Turning Points: The Impending Taper, Japan’s Troubled Economy
We stand just a couple months away from the Fed’s cessation of money printing (it should cease in October 2014). Current expectations are for the Fed to maintain low rates for another year, well into 2015. Analysts continue trying to assess the dependence of markets on the Fed and to discern the direction of the economy. In a fascinating development, emerging markets are now more seriously considering a potential departure from the US dollar as the world’s reserve currency, most notably with the creation of the BRICS bank. Notably, China continues pressing ahead with its plans to maintain high-growth rates despite a litany of problems in its banking system.
Japan’s economy continues to sputter in the months following a retail sales tax hike as of April 2014. Spanish and Italian sovereign bonds are now trading below comparable US treasuries despite the fact that Draghi has not yet monetized a single sovereign bond — demonstrating the power of the spoken word. Housing markets the world over are looking a little frothy, with significant areas of concern in Brazil, Germany, France, the United Kingdom, Canada, and Australia, among others.
Yet again, Argentina is poised to default on its bonds. Perhaps they have learned the wrong lessons about markets.
Here’s a wrap-up of key issues affecting global markets for fundamental investors.
Currencies
- EU searching for alternatives to the US dollar. (Zero Hedge)
- “What Happened to Japan’s Yen-Driven Export Boom?” (CNBC)
- “The Value of the Euro Just Won’t Go Down against the Dollar” (Seeking Alpha)
Commodities
- “Copper Traders Look beyond China” (Wall Street Journal)
- “Copper under Pressure from Indonesian Supply” (Reuters)
- Rio Tinto iron-ore output surges. (Wall Street Journal)
China’s Direction
- “‘Perfect Storm’ to Hit China Economy in 2016” (CNBC)
- “Biggest Risk to China’s Economy? Look to the Shadows, Bankers Say” (Wall Street Journal)
- “China’s Economy Continues to Defy Gravity. That May Not Be a Good Thing” (Time)
Credit Markets
- “Why Tighter Credit Spreads Matter to Investors” (Wall Street Journal)
- Junk spreads are showing signs of stress. (Seeking Alpha)
- “Credit Default Swaps Booming in China” (South China Morning Post)
Derivatives
- Deutche Bank engorged with derivatives. (Zero Hedge)
- JPMorgan creates derivatives to short junk loans. (Bloomberg)
- Bond derivatives explode as liquidity deteriorates. (Bloomberg)
Energy
- OPEC sees the United States reversing the trend of declining oil demand next year. (Wall Street Journal)
- “That Big Battery Breakthrough EV Lovers Talk about Isn’t Happening at Tesla” (Torque News)
- “Google Offering $1 Million for Solar, Wind Energy Breakthrough” (My Broadband)
Euro Crisis
- “Fund Managers Don’t See Return of the Euro Crisis” (Wall Street Journal)
- Portugal doesn’t mean a return of the euro crisis . . . yet. (CNBC)
- Europe and the end of the euro crisis (Forbes)
- “Why the Euro Crisis Still Isn’t Over, in 1 Chart” (Washington Post)
Hedge Fund Money
- “Zell Slams Ackman over His Herbalife Activism” (Pensions & Investments)
- Greenlight Capital reveals stake in Lam Research. (Market Folly)
- “Carl Icahn Says ‘Time to be Cautious’ on US Stocks” (Reuters)
Interest Rates and Central Banks
- Yellen says economy still needs Fed support. (US News & World Report)
- “Russian Central Bank Raises Key Interest Rate to 8% From 7.5%” (Wall Street Journal)
- “China to Free Up Interest Rates within Two Years” (China.org)
Japanese Debt and Inflation
- “Crazy Abenomics Orgy In Japan Is Ending Already — Pounding Hangover Next — Wolf Richter” (David Stockman)
- Europe is closely studying lessons from Japan. (Wall Street Journal)
- Abenomics is looking like a catastrophe as retail sales since the tax hike are cratering. (Global Research)
Stock Market
- “Psychics Are Bullish on Stocks” (CNN Money)
- “Warren Buffett’s ‘Single Best Measure’ Of Stock Market Value Is Higher Today Than It Was During The Credit Bubble” (Business Insider)
Follow the Bubble
- ML US Hi Yield CCC and below junk bond spreads near historic lows. (St. Louis Fed)
- “Appetite for Junk Bonds on the Wane” (Financial Times)
- Nataxis sees the fears of a German real estate bubble as overblown. (Nataxis, PDF)
Time Capsule
In light of Argentina’s upcoming default, we thought it might be instructive to look at a postmortem analysis of their last default in 2001. As they say, history doesn’t repeat itself, but it sure does rhyme. A white paper from the City University London analyzes the 2001 Argentine default on its foreign debt and its consequences in terms of the existing literature on sovereign debt default. Its purpose is to evaluate this experience and to see to what extent the Argentine case requires a rethinking of the nature and consequences of defaults. We show that the Argentine case contradicts many of their standard predictions, in particular its posterior lack of access to international credit, restriction to international trade, and negative economic growth. Moreover, it corroborates the historical fact that many defaulters “get away with it.”
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.