Sections
Global Investor: FX Impact, November 7-11
November 14, 2011
Macro Notes This week’s news from Europe—Italy’s 10-year bond yields climbing above 7 percent, and the resignation of Greek and Italian Prime Ministers—meant renewed fears about the viability of the euro. Political measures passed during the week, and a successful Italian debt auction helped reverse some of those fears, but the markets are likely to remain on edge until further progress is made. The continued fear over Europe has underscored the ugly side of currency risk for U.S. investors, as the foreign exchange impact has been negative for all major regions over the past three months. While U.S. investors did well on strengthening foreign currencies for years, 2011 may be a year that reverses the trend.
Macro Notes On Wednesday, Italian sovereign debt yields surpassed the 7 percent mark—widely considered to indicate severe economic distress. Also on Wednesday, Italian Prime Minister Berlusconi announced his intention to step down, sending markets slightly higher. Greek worries were somewhat placated by the appointment of former European Central Bank Vice President Lucas Papademos to Prime Minister of Greece on Thursday. It still remains to be seen whether new leaders will be able to effectively combat the European debt crisis, but the market seems optimistic. The euro fell again last week, but the bigger currency stories are in the Czech Republic, Hungary and Poland. Pretty much every currency in Europe took a dive on Wednesday when Italy’s sovereign debt yields shot up. But while the euro managed to retrace its losses by Monday, other currencies weren’t as lucky. On Thursday, the Czech koruna fell to its weakest level against the euro in over 16 months, as currency traders worried that the Czech Republic’s close trade ties with and reliance on exports to eurozone countries make it vulnerable to the spreading crisis. The koruna recovered a bit on Friday, but not enough to make up for Wednesday’s and Thursday’s losses. On Friday, Hungarian Prime Minister Viktor Orban announced that Hungry is reconsidering whether to adopt the euro. Also on Friday, Fitch downgraded its outlook on Hungary from stable to negative, citing concerns about Hungarian debt amidst anemic economic growth. The Hungarian forint fell nearly 4 percent during the week, before recovering somewhat on Friday. The Polish Central Bank decided to hold interest rates steady for the fifth straight month on Thursday. Although the Polish zloty rose slightly on the news, it was unable to recover from its free fall on Wednesday.
Macro Notes Korea continued its losing streak last week, shrugging off a positive upward economic revision from Fitch. Korea, like many of its neighbors, is wrestling with the competing effects of rising inflation and slowing growth. In the face of such challenges, the Bank of Korea held rates steady for the fifth straight month. This policy measure is a welcome sight for consumers, as household debt in the country is on the rise. Another batch of disappointing Chinese data did the region no favors, as Chinese exports grew at their lowest rate in two years. A miss on the economic giant’s trade surplus figures raises further questions about the country’s ability to withstand the storm of the European debt quagmire. U.S. investors in the Chinese market saw their dollar-denominated portfolios lose more than 3 percent for the week. Meanwhile India, the other Asian BRIC country whose economic vitality is so crucial to the region, experienced another week of heavy selling. The hits seem to keep coming for the Indian market and for the rupee. Factory growth has hit two-year lows, and one of the country’s most respected analysts called the country’s economic situation “grim.” Add it all up and an 8 percent growth rate may be a pipe dream. Even Australia, whose surprising rate cut last week sent the market into a tailspin, was only able to carve out minimal dollar-denominated gains after the Aussie dollar fell further. Taiwan’s economy and market seem to be following the region’s lead as the country’s economic research institute slashed its growth outlook.
Macro Notes Despite the positive movements in Mexican equities, there’s still some worry among investors after the country’s second-highest official and seven others were killed in a helicopter crash. Though some feared the death of Interior Minister Blake Mora was an assassination related to the country’s drug war, Mexican authorities said the crash was caused by foggy weather, and not sabotage. Still, Mora was laid to rest on Nov. 12 amid anxiety that that drug-related violence was escalating in the Latin American nation. This week will bring more perspective to Latin America, as Italy and Greece begin to implement the plans of their new prime ministers. After months of preparation in Latin America for a global economic slowdown, any sign of positive movements in Europe will be warmly welcomed.
Macro Notes The lack of movement in the benchmark rate reflects conflicting pressures facing the country: high inflation and the need for growth. Inflation remains high at 5.7 percent, fueled in part by a rand that’s lost about 17 percent against the dollar year-to-date. Inflation is expected to breech 6 percent next year—the upper bound target set by the central bank. High inflation would typically lead policymakers to raise interest rates. Meanwhile, with Europe’s debt crisis in full blossom, demand for South African products is threatened. They make up about a third of exports. All countries want growth, but South Africa desperately needs it to whittle down its staggering 25 percent unemployment rate. Absent inflationary pressures, the bank would lower rates to spur growth. MTN Group, the largest listing in the iShares MSCI South Africa Fund (NYSEArca: EZA), announced plans for a $1 billion investment in new transmission infrastructure. Local MTN SJ shares decreased following the announcement. In general, the arc of EZA shares followed the news around Italian debt, tanking severely when Italian bond rates peaked for the week, then made up ground Thursday and Friday.
Macro Notes The release of the latest results from the Thomson Reuters University of Michigan Consumer Confidence Index brought more good news. The Univ. of Mich. survey showed consumer confidence rising above expectations and followed last week’s jobs report that showed a slight decline in the unemployment rate. The ensuing rally was enough to wipe out what had been previously looking like another bad week for U.S. equities. While Canadian equities weren’t so fortunate to end the week higher, U.S. investors benefited from a strengthening of the Canadian dollar. The loonie rallied against the U.S. dollar, as oil prices increased and investors flocked back into riskier assets following the good news from the U.S. and Europe on Friday. |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gainers
Losers
Short-Seller’s Guide To GLD
Gold, despite its recent rebound, has gotten clobbered over the past three months.
Looking Beyond VWO And EEM
Broad-based, cap-weighted ETFs were the way to play emerging markets over the past decade. But it’s time for investors to become more strategic and look beyond VWO and EEM.
|
|
|
|
JP Morgan & ETN Credit Risk
Paul & Ugo discuss the implications of J.P. Morgan's $2 billion loss, the European debt crisis and what it means for ETN investors.
See All
