March 2013 Monthly Perspectives n For important disclosures, refer to the Disclosure Section, located at the end of this report.
Executive SummaryThe Italian election delivered a hung parliament due to the carefully, as the Continuing Resolution expires. If no actionfragmentation in the Senate. There is now probably little is taken, government could face temporarily a shutdown.room for the needed structural reforms. It is likely that alimited mandate government will be formed and markets Another Eurogroup/ECOFIN meeting will be held onseem to already expect that new elections will occur over the March 4th‐5th. European officials are due to discuss thenext 12 months. The Italian elections send negative signals to option set for assisting Ireland and Portugal in moving backEuropean politicians and probably raise the bar for a future to sustainable market financing.potential MoU with the Troika to activate the ECB’s OMT. The ECB meets on March 7th. The ECB is not expected toMoreover, France and the Netherlands have also given up on announce any policy easing (refi rate at 0.75% and depositthe 3% deficit target for 2013. As a consequence, and in the rate at 0.0%) or non‐standard measures. President Draghiface of growing resistance in public opinion, “fiscal austerity” will likely repeat the message that the accommodativewill probably lose the appeal it still had in some countries. If monetary policy stance is still broadly right. He’ll probablyconfirmed, it would provide some insurance against fiscally‐ also stress that the ECB is ready to activate the OMTinduced recessions and lower downside risk around the programme for countries that have met the “necessarycurrent Euro area growth cenario (positive for European condition”. New staff projections will also be released andequities?). The market response will probably depend on the could point to lower GDP and inflation for 2013/14.credibility of the ECB’s backstop, but may create growingtension in Germany. The FOMC will be reviewing its asset purchases at the upcoming meeting on March 19th ‐ 20th. Fed ChairmanMeanwhile, in the US, a deal to avoid the automatic cuts on Bernanke’s semi‐annual congressional testimony confirmedFederal government´s spending ($85.2bn evenly split that the FOMC is paying a lot more attention to thebetween the Defence and the Non‐defence budget) proved potencial costs of continuing with is QE policy this year. It iselusive. Financial markets largely shrugged off the stalemate looking much more likely that the Fed will slow the pace ofin Washington. March 27th is probably the next date to watch its monthy purchases soon.
Monthly Performance ReviewAsset Performance Review – February 2013 • Developed Equity Markets have done better than EM benchmarks in February. EM equities were generally lower across the board with stocks in Brazil and China down 3.9% and 0.8% respectively. The MSCI EM ($) index was also down in February; • Portuguese equities reversed some of January’s gains, but are still significantly up for the year. Portuguese 10‐year rates increased in February; • In fixed income markets, Treasuries, Gilts and Bunds showed gains in February in terms of total return; • Italian assets (FTSEMIB and BTPs) stand out as an underperformer in February; • Commodities performed poorly , with Silver, Wheat, Gold and Copper being some of the biggest losers in February; • Almost all the major currencies depreciated against the Dollar in February , led by Sterling and the Euro; • In Corporate Credit, total returns were positive across the board.Source: Bloomberg
EconomicsUS: Q1 2013 should be hit by the expiry of the payroll tax cut• The NAHB homebuilders’ index is consistent with continued growth in residential Chart 1: ECRI Weekly Leading Index (% y/y) Chart 2: Housing Starts and NAHB 30 Homebuilders Index construction spending (chart 2). The 2500 80 20 housing recovery has provided an important 70 2000 help to GDP recovery. Rising home prices 10 60 50 should provide an indirect support to 1500 0 40 consumption; 1000 30• The 0.1% annualized increase in Q4 2012 ‐10 20 500 GDP doesn’t point to the onset of a 10 ‐20 recession. It was largely due to a big drop in 0 0 02 03 04 05 06 07 08 09 10 11 12 13 government spending. The growth rate of ‐30 Housing Starts (000s Ann., LHS) the ECRI’s leading indicators remains in 06 07 08 09 10 11 12 13 NAHB Housing Index (adv. 6m, RHS) positive territory (chart 1); Source: Economic Cycle Research Institute Source: US Census Bureau; NAHB• The three‐month average of non‐farm Chart 3: Conference Board Jobs Balance payroll remains at 200,000. The and Unemployment Rate 55 11 unemployment rate increased slightly in 50 10 January to 7.9% (chart 3); 45 9• Real consumption growth accelerated to 40 8 35 2.1% annualized in Q4 2012. However, 30 7 January’s retail sales were weak, due to 25 6 lower incomes, reflecting the payroll tax 20 5 15 4 cut; 05 06 07 08 09 10 11 12 13• The FDIC’s banking profile for Q4 2012 Conference Board ‐ Jobs Hard to Get Minus Jobs shows that US banks are well placed to Plentiful (adv. 3m, LHS) Unemployment Rate (%, RHS) continue boosting lending to both firms and Source: Federal Deposit Insurance Corporation Source: Bloomberg, Bureau of Labor Statistics household (Chart 4).
EconomicsEurozone: The improvement in economic momentum is continuing, for now… Chart 1: Bank Lending Survey ‐ Change in • February’s rise in the EC Economic Sentiment Credit Conditions 70 Indicator confirmed that sentiment is rising in 60 the Euro area. The rise in the headline index 50 Tightening was the fourth consecutive monthly gain. 40 Nevertheless, the economic recovery seems 30 to remain weak, despite the improvement in 20 10 the financial markets conditions (chart 4); 0• February’s increase in the headline Ifo Loosening ‐10 business climate indicator was the fourth in a ‐20 row and left the index at its highest level in 03 04 05 06 07 08 09 10 11 12 13 almost a year. Germany could easily be the Lending to Enterprises Consumer Credit Mortgage Lending strongest performer of the major Eurozone Source: Economic Cycle Research Institute Source: Bloomberg economies in 2013;• Lending to firms and households remains Chart 4: Eurozone Economic Sentiment Indicator and GDP growth rate weak, with annual growth rates at ‐2.5% and 120 6 0.5% respectively (chart 1); 110 4• Peripheral economies are expected to have 100 2 met their fiscal deficit goals for 2012. However, government debt levels remains 90 0 historically high and are rising in most Euro 80 ‐2 are economies (charts 2 and 3); 70 ‐4• The recent rise in Italian and other bond 60 ‐6 yields following the Italian general election 00 02 04 06 08 10 12 14 has raised new questions over the ECB’s Eurozone Economic Sentiment Indicator OMTs. Eurozone GDP (% y/y) Source: European Commission, Eurostat Source: European Commission’s Winter 2013 Forecast
EconomicsPortugal: Still in recession, but sentiment shows a slight improvement • The State budget balance recorded a deficit Chart 1: Unemployment Rates (%) Chart 2: Portuguese Economic Sentiment of €31.4mn in January 2013, following a 18 120 Indicator and GDP 5 surplus of €308.1mn in January 2012. 16 115 4 110 3 However, data are influenced by the payment 14 Portugal Euro area 105 2 of financial contributions to the European 12 100 1 95 0 Union (€336mn), which have been brought 90 ‐1 10 forward relative to last year (chart 4); 85 ‐2 8 80• According to news reports, the Eurogroup is ‐3 75 ‐4 considering the extension of bailout loan 6 70 ‐5 maturities for Portugal. The postponement of 4 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Portuguese EC Economic Sentiment Indicator (LHS) the repayment of the bailout loans would 2 Portuguese GDP (% y/y, RHS) effectively be an OSI; 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Eurostat• Portugal’s Prime Minister suggested that the Source: Bloomberg government intends to move ahead with a Chart 4: Portugal Budget Balance (% GDP) deep reform of the state, which is expected 0 to include significant spending cuts. He also ‐2 confirmed that Portugal will request a delay of budget goals for a year; ‐4• The Portuguese unemployment rate stood at ‐6 17.6% in January 2013 (vs. 14.7% in January ‐8 2012) (chart 1). The EC Economic Sentiment for Portugal increased in February to 81.5, ‐10 and left the index at its highest level since ‐12 August 2012. It is probably to soon to 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12e 13e 14e 15e 16e conclude that Portugal is embarking on a Source: Bloomberg, Ernst & Young Forecast Winter Edition Source: Bank of Portugal meaningful recovery (chart 2).
EconomicsSpain: Budget deficit remains one of the widest in the Euro area• The General Spanish fiscal deficit came at Chart 1 : Spain EC Economic Sentiment Indicator and GDP 6.74% of GDP in 2012, somewhat above the 120 2 Table 1: Public sector financial balance (% GDP) target set by the European Commission (6.3%), 110 2011 2012 but below the 2011 level of 8.96% of GDP. Central Government ‐5.1 ‐3.8 1 100 Including the costs of bank recapitalization, the Autonomous regional governments ‐3.3 ‐1.7 fiscal deficit was 10% of GDP, up from 9.4% in Local government ‐0.5 ‐0.2 90 0 2011 (table 1); Social security ‐0.1 ‐1.0 80 General sector deficit ‐9.0 ‐6.7• The Secretary of State for the Economy said Support to banking sector 0.5 3.3 ‐1 70 that GDP contraction is expected to moderate Total including support to banking sector ‐9.4 ‐10.0 in Q1 2013 (chart 1). Moreover, no new fresh Source: Spanish Treasury, Fincor 60 ‐2 00 01 02 03 04 05 06 07 08 09 10 11 12 13 budget‐cutting measures are expected in 2013 Spain EC Economic Sentiment Indicator (LHS) Spain GDP (%, y/y, RHS) according to Spanish officials. The country Source: Statistical Office of Spain, European expects the European Commission to grant a Commission more “sensible” deficit‐cutting path over the next three years. European Commission Table 2: Spanish Quarterly GDP recently published forecasts suggest that more ‐‐‐‐‐‐ 2011 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 2012 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ q/q Q3 Q4 Q1 Q2 Q3 Q4 policy tightening measures will be needed GDP growth 0.0 ‐0.5 ‐0.4 ‐0.4 ‐0.3 ‐0.8 from 2014 to continue the recent progress; Private consumption ‐0.6 ‐1.0 0.5 ‐1.1 ‐0.5 ‐2.0• According to the Bank of Spain, the country’s Government consumption ‐1.3 ‐0.1 ‐1.1 ‐0.3 ‐2.5 ‐0.3 Gross capital formation ‐0.9 ‐3.3 ‐1.8 ‐3.1 ‐1.3 ‐3.9 current account reached a surplus of €4.9bn in Exports 3.5 0.1 ‐2.6 1.8 5.1 ‐0.9 December 2012, reflecting an expansion in Imports 0.8 ‐2.8 ‐2.0 ‐1.3 2.7 ‐4.8 exports and a sharp drop in domestic demand; Contributions Domestic demand (pp) ‐0.8 ‐1.4 ‐0.3 ‐1.4 ‐1.1 ‐2.0• Spanish GDP fell 0.8% q/q in Q4 2012, mainly Net trade (pp) 0.8 0.9 ‐0.2 1.0 0.8 1.2 due to a sharp drop in private consumption Source: Statistical Office of Spain, Fincor (‐3.0% q/q) and in business investment (‐5.4% Source: Bank of Spain q/q). (table 2)
EconomicsChina: Official PMI points to a moderation in growth • Even considering that there are uncertainties Chart 1: China PMI Manufacturing Indices Chart 2: China Monthly Money Supply M2 related to the Chinese New Year adjustments, 58 (y/y growth rate) 30% PMI manufacturing figures seem to indicate a slowdown in sequential growth (chart 1); 54 25%• Like the flash reading of the February’s 50 HSBC/Markit PMI, most components of the 20% official PMI showed signs of a slowdown from 46 their January levels;• January monetary data were above market 15% 42 expectations (charts 2 and 3). This seems to 2009 2010 2011 2012 2013 Official PMI Manufacturing index suggest the strong desire to borrow and lend PMI HSBC Manufacturing Index 10% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 by market participants, and current relatively Source: China Federation of Logistics & Purchasing; Source: The People’s Bank of China accommodative liquidity conditions; Bloomberg• In the recently released Q4 monetary policy report, the PBOC mentioned possible Chart 4: China Exports and Imports (US$ Bn) 200 inflationary risks. This could suggests that modestly tighter controls are possible. 175 However, a significant change in the monetary 150 policy stance is not likely if inflation data 125 continues to be benign; 100• January exports and imports growth were up 75 very strongly (chart 4). However, this probably 50 reflects Chinese New Year distortions. The 25 Chinese New Year was in January last year and 2006 2007 2008 2009 2010 2011 2012 2013 Exports Imports in February this year. Source: National Bureau of Statistics Source: National Bureau of Statistics
Markets ‐ EquitiesUS Equity Markets: Investors are looking past politics to improving economic growth • Main indices remain supported by the belief Chart1 : S&P 500 Operating Earnings P/E (x) that tail risks have come down. However, 30 some consolidation has occurred, reflecting a 26 correction in global risk appetite (US Sequestration, Italian elections, minutes from 22 January’s FOMC meeting); 18• The three‐month rate of change of the S&P 500 has continued to rise, even as US macro 14 surprises turned negative. Nevertheless, the 10 economic surprise index for the US has 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Operating Earnings P/E (bottom up ests) recently started to improve again (chart 3); Average (1988‐2012)• Bottom‐up consensus forecasts $111 and Source: Standard and Poors Source: Standard and Poors $125 of EPS for 2013 and 2014, which implies EPS growth of 15% in 2013 and of 13% in Chart 4: US Headline Inflation and Chart 3: S&P 500 and US Macro Surprises Inflation Expectations 20 150 2014. In Q4 2012, 66% of stocks surprised 6 3 15 positively on EPS (chart 2); 5 10 100 4• Despite recent skepticism about the prospect 3 2 5 50 for further monetary easing (chart 4), the Fed 2 0 0 1 is likely to still topping up the punch bowl 1 ‐5 0 ‐50 (even if at a slower rate) given that the ‐1 0 ‐10 unemployment rate remains at a high level; ‐100 ‐2 ‐15• The biggest risk is still that economic ‐3 ‐1 ‐20 ‐150 06 07 08 09 10 11 12 13 10 11 12 13 conditions don´t return to normal, i.e. that US CPI (% y/y, LHS) S&P 500 (%, 3m change, LHS) US economic growth doesn´t reaccelerate as 5‐yr Breakeven Inflation (%, RHS) Citigroup Economic Surprise Index (RHS) expected by market participants. Source: Bloomberg, US Bureau of Labour Statistics Source: Bloomberg
Markets ‐ EquitiesEuropean Markets: Will the Italian election mark the start of another Euro crisis?• The inconclusive outcome of the Italian election, which seems to point to a potentially Chart 1: European Indices ‐ 2013 P/E Ratios Chart 2: Citigroup Short term Macro Risk Index 1.0 long period of political uncertainty, has 16.1 0.9 prompted some renewed pressure on the 0.8 European stock market indices (charts 2 and 4). 14.5 0.7 14.0 Nevertheless, the ECB has effectively 0.6 committed to be a lender of last resort through 0.5 0.4 its OMT programme; 11.7 0.3 11.5 11.5 11.4• Despite a clear improvement in Germany’s 11.3 10.8 0.2 economic momentum, Euro area is still 0.1 probably stuck in a zero/negative growth 0.0 FTSE 100 DAX CAC 40 IBEX 35 FTSEMIB PSI 20 AEX SMI OMX Jan‐12 Abr‐12 Jul‐12 Out‐12 Jan‐13 territory; Source: Bloomberg Source: Bloomberg• The Q4 2012 European earnings season Chart 4: European Markets Relative Performance continues to be positive and shows 130 improvement compared to Q3. However, 120 earnings estimates have declined over last 110 month. Earnings momentum has been negative in Europe for almost two years. 100 Consensus bottom‐up 2013 earnings growth 90 forecasts stands at 6%; 80• Valuation remains moderate (chart 1). A (slow) 70 recovery in European economic growth and Jan‐12 Abr‐12 Jul‐12 Out‐12 Jan‐13 declining risk premia are expected to support Peripheral Markets Core Markets equity returns in Europe. However, Europe is Peripheral markets include Portugal, Spain and Italy Core markets include France, Germany and the Netherlands likely to continue underperforming given a Source: Bloomberg Source: Bloomberg poor earnings momentum.
Markets ‐ EquitiesPortuguese Equities: Still driven by the sovereign risk premia• Portugal’s benchmark stock index declined by Table 1: PSI 20 Q4 2012 earnings results 3.5% in February, after rising 9.7% the month Companies ‐‐‐ Net Income ‐‐‐ Sector Reported Total Beat Missed Met before (chart 2); Energy 1 1 0 0 1 Industrials 3 5 0 3 0• Our February top picks portfolio posted a Consumer Discretionary 0 1 0 0 0 Consumer Staples 1 2 0 1 0 combined performance of ‐6.7%, and Financials (*) 3 4 2 1 0 underperformed its benchmark by 3.5%. In Telecommunication Services Utilities 2 1 3 3 0 1 2 0 0 0 March, we keep BES (as a pure play on the PSI 20 11 19 3 7 1 ‐‐‐‐‐ Revenues ‐‐‐‐‐ sovereign evolution), Portucel (despite lower Sector Beat Missed Met Energy 1 0 0 UWF paper prices since YE12), and Jerónimo Industrials 1 2 0 Consumer Discretionary 0 0 0 Martins (good execution, Poland on track). We Consumer Staples 1 0 0 Financials (*) 3 0 0 remove Portugal Telecom and add EDP Telecommunication Services 1 1 0 Renováveis; Utilities PSI 20 1 8 0 3 0 0• EDP Renováveis reported FY12 results above (*) Excluding BANIF Source: Bloomberg, Fincor Source: Company Reports consensus expectations. The Board proposed a inaugural dividend (28% payout). Further Chart 3: Financial Stocks Relative Performance 300 minority stake disposals are expected in the 100 = Dec 31, 2011 coming months, which is expected to support 250 the stock price (chart 1); BES BCP 200 BPI• The earnings season has been relatively poor (table 1). So far 11 companies have reported Q4 150 2012 results (out of a total of 19 we expect to 100 include). 27% of companies reporting have beaten estimates and 64% have missed 50 estimates. On sales, 73% of companies 0 reporting have beaten estimates and only 27% Dez‐11 Mar‐12 Jun‐12 Set‐12 Dez‐12 Mar‐13 Source: Bloomberg Source: Bloomberg have missed estimates.
Markets ‐ EquitiesSpanish Equities: IBEX 35 drops 1.6% in February but outperforms the PSI 20 • Our February top picks portfolio (Mapfre, Abertis and Tecnicas Reunidas) posted a Chart 1: Best Performances in February Chart 2: Worst Performances in February combined performance of 8.5% (chart 3), and ‐10% Arcelor Mittal outperformed its benchmark by 5.1% in the Obrasco Huarte 16% period from February 4th to March 1st. In March, Bankinter ‐7% Acciona 15% we keep Mapfre, remove Tecnicas Reunidas ‐6% Sabadell (but still like the story in the medium‐term) and Mapfre 13% Abertis (after the strong move in February), and Grifols 12% ‐4% BME add Telefonica and Repsol;• Q4 2012 results pointed to stronger‐than‐ IAG 12% ‐1% FCC expected domestic cost cutting and improved KPIs by Telefonica (chart 4). With LatAm growth Source: Bloomberg Source: Bloomberg set to continue, the stock price could eventually recover in March some of the lost ground; Chart 3: Relative Performance• Repsol’s upstream production increased by 11% 108 y/y in 2012. This growth is expected to continue 106 this year, supported by new fields start‐ups. 104 Moreover, the company has announced the 102 sale of its LNG business, which is expected to 100 allow the company to avoid a credit rating 98 Top Picks downgrade to junk; IBEX 35• Despite important progress (e.g. the 96 restructuring of the banking sector), the 94 31‐Jan 07‐Fev 14‐Fev 21‐Fev 28‐Fev 07‐Mar 14‐Mar economic backdrop remains difficult. Spain Source: Company Reports Source: Bloomberg, Fincor could still need to apply for the OMT programme in the near future.
Markets – Corporate BondsCorporate Bonds: Political issues returns to the forefront• In Italy, subordinated bank debt suffered the Chart 1: US Corporate Credit Chart 2: European Financials Corporate Spreads largest losses post‐election. However, the more 115 103 350 interesting development was the resilience in 110 102 300 Italian high yield issuers. In Spain, the market 105 101 reaction has been more contained; 100 100 250• The Italian political situation remains an 95 99 200 important headwind to peripheral corporate 90 98 credit (charts 1 and 2). Given weak domestic 85 97 150 economic environments, investors face both 80 96 100 sovereign‐ and credit‐specific risks; Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13• The market will likely monitor possible spillover CDS Spread 5‐yr US IG (RHS, bps) Europe CDS Financials Senior 5‐yr (bps) CDS Spread 5‐yr US HY (LHS, bps) effects of the Italian political impasse on Europe CDS Financials Subordinated 5‐yr (bps) economic growth, and how the rating agencies Source: Bloomberg Source: Bloomberg view Italy’s sovereign rating in the coming Chart 3: European High Yield Indices 230 600 months;• In the US, in the coming weeks and months, US 550 210 political negotiations related to the Continuing 500 Resolution (expires March 27th) and the Debt 190 Ceiling (reinstated May 19th) will probably take 450 center stage. Across the board spending cuts 170 400 have already taken place on March 1st, since there was no last‐minute agreement. Despite 150 350 these political uncertainties, the macro Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 environment remains supportive to US IG and Markit iTraxx HiVol Europe 5‐year (bps, LHS) HY. However, HY remains call‐constrained given Markit iTraxx Crossover Europe 5‐year (bps, RHS) Source: Bloomberg Source: Bloomberg the current low interest rate environment.
Markets – Sovereign BondsSovereign Bonds: Euro core rates rally on the Italian election outcome• The inconclusive Italian election caused core rate to fall (chart 1), associated to a sell‐off in Italian Chart 1: Core Government 10‐yr Bond Yields (%) Chart 2: Euro Peripheral 10‐yr Government Bond Yields (%) 6.0 9.5 BTPs (chart 2). Risks remain substantial. 2.4 9.0 Nevertheless, Investors seem to be cautiously 2.2 5.5 8.5 optimistic that Italy’s newly government will 2.0 8.0 maintain a credible fiscal path. If that turns out to 1.8 5.0 7.5 7.0 be wrong, there is surely room for markets to 1.6 6.5 move much further; 1.4 4.5 6.0• Italian debt is largely domestically owned. 1.2 5.5 Moreover, the OMT programme is still perceived 1.0 4.0 5.0 by the market as a credible backstop. Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 France Germany Nevertheless, Italy has driven systematic Italy (LHS) Spain (LHS) Portugal (RHS) Source: Bloomberg Source: Bloomberg indicators higher, given the size of the sovereign debt of the country. The election outcome has raised market concerns on a rating downgrade for Chart 4: 10‐yr Treasuries Yield (%) Chart 3: UK 10‐yr Government Bond Yield (%) 2.1 2.2 Italy, given that all three rating agencies have Italy on a Negative Outlook. However, Italy has 2.0 2.1 relatively better ratings when compared to Spain; 1.9 2.0• A higher probability of QE has forced investors to 1.8 1.9 reconsider their positions in the Gilt market (chart 3); 1.7 1.8• The US Treasury market was also supported by 1.6 1.7 the Italian election outcome (chart 4). However, 1.5 we could see higher Treasury yields and a Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 1.6 Out‐12 Nov‐12 Dez‐12 Jan‐13 Fev‐13 Mar‐13 steeper yield curve into the March 19th‐20th Source: Bloomberg Source: Bloomberg FOMC meeting.
March PreviewEurogroup/ECOFIN meetings to be held on March 4th and March 5th• At this meeting, European officials are due to discuss the option Chart 1: Deposits of Euro area residents (€bn) set for assisting Ireland and Portugal in moving back to sustainable 2,400 350 market financing. Both countries are expected to continue to 2,300 330 rebuild their presence in primary markets in order to ensure 2,200 qualification for the OMT programme. According to recent 310 2,100 comments from ECB Executive Board Member Benoit Coeure, Ireland and Portugal do not yet have sufficient access to bond 2,000 290 market to qualify for OMT: "So this is the discussion that were 1,900 Spain (LHS) 270 having in particular when it comes to Ireland and Portugal, that 1,800 Italy (LHS) Portugal (RHS) OMT can be available at some point when countries have regained 1,700 250 sufficient market access, which is not the case today in our 08 09 10 11 12 13 14 judgment“; Source: European Central Bank• Moreover, Commissioner Rehn has already said that he wants to Chart 2: Loans to Euro area Residents (% y/y) discuss a possible extension in the maturities of EFSF and EFSM 35 loans and precautionary credit lines via the ESM with 30 Spain complementary ECB bond‐buying; 25 Italy• Also on the agenda are the second review of the Greek loan 20 Portugal programme, the second review of the Spanish bank 15 recapitalization programme, and the discussion of the 10 Commission’s winter forecast revisions and its implications for the 5 excessive deficit procedures; 0• Talks of the Cypriot bailout could also continue, following the ‐5 appointement of the new Cypriot cabinet; ‐10 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14• On March 14th‐15th, European Leaders will have the usual Source: European Central Bank quarterly meeting in Brussels.
March PreviewECB to hold an Interest Rate Meeting on March 7th• The ECB is not expected to announce any policy easing at the March 7th Interest Rate meeting. Further cuts in interest rates are likely to require a strong negative shock to the outlook. Repairing the monetary transmission mechanism, which implies additional non‐ conventional measures, will probably remain the main focus of the Governing Council. The ECB should repeat the message that the monetary policy is and will remain accomodative;• The Euro exchange rate is off its highs, which reduces the risk of immediate ECB action. At the February press conference, the ECB President Draghi mentioned that the Euro “is important for growth and price stability”;• Most recent economic data available since the February ECB Source: Ifo Institute meeting have been mixed. After rising for three consecutive months, the Euro area composite PMI declined in February. Moreover, the larger‐than‐expected decline in Euro area Q4 2012 Table 1: ECB Staff Macro Projections for the Euro area in 2013 (%, mid‐points, avg annual changes) GDP showed that the economy weakened further at the end of last Mar 12 Jun 12 Sep 12 Dec 12 year. Nevertheless, the strong increase in the German Ifo was HICP 1.6 1.6 1.9 1.6 encouraging (chart 1). The Euro area economy seems to remain Real GDP 1.1 1.0 0.5 ‐0.3 weak and probably stuck in recession, which seems to be consistent Private consumption 0.8 0.5 0.0 ‐0.6 Government consumption 0.6 0.0 ‐0.2 ‐0.6 with the ECB Governing Council’s view expressed in February; Gross fixed capital formation 1.4 1.5 0.5 ‐2.6• The Governing Council will probably continue to view the risks to Exports (goods and services) 4.4 5.0 4.6 2.3 the economic outlook as being on the downside; Imports (goods and servies) 4.0 4.4 3.7 1.0• New ECB staff forecasts will be published (table 1). They are likely to Source: European Central Bank reinforce the view that ECB policy is going to remain accommodative.
March PreviewNew Italian Parliament is expected to convene by mid‐March• According to the Italian Constitution, the first session of the new Parliament has to occur within 20 days of the elections. In the current case, this would point to March 17th, which is a Sunday. Hence, the first session should take place no later than March 15th;• The next step is the election of the Presidents of the two houses. The head of each parliamentarian group will then be chosen. The President of the Republic will then consult with the Presidents of the two houses, the heads of the parliamentarian groups and the heads of the coalitions. The President of the Republic will give the task of forming a government to the candidate who is most likely to succeed;• The President of the Republic will try to limit the uncertainty to Source: European Commission avoid market turbulence, but a solution to find a way out of the gridlock could be weeks away. A PD‐led minority government with support from M5S, a government of national unity and a grand coalition between PD and PdL seem to be the options that are right now on the table;• Given the huge debt stock of 127% of GDP, the debt‐sustainability of Italy can quickly be questioned again by markets. To make the country less vulnerable to this risk, it is important that the debt stock comes down over time through GDP growth, moderate borrowing costs and a primary budget balance. Markets hope that the government will not backtrack on any of the Monti‐reforms and implement growth‐enhancing structural reforms, as well as Source: Italian Ministry of Interior (much needed) political reforms.
March PreviewBank of England holds a MPC meeting on March 7th• The Bank of England will hold another Monetary Policy Meeting. A Chart 1: Gilts Yields (%) decision is expected to be announced on March 7th at 12:00 GMT; 6• The minutes from the February decision show that three members 5 of the MPC (including Governor King) voted for an extension of QE policy by £25bn (1.5% of GDP) to £400bn; 4• In recent speeches, several MPC members suggested that, if 3 necessary, further asset purchases were possible; 2 2‐yr• The recent retail sales report and PMI manufacturing were weak 5‐yr and could have tip the committee into announcing another round 1 10‐yr of QE. However, it is probably still a close call; 0• The most important development for the UK economy since the 06 07 08 09 10 11 12 13 February meeting has been the decline in Sterling, and the Source: Bloomberg decision by Moody’s to downgrade the UK from AAA to Aa1;• Any vote to extend QE, should it occur, is expected to be worth £25bn;• However, the focus of the Bank of England’s policy actions has recently shifted from Gilt purchases towards credit easing and other unconventional measures. In the view of the MPC, “… it seemed possible that a further broad‐based monetary stimulus would on its own be insufficient to transform the outlook for growth…” and “… interventions more targeted at particular frictions or market failures in the economy were likely to be more effective.” Source: Labour Force Survey
March PreviewFOMC weighs the costs and benefits of more QE on March 19th‐ 20th• The minutes from the most recent FOMC Chart 1: Breakdown of 5‐year Treasury meeting in late January pointed to rising 2.5 Yield (%) ‐0.6 fears over the potential costs from further quantitative easing; ‐0.8• Ben Bernanke’s semi‐annual testimony ‐1.0 confirmed that the FOMC is paying more 2.0 ‐1.2 attention to the potential costs of continuing with its QE in 2013; ‐1.4• However, the Fed Chairman still appears to ‐1.6 believe that the benefits outweigh the 1.5 ‐1.8 costs. He mentioned that "keeping longer‐ Jan‐12 Jul‐12 Jan‐13 term interest rates low has helped spark Breakeven Inflation Rate (LHS) Real Yield (RHS) recovery in the housing market and led to Source: Bloomberg Source: Bloomberg increased sales and production of Chart 3: automobiles and other durable goods“;• Ben Bernanke considered that shrinking the “For example, a study based on the Fed’s balance sheet could lead to net losses, Federal Reserve Board’s FRB/US model estimated that, as of 2012, the first two which would halt remittances to the rounds of LSAPs had raised real gross Treasury; domestic product almost 3 percent and• According to January’s minutes, the FOMC increased private payroll employment plans to review its assets purchases at the by about 3 million jobs, while lowering two‐day meeting, which concludes on the unemployment rate about 1.5 March 20th. It seems to be increasingly likely percentage points, relative to what would have been expected otherwise.” that the Fed will slow the pace of its monthly purchases soon. Source: Federal Reserve In Monetary Policy Report, February 26th, 2013
March PreviewChina: National People’s Congress meeting will be held from March 5th onwards• The National People’s Congress has announced that this year’s Chart 1: China Real GDP Growth (y/y) annual session will be held from March 5th onwards. Typically, the 12% session lasts for about two weeks; 11%• The National People’s Congress is not an event that policy makers 10% decide on cyclical policy directions;• GDP (which should be regarded as the lower bound), CPI (which 9% should be regarded as the government’s tolerance zone), M2 8% (which should be regarded as the desired level) and fiscal balance 7% targets for 2013 will probably be announced in the opening day; 6%• All senior government officials from the ministerial level up to the 2007 2008 2009 2010 2011 2012 president of China will be officially appointed by the National Source: Bloomberg People’s Congress;• During the National People’s Congress, ministers may release goals Chart 2: China CPI Inflation (y/y) and measures in terms of the Urbanization (probably a key focus 10% area for the new government) and Property (will the government 8% release further property thightening measures, on top of the 6% recently announced measures?) policies; 4%• The market expects China’s 2013 budget target to be set at a 2% larger deficit than the 1.5% that was set in the 2012 budget. 0% However, this could not necessarily represent a significantly ‐2% looser fiscal policy if the actual deficit in 2012 was larger than ‐4% what was set in the budget. 05 06 07 08 09 10 11 12 13 Source: Bloomberg
Charts we are watching• February was a month of divergent asset class returns. Commodities performed poorly. The CRB index reversed January´s gains, and is now 380 Commodities and US Dollar 1.50 down 0.7% since the beginning of 2013. Much of this performance can 360 1.45 probably be explained by the strength in the Dollar. Moreover, 340 1.40 uncertainty following the Italian parliamentary elections caused weak 320 1.35 sentiment across commodity markets. In base metals, nickel and 300 1.30 aluminum have led the sell‐off. With business confidence in China dipping 280 1.25 in February, markets believe that China’s appetite for commodities is 260 1.20 slowing. The news flow from the 12th National People´s Congress in 240 220 1.15 March could be key for sentiment in the base metals, particularly if the 2010 2011 2012 2013 new government announces additional infrastructure spending or policy Thomson Reuters/Jefferies CRB Commodity Index (LHS) EURUSD Spot Rate (RHS) stimulus. Oil has also been in a downward drift. However, several Source: Bloomberg geopolitical elements remain in the backdrop and could provide the next catalyst• A last‐minute agreement on the US Sequestration was not possible. Therefore, the provisions of the Budget Control Act creates automatic cuts (0.5% of GDP in 2013) on Federal government’s spending since March 1st. March 27th is probably the next date to watch carefully, as the Continuing Resolution expires. If no action is taken, government could face temporarily a shutdown. Markets are likely to face again the prospect of difficult negociations and lots of political noise. Nevertheless, investors seem to have adopted some complacency over the US debt ceiling debate. This probably reflects current US economic backdrop, with the economy expected to grow by 2% in 2013. Moreover, if the fiscal Source: Congressional Budget Office tightening proves damaging, Fed QE policy could last longer.
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