we suspect, on hopes that supply is finally peaking, and the latter helped by expectations of Chinese stimulus. Most sectors were under pressure though, with chemicals faring the worst after running into profit-taking.

United States 

US markets approached record highs in the middle of the week but traded lower on Friday on the back of headlines regarding restrictions on Chinese margin trading, as well as Greek liquidity concerns. In terms of macro data we saw weaker data from last week with March advanced retail sales missing expectations for a third month showing a disappointing first quarter, and core consumer price inflation rising.

We are getting into earnings season and US banks had a positive week with some stronger than expected reports from the investment banking sector.

Asia

Australian equities fell on the week with the government lowering its iron ore price target, and S&P warning of credit rating cuts for mining giants due to lower commodity prices. The weaker Chinese macro data noted above also weighed on sentiment for the country.

Japanese stocks finished the week lower as the yen strengthened over the week. The Bank of Japan (BoJ) hinted that it would cut its GDP and CPI outlook at the April 30 meeting. The BoJ minutes from its last Monetary Policy Meeting, held on March 16 and 17, published during the week also did not hint at any new stimulus, which added to the yen’s strength.

Week Ahead

Economic Data:      

On Monday, we have euro area construction output for February, German producer price index (PPI) for March, Spanish trade balance for February and UK April house prices.

On Tuesday in the euro area we see the publication of 2014 debt/GDP ratio and elsewhere in Japan we have supermarket sales data for March and February’s final leading index as well.

Wednesday in the euro area, sees the publication of April flash consumer confidence, as well as February industrial orders and retail sales for Italy. Elsewhere there are the US existing home sales figures for March, Japanese trade balance figures for March and the China March leading index.

Thursday brings the main data this week with euro area April flash composite Purchasing Managers Index (PMI) data and the April flash manufacturing PMI from Japan, China and the United States. This should give us more of an indicator as to whether global GDP is accelerating as expected.  Other data in the euro area comes in the form of fourth quarter government debt, French manufacturing confidence for April, Spanish first quarter unemployment and Italian hourly wage for March. In the United Kingdom, March retail sales data and public sector net borrowing figures are due to be released. Finally, in the US, we have April flash manufacturing PMI, April Kansas City Federal Reserve Bank manufacturing data, March new home sales figures and initial jobless claims.

From Germany on Friday, we have some important survey data with the April IFO expectations. We also have Germany’s March import prices and March PPI data from Spain.  Japan releases April small business confidence data, March PPI services and February all industry activity figures. Finally, in the United States, we have March durable goods orders.

Politics:

The big event is the Eurogroup meeting on Friday, April 24.

Iran and Officials from P5 + 1 are scheduled to hold nuclear talks in Vienna on April 22-23.

Monetary Policy:

A couple of ECB governing council members are scheduled to speak this week: with Vítor Constâncio on Monday, Danièle Nouy on Tuesday and Peter Praet on Thursday, but the speeches are unlikely to be market moving. Things are quiet in the United States as no Fed speakers are scheduled in the coming week.

Earnings:

A key focus will be in the US where it is one of the busiest weeks for first quarter earnings reporting.

 

Views You Can Use

Insight From Our Investment Professionals

Greek Drama Extends Its Run

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David Zahn

Greece’s debt problems have retaken centre stage, as payment deadlines approach and negotiations with creditors continue. The money-strapped country and Syriza, its radical left-wing ruling party, are back in the headlines and on the minds of investors, as predictions that Greece could leave the eurozone abound. David Zahn, head of European Fixed Income, Franklin Templeton Fixed Income Group, offers his perspective on Greece’s dramatic debt saga, as well as the orderly beginning of the European Central Bank’s quantitative easing programme. Read more.

 

2015 Asia Pacific Investor Forum Snapshot​

Whether it’s optimism returning to the eurozone or Australia facing the fallout of China’s slowing growth rate, change is in the air in various markets across the globe. Professionals from Franklin Templeton Investments offered their analysis on the evolving global investment climate at our 2015 Asia Pacific Investor Forum: Investment Ideas for a Changing World, held last month in Sydney, Australia. Read more.

A New Way Forward for Nigeria

Mark Mobius

Mark Mobius

A couple of years ago, many investors were optimistic about Nigeria and the stock market was booming, buoyed by strong economic growth and government reforms to improve the country. However, by 2014, the mood soured amid a series of unfortunate events, including the terrorist acts of Boko Haram, an Ebola outbreak and the weakening price of oil, which is the major source of income for the government and has a big impact on the economy. Despite these challenges, we continue to pursue long-term investments in Nigeria for a number of reasons. Not only is Nigeria Africa’s largest economy and a major consumer market, but the outcome of Nigeria’s presidential election in March proved its people are ready for change—hopefully for the better. Read more.

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Important Legal Information

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of April 20, 2015, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton Investments. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security.

Nothing in this document may be relied upon as investment advice or an investment recommendation.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.  Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

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