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Global Investor: FX Impact, October 24-28
October 31, 2011
Macro Notes Last week’s news that Europe plans to expand its bailout fund and force investor write-downs of Greek debt appears to have lifted markets around the world. The news eased fears about potential fallout from the European debt crisis, paving the way for a domestic stock rally, and also renewed confidence in currencies worldwide. That said, the most noteworthy feature of the week was the strength of Latin American currencies, which rallied more than the euro. In particular, the Brazilian real gained more than 6 percent on the week, racking up a more than 11 percent return, in dollar terms on the MSCI Index. The move underscores the point that news in Europe is driving not just speculation in European securities, but appetite for risk worldwide.
Macro Notes European currencies strengthened alongside equities, resulting in significant gains for those invested in dollar-denominated indexes. The euro appreciated nearly 2 percent against the dollar, but the real currency story is Turkey. The lira appreciated more than 5 percent following the Turkish central bank’s decision to more than double its overnight interest rate. As the lira strengthened through the week, the gap between the local and USD MSCI Turkey Index widened to as much as 5.1 percent.
Macro Notes Still, some gained more than others, and China was last week’s clear winner. Local as well as foreign investors had something to smile about, as the nation’s benchmark index marked its highest weekly gain in a year. U.S. investors registered profits slightly above those of their Chinese counterparts. Chinese energy and real estate companies looked particularly attractive. Petro China rallied to a two-week high, successfully beating previous profit estimates. Meanwhile, shares of real estate companies, such as Poly Real Estate Group Co. and China Vanke Co., jumped, following a local newspaper report saying future deposits required for bidding on land may be lowered by as much as 20 percent. Also, confidence in the Chinese economy was bolstered by an agreement to purchase Sweden-based automaker Saab. Zhejiang Youngman Lotus Automobile and Pang Da Automobile paid $140 million for cash-strapped Saab. Although ending the week in the green, New Zealand sported the lowest gains for investors—.57 percent for U.S. investors and a mere 0.98 percent gain for locals. A month after Standard & Poor’s downgraded New Zealand’s long-term foreign currency rating to “AA” from “AA+,” investors remain wary. However, the country is benefiting from the eurozone’s progress in addressing its debt issues as well as its ongoing trade with neighboring countries such as Australia and China. There are some murmurs that Moody’s may follow in S&P’s footsteps to downgrade the nation’s credit rating, but for now, these are simply rumors. U.S. investors remain safe as long as the kiwi dollar doesn’t lose ground. Although German and French officials made huge headway in resolving the crisis, much remains to be sorted out. New regulations will require European banks to meet stress-test requirements by raising $150 billion in new capital. The market is likely to focus intensively in the coming months on how banks will meet next year’s requirements. For now, investors’ eyes have turned to Italy and its weaknesses, and also on China, and the role it’s likely to play in helping Europe resolve its credit troubles.
Macro Notes With the exception of the well-managed Peruvian nuevo sol, all currencies within our MSCI Latin American section rallied throughout the week. Still, when it comes to areas like Chile, copper traders are rumored to be bearish on concern that demand will slow in China. Though Europe may finally be on track to confront its sovereign debt issues, concerns of a slowing Chinese economy create issues for commodity-exporting countries like Brazil and Chile. Should China’s appetite for raw materials slow down, Latin American nations might be faced with a new obstacle on the road to growth. For now, let’s take some solace in the fact that Europe has allowed the rest of the global markets to take a breather.
Macro Notes Local returns as well as FX impact received a major boost last Thursday from the European debt pact. Earlier in the week, the macro news was gloomy enough to take some belt-tightening measures off the table. Plans to rein in deficit spending were scrapped in the face of weak tax revenue. The South African government will instead continue to spend to prop up the economy and spur job growth. Government officials blamed the lack of tax revenue on the challenging global macro environment and continued uncertainty from eurozone debt crisis. Demand for South Africa’s exports is hurt by weak growth in developed as well as emerging markets. In the long run, the government hopes to reduce unemployment—now at a staggering 25 percent according to TradingEconomics.com—to 14 percent by 2020. In Israel, Teva shares dropped more than 5 percent intraday last Wednesday after a rival’s drug for MS showed promise in a much anticipated study. Potential annual sales for a successful product were estimated to be $3 billion. The broad rally the next day helped equities across the board.
Macro Notes Broad outlines of the pact include a 50 percent haircut to private holders of Greek debt and an increase in the size of the European Financial Stability Facility to $1.4 trillion. The details remain to be seen, but the framework was enough to send U.S. markets up roughly 2 percent at the open last Thursday morning. Earnings news started poorly but improved as the week wore on. Amazon dominated tech headlines when it missed by a mile on an earnings drop of 73 percent. Netflix share prices swooned 35 percent last Tuesday on news that 800,000 users defected. IBM authorized an additional $7 billion in stock buybacks. Chief Executive Whitman announced HP was back in the PC business, adding her own twist to her predecessor’s zigzag course. On the energy front, Exxon and Chevron posted strong profits. High oil prices trumped lower production for the quarter. Ford Motor Co. beat estimates on strong profits. CEO Mulally hopes to restore dividends soon, and unions ratified a labor contract, removing that uncertainty. Macro data was mixed. Consumer confidence came in the lowest in 2 1/2 years. Durable orders improved though, beating expectations. New home sales were up and new jobless claims fell, though job growth remains anemic. The good news was tempered. U.S. third-quarter growth in gross domestic product came in strong at a 2.5 percent annualized basis. This figure brought GDP back to precrisis levels. However, that comparison doesn’t look as favorable when measured on a per capita basis due to population growth. Consumer spending—a key driver of economic recovery—rose, but was propelled by decreased savings rather than increased income. Lastly, the Congressional Budget Office threw red meat to Occupy Wall St. squatters in city parks, reporting that the top 1 percent of income growth has soared 275 percent over the past 30 years while the bottom quintile averaged only 18 percent. The VIX pointed down last Thursday and Friday. If Europe debt woes recede, earnings and macro data seem to point toward calmer waters in the near term. Special note: NYSE reported issues with market close data for Thursday, Oct. 27. Affected securities include the SPDR S&P 500 ETF Trust (NYSEArca: SPY). NYSE says it’s working to correct the tape. |
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