1. March 2013
Monthly Perspectives
n
For important disclosures, refer to the Disclosure Section, located at the end of this report.
2. Executive Summary
The Italian election delivered a hung parliament due to the carefully, as the Continuing Resolution expires. If no action
fragmentation in the Senate. There is now probably little is taken, government could face temporarily a shutdown.
room for the needed structural reforms. It is likely that a
limited mandate government will be formed and markets Another Eurogroup/ECOFIN meeting will be held on
seem to already expect that new elections will occur over the March 4th‐5th. European officials are due to discuss the
next 12 months. The Italian elections send negative signals to option set for assisting Ireland and Portugal in moving back
European politicians and probably raise the bar for a future to sustainable market financing.
potential MoU with the Troika to activate the ECB’s OMT.
The ECB meets on March 7th. The ECB is not expected to
Moreover, France and the Netherlands have also given up on announce any policy easing (refi rate at 0.75% and deposit
the 3% deficit target for 2013. As a consequence, and in the rate at 0.0%) or non‐standard measures. President Draghi
face of growing resistance in public opinion, “fiscal austerity” will likely repeat the message that the accommodative
will probably lose the appeal it still had in some countries. If monetary policy stance is still broadly right. He’ll probably
confirmed, it would provide some insurance against fiscally‐ also stress that the ECB is ready to activate the OMT
induced recessions and lower downside risk around the programme for countries that have met the “necessary
current Euro area growth cenario (positive for European condition”. New staff projections will also be released and
equities?). The market response will probably depend on the could point to lower GDP and inflation for 2013/14.
credibility of the ECB’s backstop, but may create growing
tension in Germany. The FOMC will be reviewing its asset purchases at the
upcoming meeting on March 19th ‐ 20th. Fed Chairman
Meanwhile, in the US, a deal to avoid the automatic cuts on Bernanke’s semi‐annual congressional testimony confirmed
Federal government´s spending ($85.2bn evenly split that the FOMC is paying a lot more attention to the
between the Defence and the Non‐defence budget) proved potencial costs of continuing with is QE policy this year. It is
elusive. Financial markets largely shrugged off the stalemate looking much more likely that the Fed will slow the pace of
in Washington. March 27th is probably the next date to watch its monthy purchases soon.
3. Monthly Performance Review
Asset Performance Review – February 2013
• Developed Equity Markets have done better than EM benchmarks in February. EM equities were generally lower
across the board with stocks in Brazil and China down 3.9% and 0.8% respectively. The MSCI EM ($) index was also
down in February;
• Portuguese equities reversed some of January’s gains, but are still significantly up for the year. Portuguese 10‐year
rates increased in February;
• In fixed income markets, Treasuries, Gilts and Bunds showed gains in February in terms of total return;
• Italian assets (FTSEMIB and BTPs) stand out as an underperformer in February;
• Commodities performed poorly , with Silver, Wheat, Gold and Copper being some of the biggest losers in February;
• Almost all the major currencies depreciated against the Dollar in February , led by Sterling and the Euro;
• In Corporate Credit, total returns were positive across the board.
Source: Bloomberg
4. Economics
US: Q1 2013 should be hit by the expiry of the payroll tax cut
• The NAHB homebuilders’ index is consistent
with continued growth in residential Chart 1: ECRI Weekly Leading Index (% y/y) Chart 2: Housing Starts and NAHB
30
Homebuilders Index
construction spending (chart 2). The 2500 80
20
housing recovery has provided an important 70
2000
help to GDP recovery. Rising home prices 10
60
50
should provide an indirect support to 1500
0 40
consumption; 1000 30
• The 0.1% annualized increase in Q4 2012 ‐10 20
500
GDP doesn’t point to the onset of a 10
‐20
recession. It was largely due to a big drop in 0 0
02 03 04 05 06 07 08 09 10 11 12 13
government spending. The growth rate of ‐30 Housing Starts (000s Ann., LHS)
the ECRI’s leading indicators remains in 06 07 08 09 10 11 12 13 NAHB Housing Index (adv. 6m, RHS)
positive territory (chart 1); Source: Economic Cycle Research Institute Source: US Census Bureau; NAHB
• The three‐month average of non‐farm
Chart 3: Conference Board Jobs Balance
payroll remains at 200,000. The and Unemployment Rate
55 11
unemployment rate increased slightly in 50 10
January to 7.9% (chart 3); 45 9
• Real consumption growth accelerated to 40
8
35
2.1% annualized in Q4 2012. However, 30
7
January’s retail sales were weak, due to 25 6
lower incomes, reflecting the payroll tax 20 5
15 4
cut; 05 06 07 08 09 10 11 12 13
• The FDIC’s banking profile for Q4 2012 Conference Board ‐ Jobs Hard to Get Minus Jobs
shows that US banks are well placed to Plentiful (adv. 3m, LHS)
Unemployment Rate (%, RHS)
continue boosting lending to both firms and
Source: Federal Deposit Insurance Corporation Source: Bloomberg, Bureau of Labor Statistics
household (Chart 4).
5. Economics
Eurozone: The improvement in economic momentum is continuing, for now…
Chart 1: Bank Lending Survey ‐ Change in
• February’s rise in the EC Economic Sentiment Credit Conditions
70
Indicator confirmed that sentiment is rising in 60
the Euro area. The rise in the headline index 50 Tightening
was the fourth consecutive monthly gain. 40
Nevertheless, the economic recovery seems 30
to remain weak, despite the improvement in 20
10
the financial markets conditions (chart 4);
0
• February’s increase in the headline Ifo Loosening
‐10
business climate indicator was the fourth in a ‐20
row and left the index at its highest level in 03 04 05 06 07 08 09 10 11 12 13
almost a year. Germany could easily be the Lending to Enterprises Consumer Credit
Mortgage Lending
strongest performer of the major Eurozone
Source: Economic Cycle Research Institute Source: Bloomberg
economies in 2013;
• Lending to firms and households remains Chart 4: Eurozone Economic Sentiment
Indicator and GDP growth rate
weak, with annual growth rates at ‐2.5% and 120 6
0.5% respectively (chart 1);
110 4
• Peripheral economies are expected to have
100 2
met their fiscal deficit goals for 2012.
However, government debt levels remains 90 0
historically high and are rising in most Euro 80 ‐2
are economies (charts 2 and 3);
70 ‐4
• The recent rise in Italian and other bond
60 ‐6
yields following the Italian general election 00 02 04 06 08 10 12 14
has raised new questions over the ECB’s Eurozone Economic Sentiment Indicator
OMTs. Eurozone GDP (% y/y)
Source: European Commission, Eurostat Source: European Commission’s Winter 2013 Forecast
6. Economics
Portugal: Still in recession, but sentiment shows a slight improvement
• The State budget balance recorded a deficit Chart 1: Unemployment Rates (%) Chart 2: Portuguese Economic Sentiment
of €31.4mn in January 2013, following a 18
120
Indicator and GDP
5
surplus of €308.1mn in January 2012. 16 115 4
110 3
However, data are influenced by the payment 14 Portugal Euro area
105 2
of financial contributions to the European 12
100 1
95 0
Union (€336mn), which have been brought 90 ‐1
10
forward relative to last year (chart 4); 85 ‐2
8 80
• According to news reports, the Eurogroup is ‐3
75 ‐4
considering the extension of bailout loan 6 70 ‐5
maturities for Portugal. The postponement of 4
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Portuguese EC Economic Sentiment Indicator (LHS)
the repayment of the bailout loans would 2 Portuguese GDP (% y/y, RHS)
effectively be an OSI; 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: Eurostat
• Portugal’s Prime Minister suggested that the Source: Bloomberg
government intends to move ahead with a Chart 4: Portugal Budget Balance (% GDP)
deep reform of the state, which is expected 0
to include significant spending cuts. He also ‐2
confirmed that Portugal will request a delay
of budget goals for a year; ‐4
• The Portuguese unemployment rate stood at ‐6
17.6% in January 2013 (vs. 14.7% in January
‐8
2012) (chart 1). The EC Economic Sentiment
for Portugal increased in February to 81.5, ‐10
and left the index at its highest level since ‐12
August 2012. It is probably to soon to
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12e
13e
14e
15e
16e
conclude that Portugal is embarking on a Source: Bloomberg, Ernst & Young Forecast Winter
Edition Source: Bank of Portugal
meaningful recovery (chart 2).
7. Economics
Spain: Budget deficit remains one of the widest in the Euro area
• The General Spanish fiscal deficit came at
Chart 1 : Spain EC Economic Sentiment Indicator and GDP
6.74% of GDP in 2012, somewhat above the 120 2
Table 1: Public sector financial balance (% GDP)
target set by the European Commission (6.3%), 110
2011 2012
but below the 2011 level of 8.96% of GDP. Central Government ‐5.1 ‐3.8 1
100
Including the costs of bank recapitalization, the Autonomous regional governments ‐3.3 ‐1.7
fiscal deficit was 10% of GDP, up from 9.4% in Local government ‐0.5 ‐0.2 90 0
2011 (table 1); Social security ‐0.1 ‐1.0
80
General sector deficit ‐9.0 ‐6.7
• The Secretary of State for the Economy said Support to banking sector 0.5 3.3
‐1
70
that GDP contraction is expected to moderate Total including support to banking sector ‐9.4 ‐10.0
in Q1 2013 (chart 1). Moreover, no new fresh Source: Spanish Treasury, Fincor 60 ‐2
00 01 02 03 04 05 06 07 08 09 10 11 12 13
budget‐cutting measures are expected in 2013 Spain EC Economic Sentiment Indicator (LHS) Spain GDP (%, y/y, RHS)
according to Spanish officials. The country
Source: Statistical Office of Spain, European
expects the European Commission to grant a Commission
more “sensible” deficit‐cutting path over the
next three years. European Commission Table 2: Spanish Quarterly GDP
recently published forecasts suggest that more ‐‐‐‐‐‐ 2011 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 2012 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐
q/q Q3 Q4 Q1 Q2 Q3 Q4
policy tightening measures will be needed GDP growth 0.0 ‐0.5 ‐0.4 ‐0.4 ‐0.3 ‐0.8
from 2014 to continue the recent progress; Private consumption ‐0.6 ‐1.0 0.5 ‐1.1 ‐0.5 ‐2.0
• According to the Bank of Spain, the country’s Government consumption ‐1.3 ‐0.1 ‐1.1 ‐0.3 ‐2.5 ‐0.3
Gross capital formation ‐0.9 ‐3.3 ‐1.8 ‐3.1 ‐1.3 ‐3.9
current account reached a surplus of €4.9bn in Exports 3.5 0.1 ‐2.6 1.8 5.1 ‐0.9
December 2012, reflecting an expansion in Imports 0.8 ‐2.8 ‐2.0 ‐1.3 2.7 ‐4.8
exports and a sharp drop in domestic demand; Contributions
Domestic demand (pp) ‐0.8 ‐1.4 ‐0.3 ‐1.4 ‐1.1 ‐2.0
• Spanish GDP fell 0.8% q/q in Q4 2012, mainly Net trade (pp) 0.8 0.9 ‐0.2 1.0 0.8 1.2
due to a sharp drop in private consumption Source: Statistical Office of Spain, Fincor
(‐3.0% q/q) and in business investment (‐5.4% Source: Bank of Spain
q/q). (table 2)
8. Economics
China: Official PMI points to a moderation in growth
• Even considering that there are uncertainties
Chart 1: China PMI Manufacturing Indices Chart 2: China Monthly Money Supply M2
related to the Chinese New Year adjustments, 58 (y/y growth rate)
30%
PMI manufacturing figures seem to indicate a
slowdown in sequential growth (chart 1); 54
25%
• Like the flash reading of the February’s
50
HSBC/Markit PMI, most components of the
20%
official PMI showed signs of a slowdown from
46
their January levels;
• January monetary data were above market 15%
42
expectations (charts 2 and 3). This seems to 2009 2010 2011 2012 2013
Official PMI Manufacturing index
suggest the strong desire to borrow and lend PMI HSBC Manufacturing Index
10%
00 01 02 03 04 05 06 07 08 09 10 11 12 13
by market participants, and current relatively Source: China Federation of Logistics & Purchasing; Source: The People’s Bank of China
accommodative liquidity conditions; Bloomberg
• In the recently released Q4 monetary policy
report, the PBOC mentioned possible Chart 4: China Exports and Imports (US$ Bn)
200
inflationary risks. This could suggests that
modestly tighter controls are possible. 175
However, a significant change in the monetary 150
policy stance is not likely if inflation data 125
continues to be benign; 100
• January exports and imports growth were up 75
very strongly (chart 4). However, this probably 50
reflects Chinese New Year distortions. The 25
Chinese New Year was in January last year and 2006 2007 2008 2009 2010 2011 2012 2013
Exports Imports
in February this year. Source: National Bureau of Statistics Source: National Bureau of Statistics
9. Markets ‐ Equities
US Equity Markets: Investors are looking past politics to improving economic growth
• Main indices remain supported by the belief Chart1 : S&P 500 Operating Earnings P/E (x)
that tail risks have come down. However, 30
some consolidation has occurred, reflecting a 26
correction in global risk appetite (US
Sequestration, Italian elections, minutes from 22
January’s FOMC meeting); 18
• The three‐month rate of change of the S&P
500 has continued to rise, even as US macro 14
surprises turned negative. Nevertheless, the 10
economic surprise index for the US has 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Operating Earnings P/E (bottom up ests)
recently started to improve again (chart 3); Average (1988‐2012)
• Bottom‐up consensus forecasts $111 and Source: Standard and Poors Source: Standard and Poors
$125 of EPS for 2013 and 2014, which implies
EPS growth of 15% in 2013 and of 13% in Chart 4: US Headline Inflation and Chart 3: S&P 500 and US Macro Surprises
Inflation Expectations 20 150
2014. In Q4 2012, 66% of stocks surprised 6 3
15
positively on EPS (chart 2); 5
10
100
4
• Despite recent skepticism about the prospect 3
2
5
50
for further monetary easing (chart 4), the Fed 2 0 0
1
is likely to still topping up the punch bowl 1
‐5
0 ‐50
(even if at a slower rate) given that the ‐1 0 ‐10
unemployment rate remains at a high level; ‐100
‐2 ‐15
• The biggest risk is still that economic ‐3 ‐1 ‐20 ‐150
06 07 08 09 10 11 12 13
10 11 12 13
conditions don´t return to normal, i.e. that US CPI (% y/y, LHS)
S&P 500 (%, 3m change, LHS)
US economic growth doesn´t reaccelerate as 5‐yr Breakeven Inflation (%, RHS)
Citigroup Economic Surprise Index (RHS)
expected by market participants. Source: Bloomberg, US Bureau of Labour Statistics Source: Bloomberg
10. Markets ‐ Equities
European Markets: Will the Italian election mark the start of another Euro crisis?
• The inconclusive outcome of the Italian
election, which seems to point to a potentially Chart 1: European Indices ‐ 2013 P/E Ratios Chart 2: Citigroup Short term Macro Risk Index
1.0
long period of political uncertainty, has 16.1
0.9
prompted some renewed pressure on the 0.8
European stock market indices (charts 2 and 4). 14.5
0.7
14.0
Nevertheless, the ECB has effectively 0.6
committed to be a lender of last resort through 0.5
0.4
its OMT programme; 11.7 0.3
11.5 11.5 11.4
• Despite a clear improvement in Germany’s 11.3
10.8 0.2
economic momentum, Euro area is still 0.1
probably stuck in a zero/negative growth 0.0
FTSE 100 DAX CAC 40 IBEX 35 FTSEMIB PSI 20 AEX SMI OMX Jan‐12 Abr‐12 Jul‐12 Out‐12 Jan‐13
territory;
Source: Bloomberg Source: Bloomberg
• The Q4 2012 European earnings season
Chart 4: European Markets Relative Performance
continues to be positive and shows 130
improvement compared to Q3. However, 120
earnings estimates have declined over last
110
month. Earnings momentum has been
negative in Europe for almost two years. 100
Consensus bottom‐up 2013 earnings growth 90
forecasts stands at 6%; 80
• Valuation remains moderate (chart 1). A (slow)
70
recovery in European economic growth and Jan‐12 Abr‐12 Jul‐12 Out‐12 Jan‐13
declining risk premia are expected to support Peripheral Markets Core Markets
equity returns in Europe. However, Europe is Peripheral markets include Portugal, Spain and Italy
Core markets include France, Germany and the Netherlands
likely to continue underperforming given a Source: Bloomberg Source: Bloomberg
poor earnings momentum.
11. Markets ‐ Equities
Portuguese Equities: Still driven by the sovereign risk premia
• Portugal’s benchmark stock index declined by Table 1: PSI 20 Q4 2012 earnings results
3.5% in February, after rising 9.7% the month Companies ‐‐‐ Net Income ‐‐‐
Sector Reported Total Beat Missed Met
before (chart 2); Energy 1 1 0 0 1
Industrials 3 5 0 3 0
• Our February top picks portfolio posted a Consumer Discretionary 0 1 0 0 0
Consumer Staples 1 2 0 1 0
combined performance of ‐6.7%, and Financials (*) 3 4 2 1 0
underperformed its benchmark by 3.5%. In Telecommunication Services
Utilities
2
1
3
3
0
1
2
0
0
0
March, we keep BES (as a pure play on the PSI 20 11 19 3 7 1
‐‐‐‐‐ Revenues ‐‐‐‐‐
sovereign evolution), Portucel (despite lower Sector Beat Missed Met
Energy 1 0 0
UWF paper prices since YE12), and Jerónimo Industrials 1 2 0
Consumer Discretionary 0 0 0
Martins (good execution, Poland on track). We Consumer Staples 1 0 0
Financials (*) 3 0 0
remove Portugal Telecom and add EDP Telecommunication Services 1 1 0
Renováveis; Utilities
PSI 20
1
8
0
3
0
0
• EDP Renováveis reported FY12 results above (*) Excluding BANIF
Source: Bloomberg, Fincor
Source: Company Reports
consensus expectations. The Board proposed a
inaugural dividend (28% payout). Further Chart 3: Financial Stocks Relative Performance
300
minority stake disposals are expected in the 100 = Dec 31, 2011
coming months, which is expected to support 250
the stock price (chart 1); BES BCP
200 BPI
• The earnings season has been relatively poor
(table 1). So far 11 companies have reported Q4 150
2012 results (out of a total of 19 we expect to
100
include). 27% of companies reporting have
beaten estimates and 64% have missed 50
estimates. On sales, 73% of companies 0
reporting have beaten estimates and only 27% Dez‐11 Mar‐12 Jun‐12 Set‐12 Dez‐12 Mar‐13
Source: Bloomberg Source: Bloomberg
have missed estimates.
12. Markets ‐ Equities
Spanish Equities: IBEX 35 drops 1.6% in February but outperforms the PSI 20
• Our February top picks portfolio (Mapfre,
Abertis and Tecnicas Reunidas) posted a Chart 1: Best Performances in February Chart 2: Worst Performances in February
combined performance of 8.5% (chart 3), and ‐10% Arcelor Mittal
outperformed its benchmark by 5.1% in the Obrasco Huarte 16%
period from February 4th to March 1st. In March, Bankinter
‐7% Acciona
15%
we keep Mapfre, remove Tecnicas Reunidas
‐6% Sabadell
(but still like the story in the medium‐term) and Mapfre 13%
Abertis (after the strong move in February), and
Grifols 12% ‐4% BME
add Telefonica and Repsol;
• Q4 2012 results pointed to stronger‐than‐ IAG 12% ‐1% FCC
expected domestic cost cutting and improved
KPIs by Telefonica (chart 4). With LatAm growth Source: Bloomberg Source: Bloomberg
set to continue, the stock price could eventually
recover in March some of the lost ground; Chart 3: Relative Performance
• Repsol’s upstream production increased by 11% 108
y/y in 2012. This growth is expected to continue 106
this year, supported by new fields start‐ups. 104
Moreover, the company has announced the 102
sale of its LNG business, which is expected to
100
allow the company to avoid a credit rating
98 Top Picks
downgrade to junk;
IBEX 35
• Despite important progress (e.g. the 96
restructuring of the banking sector), the 94
31‐Jan 07‐Fev 14‐Fev 21‐Fev 28‐Fev 07‐Mar 14‐Mar
economic backdrop remains difficult. Spain
Source: Company Reports Source: Bloomberg, Fincor
could still need to apply for the OMT
programme in the near future.
13. Markets – Corporate Bonds
Corporate Bonds: Political issues returns to the forefront
• In Italy, subordinated bank debt suffered the Chart 1: US Corporate Credit Chart 2: European Financials Corporate Spreads
largest losses post‐election. However, the more 115 103
350
interesting development was the resilience in 110 102
300
Italian high yield issuers. In Spain, the market 105 101
reaction has been more contained; 100 100 250
• The Italian political situation remains an 95 99
200
important headwind to peripheral corporate 90 98
credit (charts 1 and 2). Given weak domestic 85 97 150
economic environments, investors face both 80 96
100
sovereign‐ and credit‐specific risks; Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13
Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13
• The market will likely monitor possible spillover CDS Spread 5‐yr US IG (RHS, bps)
Europe CDS Financials Senior 5‐yr (bps)
CDS Spread 5‐yr US HY (LHS, bps)
effects of the Italian political impasse on Europe CDS Financials Subordinated 5‐yr (bps)
economic growth, and how the rating agencies Source: Bloomberg Source: Bloomberg
view Italy’s sovereign rating in the coming Chart 3: European High Yield Indices
230 600
months;
• In the US, in the coming weeks and months, US 550
210
political negotiations related to the Continuing
500
Resolution (expires March 27th) and the Debt 190
Ceiling (reinstated May 19th) will probably take 450
center stage. Across the board spending cuts 170
400
have already taken place on March 1st, since
there was no last‐minute agreement. Despite 150 350
these political uncertainties, the macro Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13
environment remains supportive to US IG and Markit iTraxx HiVol Europe 5‐year (bps, LHS)
HY. However, HY remains call‐constrained given Markit iTraxx Crossover Europe 5‐year (bps, RHS)
Source: Bloomberg Source: Bloomberg
the current low interest rate environment.
14. Markets – Sovereign Bonds
Sovereign Bonds: Euro core rates rally on the Italian election outcome
• The inconclusive Italian election caused core rate
to fall (chart 1), associated to a sell‐off in Italian Chart 1: Core Government 10‐yr Bond Yields (%) Chart 2: Euro Peripheral 10‐yr Government Bond Yields (%)
6.0 9.5
BTPs (chart 2). Risks remain substantial. 2.4 9.0
Nevertheless, Investors seem to be cautiously 2.2 5.5 8.5
optimistic that Italy’s newly government will 2.0 8.0
maintain a credible fiscal path. If that turns out to 1.8 5.0
7.5
7.0
be wrong, there is surely room for markets to 1.6
6.5
move much further; 1.4 4.5 6.0
• Italian debt is largely domestically owned. 1.2 5.5
Moreover, the OMT programme is still perceived 1.0 4.0 5.0
by the market as a credible backstop. Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13
France Germany
Nevertheless, Italy has driven systematic Italy (LHS) Spain (LHS) Portugal (RHS)
Source: Bloomberg Source: Bloomberg
indicators higher, given the size of the sovereign
debt of the country. The election outcome has
raised market concerns on a rating downgrade for Chart 4: 10‐yr Treasuries Yield (%) Chart 3: UK 10‐yr Government Bond Yield (%)
2.1 2.2
Italy, given that all three rating agencies have
Italy on a Negative Outlook. However, Italy has 2.0 2.1
relatively better ratings when compared to Spain; 1.9 2.0
• A higher probability of QE has forced investors to
1.8 1.9
reconsider their positions in the Gilt market
(chart 3); 1.7 1.8
• The US Treasury market was also supported by 1.6
1.7
the Italian election outcome (chart 4). However,
1.5
we could see higher Treasury yields and a Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 1.6
Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13
steeper yield curve into the March 19th‐20th Source: Bloomberg Source: Bloomberg
FOMC meeting.
15. March Preview
Eurogroup/ECOFIN meetings to be held on March 4th and March 5th
• At this meeting, European officials are due to discuss the option Chart 1: Deposits of Euro area residents (€bn)
set for assisting Ireland and Portugal in moving back to sustainable 2,400 350
market financing. Both countries are expected to continue to 2,300
330
rebuild their presence in primary markets in order to ensure 2,200
qualification for the OMT programme. According to recent 310
2,100
comments from ECB Executive Board Member Benoit Coeure,
Ireland and Portugal do not yet have sufficient access to bond 2,000
290
market to qualify for OMT: "So this is the discussion that we're 1,900
Spain (LHS)
270
having in particular when it comes to Ireland and Portugal, that 1,800 Italy (LHS)
Portugal (RHS)
OMT can be available at some point when countries have regained 1,700 250
sufficient market access, which is not the case today in our 08 09 10 11 12 13 14
judgment“; Source: European Central Bank
• Moreover, Commissioner Rehn has already said that he wants to
Chart 2: Loans to Euro area Residents (% y/y)
discuss a possible extension in the maturities of EFSF and EFSM 35
loans and precautionary credit lines via the ESM with 30
Spain
complementary ECB bond‐buying; 25 Italy
• Also on the agenda are the second review of the Greek loan 20 Portugal
programme, the second review of the Spanish bank 15
recapitalization programme, and the discussion of the 10
Commission’s winter forecast revisions and its implications for the 5
excessive deficit procedures; 0
• Talks of the Cypriot bailout could also continue, following the ‐5
appointement of the new Cypriot cabinet; ‐10
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
• On March 14th‐15th, European Leaders will have the usual
Source: European Central Bank
quarterly meeting in Brussels.
16. March Preview
ECB to hold an Interest Rate Meeting on March 7th
• The ECB is not expected to announce any policy easing at the March
7th Interest Rate meeting. Further cuts in interest rates are likely to
require a strong negative shock to the outlook. Repairing the
monetary transmission mechanism, which implies additional non‐
conventional measures, will probably remain the main focus of the
Governing Council. The ECB should repeat the message that the
monetary policy is and will remain accomodative;
• The Euro exchange rate is off its highs, which reduces the risk of
immediate ECB action. At the February press conference, the ECB
President Draghi mentioned that the Euro “is important for growth
and price stability”;
• Most recent economic data available since the February ECB Source: Ifo Institute
meeting have been mixed. After rising for three consecutive
months, the Euro area composite PMI declined in February.
Moreover, the larger‐than‐expected decline in Euro area Q4 2012 Table 1: ECB Staff Macro Projections for the Euro area in 2013
(%, mid‐points, avg annual changes)
GDP showed that the economy weakened further at the end of last
Mar 12 Jun 12 Sep 12 Dec 12
year. Nevertheless, the strong increase in the German Ifo was HICP 1.6 1.6 1.9 1.6
encouraging (chart 1). The Euro area economy seems to remain Real GDP 1.1 1.0 0.5 ‐0.3
weak and probably stuck in recession, which seems to be consistent Private consumption 0.8 0.5 0.0 ‐0.6
Government consumption 0.6 0.0 ‐0.2 ‐0.6
with the ECB Governing Council’s view expressed in February; Gross fixed capital formation 1.4 1.5 0.5 ‐2.6
• The Governing Council will probably continue to view the risks to Exports (goods and services) 4.4 5.0 4.6 2.3
the economic outlook as being on the downside; Imports (goods and servies) 4.0 4.4 3.7 1.0
• New ECB staff forecasts will be published (table 1). They are likely to Source: European Central Bank
reinforce the view that ECB policy is going to remain
accommodative.
17. March Preview
New Italian Parliament is expected to convene by mid‐March
• According to the Italian Constitution, the first session of the new
Parliament has to occur within 20 days of the elections. In the
current case, this would point to March 17th, which is a Sunday.
Hence, the first session should take place no later than March 15th;
• The next step is the election of the Presidents of the two houses.
The head of each parliamentarian group will then be chosen. The
President of the Republic will then consult with the Presidents of
the two houses, the heads of the parliamentarian groups and the
heads of the coalitions. The President of the Republic will give the
task of forming a government to the candidate who is most likely
to succeed;
• The President of the Republic will try to limit the uncertainty to Source: European Commission
avoid market turbulence, but a solution to find a way out of the
gridlock could be weeks away. A PD‐led minority government with
support from M5S, a government of national unity and a grand
coalition between PD and PdL seem to be the options that are
right now on the table;
• Given the huge debt stock of 127% of GDP, the debt‐sustainability
of Italy can quickly be questioned again by markets. To make the
country less vulnerable to this risk, it is important that the debt
stock comes down over time through GDP growth, moderate
borrowing costs and a primary budget balance. Markets hope that
the government will not backtrack on any of the Monti‐reforms
and implement growth‐enhancing structural reforms, as well as
Source: Italian Ministry of Interior
(much needed) political reforms.
18. March Preview
Bank of England holds a MPC meeting on March 7th
• The Bank of England will hold another Monetary Policy Meeting. A Chart 1: Gilts Yields (%)
decision is expected to be announced on March 7th at 12:00 GMT; 6
• The minutes from the February decision show that three members 5
of the MPC (including Governor King) voted for an extension of QE
policy by £25bn (1.5% of GDP) to £400bn; 4
• In recent speeches, several MPC members suggested that, if 3
necessary, further asset purchases were possible;
2 2‐yr
• The recent retail sales report and PMI manufacturing were weak
5‐yr
and could have tip the committee into announcing another round 1
10‐yr
of QE. However, it is probably still a close call; 0
• The most important development for the UK economy since the 06 07 08 09 10 11 12 13
February meeting has been the decline in Sterling, and the Source: Bloomberg
decision by Moody’s to downgrade the UK from AAA to Aa1;
• Any vote to extend QE, should it occur, is expected to be worth
£25bn;
• However, the focus of the Bank of England’s policy actions has
recently shifted from Gilt purchases towards credit easing and
other unconventional measures. In the view of the MPC, “… it
seemed possible that a further broad‐based monetary stimulus
would on its own be insufficient to transform the outlook for
growth…” and “… interventions more targeted at particular
frictions or market failures in the economy were likely to be more
effective.”
Source: Labour Force Survey
19. March Preview
FOMC weighs the costs and benefits of more QE on March 19th‐ 20th
• The minutes from the most recent FOMC Chart 1: Breakdown of 5‐year Treasury
meeting in late January pointed to rising 2.5
Yield (%)
‐0.6
fears over the potential costs from further
quantitative easing; ‐0.8
• Ben Bernanke’s semi‐annual testimony ‐1.0
confirmed that the FOMC is paying more
2.0 ‐1.2
attention to the potential costs of
continuing with its QE in 2013; ‐1.4
• However, the Fed Chairman still appears to ‐1.6
believe that the benefits outweigh the
1.5 ‐1.8
costs. He mentioned that "keeping longer‐
Jan‐12 Jul‐12 Jan‐13
term interest rates low has helped spark Breakeven Inflation Rate (LHS) Real Yield (RHS)
recovery in the housing market and led to Source: Bloomberg Source: Bloomberg
increased sales and production of Chart 3:
automobiles and other durable goods“;
• Ben Bernanke considered that shrinking the “For example, a study based on the
Fed’s balance sheet could lead to net losses, Federal Reserve Board’s FRB/US model
estimated that, as of 2012, the first two
which would halt remittances to the rounds of LSAPs had raised real gross
Treasury; domestic product almost 3 percent and
• According to January’s minutes, the FOMC increased private payroll employment
plans to review its assets purchases at the by about 3 million jobs, while lowering
two‐day meeting, which concludes on the unemployment rate about 1.5
March 20th. It seems to be increasingly likely percentage points, relative to what
would have been expected otherwise.”
that the Fed will slow the pace of its
monthly purchases soon. Source: Federal Reserve In Monetary Policy Report, February 26th, 2013
20. March Preview
China: National People’s Congress meeting will be held from March 5th onwards
• The National People’s Congress has announced that this year’s
Chart 1: China Real GDP Growth (y/y)
annual session will be held from March 5th onwards. Typically, the 12%
session lasts for about two weeks; 11%
• The National People’s Congress is not an event that policy makers
10%
decide on cyclical policy directions;
• GDP (which should be regarded as the lower bound), CPI (which 9%
should be regarded as the government’s tolerance zone), M2 8%
(which should be regarded as the desired level) and fiscal balance 7%
targets for 2013 will probably be announced in the opening day; 6%
• All senior government officials from the ministerial level up to the 2007 2008 2009 2010 2011 2012
president of China will be officially appointed by the National
Source: Bloomberg
People’s Congress;
• During the National People’s Congress, ministers may release goals Chart 2: China CPI Inflation (y/y)
and measures in terms of the Urbanization (probably a key focus 10%
area for the new government) and Property (will the government 8%
release further property thightening measures, on top of the 6%
recently announced measures?) policies; 4%
• The market expects China’s 2013 budget target to be set at a 2%
larger deficit than the 1.5% that was set in the 2012 budget. 0%
However, this could not necessarily represent a significantly ‐2%
looser fiscal policy if the actual deficit in 2012 was larger than ‐4%
what was set in the budget. 05 06 07 08 09 10 11 12 13
Source: Bloomberg
21. Charts we are watching
• February was a month of divergent asset class returns. Commodities
performed poorly. The CRB index reversed January´s gains, and is now 380
Commodities and US Dollar
1.50
down 0.7% since the beginning of 2013. Much of this performance can 360 1.45
probably be explained by the strength in the Dollar. Moreover, 340
1.40
uncertainty following the Italian parliamentary elections caused weak 320
1.35
sentiment across commodity markets. In base metals, nickel and 300
1.30
aluminum have led the sell‐off. With business confidence in China dipping 280
1.25
in February, markets believe that China’s appetite for commodities is 260
1.20
slowing. The news flow from the 12th National People´s Congress in 240
220 1.15
March could be key for sentiment in the base metals, particularly if the 2010 2011 2012 2013
new government announces additional infrastructure spending or policy Thomson Reuters/Jefferies CRB Commodity Index (LHS)
EURUSD Spot Rate (RHS)
stimulus. Oil has also been in a downward drift. However, several
Source: Bloomberg
geopolitical elements remain in the backdrop and could provide the next
catalyst
• A last‐minute agreement on the US Sequestration was not possible.
Therefore, the provisions of the Budget Control Act creates automatic
cuts (0.5% of GDP in 2013) on Federal government’s spending since
March 1st. March 27th is probably the next date to watch carefully, as the
Continuing Resolution expires. If no action is taken, government could
face temporarily a shutdown. Markets are likely to face again the
prospect of difficult negociations and lots of political noise. Nevertheless,
investors seem to have adopted some complacency over the US debt
ceiling debate. This probably reflects current US economic backdrop, with
the economy expected to grow by 2% in 2013. Moreover, if the fiscal
Source: Congressional Budget Office
tightening proves damaging, Fed QE policy could last longer.
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