Archive for January, 2014

A Cold Start

Yesterday came the news that the US economy grew at a 3.2% annualised pace in the fourth quarter of last year. This encouraging sign came on top of Tuesday’s Q4 GDP data for the UK, which capped off the strongest year since before the Great Recession. Yet markets hardly noticed. Perhaps it’s the freak winter weather over the Atlantic, but January has got 2014 off to a bearish start.

At the time of writing the S&P 500, the FTSE 100 and the Euro Stoxx 50 are all down by 4-5% so far this year and the Nikkei has dropped by over 8%. Ten year yields in safe haven markets are about 0.3%-0.4% lower; Greek debt has sold off. Emerging market debt is weaker, and EM equity is also off, especially in Latin America. The trade weighted yen has strengthened for the first month since August, and the dollar has risen too. Highest profile currency losers have been Argentina and a few other EM nations. Gold is up; industrial metals, down. Credit spreads are wider.

Risk, in other words, is off again.

Explanations for this sorry start vary, as ever. There is a vague consensus that emerging markets are a problem, and talk of capital flight and current account deficits. Unfortunately this doesn’t quite add up though. Turkey saw its currency lose nearly 9% of its value against the dollar by the end of last week and yes, it runs a material current account deficit – 7.2% of GDP at the last count – but it hasn’t run a surplus since 2002, so it is not clear why this measure should suddenly assume overriding relevance. For that matter, the Russian rouble has fallen by over 7% against the dollar so far this year, and yet Russia has posted a current account surplus each quarter since the crisis of 1998 (amassing some of the most substantial reserve assets in the world as it did so). Then there is the other North American dollar. Yes, Canada also has a current account deficit – but nobody seems to be talking about that in relation to the 5.5% sell off worn by the poor old loonie. In fact, coupled with more moderate weakness in the Aussie dollar, the real currency story begins to look like US dollar strength with EM specifics a bit of a side-show. Though again, that might not square with higher gold.

The half-hearted media attention given to EM is understandable. There is no news like bad news: crises shift copy. Away from emerging-land, however, there are plenty of other discrepancies which have gone unnoticed. In the UK we have had real evidence of the extent to which stronger growth is good news for sovereign debt, and with recovery on the Continent picking up, Spanish and Portuguese bonds have outperformed German bunds in this month’s rally. Ten year Portuguese debt came within a hair’s breadth of knocking through 5% today and has made new post-bailout lows. And yet Greek debt, as we have seen, has sold off – while the Athens Stock Exchange has outperformed all major markets, currently standing a little higher on the year to date.

In the US, stock market weakness has been accompanied by earnings reports which have surprised to the upside 72% of the time. As of this afternoon 250 of the member companies of the S&P 500 index have reported EPS for Q4 and have managed a +10.5% share-weighted change on the year since Q4 2012. Both of these percentages compare favourably with the picture at the end of January 2013, a month which saw the S&P rise by more than 5%.

There is more that could be said along these lines but the picture is clear – which is to say, not very clear at all, and subjected to interpretations which barely convince even at a superficial level.

What can perhaps be observed is that 2013 saw some unequivocal behaviour from asset classes and that uncertainty has reasserted itself since. We should not expect markets to move in straight lines. Sometimes this sets them against the grain of the fundamentals – and that, of course, can present opportunities.

31/01/2014 at 3:30 pm

The French Infection?

To be clear from the outset, this post has nothing to do with Hollandaise sauce. Its focus is the possible extent of the economic setback in France which saw GDP for the third quarter contract by 0.1% in real terms: a worse outcome than that of any other major European economy, of the recently crisis-hit countries of Italy, Spain and Portugal, and of the eurozone as a whole.

It is France’s importance to the last which is of most interest. France is the second-largest economy in the bloc, accounting for more than one fifth of euro-area output. Fears of damage to the eurozone’s prospects from extreme events at its fringes have abated – rightly so, perhaps. But even a relatively mild bout of weakness at its heart could still be damaging, and this risk has only recently begun to attract attention.

Business-focused London freesheet City A.M. ran a piece on the subject last week which provoked an extraordinary rebuttal from the French Embassy, of all places. Referring to “France’s failed socialist experiment” in its headline the piece was crowing, polemical and clearly provocative – well worth reading, in fact – but it is the claims made in the official French defence which need examining.

On growth in particular, Embassy staff refuted the assertion that France’s economy “is shrinking at an accelerating rate” by noting that “the European Commission’s growth forecast for France stands at 0.2% for 2013 and 0.9% for 2014. Real GDP growth is expected to reach 1.7% in 2015.” This is true. Unfortunately, however, the Commission’s European Economic Forecast Autumn 2013, which is where those figures come from, was published on 5 November – 9 days before the actual GDP data for Q3 was released. At the time their quarterly forecast for French growth in the quarter was +0.1% as against +0.2% for the eurozone as a whole. Given the size of its economy the actual outturn of +0.1% for the bloc could be explained by even such a small disappointment from France alone.

Looking forward, even the forecast 0.7% increase in the pace of yearly growth for 2014 was disappointing. True, eurozone members Latvia, Luxembourg and Malta were expected to show lower increases; but then they were expected to have grown at rather higher rates of about 2-4% last year to start with. All of the other eighteen euro countries were forecast to improve more rapidly, as was the UK (+0.9%) and the eurozone itself (+1.5%).

The British article focused in particular on recent downturns in PMI output indicators, which have fallen from a Q3 average of 49.7 for manufacturing and 49.5 for services to Q4 averages of 48.2 and 48.9 respectively (a level below 50 indicates a contraction in activity). In reply, the Embassy noted that “PMI surveys have been very unreliable in predicting France’s GDP growth over the last few quarters. Business surveys conducted by Insee … have had a better track record and … point to an economic rebound in the last quarter of 2013 [of] +0.4%.”

The point about INSEE vs. PMI statistics is arguable. Take the  +0.4% growth estimate for Q4 at face value, however, and the original Commission forecast for calendar 2013 would be achieved. After all, it is not unusual for economic data to show unexpected but ultimately immaterial fluctuations from one release to the next, nor indeed for GDP statistics to be revised up a quarter or several after their initial publication. And market reaction to the disappointing Q3 data was indetectable at the time.

Perhaps the truth lies somewhere between the City’s disdain and the pride of La Défense. (The most recent Bloomberg survey of economists settled the professional consensus for Q4 GDP growth at +0.1%.) A continued period of economic stagnation in France, whatever the cause, would be a matter of regret. Another recession – however shallow or short-lived – would be a setback. Anything more serious would come as a shock.

This blog observed recently that there were no “black swans” last year, making for a welcome change. Let us hope that we will not find one in the shape of another meaningful downturn in France – and therefore, possibly, the eurozone, again. Inauspicious festival as it may be for that country’s President just now, we shall find out when Q4 data is published – on Valentine’s Day.

17/01/2014 at 4:15 pm

The Year That Was

With 2014 now a few days old it is time to have a look at what markets delivered during 2013. (All returns data is given in GBP terms.)


The risk-on pattern established from the summer of 2012 continued, with the MSCI World Index returning exactly 25%. Of this, 23% had been reached by the time of the Japanese market crash towards the end of May. Risk-on was highly selective, however. By the same point, the MSCI Emerging Markets Index had lagged on concerns over growth in developed markets, delivering only 8.1%. EM took a particularly hard battering in the weeks that followed. With recovery into year end only partial, returns for the whole period were modestly negative and trailed the World Index by a staggering 29.3%.

Variety within these numbers was enormous. While markets in Nigeria, Bulgaria and Argentina all returned around 40-45%, stock indices in Brazil, Turkey and Peru lost around 30%. Among developed markets the US did best, delivering 29.7%. The Nikkei 225 and Euro Stoxx 50 were close behind, returning 26.5% and 25.8% respectively; and the FTSE 100 turned in a most respectable 19.2%.

Fixed Income

Major government markets generally had a poor year. The 10-year gilt yield rose by 1.2% to close at 3% – exactly the same story as for the 10-year US treasury. Japan did better, closing broadly flat at 0.7%, and Germany wound up somewhere in between, with the 10-year bund yield creeping up from 1.3% to 1.9%.

In returns terms the top performers came from the eurozone periphery, with the Greek market delivering an extremely un-bondlike 40%. Spanish and Irish markets returned 14%, paltry by comparison, but again, rather extraordinary for government markets. Allowing for currency weakness the poorest performers were South Africa, Australia and Japan, which lost 18-20%; in local currency terms, however, it was the big developed markets which fared worst.

Credit generally had a storming time. The iTraxx main index of European CDS prices registered a fall in investment-grade spreads from 117bp to 70bp, only 5bp above the post-crunch low seen in January 2010. The crossover index, a measure of high yield risk pricing, saw spreads fall by almost 2%, smashing through similar lows to reach 282bp, a level not witnessed since late 2007. The exception was emerging market sovereign debt. Here, the BofA / Merrill Lynch index of hard-currency-denominated bonds from EM issuers saw spreads rise from 248bp to 297bp with the weakness concentrated in the first half of the year.


After a shaky start the pound had a respectable year, closing 1.7% higher on a trade-weighted basis. It was little changed against the dollar and the euro (about 2% stronger and 2% weaker respectively), though put on 19% against the yen. In fact, only a handful of what Bloomberg calls the “expanded majors” beat it, with the top performer in that basket being the Israeli shekel, which topped sterling by 5.5%. The Chinese yuan, subject as it is to a policy of gradual, managed revaluation, gained 1% against the GBP, and a couple of the emerging European countries squeaked a little higher too.

At the bottom of the pile the action was much more dramatic: emerging market currencies from South America to the Far East tumbled by as much as 20+%.


Appearing as they now do on various currency screens it seems appropriate to link this section with the last one by starting out with a look at gold and silver. And what an unpleasant sight meets the eyes: gold dropped by 29% against the pound and silver by 37%. In fact, in its “home” currency of US dollars, gold saw a twelve-year bull run end in 2013 and its biggest yearly percentage fall since 1981. (The latter point also goes for silver.)

It was a quiet year for oil, with the near Brent future flat over a year which saw price volatility reach some key lows. More interesting was the gas market, with the NYMEX future rising by 26%, its second consecutive annual increase.

Less interesting from an investment point of view but of some economic interest, the Bloomberg index of industrial metals prices dropped by 8% while the Baltic Dry Index of freight more than tripled (+226%).


Last, but for UK investors especially, far from least: bricks and mortar. The Nationwide index of house prices for December was out this morning and showed an increase of 8.4% on the year, the highest rate since June 2010.

Commercial property has had a duller time. IPD data for December is not yet available but the trend in recent months has been positive and we are on course for an increase in capital value across all sectors (retail, office and industrial) of about 2.5% for the year. Interestingly, this index remains 36% below its 2007 peak, and lower even than the previous high reached in 1989.

In Conclusion …

2013 presented investors with a decidedly mixed bag of results. Past performance is of course no guide to future returns and it would be otiose to extrapolate from or over-interpret them. What is clear, however, is that trends in some markets have been much more pronounced than others; and although much market behaviour has been logically and intuitively correlative, in some cases these trends have diverged to the point of incompatibility. Should they reconverge in 2014 it could be a good year for investors – if we manage to find ourselves on the right side of the reconvergence …

03/01/2014 at 4:22 pm

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