Daily Note – Weaning the stock market junkie off the Fed


Eurozone: Is the ECB beginning to panic ?

Ukraine: Russia’s unfinished business ?

United States: Fisher intent on weaning stick market junkie off Fed dealer

Australia: In a policy cul de sac?


Good morning,

Are we seeing the unfinished business of 1991 coming back to haunt us? In 1991, I lived in Russia in the tiny town of Ruza (about 100 miles to the west of Moscow) when the Soviet Union was breaking apart. It was not a pretty sight on the ground. Western Russia was full of racist movements determined to impose Mother Russsia’s will on these breakaway upstart States.

As things panned out, the peaceful breakup of the Soviet Union was one of the most spectacular successes in  geo-political realignment the world has ever seen. But there was always Ukraine. Ukraine is different because it is still, in the eyes on many Russians, part of Russia. More importantly, for millions of Russians living in Ukraine, western Ukraine and Crimea are Russia.

News this morning that Russian separatists have stormed the Crimean Parliament is not unexpected and it is not good.

Yesterday, Ukraine’s acting President Turchynov stated  that Russia’s Black Sea troop movements will be seen as an act of aggression-  but again, what did they expect? They depose a democratically elected President, wrap themselves in the flag of western Ukranian Unitarian Catholic nationalism and think the Orthodox Russians in the East are just going to say ten Our Fathers and a few Hail Marys!

From the market’s point of view, the EU won’t let the Ukranians default in the next three months, but bridging finance to pay a few downpayments is not the same as solvency. Ukraine will not pay the money it owes, period.

If we take the Black Sea area in its totality we are talking about Russia, Ukraine and of course Turkey. The Russian Rouble continues to weaken and now is dragging the Turkish Lira with it – as if Turkey didn’t have enough problems of its own (see chart below).

I think Russia will be a buy quite soon and will be happy to buy the market, particularly if the currency continues to weaken.

Just to note for new readers where the chart below shows the USD as a higher number, it means it takes more local currency to buy 1$ –  therefore reflecting weakness.

Figure 1: Russian Ruble & Turkish Lira


Eurozone: The ECB are getting all Omen on us

Table 1 27 feb

When I was a kid, I was petrified of the film the Omen and in particular the girl, possessed by the devil,  who could spin her head a full 360 degrees. Now the ECB seems to be playing the same game, which is not quite as terrifying as it is  comical in terms of the central bank’s inability to focus on anything for more than a few days.

The influential ECB board member, Mersch, suggested yesterday that the ECB are considering all options  ahead of next week’s board meeting. When a central bank is full of inflation hawks and inflation has disappeared, it is difficult for these people to change their minds. But I have always been of the view that when the threat is deflation the worse thing we can have is a dogmatic central bank. This is what happened in Germany in 1930!

With some already weaker regional inflation data in Germany this morning, the pressure is building on the EC to do something this week or month. If for no other reason that doing nothing would lead to a move higher in the Euro and this would make deflation worse not better.

This morning, Spanish GDP was revised down from +0.3%qoq to +0.2%qoq. It reveals the ongoing drag to growth from austerity.  Private consumption, investment and net exports all did well but  government consumption was down sharply.

Meanwhile, the junior partner in Cyprus’s governing coalition withdrew its support for the government late Wednesday. The action by center-right Democratic Party, or Diko, was expected and doesn’t directly imperil the government of President Nicos Anastasiades. The departure deprives the coalition of a majority in Cyprus’s Parliament. Without Diko’s support, the government may find it harder to pass unpopular reforms

United States: Despite poor weather New Home sales increased 

Table 2 27 febNew home sales rose 9.6% in January (vs. consensus -3.4%). Taken together with an upward revision to December (+3.2pp to -3.8%), this left the level of new home sales at a new post-recession high of 468,000 (vs. consensus 400,000).

January gains occurred in the South, West and Northeast, while sales fell in the Midwest. As a timely indicator of housing activity, the better-than-expected new home sales report is a welcome departure from recent downside surprises on the NAHB housing market index, housing starts and existing home sales.

But I wouldn’t read too much into one figure when so many indicators have shown weakness. Consider the chart below, particularly the last few observations. While new home sales spiked to a new high yesterday, the broad NAHB housing market sentiment index recently dived lower. So lots of houses are being bought right now, but there’s not a huge amount of confidence in the market in general.

Figure 2: US Housing Starts vs NAHB Housing Market Sentiment Index

US Housing

United States: Fed’s Fisher is trying to wean the Fed off the stockmarket

In the Bernanke years, the Fed incorporated a third policy to its objectives of low inflation and low unemployment and that was implicitly, a higher stock market. This has changed. The new regime at the Fed isn’t too concerned about the Dow. And it said this much yesterday.

Fisher says that he does not expect any pause in $10bn tapering. He also   that not even a significant correction in the stock market would lead him to think that the Fed needs to alter the wind down in purchases.

Meanwhile, in what’s going to be a busy day, Janet Yellen speaks to the US Senate. It will be interesting to see if her view of the world has changed in the last two weeks.

Australia: Poor Q4 Capex spending focuses market attention on next week’s GDP figure

Table 3 27 feb

The poor Aussies are in such a bind – too much of the wrong type of activity and not enough of the right type!

The most important figure from this latest report in terms of the lead up to the 4Q13 GDP release next week is the whopping 8.6% qoq decline in machinery and equipment investment. This was well below our expectation.

Combined with the weak construction data released yesterday, private sector demand growth has likely stalled into the end of 2013.

The key message from the survey is that mining investment will decline by 25% in FY15. Non-mining investment will decline by 2.5% in FY15, resulting in a 17% decline in total investment!

But credit growth and high house prices mean that cutting rates would be counter-productive. Australia is looking more and more like any normal credit bubble right now, and we know how they end.

United Kingdom: Q4 Growth in line with expectations

Table 4 27 febQ4 GDP was unrevised at +0.7%qoq on its second release, in line with expectations (Cons: +0.7%qoq). There were modest revisions to earlier quarters in 2013 which reduced year-on-year growth in Q4 from +2.8%yoy to +2.7%yoy – these are stellar figures in a world of tepid activity.

For me one of the key figures yesterday was the big pickup in business investment (see chart below). I have long talked about the need for corporates to step up and spend some of the cash they have on their balance sheets. Is this a sign of it?

As this chart shows, business expenditure needs to further accelerate if growth is to continue at around 3% this year.

Figure 3: UK Business Investment vs GDP Growth

UK Invest 27 feb

Portfolio: Some recovery in my portfolio in the last 24 hours

Table 5 27 feb

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Global Macro 360-Daily Note-Weaning the stock market junkie off the Fed


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