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07 February 2013

WEEKLY INVESTOR RESEARCH

Summary

Markets traded erratically due to perceived rising risks in the financial and political spheres of Europe as downside risks
to currencies in HIDCs (Heavily Indebted Developed Countries) continue to become more evident.

Global

US higher frequency data is still improving with better than expected ISM Manufacturing
and University of Michigan Consumer confidence data. US payrolls came in line with
expectations, but the previous numbers were revised higher by 50,000 jobs. After the
US Congress managed to roll the debt ceiling until May, the market has turned its
attention to European politics, where recent developments added uncertainty.
Specifically, in Italy former Prime Minister Silvio Berlusconi’s centre-right coalition gained
ground in the polls on the back of a campaign promising property and other tax cuts.
Meanwhile, in Spain Mr. Rajoy was dragged into an illegal party finance scandal, which
threatens to eat away at his popularity, which is already battered by sky-high
unemployment and a fragile economic outlook. On the data front, European
Manufacturing PMI failed to surprise, but banks were affected by a new wave of weaker
than expected earnings on account of asset write-downs. The government of The
Netherlands nationalised SNS Reaal – its fourth-largest bank – at a cost of EUR 3.7bn to
Dutch taxpayers. SNS Reaal had high levels of exposure in Spanish assets. At the same
time, the parliament of Ireland rushed to liquidate Anglo Irish Bank after an attempt to
cut a deal with the ECB to replace EUR 28bn of its costly promissory notes leaked in the
press.
US equities were flat on the week, while European equities declined 3%. US 10 year
Treasury yields retraced from a 2.06% high to 1.97% and Italian and Spanish bonds
widened 20-30bps with the 10 year now flirting with the 5.5% mark. Italian bonds also
increased between 7 and 25bps with the 10 year bond now at 4.55%. The Euro was flat
around 1.355 levels while the JPY weakened more 2.2% at 93.80.
The ECB and the BoE will announce their monetary policy committee meeting decision
today. The ECB maintained the benchmark rate at 0.75% and ECB deposit facility rate at
0%. Mr. Draghi is expected to deliver a somehow more dovish impression at the 2:30
press conference, potentially commenting on the Euro strength. In England, the BoE
kept the key rate at 0.5% and pledged to maintain the target for bond purchases at
£375bn by reinvesting future gilts redemption. The market will be paying more attention
to the BoE’s future governor Mr. Carney’s testimony in congress in which the current
Bank of Canada governor left a less dovish impression by mentioning that an exit
strategy from ultra-low monetary policy should be designed.
In Asia, geopolitical tensions between Japan and China escalated after the revelation
that a Chinese Navy targeted a Japanese warship with its weapons radar last month.
In this context, Emerging Markets bonds continued to face some temporary profittaking.
The sovereign external debt index (EMBI GD) was down 0.7% over the last week;
Corporate credit was down 0.8%. Local currency indices have done better and the
GBI-EM is up 0.5% on the week, while the ELMI+ climbed 0.2%. The MSCI Emerging
Markets was down 0.5%. For another week, JPY weakness proved to be an important
headwind, particularly to Emerging Market Asian currencies, as JPY remains the funding
currency of choice as opposed to USD. EMEA and Latin American currencies outperformed
against the USD, in sympathy with the EUR while Middle East and African
currencies recovered from recent lows.

Latin America

In Brazil, CPI came slightly higher than expected at 0.86% mom, moving the annualised
inflation to 6.15%; In Colombia, on the other hand, inflation surprised to the downside,
as the annualised number reached 2.0% (vs. 2.22% expected). December’s monthly
economic activity in Chile rose by 4.7% vs. 3.7% expected. The Peruvian Central bank
stepped up US Dollar purchases in the FX markets in an attempt to reduce the PEN
appreciation pace.

Asia

India’s government speed-up economic reforms and privatisation resulted in the
announcement of the intention to sell a stake of state-controlled power company NTPC
in an attempt to achieve the 5.3% fiscal deficit target. Consumer prices in Thailand rose
3.39%, about 10bps below expectations while Indonesian inflation surprised to the
upside at 4.57%. South Korean exports in January rose by 11.8%. The Chinese official
PMI came at 50.4 (vs. 51 expected), while HSBC China PMI was better than expected at
52.3.

Eastern Europe, Africa, and Middle East

Poland cut interest rates by 25bps to 3.75% as largely expected in order to smooth out
the economic deceleration motivated by Western European slowdown. Romania kept
rates unchanged at 5.25%. In Turkey, inflation came above expectations at an
annualised rate of 7.31%. The Hungarian PMI came better than expected at 55.9 while
rumours regarding the announcement of the Central Bank Governor added volatility to
the HUF. The Czech National Bank maintained its base rate at 0.05%, while Governor
Singer’s comments gave a lower probability to currency interventions which benefited
the Czech Krona. Uganda kept its benchmark interest rates at 12%. South Africa
manufacturing production declined more than expected by 2.2% mom (up 2.0% yoy).
The level of FX reserves in Egypt dropped to U$ 13.6bn at the end of January – below
the important level of three months import cover.

 

 

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