Archive for November, 2010
Despite the coverage they have received this week, this post is not about the most recent travails of the more heavily indebted sovereign borrowers (to which readers of this blog were alerted some time ago). In the spirit of the royal engagement, we would rather focus on some good news – the latest figures on mortgage delinquencies and home foreclosures out of the US.
A high profile news item in the States, this data tends to be less well followed over here. By way of background, both delinquencies – defined as mortgages falling more than 30 days behind payment – and foreclosures rose recently to record highs. Having sent a thunderbolt through the world financial system by way of the subprime crisis, the mortgage market has remained a millstone round the neck of the American economy ever since.
But last quarter – for the second quarter in a row – the percentage of US home loans counted as delinquent, and the percentage of mortgages that have become the subject of foreclosure proceedings, fell.
“The decline reflects an improving economy and is the latest sign that the worst of the mortgage crisis may be easing … Separately, data released by the Treasury Department on Thursday showed that the number of homeowners receiving help under the Obama administration’s Home Affordable Modification Program declined for the first time since the program began.
The article sounds plenty of cautionary notes, which is fair enough considering the extent of the problem (over 9% of all American mortgage borrowers have fallen behind on payments; for subprime borrowers, the figure is over 26%). And the need to improve sloppy procedures at US banks has likely delayed some foreclosures into subsequent quarters.
However, taken together with the US bank results we noted a month ago – which showed an across-the-board improvement in provisions for credit losses, despite a wide variety of bottom-line outcomes – yesterday’s mortgage data gives us further encouragement that Uncle Sam’s convalescence is well underway.
The world still has its trouble spots. But a properly entrenched recovery in what remains its largest economy by some distance, accounting for about 25% of global GDP, would shift the balance of risks to growth decisively to the upside.
One might ask in such circumstances how long a prudent central bank should keep taking chances with inflation before returning monetary policy to more normal levels, but that is a question for another day.
An unruly student mob marches through the capital’s streets. A few dozen hotheads storm and occupy the HQ of the ruling party and, forcing their way onto the roof, throw missiles at the seemingly powerless police lines below. Windows are broken, fires started, arrests made.
A week ago the notion that this would have been the headline story across the British press would have seemed absurd. News like this belongs in Paris, surely, or Athens perhaps – not London. After all, it was only three weeks ago that we saw a much more low key student protest in response to the Comprehensive Spending Review – a mere 2,500-3,000 marchers and a half hearted attempt to break into a government building. This week’s events, which involved twenty times the number of participants, were shocking.
So what is the significance of this news for financial markets?
Over the summer, we noted the remote but real risk of economic disruption arising from a possible reaction to the UK’s planned austerity measures:
Britain’s coalition is holding up reasonably well for the moment. But over the next few months we will be enacting austerity measures of our own. British people haven’t had a sovereign crisis and IMF intervention to convince them of these measures, and they are likely to prove unpopular. Should the coalition face Greek-style resistance to its plans, together with siren voices from the Labour opposition denying that they are necessary, might it fall apart? Or seek to preserve itself by watering down its commitment to reduce borrowing? […] What price sterling under those conditions?
Today that risk looks rather less distant. While the kind of strikes and stoppages that have become a routine feature of fiscal consolidation in parts of Europe are far harder for unions to orchestrate in this country, Wednesday’s riot reminds us that there are people who would love to take us down that road.
Lest we forget where that road leads, the sclerosis in Greece together with the accompanying fall off in tourism is expected to see its economy contract by 4% this year, followed by another 2.5-3% in 2011. This is worse than its performance over the previous two years, and worse than the government had been expecting as recently as July.
Let us hope that in future, we in the UK have no cause to rank the phrase “it couldn’t happen here” alongside “this time it’s different” in the lexicon of investment folly.
It’s been another interesting week in these most interesting of times. The Fed’s decision to purchase another $600bn worth of US bonds did not come as a surprise, but it moved markets nonetheless. Equities did best, though bonds also performed well: after all, it is the bond market that is directly affected by the QE fairy dust. The big loser was the dollar, though as its weakness has been underpinning US export growth of 15-20% p.a. of late against a backdrop of near-zero inflation it seems unlikely that this will trouble American policymakers overmuch.
Perhaps a little less high profile were Angela Merkel’s renewed efforts to secure a debt restructuring for the peripheral eurozone countries and so reduce the burden of bailing them out that has fallen on German taxpayers. But her concern should remind us that the developed world continues to enjoy decidedly mixed fortunes at present.
For there are bonds and bonds, and while US Treasuries and German Bunds have risen over the last couple of weeks on the QE story, not every country’s debt has followed suit.
The yield of 10 year US and German bonds has fallen by 0.08% since two weeks ago. 10 year Greek bonds, however, yield almost 2% more, and 10 year Irish bonds about 1.1% more, which has pushed their spread over German paper to a new record (5.3%). Similarly, 10 year Spanish government bonds have risen 0.4% to a spread of more than 2% over Germany, and Portuguese bonds about 1% to a spread of 4.2%.
This compares to unchanged yields both for the safe eurozone countries such as France and the eurozone’s seemingly safe (but lower rated) eastern neighbours, such as Russia and Poland.
Nobody serious believes that financial markets are perfectly efficient any more. But investors ignore messages like these price movements at their peril. It was only at the end of June – a mere four months ago – that equity markets found themselves nursing significant quarterly losses, in large part due to the threatened sovereign debt collapse in Greece. Despite the fact that the credit ratings of countries such as Ireland and Spain remain relatively high, the bond market is telling us on its fringes that the PIGS could well have another sting in their tail.