MacroScope

Safe-haven Canada

The European crisis has thinned the ranks of countries considered safe-havens for investors, and may be contributing to an increase in foreign ownership of Canadian assets. Canada, whose comparatively robust banking sector helped it weather the 2008-2009 financial crisis better than many peers, saw capital inflows in July that helped reverse a June decline, according to the latest figures.

Foreigners resumed their net purchases of Canadian securities in July, taking on C$6.67 billion ($6.88 billion) after having reduced their holdings by C$7.76 billion in June, Statistics Canada said on Monday. Canadian authorities have said foreign investors view Canada as a safe haven. So far this year foreigners have made C$41.23 billion in net purchases, a substantial amount though down from C$54.31 billion seen in the first seven months of 2011.

According to Charles St-Arnaud, economist at Nomura, stocks saw their biggest inflow since February 2011:

Overall, the report shows that foreign investors’ appetite for Canadian assets continues at a steady pace. The sizeable inflow into equity is interesting as it suggests that foreigners have confidence in the medium- to long-term outlook for the Canadian economy.

Foreigners resumed their net purchases of Canadian securities in July, with the government saying investors view the country as a safe haven following the global financial crisis. Join Discussion

No time for complacency

After a tumultuous fortnight where the European Central Bank, U.S. Federal Reserve, German judges and Dutch voters combined to markedly lift the mood on financial markets, we’re probably in for a more humdrum few days, although a raft of economic data this week will be important – a critical mass of analysts are saying that after strong rallies, it will require evidence of real economic recovery, rather than crisis-fighting solutions, to keep stocks heading up into the year-end.

A weekend meeting of EU finance ministers reflected the progress made, but also the remaining potential pitfalls. Our team there reported the atmosphere was notably more relaxed and Spain’s announcement that it would unveil fresh economic reforms alongside its 2013 budget at the end of the month sent a strong signal that a request for bond-buying help from Madrid is likely in October. If made, the ECB could then pile into the secondary market to buy Spanish debt  if required and hopefully drag Italian borrowing costs down in tandem with Spain’s.

BUT. The Nicosia meeting also exposed unresolved differences between Germany and others over plans to build a banking union. German Finance Minister Wolfgang Schaeuble said handing bank oversight to the European Central Bank is not in itself sufficient to allow the euro zone’s rescue fund to directly assist banks – another key plank of the euro zone’s arsenal. It sounds like that debate went nowhere. Having largely been the dog that hasn’t barked so far, public unrest is on the rise with big marches in Portugal and Spain over the weekend against further planned tax hikes and spending cuts.

And, putting further out risks such as Italian elections to one side, it remains to be seen whether euro zone policymakers have learned from previous mistakes when they took their foot off the gas each time the crisis hit a lull. It is noticeable that German officials are already telling anyone who will listen that a Spanish aid programme may well not be necessary given the extent of the country’s borrowing costs since Mario Draghi’s late-July declaration that he would do whatever it takes to save the euro. German Chancellor Angela Merkel’s setpiece news conference today could shed some light here.

Our working hypothesis has been that having put so much effort into shoring up Spain, the euro zone couldn’t conceivably let Greece drop, thereby plunging the whole lot of them back into crisis. That still holds true – Greece must get more time and/or money to meet its bailout targets. But Austrian Finance Minister Maria Fekter muddied the waters on Sunday,  saying Athens would get only “a few more weeks” and no more cash. Fekter has a track record as something of a loose cannon but if she’s right, Greece is doomed, and most importantly for the rest of the euro zone, doomed quickly.

There’s plenty to chew on over the week, notably Spanish, French and German bond auctions, Prime Minister Rajoy holding talks with Catalonia, Spain’s most indebted region, and fresh after elections which kept pro-European parties at the helm, the Netherlands’ 2013 budget plan will be unveiled.

Flash September PMI surveys for the euro zone, Germany and France will serve as a reminder that even if some time has been bought for the euro zone to put its house in order, it is heading firmly for recession with little prospect of a strong recovery thereafter. Germany’s ZEW sentiment index and a slew of British economic data is unlikely to look much prettier.

German Finance Minister Wolfgang Schaeuble questioned the need for a Spanish bailout if the country's borrowing costs continued to fall anyway. Join Discussion

The Fed and QE3: All the polls in one place

With just a couple of hours to go before the world finds out whether the U.S. Federal Reserve will fire up the printing presses again this month, here’s a compilation of polls on the subject from different sources.

Not all are scientific in nature — the CNN and MarketWatch polls are simple yes/no questions open to the public on their websites — but it’s interesting to see that at least anecdotally, there seems to be a divide between the public and the professionals about whether the Fed will start up its bond buying program again.

With thanks to Somya Gupta for compiling.

72%

Economists

69%

Money managers, investment strategists and economists

With just a couple of hours to go before the world finds out whether the U.S. Federal Reserve will fire up the printing presses again, here's a handy compilation of the polls on the subject from different sources. Join Discussion

Olympics provided gold for Team GB, but not the economy

Britain’s Olympic and Paralympic teams may have brought home more medals than organisers had dreamed possible but the Games themselves have probably failed to lift the economy as much as the government had hoped.

The country’s gross domestic product will grow 0.6 percent in the current quarter, according to the latest Reuters poll, revised down from a 0.7 percent prediction in an August poll.

That is enough to drag Britain out of its second recession in four years but most of the bounceback is from an extra working day and better weather in the quarter.

 

“The Olympics’ actual effect will only be small,” said James Knightley at ING Financial Markets.

Before the sporting extravaganza kicked off, Britain’s government touted the Olympics as a historic opportunity to showcase UK business and tourism.

Prime Minister David Cameron suggested the Games would generate 13 billion pounds over four years, on a roughly 9 billion pound cost.

Britain's Olympic and Paralympic teams may have brought home more medals than organisers had dreamed possible but the Games themselves have probably failed to lift the economy as much as the government had hoped. Join Discussion

Do they they think it’s all over?

Is everything falling into place to at least declare a moratorium in the euro zone debt crisis?

Well the ESM rescue fund getting a go-ahead from Germany’s consitutional court and the Dutch opting to vote for the two main pro-European parties, following Mario Draghi’s confirmation last week that the European Central Bank would buy Spanish and Italian bonds if required, means things are starting to look a little rosier.

The risks? Next spring’s Italian election, and what sort of government results, casts a long shadow and it is just about conceivable that Spain could baulk at asking for help, given the strings attached, although the sheer amount of debt it needs to shift by the end of the year will almost certainly force its hand. If the Bundesbank mounted a guerrilla war campaign against the ECB bond-buying programme it could well undermine its effectiveness. That is a big if given broad German political support for the scheme. Key countries remain deep in recession with little prospect of returning to growth because of the imperative to keep eating away at their debt mountains, which could eventually trigger a dramatic public reaction. France could well get dragged into that category.

More generally, there is the previous history of this crisis which has shown that when the heat is lifted, policymakers can take their foot off the pedal. Surely they’ve learned that lesson by now, I hear you cry. Well, Spanish premier Mariano Rajoy was out yesterday saying he was still studying the price to be paid for seeking help but improved market conditions may make aid unnecessary. Spanish 10-year yields have tumbled from around 7.5 percent to 5.7 since Draghi first showed his hand in late July. That’s still too high for Madrid to manage indefinitely. After regional elections in late October, Rajoy may well jump.

Everything achieved in the past week has been about buying policymakers time to put the permanent structures in place to make the euro zone viable in perpetuity. None of it amounts to a permanent solution. Evidence yesterday of a growing row about the scope and powers of a cross-border banking union and a distinctly mixed reception for Barroso’s call for a properly federal Europe shows there’s a lot still to be done. The most profound parts of a banking union, particularly a joint deposit guarantee scheme to prevent bank runs, are not even on the table yet and are likely to take years to introduce.

Nonetheless, given the last week’s events it’s a sound bet that today’s Italian bond auction will sail out of the door even though Rome is selling 15-year paper for the first time in over a year. A hefty 6.5 billion euros of three bonds is on offer and going that far down the maturity scale denotes some confidence. Yields tumbled sharply at a sale of treasury bills on Wednesday. Offering a glimmer of light at the end of the tunnel to its bailed-out peers, Ireland will hold its second T-bill sale of the year with yields expected to fall there too.

The other big event is the Swiss National Bank’s quarterly policy meeting. With the euro climbing versus the safe haven Swiss franc after Draghi’s thunderbolt, some of the pressure to take fresh action may have been removed. The cap imposed on the franc by the SNB has held intact, pretty much, for a year now. A Reuters poll showed economists expect it to hold even under a high stress scenario such as Greece bombing out of the euro zone. The SNB will also issue fresh forecasts which are expected to cut its growth outlook for 2012 to 1 percent from 1.5 percent.

Dutch Prime Minister Mark Rutte wins closely contested election Join Discussion

More Fed QE: done deal or Pavlovian response?

“Will he or won’t he?” That’s what investors, traders and policy-watchers in the financial markets are pondering, frozen at their terminals waiting to find out if Federal Reserve Chairman Ben Bernanke will persuade his colleagues to print more money this week.

Among economists who work for primary bond dealers, the firms who sell government bonds directly to the Fed, there’s a striking conviction rate that he will, 68 percent, according to the latest Reuters Poll of probabilities.

The wider forecasting community isn’t far behind, at 65 percent.

While that kind of probability is more than enough to make people paid handsomely to take huge bets with other people’s money to confidently say something is a done deal, the real policy decision is probably a lot closer.

Indeed, just a few weeks ago, after Bernanke gave a speech at the Fed’s annual conference in Jackson Hole, Wyoming that failed to give a clear signal for the timing of more QE or indeed whether or not he would print more money, the broad consensus among economists and global asset managers was a mere 45 percent chance it would do so at the meeting this week.

That’s about as split down the middle as these unscientific debates through analyst polls can go.

Since then, one major bit of economic news was a set of disappointing payrolls data. Jobs growth in August was 96,000, well below the Reuters Poll consensus for 125,000, and below 141,000 in July, although this is from a survey for which a month-on-month change of 100,000 or greater is considered statistically significant.

This time around, there still appears to be enough conviction that the Fed will do another round of QE, perhaps more as an insurance policy than out of real worry that the U.S. economy, which is doing much better than Europe’s, is about to flat-line or even fall back into recession. Join Discussion

Get me to the court on time

Another blockbuster chapter in the euro zone epic.

Top billing today goes to Germany’s constitutional court, which is expected to give a green light to the euro zone’s permanent rescue fund, the ESM, albeit with some conditions imposed in terms of parliamentary oversight. The ruling begins at 0800 GMT. If the court defied expectations and upheld complaints about the fund, it would lead to the mother of all market sell-offs and plunge the euro zone into its deepest crisis yet.

Without the ESM, the European Central Bank’s carefully constructed plan to backstop the euro zone would be in tatters. It has said it will only intervene to buy the bonds of the bloc’s strugglers if they first seek help from the rescue fund and sign up to the strings that will be attached. The first rescue fund, the EFSF, could perhaps fill this role for a while but its resources are now threadbare, so without the ESM, markets would scent blood.

The Dutch go to the polls but with the hard-left Socialists seemingly losing support, the ruling Liberal party and moderate centre-left Labour are  neck-and-neck and look likely to form a coalition government committed to tight debt control and, more importantly, to the euro zone. So unless voters are lying to pollsters, some of the drama has leached out of this particular saga although it could take some considerable time to put a coalition together.

The other big plank of the day is the unveiling of the European Commission’s plan for banking union and cross-border supervision. Brussels is already at odds with Germany. Berlin wants only the 30 or so very biggest European banks to be put under ECB supervision, the Commission wants all banks to be under its umbrella, or at least the roughly 200 which account for 95 percent of euro zone banking assets. Further wrangling leading to delay would send a bad signal just as ECB chief Mario Draghi has cheered markets up. And it should be noted that the most profound parts of a banking union, particularly a joint deposit guarantee scheme to prevent bank runs, are not even on the table yet and are likely to take years to introduce.

Don’t think that that’s your lot. Bundesbank President Jens Weidmann breaks cover for the first time since he opposed the ECB’s new bond-buying plan at is policy meeting last week. Whether he reaffirms his anti- stance in today’s speech will be a key indication of whether he intends to simmer down now, or fight a guerrilla war against the plan to help Spain and Italy, which is already finding purchase with the German public and media. If he goes down the latter route, events of last year show there could be serious implications for how aggressive and effective the ECB can be in the bond market.

Angela Merkel, who appears perfectly happy with the Draghi plan, not least because it won’t directly cost the German taxpayer, but does not want to cut Weidmann loose, speaks in parliament, where she is also expected to address the court ruling on the ESM. The big question is whether Spain can stomach the conditions which will be attached to bond-buying help. The fact Spain’s debt numbers are going the wrong way will almost certainly force Madrid’s hand. Prime Minister Mariano Rajoy met his Finnish counterpart yesterday and today Finland’s newspapers are running stories saying Rajoy will turn to the ECB in order to avoid a full sovereign bailout. Crucially, he also seems to have said he has no objection to the IMF being involved in setting the conditions for help, which we had thought would be very hard to swallow. Rajoy speaks in parliament this morning.

Judges at the German constitutional court. Join Discussion

Not enough jobs? Blame the government

The U.S. labor market has been adding jobs for two-and-a-half years, helping bring down the jobless rate from a peak of 10 percent in late 2009 to the current 8.1 percent rate. But recently, job growth has slowed to under 100,000 per month – not enough to keep the jobless rate on a downward path. Heidi Shierholz at the liberal Economic Policy Institute in Washington says this leaves the U.S. economy well short of achieving its full capacity:

We’d need to add around 350,000 jobs a month to get back to the pre-recession unemployment rate in three years.

With just 96,000 jobs created in August, we’re still a long way off from that kind of strength – and a steady flow of job losses from the public sector isn’t helping. State and local governments have been slashing public payrolls to balance their budgets. In August, the public sector lost 7,000 jobs, but that was mere drop in the bucket of public sector job losses that now total 680,000 lost jobs since August 2008. The total impact is even larger, says Shierholz.

Through ripple effects, the loss of public-sector jobs also causes job loss in the private sector, amplifying the drain on the recovery.

The anemic job growth of the last two-and-a-half years has left the labor market with a deficit of 9.8 million jobs, she said.

The lack of demand for workers means unemployment durations remain extremely high. If emergency unemployment compensation (EUC) benefits are allowed to lapse (as is currently scheduled to happen at the end of this year), only around a quarter of all unemployed workers would be receiving unemployment insurance benefits, the lowest share on record. Given the weakness of the labor market, this would … likely cost about 430,000 jobs. Continuing emergency unemployment insurance benefits should be part of the continuing appropriations legislation that congressional leaders are currently negotiating.

The U.S. economy has seen 680,000 public sector jobs vanish since August 2008. Join Discussion

Another euro zone week to reckon with

Despite Mario Draghi’s game changer, or potential game changer, the coming week’s events still have the power to shape the path of the euro zone debt crisis in a quite decisive way, regardless of the European Central Bank’s offer to buy as many government bonds as needed to buy politicians time to do their work.

The nuclear event would be the German constitutional court ruling on Wednesday that the bloc’s new ESM rescue fund should not come into being, which would leave the ECB’s plans in tatters since its intervention requires a country to seek help from the rescue funds first and the ESM’s predecessor, the EFSF, looks distinctly threadbare. That is unlikely to happen given the court’s previous history but it could well add conditions demanding greater German parliamentary scrutiny and even a future referendum on deeper European integration. For the time being though, the markets are likely to take a binary view. ‘Yes’ to the ESM good, ‘No’ very bad.

Dutch elections on the same day look to have been robbed of some of their potential drama with the firebrand hard-left socialists now slipping in the polls and the fiscally conservative Liberals neck-and-neck with the likeminded centre-left Labour party. But there are no guarantees and Germany could yet be robbed of one of its staunchest allies in the debt crisis debate.

There’s much more… At the end of the week European Union finance ministers gather in Cyprus with a separate meeting of the euro zoners who really count set for the Friday. Spanish officials had suggested that this could be the venue to discuss the details of a sovereign bailout which would offer bond-buying help but the signs now are that Prime Minister Rajoy is dragging his feet in an effort to have as few of the strings that the ECB says is necessary attached as possible. The fall in Spanish borrowing costs thanks to Draghi’s intervention also takes a little of the heat off.

But time is pressing. Spain faces a refinancing crunch in late October so unless Mario Draghi’s verbal intervention is enough to suppress Spanish yields – which may work for a while but probably not for long – it may be tipped into seeking help.

French President Francois Hollande, nervous that his country could get dragged into the mire, wants a solution for Spain and Greece to be nailed at a mid-October EU leaders’ summit. On Greece, the troika of EU/IMF/ECB inspectors will continue their assessment and will struggle to find a chink of light.Over the weekend, Hollande pledged deep cuts next year, meaningful labour reform and lowered his growth forecast — not a pretty mix for a struggling economy.

The fourth plank of yet another pivotal week is the European Commission’s unveiling of its blueprint for a banking union. Once cross-border supervision is established, EU leaders have decided the ESM can refinance banks directly – giving them another string to their crisis-fighting bow – but Brussels is already at odds with Germany. Berlin wants only the 30 or so very biggest European banks to be put under ECB supervision, the Commission wants all banks to be under its umbrella, or at least the roughly 200 which account for 95 percent of euro zone banking assets. Further wrangling leading to delay would send a bad signal just as Draghi has cheered markets up. And it should be noted that the most profound parts of a banking union, particularly a joint deposit guarantee scheme to prevent bank runs, are not even on the table yet and are likely to take years to introduce.

Another pivotal week for the euro zone Join Discussion

The morning after the night before

After some perplexingly negative initial market reaction to the Draghi gambit everything turned around. European stocks leapt nearly 2.5 percent yesterday and Asian shares are set to bank their biggest daily gain in six weeks. Italian and Spanish borrowing costs have fallen markedly.

The fact that the ECB has set no limit on how many bonds it might buy marks this scheme out as very different to its predecessor but we’ve seen many false dawns before so it behoves us to keep an eye on what might prevent ECB President Mario Draghi drawing a line under nearly three years of debt crisis.

       1. Could Bundesbank chief Jens Weidmann, who remains strongly opposed, quit as his predecessor did last year? Very unlikely for now though there could be a later confrontation, on which more below. It was notable how many of Angela Merkel’s political lieutenants were deployed in public to back Draghi yesterday, although the German press have taken an altogether more negative view which could inflame German public opinion.

       2. The biggest risk is that Spain cannot stomach the sort of conditionality and outside intrusion that could be imposed if its seeks help from the euro zone rescue fund, after which the ECB can pile in. Prime Minister Mariano Rajoy declared in advance that he didn’t expect to have to jump through any extra hoops in order to get help. And of course if more austerity is demanded and adhered to, recession will deepen leading to  a Greek-style downward spiral.        

        3. The German constitutional court could rule next Wednesday that the new ESM rescue fund should not come into being. That seems extremely unlikely but conditions could be imposed by the court giving the Bundestag more oversight and a growing number of German lawmakers are against doling out more help to euro zone weaklings.

        4. The other big problem could come further out. If Spain reneges on its austerity pledges because they get too painful or Italy elected an anti-austerity government in the spring and also refused to meet its reform commitments, could the ECB really withdraw support, pushing them into default and watch calamity unfold in the euro zone?  It’s very hard to see how it could so the spectre of moral hazard looms large. At that point it is easy to see the Bundesbank and broader German opinion going truly ballistic.

         Despite all the risks, Draghi has potentially bought the euro zone a considerable period of time. If the LTRO money printing exercise delivered three months of calm at the beginning of the year, this unlimited programme could presumably buy a lot more. Governments now have to use it. As key ECB man Joerg Asmussen says this morning, the central bank could not substitute for government reforms.

ECB President Mario Draghi Join Discussion