Wednesday, October 30, 2013

The British Pound Is Plunging

The British pound just tanked.

This is coming in the wake of the Bank of England's Monetary Policy Committee announcement.

While the MPC is keeping interest rates and its assest purchase plan unchanged -- as expected -- the language appears to signal that the BoE could keep monetary policy loose for longer.

From the statement:

Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile.  In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.  Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term.  Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.

At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

Here's a look at the British pound, which is down 1.2% against the U.S. dollar:



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The George Clooney Of Central Bankers Just Started An Incredibly Difficult Job: Saving The UK Economy

After a double-dip recession and a modest recovery in the second quarter, the UK economy is in need of some fresh ideas. Enter Mark Carney.

The former Bank of Canada governor, took the reins from Mervyn King on July 1.

Carney is charming, with many likening him to George Clooney and Cary Grant. And celebrated — he is often called the rock star central banker.

And then there is his erudite background. He has a bachelor's degree in economics from Harvard, an MPhil in economics from Oxford, and a PHD in economics from Nuffield College, Oxford. He then spent 13 years at Goldman Sachs before transitioning to the public sector.

As governor of the Bank of Canada he was considered to have the Midas touch. He was credited with steering  Canada away from the worst of the financial crisis and helping put it back on the path to recovery much faster than other developed economies.

So, it's understandable that he managed to negotiate a £874,000 package to move to London, according to The Guardian, including a monthly £10,000 housing allowance. He will also only be serving a five-year term, instead of the usual eight.

Forward guidance:  First order of the day

The pressure is on for Carney, as an outsider, to bring with him a change in "the culture of an institution that has been dominated by a single personality for the past 20 years," according to UBS' Amit Kara.

He is expected to introduce forward guidance, similar to the Fed i.e. signal monetary policy stance ahead of time. But Kara argues that forward guidance is likely to be less effective in the UK because of "the unpredictability of the UK economy." The Bank of England on the other hand has managed to get its forecasts wrong. From Kara:

"Mr Carney will most likely announce a framework for guidance in August along with publication of the Inflation Report. The framework will be necessarily cautious and, as such, include a heavy dose of conditionality to satisfy other MPC members that are similarly skeptical about the benefits of forward guidance.

"We have also contended that Mr Carney will bring about a welcome change in the culture of the institution. In this context, though, it is important to remind ourselves that the BoE has been one of the most aggressive and innovative central banks in recent years, and that is one aspect (along with the traditional pink coats of the doormen) that the new governor will be keen to preserve."

But others argue that forward guidance could help ease some of the volatility and spill over from rising rates in the U.S.

How different will Carney be from his predecessor, Mervyn King?

First, in his testimony to the Treasury Select Committee (TSC) in February, Carney said central banks should consider nominal gross domestic product (NGDP) targeting if QE measures aren't enough, since this would allow for a more aggressive response. Carney did however say that inflation targeting was preferred over  NGDP targeting.

In this regard he is quite like King, because he believes there is "considerable flexibility in the current inflation targeting framework and a very high bar for switching from it," according to a February note by Jamie Dannhauser at Lombard Street Research.

Second, both Carney and King justify extending the time frame for inflation to be brought back to target, though Carney is more likely to have a time frame.

Third, like King, Carney is expected to vote for more gilt purchases. Remember King was looking for an additional £25 billion in gilt purchases but had six members of the MPC vote against it. Dannhauser thinks the MPC under Carney will vote for more gilt purchases in 2013-2014, but that they would not take center stage in the committee's tool box.

Fourth, unlike King, Carney is in favor "of using monetary policy to ‘lean against the wind’ of asset bubbles," wrote Dannhauser. He thinks it is important to use interest rates to ensure financial stability. 

"In all likelihood, the differences between Bank of England policy under Carney and that under Mervyn King will be more apparent than real...

"Carney himself questions the magnitude of QE’s benefit on the real economy, and while acknowledging that the marginal benefit is likely to be positive, notes that there are potential costs from long- lasting monetary stimulus. Like Mervyn King, Mark Carney does not appear persuaded by some of the more radical monetary ideas that could be considered, e.g. money-financed fiscal policy, or notably a change of fiscal course. Both are also persuaded of the need for swift and radical reform of the banking system, and at the same time complacent about the short-term damage to output growth and the increasing pro-cyclicality of bank regulation.

"All in all, we do not believe that much of substance is going to change. Monetary policy will continue along the same path, i.e. aggressive stimulus and an extended time frame over which inflation is brought back to target."

Remember, Carney was hand-picked by Mervyn King. So, in the near term, the biggest difference we see might just be the changes he brings to culture and hierarchy at the Old Lady of Threadneedle Street.

Not everyone's a fan

Some have raised questions about his time at Goldman Sachs and his decision to appoint another investment banker, Banco Santander's Charlotte Hogg, to be the BoE's first chief operating officer.

"That resumeƩ rundown isn't meant to impute personal venality to any of these officials; it's to point out the corruption of a system governed by unelected ex-bankers colluding in unprecedented austerity for the poor, while shoveling hundreds of billions at bankers ," wrote Aditya Chakraborty in The Guardian.

Societe Generale's Albert Edwards said Carney's stance on NGDP targeting was cause for concern because it showed the willingness of "policymakers to become more and more interventionist in their monetary experiments."

He even compared Carney to Alan Greenspan:

"In 2005 I described Alan Greenspan as an economic war criminal when most others had decided he was “the greatest central banker who ever lived”, Hence I note with alarm that some commentators are so excited about the appointment of Mark Carney to the Bank of England Governorship that now he Carney, is now being dubbed “the world’s greatest central banker”. Oh dear! From everything I have read so far I fear that in the fullness of time he will have more similarities with Alan Greenspan than just this unwanted accolade and his legacy will be equally destructive."

Of course the course isn't easy for Carney at the Bank of England. Dissent from the other members of the monetary policy committee could dampen his agenda, as could the constraints of fiscal policy.

Carney will preside over his first meeting as the governor of the Bank of England this week. He isn't expected to announce additional gilt purchases at his first meeting.


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Tuesday, October 29, 2013

The Commodities Supercycle Is Over — Here's What's Next

molten hot silver gold REUTERS/Peter Andrews

Workers pour molten silver into moulds at the KGHM copper and precious metals smelter processing plant in Glogow May 10, 2013.

$('.icon-tooltip').tooltip();Sluggish global growth and a recent economic slowdown in resource-hungry China have hammered commodities markets this year, sending the price of everything from iron ore to copper tumbling. With those sharp reversals—as well as the Fed’s comments about tapering the size of the United States’ monetary stimulus—fresh in their minds, the 300 clients who convened last week at Credit Suisse’s New York headquarters for the bank’s third annual Commodities Day had plenty to talk about.

With few exceptions, the prices of commodities such as oil products, precious metals and industrial metals have been steadily rising over the past decade in what analysts have termed a “commodities supercycle.” That era is over, Credit Suisse experts say, and they expect prices to remain under pressure at least through the end of the year. What’s more, the prices of individual commodities will no longer rise and fall together as they have for the last five years, Credit Suisse’s commodities team explained in a June 25 research note (“Commodities Forecast Update: The Return of Fundamentals”). As a result, investors and traders are going to have to focus on the specific supply and demand dynamics for individual commodities.

Copper and iron ore prices, for example, are expected to decline because supplies of both metals are becoming more plentiful at the same time that demand is declining. Copper is used in wiring and electrical equipment, and is thus sensitive to both building activity and demand for electronics. And iron ore is an indicator of industrial activity of all kinds. Prices of both should soften as China’s building and manufacturing boom cools off. Demand for palladium, on the other hand, should stay strong thanks to the steadily growing Chinese car market, at the same time that labor unrest in South Africa looks likely to slow growth in supply. That points to higher prices.

The Attendees

Attendees at Commodities Day represented a wide variety of investors. Close to one-third were from hedge funds, while roughly one-fourth were institutional investors.

The Year Ahead

Out of four commodity sectors – energy, precious metals, industrial metals and agriculture – energy and agriculture nearly tied (37 percent and 36 percent, respectively) as investors’ pick for the most promising bet over the next year.

Most investors – 41 percent – think commodity prices will remain at their current levels a year from now. Perhaps more telling is the fact that nearly one in four respondents (23 percent) said they had absolutely no idea where commodity prices were going.

One thing is clear, though. Investors don’t expect the market to stabilize. More than half (53 percent) of those surveyed believed volatility would be higher over the coming year than it was in the previous year. About a third of investors thought volatility would stay the same, but only 15 percent thought it would decline.

Oil Markets

Brent crude oil prices have fallen from a high of $118.90 in February to just over $100 in early July. Most investors think that decline will continue.

Credit Suisse recently cut its Brent crude oil forecast for the next six months to $108 from $112, due to concerns about how much consumption can rise given a still-fragile U.S. recovery as well as the risk of a slowdown in emerging markets. But in the medium term, Credit Suisse’s oil analysts are optimistic about prices, noting that global supply is likely to stay tight this year as international sanctions are successfully keeping Iranian crude off European and other key markets. Ongoing conflicts in large OPEC countries such as Iraq, Nigeria and Libya, have also tightened production. Credit Suisse expects Saudi Arabia, the world’s largest oil producer, would have to boost production by 1.2 million barrels per day in the third quarter to keep prices from falling.

In the long term, analysts say, developed markets will use less oil, not more, and emerging markets could see a similar decline within a decade. At the same time, a shale drilling boom in the U.S. will bring more supply of shale oil online. “The clear implication is that in a slower-growth world, still fraught with uncertainty, plentiful supplies eventually bring down oil prices,” analysts said in the “Return to Fundamentals” research note. 

Metals

Of the four base metals used for industrial and commercial purposes (copper, aluminum, zinc and lead), 35 percent of investors predicted that copper—which has shed 34 percent of its value since a 2011 peak—would be the best-performing base metal over the next year. But Credit Suisse’s commodities team said copper prices might fall further still. “Copper stands out as being the most overvalued of the LME metals, in our view,” analysts said the “Return to Fundamentals” research note. “Inevitably, we think prices must come under further downward pressure soon.”

Nearly half of attendees think the recent rout in gold prices isn’t quite over, and think the metal will be trading between $1,000 and $1,200 an ounce in a year. Gold has not dipped below $1,200 an ounce since 2010, but is currently trading around $1,246, down from a high of nearly $1,792 in October.

But if investors were pessimistic about gold, they were hot for palladium. More than half of the survey respondents—53 percent—thought palladium would outperform gold, silver and platinum in the coming year. Credit Suisse analysts are maintaining a long-term bullish outlook on palladium and believe that supply will fall short of demand through 2016, keeping prices high. But they also noted that ETF holdings, investors and funds account for 50 percent of annual palladium demand, making the precious metal vulnerable to a selloff if investor fears about a global macroeconomic slowdown return.

The Financialist is a digital magazine presented by Credit Suisse that looks at the trends and ideas that drive markets, businesses and economies.


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The Supreme Court's Gay Marriage Ruling Is Bad News For Some Gay-Friendly Financial Advisors

Gay Pride Parade, Edith Windsor, DOMA Robert Libetti/Business Insider

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors. For more visit Business Insider's new Wealth Advisor vertical.

What The DOMA Ruling Means For Financial Advisors (Wall Street Journal)

Financial advisors are wondering what the Supreme Court's historic decision overturning the Defense of Marriage Act will do to business. For some firms that offered niche estate planning for same-sex couples, the decision — which effectively extends to gay couples the same federal tax breaks that heterosexual couples enjoy — might actually harm short-term business. Still, plenty of firms could get new clients now that federal marriage rules will encompass more Americans.

Advisors could also benefit from some of ambiguity surrounding the ruling, since it still isn't clear if same-sex partners will be recognized by states that don't acknowledge gay marriage, if the couple married in another state that does recognize it.

Now Might Be A Good Time To Buy Junk Bonds (BlackRock)

With interest rates surging and bonds undergoing a massive sell-off in recent weeks, now might be just the right time to get in on junk bonds once again. "High yield has been a popular trade for several years given the economic recovery and low default rate," write the analysts at BlackRock. "With the recent shift in interest rates and the economy still growing, the sector is attractive. Can investors continue to reap returns? We believe so."


Here Are 3 Reasons Why You Should Still Own Bonds (Vanguard)

Keep holding onto Treasuries, says Vanguard's Joe Davis. Here's why:

1.It has taken time for interest rates to rise. So just because they are low it doesn't mean that they will jump over the next two days. 2. "Secondly is that with low interest rates, that did imply muted return for bond portfolios over the next several years, and that there was more risk of a one-year or one-month loss going forward than there had been over the past 30 or 40 years just because the low-income cushions in those portfolios, and that has played out at least in the past day or two." 3. "Bonds are just inherently, as a broad asset class, less volatile than equities, and that played out yesterday."

FINRA Increased Enforcement in 2012 (Financial Planning)

2012 was a banner year for FINRA, which brought a grand total of 1,541 disciplinary actions. The self-regulator took home almost $70 million in fines, and ordered $34 million in restitution to investors. According to its annual report, the regulator expelled 30 firms, 294 individuals, and suspended another 549.

Medicare Related Mistakes Can Really Hurt Retirees (FA Mag)

Financial advisors should be well versed on Medicare and related insurance plans — such as Medicare Advantage — before advising clients, according to Brian Hanby who heads a Utah-based insurance agency. "A lot of people do not realize how much health care can cost even with Medicare. It can be a nightmare if you have serious health problems,” Hanby told FA Mag.


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EL-ERIAN: Anyone Following Egypt Needs To Keep An Eye On One Useful Measure, And It's Not The Stock Market

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Markets More: Mohamed El-Erian Egypt EL-ERIAN: Anyone Following Egypt Needs To Keep An Eye On One Useful Measure, And It's Not The Stock Market Mohamed El-Erian, Contributor Jul. 3, 2013, 1:29 PM 3,917 Tweet!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0];if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src="//platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs");EmailShare on Tumblr

Mohamed El-ErianREUTERS/Fred Prouser

Mohamed A. El-Erian, CEO and co-CIO of PIMCO, takes part in a panel discussion titled "Global Markets in Uncertain Times" at the Milken Institute Global Conference in Beverly Hills, California April 29, 2013.

$('.icon-tooltip').tooltip(); Mohamed El-ErianMohamed El-Erian is CEO and co-CIO of PIMCO.

Recent PostsEL-ERIAN: The Next Few Days Will Be Critical For The Global...EL-ERIAN: The Fed Better Be Right About The EconomyEL-ERIAN: The Market 'Sucking Sounds' Are Getting Louder As Four...With all the focus on Egypt today, people are scrambling to find a simple market-based measure that speaks to both the extent of the economic disruptions and the potential financial spillover effects on other countries.
The most commonly-viewed Egyptian chart – stock market prices – is not the right one. There is another one; and while better (and, maybe, even the best in relative terms), it is far from comprehensive.

This better data series measures the spread on the 5-year CDS (credit default swap). It is a good – not perfect – market indicator of sovereign risk; and it dominates the information content provided by the much more popular stock market index.

The higher the spread (and it just traded at around 1,000 basis points), the harder it is to encourage investment in new plant and equipment; the more difficult and expensive it is to secure trade financing (including for critical imports of food stuffs and other basic needs); and the lower the job and income opportunities for average Egyptians. And all this speaks to the bigger issue: A struggling economy is both a source and a consequence of Egypt’s current political tensions.

As insightful as this data series is, it does not capture however the potential spillover effects. Indeed, even the analytics of this particular contagion question is quite complex.

Measured by traditional economic and financial variables, Egypt’s regional and global network effects are quite limited. This is true in terms of the usual measures, including trade links, global demand and supply influences and cross-border financial interactions.

But this does not mean that Egypt has no systemic effects. It remains the largest and most influential country in the Arab region. It is a significant geo-political actor in an important part of the world. And the demonstration effects could extend quite far and wide.

The bad news is that there is no single simple measure that comes anywhere near to capturing all this. The good news is that the CDS spread provides useful insights into one of the underlying contributing factors.

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The better indicator of sovereign risk.

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