The situation in Cyprus which an investor might try to assess this morning is not quite as dire as the one seen 24 hours ago; at least on the surface.
The vote on that vexatious tax on deposits did not take place on Monday as originally planned but has…
Dancing Fox
A foraging fox in Dulwich south west London, Sunday January 20th 2012. © Harry Dorset, 2011 #uksnow
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The Bankia Signal
Another Friday, another wait for economic news out of Spain.
The results of the second part of an…
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ECB Floats Yield Target Idea; U-Boats Launched
Late this morning the markets seem to have sobered up a bit following earlier barely fettered…
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The below views are based on my soundings, readings and common sense. Responsibility my own:
- ESM banking licence:crisis would need to deteriorate significantly (threaten the core) before such a politically contentious and legally complex policy change…
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There’s half an hour to go before the FOMC policy announcement, which will be followed by ‘The Ben Bernanke Show’ from 1815 GMT.
You can Watch the Federal Reserve press conference with chairman Bernanke here: http://www.ustream.tv/embed/4944768
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The Cherubs at Ludgate
We continue our Square Mile Photo series of specially commissioned photographs by Harry Dorset.
Photograph of a sculpture depicting two cherubs at Ludgate Circus, near Fleet Street, London EC4. © Harry Dorset, 2011
Cherubs watching over Ludgate Circus
T…
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Overall, yes, today’s ‘Flash’ UK GDP figures aren’t pretty.
But in perspective, the result is generally being taken to indicate a far less dire state of play for the UK’s economic state and performance than the headlines [data and Fleet Street] suggest.
Also, it goes without saying that we need to come armed to these figures with the idea of ‘technical recession.’
With that in mind, the notion that the UK was not in recession yesterday, or last week, or last month or even last year - but that the economic climate has since degenerated into one during the last quarter, is a bit silly.
Capital Economics Chief Global Economist Julian Jessop says the market’s reaction was rational:
“The market reaction to the news that the UK is back in recession, at least on the basis of two successive quarterly declines in GDP, was remarkably muted.
Sterling wobbled only briefly, while gilt yields and the FTSE still rose over the course of the day. This sanguine response does make some sense.
After all, the difference between the 0.2% q/q fall reported in the preliminary data for Q1 and the 0.1% q/q rise expected by the market is pretty small and could yet be revised away.
Either way, the level of GDP is still well below its peak. What happened in the first quarter is also largely old news, with the forward-looking surveys mostly a little better.
The MPC itself pointed to the possibility of a drop in output in Q1 at its last meeting and indicated that it would place greater weight on the more upbeat surveys.”
UniCredit Global Chief Economist Erik F. Nielsen reminds that the data are not a major surprise:
“While consensus and we expected modest positive growth, this outcome doesn’t come as a total surprise. There was great uncertainty about today’s figure: on one hand, business surveys pointed to decent positive growth; on the other hand, we knew that construction was going to be a significant drag (output in the sector fell -3% qoq) and that output in the production sector was going to be negative (-0.4%).
What was a bit surprising, and disappointing, was the weakness in the services sector (+0.1%), which contrasted with the positive message from business surveys.”
Monument Securities Chief Global Economist Stephen Lewis casts a sceptical eye over the important Construction component of the data:
“Last year the official statisticians estimated the rate of contraction in construction activity, 2011Q1 on 2010Q4, at 4.7%, compared with which this year’s 3.0% decline might be regarded as mild.
The point is, though, that the ONS now estimates the quarterly fall in construction output in 2011Q1 at only 1.5%. If a similar adjustment is eventually made to the 2012Q1 preliminary estimate, it may turn out that construction output did not fall at all in that quarter.
Since construction makes up 8% of total GDP, an adjustment on that scale might even leave GDP growth very slightly positive for the quarter.
Despite the negative 2012Q1 GDP data, all is not gloom for the UK economy, or so it appears. The latest quarterly CBI industrial trends survey has uncovered remarkable buoyancy in respondents’ confidence. The survey’s balance of business optimism swung from -25 in January to +22 in April.”
UBS Strategist Chris Walker:
“Leading indicators such as services PMI have stabilised since earlier in the year and returned to expansionary territory. We think today’s weak Q1 GDP print is liable to be revised later, and the weak headline number is hard to reconcile with recent forward-looking data.”
BNP Paribas UK Economist David Tinsley:
“There’s something for everyone in the UK data today. On one reading the UK is in a double-dip recession. On another the manufacturing sector is poised to lead the economy to sunlit uplands of sustainable growth. The truth, probably, lies somewhere in between.”
Compiled by ThSM
Part I
Pre-load:
Another indecisive session for equity markets, albeit a more moderate one than we’ve had of late, during which stocks and other risky assets have slid alarmingly.
And in Spain, the epicentre of the latest euro-zone worries, the 10-year bond yield remains close to 6%, having recently peeped above that for the first time since November 2011.
Plus, the euro has been threatening another visit below the 1.30 barrier all week.
There’s no getting away from it: the crazy days last seen at the height of The Crisis, in 2011, could still be lurking not too far below the surface of euro-zone markets.
Not that I’ve met many people in this parish and beyond who would be genuinely surprised if that proves to be the case.
The idea that joint efforts by EU leaders, IMF and ECB [via SMP and latterly LTRO] have succeeded in stemming the debt crisis, is questionable, at best, in my view.
Still, it’s a notion which many market participants are happy to play along with while it suits them.
But even if we accept that view, who in the markets wouldn’t want another LTRO?
Markets do seem to be behaving as if they want another one.
After all, their apparent effect on more hazardous markets is well-known and benign.
Markets, are behaving en masse as if they seek to ‘re-live’ these apparent effects, very much like the ‘addicts to central bank funding’ which critics say markets have become.
This underlying desire for more cheap, cash [it’s difficult to imagine why markets would want such a thing] raises the issue of whether the widely held perception of what LTROs achieve is, in fact, valid.
It’s a question which the ECB is likely to consider closely.
Perhaps we should too.
I.e., apart from providing cheap money for over-privileged financial institutions, do LTROs help anyone, or anything else, in any material way?
There’s a widespread suspicion that the perceived effect of LTROs and their actual effects are quite distinct from each other.
And, if LTROs in fact don’t have enough of the effects which are desired, is it really worth chucking another EUR529.5 billion at ‘The Problem?
[EUR529.5 billion was the amount allotted at the second 3-year LTRO, held on February 29th.]
Comments from ECB President Draghi at the press conference which followed the ECB’s last interest rate announcement [rates were kept at 1%] make it clear that another flood of ECB cash has not been ruled out.
But perhaps it should be ruled out.
If it can’t be demonstrated that ECB long-term cash floods help the wider financial system [including individuals and households] that tends to weaken the case for opening the taps again.
Have the LTROs boosted European sovereign bond prices and helped credit expansion in the real economy?
Or has the credit injection just stayed in the banking system to ease the inter-bank credit squeeze and provide funding for bank debt redemptions?
I’m guessing we all already suspect what the answer is.
But fellow market-macroeconomics geeks will take a look at the next post in the series – I’ll tweet when it’s done.
* The pun ‘LTROver’ has already been used; quoting the source slightly obviates me from blame.
Meze
JPMorgan has published a portentous note this morning.
It’s titled ‘Risk of Greek default and exit rises’.
Well maybe the risk is rising, especially given events over the last week.
Not to mention also that Greece has EUR14.4 billion worth of debt redemption payments due close enough to the fabled March 15th for headline writers [like me, I admit] to have a field day [the deadline is March 20th, actually].
Let’s be clear: without this assistance from official lenders and a restructuring of its debts, Athens will default on its payment.
Effectively, it would be treated by international markets as having gone bust.
On the other hand - take a look at the stock markets right now.
Most major stock markets are in the green.
Even if not by huge amounts; and even as chatter about a more serious delay of the bailout process hits the wires.
Greece’s potential scenarios are burned into the synapses of anyone who watches financial markets.
And many people who don’t are also more cognizant of Greece’s predicament than they’d like to be, given the saturation coverage of everything ‘sovereign debt crisis’ over the last couple of years.
Finally, the taboo of an exit from the euro zone amongst our leaders, broke some months ago.
EU leaders openly musing about Greece not being in the euro zone is almost de rigeur nowadays, having been something few would countenance publicly just half a year ago.
So let the penny drop to the ‘Cassandras’ amongst us - at least in terms of their disingenuousness.
Of course, we know, that ‘they’ know - privately, that we know, that they know. Etc.
A reminder that JPMorgan and others have massive bets against Greece and would profit big if Greece were judged to have defaulted.
Perspective rocks. But only ever so gently when it comes to markets nowadays!
ThSM
Personally, I’m making an effort to remain alert as we go into the 2 millionth Summit [slight exaggeration] to discuss the euro-zone crisis.
No matter how monotonous this newsflow has become though, it can still spring surprises - including for the market of course.
Here are the main focus points to keep a close eye on, in my view:
Overall, the Summit is expected to focus on finalizing the ESM. [Replacement for EFSF]
Still, 2Q could be another nervous, largely sidelined month!
The ECB isn’t responsible for any of the following…
Tacitly, and at times not so tacitly at all, European officials have steered opinion [that’s as strong a phrase as we can use without shattering the ‘treaty’ notion I think] toward the idea that this new fiscal compact and policies to stimulate economic growth and employment might be thought of as consequentially linked to expanded central bank policy.
And what do you know, the ECB has indeed complained explicity of late that fiscal compact plans have been watered down compared to original proposals in December.
This is the ECB just concerned about fiscal rectitude, mind. There’s no suggestion of contingency here. None at all.
All the same, the market will pry over details of the proposed treaty changes with a fine toothcomb.
Markets of course hope that the agreement will give the ECB more room to maneuver, given that stricter rules and further budgetary oversight are likely to limit moral hazard concerns.
At the same time, it’s also hoped a new fiscal compact will help stabilize markets and reduce the fiscal risk premium in the euro zone.
Meanwhile, Greece’s PSI dicusssions limp on.
Perhaps most saliently, we can note word out of Greece in the last 24 hours rejecting calls for a budgetary commissioner to oversee the Greek budget as part of a new bailout package. And officials in Berlin consequently turned that new mood music down a bit in response to Greece’s rejection signals.
Expect attention during this latest, not-so-greatest Summit, to pivot on developments on those two broad fronts - conditions for a new bailout injection and yes, Greece’s PSI negotiations.
Naturally, neither are near the top of the agenda in line with the generally upside down way we in Europe deal with sovereign debt crises.
ThSM
Insider Baseball by Joan Didion (New York Review Of Books): This essay just nails the ways in which politics is basically upmarket reality TV (in that almost everything about what most people see and read about politics is content which has been deliberately manufactured to fill in TV…
