The general improvement in sentiment in the financial markets over the past month has also been evident in the commodity markets.
There has been further evidence that the global economic recovery in continuing, there has been more support for the view that the pressures resulting from the sovereign debt crisis in Europe may be easing.
As a result, base metals are generally lower over the month, even after the rally on the latest Chinese announcement about the renminbi; most soft commodity prices are slightly lower, although there have been sharp rises in beverage prices on concerns about future supplies; precious metal prices have moved higher as investors have continued to seek “safe havens in the storm”; and there has been a strong recovery in oil prices, helped by optimistic signs of a pick up in US demand.
Base metal prices are ending the past month well above recent low levels, but still slightly lower overall, and there has been an additional boost to confidence in the announcement of a “more flexible” policy towards the renminbi.
It is assumed that even a modest appreciation of the Chinese currency will boost the purchasing power of Chinese buyers, and increase still further China’s position as the world’s largest importer of a broad range of global commodities.
But there is clearly a risk that the importance of this fairly modest move is being exaggerated; and the extent of the earlier reaction should be a powerful warning of the degree of speculative activity in the markets, and the vulnerability of prices. Chinese demand clearly remains a critical factor, and the evidence suggests that it will remain reasonably strong.
Soft commodity markets have again produced a more mixed performance.
Movements in grain prices have been fairly modest, although there has been some support from a recent report by the US Department of Agriculture that the increasing importance of ethanol production will continue to draw down stock levels and help to offset the effects of what is expected to be a bumper grain crop this year.
Most price movements elsewhere have been fairly small; but there have been two significant exceptions. Cocoa prices have been pushed to their highest levels for more than 30 years because of disappointing crop levels in West Africa, and particularly in the Ivory Coast, and the warning that the fall in production will continue unless there is significant investment in new trees and in fertilisers.
There are fears that demand will outstrip supply for the fifth successive year in the 2010/2011 season, and this has forced cocoa buyers to push up prices to cover their requirements, and has exposed the position of banks and others that sold call options in the expectation that prices would fall. The second significant exception has been coffee prices, which have increased by almost 20% during the past month.
The indications are that one commodity-trading house has accumulated a very large number of futures contracts and has indicated that it intends to take delivery of the coffee.
Other funds that had sold futures contracts short have been unable to obtain the coffee to honour those contracts, and so have been forced to scramble to close them and have suffered considerable losses as prices have moved higher.
It is not yet clear whether this technical position has now been cleared; but the fundamentals do not appear to justify the price action, since Brazilian production is expected to be very high in the current season, and so, once the technical position had been cleared, prices could fall fairly sharply.
Oil prices have also been affected by the improvement in market sentiment, and have recovered very sharply over the past month.
Speculative activity has been an important factor; but there has also been an encouraging report from the US Department of Energy indicating strong demand for oil products in the US, and a larger-than-expected reduction in crude oil inventories.
There has also been evidence of continuing strong demand from China; and a warning of the onset of the hurricane season in the Gulf of Mexico, and its possible effects on production levels.
So far however the dramatic oil spill at the BP production well in the Gulf does not appear to have had a noticeable effect on market prices, although the possible consequences, especially for deep-water drilling operations in the future, could clearly become a very significant factor.
The recovery in prices has been very impressive; but it may not be sustainable. OPEC itself has recently issued a very cautious monthly report which argues that “recent developments have moved oil prices out of equilibrium”, and which emphasises that increasing supplies from non-OPEC countries are keeping downward pressure on prices.
It concludes, that “although demand has seen some improvement recently, it has been more than overwhelmed by the higher growth in supply”. It seems likely therefore that the present rally will lose momentum unless there is a serious deterioration in the political situation in the Middle East. Precious metal prices have also moved higher over the past month; investors are clearly still seeking “safe havens in the storm” despite the improvement in sentiment about prospects that has pushed some other commodity prices higher.
Gold prices have reached $1250 per ounce, and silver prices have also moved significantly higher, with exchange-traded funds aggressive buyers of both metals.
The World Gold Council, in its recent quarterly report, indicated that demand for gold was “exceptionally strong”, and that it was expected to remain so for the rest of year, “driven by jewellery demand in India and China, and investment demand in the US and in Europe”.
However it is clear that investment demand is the more important factor, with EFT gold holdings now above 2000 tons, and central banks also adding to their holdings again.
There is an obvious risk that the latest surge in prices will lead to some profit taking. But given the present situation, and particularly the risk of sovereign debt defaults, it would be unwise to assume that the improvement in precious metal prices in over.
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
Sunday, June 26, 2011
Financial Markets Focusing Greece and Spain - Shaw Capital Management Newsletter
The situation in Greece and in Spain has obviously caused great concern in London. But the Bank is also aware of the risks as a time when the economy is still in a very fragile state, and of the need to compensate for the fiscal retrenchment by maintaining a supportive monetary policy, and low short-term interest rates. There are therefore reasons for concern about the prospects for sterling. If the latest measures do succeed in reducing the fiscal deficit to manageable levels without aborting the economic recovery, and if the problems affecting the euro continue, or become even more serious, then sterling may well maintain current levels or even appreciate further.
Shaw Capital Management, Korea - Investment Innovation & Excellence. We provide the information, insight and expertise that you need to make the right investment choices. Shaw Capital Management Korea typically offers its clients such services as asset allocation and portfolio design; traditional and non-traditional manager review and selection; portfolio implementation; portfolio monitoring and consolidated performance reporting; and other wealth management services, including estate, tax, trust and insurance planning, asset custody, closely held business issues associated with the establishment or expansion of a family office, the formation of family investment partnerships or LLCs, philanthropy, family dynamics and inter-generation issues, etc.
But the situation is very uncertain, and the odds do seem to favour a further period of weakness until the effects of the latest government measures can be more accurately assessed.
The yen has weakened slightly over the past month as the improvement in market sentiment has increased
the “risk appetite” of investors for the equity markets, and for commodity-related currencies.
The economic background in Japan has continued to improve, helped by the export performance; but there are still doubts about whether this improvement can be sustained, and these doubts have been increased by the latest announcement by the new prime minister that the main priority of his government will be a reduction in the huge fiscal deficit, rather than the promotion of fresh measures to accelerate the growth rate.
There is also a further uncertainty created by the decision by the Chinese authorities to adopt a “more flexible” policy on the renminbi that presumably means that it will be allowed to appreciate slightly faster. It is not clear what the consequences of this move will be; but overall it seems likely that conditions elsewhere, especially those affecting the euro, and some disappointment with “risky” investments in global mark
Shaw Capital Management, Korea - Investment Innovation & Excellence. We provide the information, insight and expertise that you need to make the right investment choices. Shaw Capital Management Korea typically offers its clients such services as asset allocation and portfolio design; traditional and non-traditional manager review and selection; portfolio implementation; portfolio monitoring and consolidated performance reporting; and other wealth management services, including estate, tax, trust and insurance planning, asset custody, closely held business issues associated with the establishment or expansion of a family office, the formation of family investment partnerships or LLCs, philanthropy, family dynamics and inter-generation issues, etc.
But the situation is very uncertain, and the odds do seem to favour a further period of weakness until the effects of the latest government measures can be more accurately assessed.
The yen has weakened slightly over the past month as the improvement in market sentiment has increased
the “risk appetite” of investors for the equity markets, and for commodity-related currencies.
The economic background in Japan has continued to improve, helped by the export performance; but there are still doubts about whether this improvement can be sustained, and these doubts have been increased by the latest announcement by the new prime minister that the main priority of his government will be a reduction in the huge fiscal deficit, rather than the promotion of fresh measures to accelerate the growth rate.
There is also a further uncertainty created by the decision by the Chinese authorities to adopt a “more flexible” policy on the renminbi that presumably means that it will be allowed to appreciate slightly faster. It is not clear what the consequences of this move will be; but overall it seems likely that conditions elsewhere, especially those affecting the euro, and some disappointment with “risky” investments in global mark
Wednesday, June 22, 2011
Latest World Headlines: Shaw Capital Management
Published: June 6 2011 22:59 | Last updated: June 6 2011 22:59
Investment products described as “guaranteed”, “protected” or “secure” may have to carry an explanation stating exactly what these terms mean, in the latest warning from the Financial Services Authority that financial companies are not properly advertising risk to consumers.
So-called structured products, which offer people exposure to the stock market with some level of protection, were being promoted “without any clear and adequate justification for the descriptions used”, the regulator said in a quarterly consultation paper on Monday. It has proposed introducing guidelines that would force financial services companies to explain the use of terms such as “guaranteed” in advertisements or fact sheets.
Investment products described as “guaranteed”, “protected” or “secure” may have to carry an explanation stating exactly what these terms mean, in the latest warning from the Financial Services Authority that financial companies are not properly advertising risk to consumers.
So-called structured products, which offer people exposure to the stock market with some level of protection, were being promoted “without any clear and adequate justification for the descriptions used”, the regulator said in a quarterly consultation paper on Monday. It has proposed introducing guidelines that would force financial services companies to explain the use of terms such as “guaranteed” in advertisements or fact sheets.
SHAW CAPITAL MANAGEMENT:Shaw warns FSA stance on mutuals could force mergers
SHAW CAPITAL MANAGEMENT:Shaw warns FSA stance on mutuals could force mergers
Martin Shaw, chief executive of the Association of Financial Mutuals has warned that the Financial Services Authority s stance on friendly society s use of with-profits funds will force societies to merge or demutualise in order to survive.
The FSA has sent a dear CEO letter to friendly societies » Full Story on clipmarks.com
Diamond Could Store Quantum Information
When it comes to quantum computing, flawed diamonds are better than perfect ones. Click to enlarge this image.
Ann Thomas/Corbis
THE GIST
* By manipulating atoms inside diamonds, scientists have developed a new way to store information.
* The technique could lead to quantum computers capable of solving problems beyond the reach of today's technology.
One of the most common defects in diamond is nitrogen, which turns the stone yellow. When a nitrogen atom sits next to a vacant spot in the carbon crystal, the intruding element provides an extra electron that moves into the hole. Several years ago, scientists learned how to change the spin of such electrons using microwave energy and put them to work as quantum bits, or qubits.
The technique has "a fidelity of 85 to 95 percent," Awschalom said March 22
this diamond memory works at room temperature. The spins inside the diamond can be both changed and measured by shining laser light into the diamond
Martin Shaw, chief executive of the Association of Financial Mutuals has warned that the Financial Services Authority s stance on friendly society s use of with-profits funds will force societies to merge or demutualise in order to survive.
The FSA has sent a dear CEO letter to friendly societies » Full Story on clipmarks.com
Diamond Could Store Quantum Information
When it comes to quantum computing, flawed diamonds are better than perfect ones. Click to enlarge this image.
Ann Thomas/Corbis
THE GIST
* By manipulating atoms inside diamonds, scientists have developed a new way to store information.
* The technique could lead to quantum computers capable of solving problems beyond the reach of today's technology.
One of the most common defects in diamond is nitrogen, which turns the stone yellow. When a nitrogen atom sits next to a vacant spot in the carbon crystal, the intruding element provides an extra electron that moves into the hole. Several years ago, scientists learned how to change the spin of such electrons using microwave energy and put them to work as quantum bits, or qubits.
The technique has "a fidelity of 85 to 95 percent," Awschalom said March 22
this diamond memory works at room temperature. The spins inside the diamond can be both changed and measured by shining laser light into the diamond
Shaw Capital Management - Investment Innovation & Excellence
Shaw Capital Management
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
We look forward to working with you and being the open architects of your financial well being.
Read more about our company and how we can help you to manage your wealth and reach your investment goals.
A New Economy
Smart money is now wise to the problems of the past years; good investments are now here.
Shaw Capital Management and the New Economy
Read more about Shaw Capital and the New Economy.
Strategies
Our goal is to provide consistent quality investment advice to our clients.
Shaw Capital Management and our Investment Strategies
Read more about our corporate strategies.
Services
As the leading open architecture advisory firm, we possess a number of characteristics that set us apart from other companies.
* Independence
* Experience
* Making our experience count
* Intellectual leadership
* Centralized knowledge base
Learn more about our unique service offer.
Downloads
Keep up to date with Shaw Capital news and important industry developments.
Visit our download page and document library.
Account Forms
Our account forms are available for download at any time. Should you require any assistance completing them, please don't hesitate to contact an advisor.
Request a call
If you would like one of our experienced advisors to contact you about your investment needs, please feel free to request a no-obligation call from a member of our team.
Contact us
Please visit our contact page or use the following contact details:
Email us: info@shaw-capital.com
This web site is copyright © Shaw Capital Management 2010
http://www.shaw-capital.com
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
We look forward to working with you and being the open architects of your financial well being.
Read more about our company and how we can help you to manage your wealth and reach your investment goals.
A New Economy
Smart money is now wise to the problems of the past years; good investments are now here.
Shaw Capital Management and the New Economy
Read more about Shaw Capital and the New Economy.
Strategies
Our goal is to provide consistent quality investment advice to our clients.
Shaw Capital Management and our Investment Strategies
Read more about our corporate strategies.
Services
As the leading open architecture advisory firm, we possess a number of characteristics that set us apart from other companies.
* Independence
* Experience
* Making our experience count
* Intellectual leadership
* Centralized knowledge base
Learn more about our unique service offer.
Downloads
Keep up to date with Shaw Capital news and important industry developments.
Visit our download page and document library.
Account Forms
Our account forms are available for download at any time. Should you require any assistance completing them, please don't hesitate to contact an advisor.
Request a call
If you would like one of our experienced advisors to contact you about your investment needs, please feel free to request a no-obligation call from a member of our team.
Contact us
Please visit our contact page or use the following contact details:
Email us: info@shaw-capital.com
This web site is copyright © Shaw Capital Management 2010
http://www.shaw-capital.com
Sunday, June 19, 2011
Shaw Capital Management August Newsletter: Financial Markets Focusing Europe
The big fall in the euro in recent months is clearly having a significant impact on the performance of the
euro-zone economy.
Shaw Capital Management, Korea - Investment Innovation & Excellence. We provide the information, insight and expertise that you need to make the right investment choices. Shaw Capital Management Korea typically offers its clients such services as asset allocation and portfolio design; traditional and non-traditional manager review and selection; portfolio implementation; portfolio monitoring and consolidated performance reporting; and other wealth management services, including estate, tax, trust and insurance planning, asset custody, closely held business issues associated with the establishment or expansion of a family office, the formation of family investment partnerships or LLCs, philanthropy, family dynamics and inter-generation issues, etc.
Factory output expanded at a record pace in April, helped by investment spending associated with the export effort, and overseas demand for European capital equipment, and the trend appears to be continuing. The major beneficiary has been Germany, but other northern member countries are also involved.
However the situation is much less encouraging in Greece, Spain, and Portugal, because they are less competitive in export markets, and are being forced to introduce austerity measures to reduce their fiscal deficits.
Domestic demand across the entire euro-zone remains weak, and so, despite the export performance of some member countries, it seems unlikely that the overall growth rate for the zone this year will reach 2%. The European Central Bank remains reasonably optimistic about prospects; but fortunately it has not moved towards an “exit strategy” that might involve reversing the measures that were introduced to counter the recession.
Short-term interest rates have been left unchanged and close to zero, the programme to provide unlimited three-month loans to the banking system is continuing, and the bank is also still intervening in the markets to buy the bonds of weaker member countries that had been sold heavily because of fears about debt defaults. The bank is therefore continuing to provide support for the system; but it is not really doing enough to offset the concerns about the debt crisis.
Greece remains in the eye of the storm; but there have been increasing concerns about the situation in Spain; and the situation has been made worse by the latest warning from the Fitch Ratings agency that it may take further massive asset purchases by the European Central Bank to prevent the sovereign debt crisis in the area escalating out of control.
Shaw Capital Management August 2010: Financial Markets Focusing Europe - There are fears that Spain will need to follow Greece in requesting help from other member countries and the IMF to enable it to avoid a default, and that Portugal, and perhaps even Italy, may also need to be rescued.
The pressures on the euro will therefore be intense; and whilst there may well be further support from the Swiss National Bank and others, the future of the single currency system clearly remains very uncertain. The latest modest rally in the euro must therefore be treated with great care.
Sterling has recovered from the weakness that developed in May, and is ending the month higher. The economic background in the UK has not provided any real support, and the Bank of England is clearly intending to maintain short-term interest rates at very low levels; but there has been some movement of funds out of the euro into sterling, and the new coalition government in the UK has introduced measures to reduce the massive fiscal deficit that have been well received in the markets and led to an improvement in sentiment.
There is clearly a risk that these latest measures in the Budget will depress the level of activity still further, and fail to solve the fiscal problems; but for the moment it seems that the new government is being given the benefit of the doubt.
The evidence on the performance of the economy ahead of the Budget announcement was still pointing to a very slow recovery in activity.
The manufacturing sector is reasonably buoyant, with exports expanding rapidly; and retail sales also increased more quickly than expected.
But unemployment rose again to 2.47 million, and the latest survey from the CBI indicated that the value and volume of business in the services sector fell, and that further weakness was expected in the second half of the year.
However the situation has obviously been changed significantly by the latest Budget measures, and the latest estimates from the newly-formed Office for Budget Responsibility are that growth will now only be 1.2% this year, rising to 2.3% next year, and improving slightly in succeeding years.
The Bank of England has welcomed the decision by the new government to introduce measures to address the problems created by the huge fiscal deficit. The governor, Mervyn King, argued recently that they would “eliminate some of the downside risks…and are desirable to remove the risk of an adverse market reaction.”
euro-zone economy.
Shaw Capital Management, Korea - Investment Innovation & Excellence. We provide the information, insight and expertise that you need to make the right investment choices. Shaw Capital Management Korea typically offers its clients such services as asset allocation and portfolio design; traditional and non-traditional manager review and selection; portfolio implementation; portfolio monitoring and consolidated performance reporting; and other wealth management services, including estate, tax, trust and insurance planning, asset custody, closely held business issues associated with the establishment or expansion of a family office, the formation of family investment partnerships or LLCs, philanthropy, family dynamics and inter-generation issues, etc.
Factory output expanded at a record pace in April, helped by investment spending associated with the export effort, and overseas demand for European capital equipment, and the trend appears to be continuing. The major beneficiary has been Germany, but other northern member countries are also involved.
However the situation is much less encouraging in Greece, Spain, and Portugal, because they are less competitive in export markets, and are being forced to introduce austerity measures to reduce their fiscal deficits.
Domestic demand across the entire euro-zone remains weak, and so, despite the export performance of some member countries, it seems unlikely that the overall growth rate for the zone this year will reach 2%. The European Central Bank remains reasonably optimistic about prospects; but fortunately it has not moved towards an “exit strategy” that might involve reversing the measures that were introduced to counter the recession.
Short-term interest rates have been left unchanged and close to zero, the programme to provide unlimited three-month loans to the banking system is continuing, and the bank is also still intervening in the markets to buy the bonds of weaker member countries that had been sold heavily because of fears about debt defaults. The bank is therefore continuing to provide support for the system; but it is not really doing enough to offset the concerns about the debt crisis.
Greece remains in the eye of the storm; but there have been increasing concerns about the situation in Spain; and the situation has been made worse by the latest warning from the Fitch Ratings agency that it may take further massive asset purchases by the European Central Bank to prevent the sovereign debt crisis in the area escalating out of control.
Shaw Capital Management August 2010: Financial Markets Focusing Europe - There are fears that Spain will need to follow Greece in requesting help from other member countries and the IMF to enable it to avoid a default, and that Portugal, and perhaps even Italy, may also need to be rescued.
The pressures on the euro will therefore be intense; and whilst there may well be further support from the Swiss National Bank and others, the future of the single currency system clearly remains very uncertain. The latest modest rally in the euro must therefore be treated with great care.
Sterling has recovered from the weakness that developed in May, and is ending the month higher. The economic background in the UK has not provided any real support, and the Bank of England is clearly intending to maintain short-term interest rates at very low levels; but there has been some movement of funds out of the euro into sterling, and the new coalition government in the UK has introduced measures to reduce the massive fiscal deficit that have been well received in the markets and led to an improvement in sentiment.
There is clearly a risk that these latest measures in the Budget will depress the level of activity still further, and fail to solve the fiscal problems; but for the moment it seems that the new government is being given the benefit of the doubt.
The evidence on the performance of the economy ahead of the Budget announcement was still pointing to a very slow recovery in activity.
The manufacturing sector is reasonably buoyant, with exports expanding rapidly; and retail sales also increased more quickly than expected.
But unemployment rose again to 2.47 million, and the latest survey from the CBI indicated that the value and volume of business in the services sector fell, and that further weakness was expected in the second half of the year.
However the situation has obviously been changed significantly by the latest Budget measures, and the latest estimates from the newly-formed Office for Budget Responsibility are that growth will now only be 1.2% this year, rising to 2.3% next year, and improving slightly in succeeding years.
The Bank of England has welcomed the decision by the new government to introduce measures to address the problems created by the huge fiscal deficit. The governor, Mervyn King, argued recently that they would “eliminate some of the downside risks…and are desirable to remove the risk of an adverse market reaction.”
Shaw Capital Management August 2010: Financial Markets
Sentiment in the financial markets has improved over the past month. There has been further evidence that
the recovery in the global economy is continuing; the sovereign debt crisis in Europe has not yet produced a major casualty; there has been a modest rally in the euro; and the Chinese authorities have announced that they intend to adopt a “more flexible” policy towards the renminbi that is expected to allow it to appreciate at a slightly faster rate.
Shaw Capital Management August 2010: Financial Markets - These developments have suggested that the gloom was overdone. The effect in the currency markets had been to slightly weaken both the dollar and the yen, as the “risk appetite” amongst investors and traders has increased, and to strengthen the commodity-linked currencies and ease the pressures on the euro. Sterling has also improved over the month, helped by the measures announced by the new coalition government in the UK, both before and during the recent budget statement, to significantly reduce the huge fiscal deficit.
Shaw Capital Management views on financial market - But overall movements in the major currencies have been fairly small, and there is still considerable optimism about prospects.
The latest evidence on the performance of the US economy has enhanced the prospects for the dollar, and this should also continue to provide some stability for the yen.
The sovereign debt problems in Greece, Spain, Portugal, and even in Italy, continue to worsen, and may well lead to defaults and put further pressure on the single currency system.
There must also be serious doubts about the latest improvement in sterling.
The new government in the UK is making credible efforts to reduce the size of the fiscal deficit; but it faces a daunting task, and will find it very difficult to maintain its tough stance.
There is therefore a serious risk of a crisis in the UK currency market, and so it is crucial that the international agencies prepare contingency measures to enable them to act quickly if the situation appears to be running out of control.
The latest available evidence on the performance of the US economy; show the recovery from recession remains on track.
Retail sales were 1.2% lower in May than in April, emphasising the cautious mood amongst consumers; non-farm payrolls increased by 431,000 in May, but 411,000 jobs were accounted for by temporary government hiring to complete the 2010 census, leaving the increase in “real” jobs well below expectations; new home starts fell sharply in May following the withdrawal of government measures to prop up the market, and existing home sales also fel.
And the M3 measure of broad money growth is also continuing to decline because of weak loan demand from reliable borrowers, and the reluctance of the banks to lend to anyone else. There are offsetting factors in the strength of the manufacturing sector; and consumer confidence figures remain reasonably strong.
The Commerce Department has recently revised its estimate of growth in the first quarter of the year down to a 3% annualised rate; but this rate may not have been maintained in the current quarter; and this has already led to a strong plea to Congress from the government to authorise additional spending programmes costing up to $50 billion “to keep the recovery on track”, it is not clear how Congress will respond.
The Fed chairman, Ben Bernanke’s recently testimony to Congress; that the pace of the recovery will not be strong enough to fix the jobs market or reduce the budget deficit without further help, also argued that, despite the size of that deficit, “to avoid sharp, disruptive shifts in spending programmes and tax
policies in the future, and to retain the confidence of the public and the markets, we should start planning now how we will meet these budgetary challenges”. This view about the economy is repeated in the statement after the latest meeting of the bank’s Open Market Committee, and so, although the bank believes
that the recovery is continuing, it is not surprising that it is quietly considering what steps it might have to take if the recovery unexpectedly falters.
There has been a modest recovery in the euro from a low-point in the early part of the past month, although it is still ending the period slightly lower.
The economic background in the euro-zone is continuing to improve, and there has been evidence of support for the euro, particularly from the Swiss National Bank, which reported an increase in its foreign currency reserves of more than $100 billion in May. But the benefits have been limited by the on-going sovereign debt problems amongst some member countries of the euro-zone, and especially by the serious deterioration in the situation in Spain, and so the improvement that has occurred remains very fragile.
the recovery in the global economy is continuing; the sovereign debt crisis in Europe has not yet produced a major casualty; there has been a modest rally in the euro; and the Chinese authorities have announced that they intend to adopt a “more flexible” policy towards the renminbi that is expected to allow it to appreciate at a slightly faster rate.
Shaw Capital Management August 2010: Financial Markets - These developments have suggested that the gloom was overdone. The effect in the currency markets had been to slightly weaken both the dollar and the yen, as the “risk appetite” amongst investors and traders has increased, and to strengthen the commodity-linked currencies and ease the pressures on the euro. Sterling has also improved over the month, helped by the measures announced by the new coalition government in the UK, both before and during the recent budget statement, to significantly reduce the huge fiscal deficit.
Shaw Capital Management views on financial market - But overall movements in the major currencies have been fairly small, and there is still considerable optimism about prospects.
The latest evidence on the performance of the US economy has enhanced the prospects for the dollar, and this should also continue to provide some stability for the yen.
The sovereign debt problems in Greece, Spain, Portugal, and even in Italy, continue to worsen, and may well lead to defaults and put further pressure on the single currency system.
There must also be serious doubts about the latest improvement in sterling.
The new government in the UK is making credible efforts to reduce the size of the fiscal deficit; but it faces a daunting task, and will find it very difficult to maintain its tough stance.
There is therefore a serious risk of a crisis in the UK currency market, and so it is crucial that the international agencies prepare contingency measures to enable them to act quickly if the situation appears to be running out of control.
The latest available evidence on the performance of the US economy; show the recovery from recession remains on track.
Retail sales were 1.2% lower in May than in April, emphasising the cautious mood amongst consumers; non-farm payrolls increased by 431,000 in May, but 411,000 jobs were accounted for by temporary government hiring to complete the 2010 census, leaving the increase in “real” jobs well below expectations; new home starts fell sharply in May following the withdrawal of government measures to prop up the market, and existing home sales also fel.
And the M3 measure of broad money growth is also continuing to decline because of weak loan demand from reliable borrowers, and the reluctance of the banks to lend to anyone else. There are offsetting factors in the strength of the manufacturing sector; and consumer confidence figures remain reasonably strong.
The Commerce Department has recently revised its estimate of growth in the first quarter of the year down to a 3% annualised rate; but this rate may not have been maintained in the current quarter; and this has already led to a strong plea to Congress from the government to authorise additional spending programmes costing up to $50 billion “to keep the recovery on track”, it is not clear how Congress will respond.
The Fed chairman, Ben Bernanke’s recently testimony to Congress; that the pace of the recovery will not be strong enough to fix the jobs market or reduce the budget deficit without further help, also argued that, despite the size of that deficit, “to avoid sharp, disruptive shifts in spending programmes and tax
policies in the future, and to retain the confidence of the public and the markets, we should start planning now how we will meet these budgetary challenges”. This view about the economy is repeated in the statement after the latest meeting of the bank’s Open Market Committee, and so, although the bank believes
that the recovery is continuing, it is not surprising that it is quietly considering what steps it might have to take if the recovery unexpectedly falters.
There has been a modest recovery in the euro from a low-point in the early part of the past month, although it is still ending the period slightly lower.
The economic background in the euro-zone is continuing to improve, and there has been evidence of support for the euro, particularly from the Swiss National Bank, which reported an increase in its foreign currency reserves of more than $100 billion in May. But the benefits have been limited by the on-going sovereign debt problems amongst some member countries of the euro-zone, and especially by the serious deterioration in the situation in Spain, and so the improvement that has occurred remains very fragile.
Shaw Capital Management Korea: Postal Reform Rollback
The Japanese government has decided to revise the
proposed reforms of the postal system …
Shaw Capital Management Korea: One of the world’s largest financial institutions
The government now proposes to absorb Japan Post
Network Co. and Japan Post Service Co. into Japan Post
Holdings on October 1, 2011.
The newly consolidated holding group will continue
to have two financial units, turning the system into a
three-company structure, from the current five
companies (currently, the system consists of Japan Post
Holdings Co. and four units — a postal service, a savings
bank, a life insurance company and a retailer for the
services of the other three).
Under the new plan, the current Democratic Party of
Japan-led government (DPJ) also plans to double the
maximum amount of deposits that Japan Post’s banking
unit can accept per person from the current ¥10 million
to ¥20 million and to raise postal insurance coverage
from the current ¥13 million to ¥25 million.
The government is also likely to hold on to more than
a third of the postal group’s shares in a turnaround
from full privatization — this will enable the
government to veto any major changes in the firm.
The bill with these latest changes, is expected to be
submitted to the Diet.
“We made the bill’s outline with the aim of ensuring
that Japan Post will sufficiently offer universal services
throughout the nation”, Shizuka Kamei, Japan’s Finance
Minister, told reporters at a press conference.
The Japan Post group provides insurance services
through its 24,000 post offices across the nation
especially in rural areas where private banks have little
or no presence or have trouble gaining the trust of
locals, and holds savings accounts for about 57 million
people.
The group as a whole employs about 226,000 people
and, with assets of more than ¥300,000 billion, sits at
the heart of a system of public institutions that own
almost half of Japan’s national debt.
Moreover, it helps to keep the government’s cost of
borrowing low even as its gross debt closes in on 200%
of annual output.
Japan Post was nominally privatised in 2003; with the
reforms spearheaded by former Prime Minister
Junichiro Koizumi, the champion of structural reforms
for a more market-oriented economy.
Under the previous plan, Japan Post’s financial units
were to be fully released from government control by
2017. With these latest moves, Prime Minister Yukio
Hatoyama’s government, which took power last
September from the long-ruling Liberal Democratic
Party (LDP), is halting the sale of its shares to maintain
control over the company’s plentiful assets, long a
source of public financing.
Behind the proposal is the government need for a
growth strategy.
In the fiscal 2010 budget, general-account expenditures
stand at a record ¥92 trillion, so politicians are pushing
for postal savings to be used to finance their policies.
But these proposed changes to postal reform raise
numerous concerns.
First of all, if the massive postal group attracts even
more money with the lifting of the savings cap, it will
hamper private-sector financial businesses and spark
an outflow of funds from private banks.
Tadashi Ogawa, chairman of the Regional Banks
Association, says raising the deposit cap is “truly
regrettable” because small regional banks in particular
will be affected in times of financial crisis because
depositors may flee to Japan Post Bank.
Moreover, the two subsidiaries — the postal bank and
insurance company — are likely to be permitted
substantial operational freedom.
This would, for example, enable them to offer housing
loans or sell cancer insurance policies.
The uneven public-private playing field, however,
would no longer be just a domestic problem. The US
and Europe have already expressed concerns about
these developments.
Also, creating an even bigger public financial entity
will loosen the government’s fiscal discipline through
increased purchases of government bonds (JGBs) and
accelerate wasteful spending on public works projects.
The system of public institutions buying JGBs has been
central to the economic status quo that has kept Japan
afloat since its stock market plunged in 1990.
“The revision will be a turning point for the worse”,
says Naoko Nemoto, a banking analyst at rating agency
Standard & Poor’s in Japan.
The deep misgivings over public spending originate
from the way postal savings were used for years.
The money had long been used to fund unnecessary
public projects such as highways, bridges and airports
in the middle of nowhere via the Finance Ministry’s
fiscal investment and loan program, which was
reformed in 2001.
These expenditures were not only inefficient but also
lacked transparency because they were made through
government-affiliated organisations.
Creating an even bigger public financial entity is also
risky because it will distort the entire interest-rate
structure of financial markets, where loans with higher
risks should reflect higher returns.
If a public institution extends loans with below-market
interest rates to support certain industries, we are back
to the government ‘picking winners’ or worse just
backing losers.
In other words, this is yet another example of how the
DPJ is mis-managing the Japanese economy, pandering
to voters and reversing necessary reforms passed by
the Koizumi government.
Shaw Capital Management Korea: World Trade
The fall-out from the failure of the Doha Round of trade
liberalisation measures, and the impact of the recession,
are continuing to increase the threat of further
protectionist restrictions on world trading activities.
The US Commerce Department has recently launched
an investigation into whether certain forms of
aluminium made in China is being dumped, or sold at
less than its fair value, in the US; and the Chinese
Commerce Ministry has responded by launching its
own anti-dumping enquires into imports of
caprolactam, a widely-used synthetic polymer, from
both the US and Europe, and has finalised the ruling
on some nylon imports.
These developments are not likely to lead to early and
dramatic changes; but they do provide a further
illustration of the dangers if the global economic
recovery does not accelerate and lead to a relaxation
of the pressures in the trading system.
proposed reforms of the postal system …
Shaw Capital Management Korea: One of the world’s largest financial institutions
The government now proposes to absorb Japan Post
Network Co. and Japan Post Service Co. into Japan Post
Holdings on October 1, 2011.
The newly consolidated holding group will continue
to have two financial units, turning the system into a
three-company structure, from the current five
companies (currently, the system consists of Japan Post
Holdings Co. and four units — a postal service, a savings
bank, a life insurance company and a retailer for the
services of the other three).
Under the new plan, the current Democratic Party of
Japan-led government (DPJ) also plans to double the
maximum amount of deposits that Japan Post’s banking
unit can accept per person from the current ¥10 million
to ¥20 million and to raise postal insurance coverage
from the current ¥13 million to ¥25 million.
The government is also likely to hold on to more than
a third of the postal group’s shares in a turnaround
from full privatization — this will enable the
government to veto any major changes in the firm.
The bill with these latest changes, is expected to be
submitted to the Diet.
“We made the bill’s outline with the aim of ensuring
that Japan Post will sufficiently offer universal services
throughout the nation”, Shizuka Kamei, Japan’s Finance
Minister, told reporters at a press conference.
The Japan Post group provides insurance services
through its 24,000 post offices across the nation
especially in rural areas where private banks have little
or no presence or have trouble gaining the trust of
locals, and holds savings accounts for about 57 million
people.
The group as a whole employs about 226,000 people
and, with assets of more than ¥300,000 billion, sits at
the heart of a system of public institutions that own
almost half of Japan’s national debt.
Moreover, it helps to keep the government’s cost of
borrowing low even as its gross debt closes in on 200%
of annual output.
Japan Post was nominally privatised in 2003; with the
reforms spearheaded by former Prime Minister
Junichiro Koizumi, the champion of structural reforms
for a more market-oriented economy.
Under the previous plan, Japan Post’s financial units
were to be fully released from government control by
2017. With these latest moves, Prime Minister Yukio
Hatoyama’s government, which took power last
September from the long-ruling Liberal Democratic
Party (LDP), is halting the sale of its shares to maintain
control over the company’s plentiful assets, long a
source of public financing.
Behind the proposal is the government need for a
growth strategy.
In the fiscal 2010 budget, general-account expenditures
stand at a record ¥92 trillion, so politicians are pushing
for postal savings to be used to finance their policies.
But these proposed changes to postal reform raise
numerous concerns.
First of all, if the massive postal group attracts even
more money with the lifting of the savings cap, it will
hamper private-sector financial businesses and spark
an outflow of funds from private banks.
Tadashi Ogawa, chairman of the Regional Banks
Association, says raising the deposit cap is “truly
regrettable” because small regional banks in particular
will be affected in times of financial crisis because
depositors may flee to Japan Post Bank.
Moreover, the two subsidiaries — the postal bank and
insurance company — are likely to be permitted
substantial operational freedom.
This would, for example, enable them to offer housing
loans or sell cancer insurance policies.
The uneven public-private playing field, however,
would no longer be just a domestic problem. The US
and Europe have already expressed concerns about
these developments.
Also, creating an even bigger public financial entity
will loosen the government’s fiscal discipline through
increased purchases of government bonds (JGBs) and
accelerate wasteful spending on public works projects.
The system of public institutions buying JGBs has been
central to the economic status quo that has kept Japan
afloat since its stock market plunged in 1990.
“The revision will be a turning point for the worse”,
says Naoko Nemoto, a banking analyst at rating agency
Standard & Poor’s in Japan.
The deep misgivings over public spending originate
from the way postal savings were used for years.
The money had long been used to fund unnecessary
public projects such as highways, bridges and airports
in the middle of nowhere via the Finance Ministry’s
fiscal investment and loan program, which was
reformed in 2001.
These expenditures were not only inefficient but also
lacked transparency because they were made through
government-affiliated organisations.
Creating an even bigger public financial entity is also
risky because it will distort the entire interest-rate
structure of financial markets, where loans with higher
risks should reflect higher returns.
If a public institution extends loans with below-market
interest rates to support certain industries, we are back
to the government ‘picking winners’ or worse just
backing losers.
In other words, this is yet another example of how the
DPJ is mis-managing the Japanese economy, pandering
to voters and reversing necessary reforms passed by
the Koizumi government.
Shaw Capital Management Korea: World Trade
The fall-out from the failure of the Doha Round of trade
liberalisation measures, and the impact of the recession,
are continuing to increase the threat of further
protectionist restrictions on world trading activities.
The US Commerce Department has recently launched
an investigation into whether certain forms of
aluminium made in China is being dumped, or sold at
less than its fair value, in the US; and the Chinese
Commerce Ministry has responded by launching its
own anti-dumping enquires into imports of
caprolactam, a widely-used synthetic polymer, from
both the US and Europe, and has finalised the ruling
on some nylon imports.
These developments are not likely to lead to early and
dramatic changes; but they do provide a further
illustration of the dangers if the global economic
recovery does not accelerate and lead to a relaxation
of the pressures in the trading system.
Sunday, June 12, 2011
Salamat Shaw Capital Management Korea: Portfolio Recommendations
We have made no changes in our portfolios this month.
The latest developments in the government debt
markets have increased the uncertainties about
prospects for both the bond and financial markets.
However, although the pace of the global economic
recovery may be affected, there appears to be enough
momentum to enable it to continue.
We have therefore maintained the level of our exposure
to the equity markets; and we have left 10% of the funds
in the portfolio in cash deposits as a contingency
measure. Bond exposure is zero.
Shaw Capital Management Korea: Portfolio
Recommendations - The UK Hung Parliament
The bond markets are totally calm about the hung
Parliament, as they are about both UK and US bond
prospects, with yields still below 4%, in spite of the
huge deficits both countries are running.
What is going on?
The first point is that both countries are recovering,
and seem set for growth rates in the 2–3% range.
Such growth is not ‘V-shaped’ but a V was unlikely
given the shortage of oil and raw materials, which
continues to limit world recovery potential. It does
give a prospect of improving tax revenues and falling
benefit expenditures.
As growth goes forward it will be possible to work out
more accurately how much of the current deficit is
‘structural’ — i.e. will not disappear with returning
growth.
For the UK the current estimate is that about 8% of
GDP is structural: still requiring a huge programme of
retrenchment.
The second point is that neither the UK nor the US has
ever formally defaulted in modern times.
Indeed for the UK, they can date this from the end of
the Napoleonic Wars when public debt reached around
300% of GDP.
The third point is the new unwillingness to use higher
inflation to bring down the debt in real value. Inflation
(implying an ‘inflation tax’ on government monetary
liabilities which thereby lose their value) is now
proscribed after the poor experiences of developed
countries during the ‘great inflation’ of the 1970s.
Electorates have rejoiced at the new inflation targeting
policies that have formally ended governments’
experiments with this form of taxation.
The electorates hated the messy and unintended
redistributions of wealth this tax implied — often from
the weak such as pensioners to the wealthy and the
unionized.
In this context bond markets have treated Mr. Obama’s
delays and the UK’s election result as simply policy
deferred.
In that they are likely to be right.
Shaw Capital Management Korea: Portfolio
Recommendations - The state of the eurozone
By contrast the situation in the euro-zone looks
increasingly difficult.
The problem is that Greece and Portugal — the two
main current problem cases — joined the euro in the
expectation that low interest rates would keep their
public finances under control.
Internally these countries have difficulty in raising
taxes and curbing expenditure but joining the EU and
then the euro gave them the authority to insist on fiscal
discipline as the ‘price’ of joining.
Now the discipline is becoming harsh and yet interest
rate premia are rising, as the risk of default increases.
Germany and the other euro-zone countries are
unwilling to transfer resources to them — and even to
provide loans on terms below these market rates.
Germany’s position in particular has hardened
massively under hostile home reactions to perceived
‘bail-out’.
Germany is simply unwilling to make transfers after
the huge costs of its integration policies for East
Germany.
There will come a point where the advantages of being
in the euro are outweighed by the disadvantages for a
country like Greece.
Once interest rate premia get high enough inside the
euro, the attraction of floating the currency down
outside it and still paying similar interest rates will
become overwhelming to governments faced with
public hostility to further sacrifice.
A large devaluation is a way of allowing the economy
to recover and produce extra revenue.
Furthermore reintroducing the local currency will
allow the government to re-denominate the debt in
that new sovereign currency … so effecting a de facto
partial default.
These exits would not spell the end of the euro. But
they will remind markets that the euro is bound
together by political convenience only and not by some
deep commitment to European integration.
Up to now there has been a general belief in such a
commitment; however, Germany’s recent actions have
destroyed this belief.
It was this belief that kept interest rate premia down
on sovereign debt of euro-zone countries; rather like
the debt of UK local authorities — formally underwritten
by the UK government, it was felt that these countries’
debt was being implicitly underwritten by other eurozone
members. No longer.
But of course what can happen to Greece could happen
to any other country. If so its risk premia too would
rise and it too would face the same trade-off between
staying in or exiting with the freedom to float at similar
interest rates outside.
Hence the chances of more break-up would get larger
and the system would become gradually closer to a
system of ‘fixed but adjustable’ exchange rates like the
old European Monetary System.
The latest developments in the government debt
markets have increased the uncertainties about
prospects for both the bond and financial markets.
However, although the pace of the global economic
recovery may be affected, there appears to be enough
momentum to enable it to continue.
We have therefore maintained the level of our exposure
to the equity markets; and we have left 10% of the funds
in the portfolio in cash deposits as a contingency
measure. Bond exposure is zero.
Shaw Capital Management Korea: Portfolio
Recommendations - The UK Hung Parliament
The bond markets are totally calm about the hung
Parliament, as they are about both UK and US bond
prospects, with yields still below 4%, in spite of the
huge deficits both countries are running.
What is going on?
The first point is that both countries are recovering,
and seem set for growth rates in the 2–3% range.
Such growth is not ‘V-shaped’ but a V was unlikely
given the shortage of oil and raw materials, which
continues to limit world recovery potential. It does
give a prospect of improving tax revenues and falling
benefit expenditures.
As growth goes forward it will be possible to work out
more accurately how much of the current deficit is
‘structural’ — i.e. will not disappear with returning
growth.
For the UK the current estimate is that about 8% of
GDP is structural: still requiring a huge programme of
retrenchment.
The second point is that neither the UK nor the US has
ever formally defaulted in modern times.
Indeed for the UK, they can date this from the end of
the Napoleonic Wars when public debt reached around
300% of GDP.
The third point is the new unwillingness to use higher
inflation to bring down the debt in real value. Inflation
(implying an ‘inflation tax’ on government monetary
liabilities which thereby lose their value) is now
proscribed after the poor experiences of developed
countries during the ‘great inflation’ of the 1970s.
Electorates have rejoiced at the new inflation targeting
policies that have formally ended governments’
experiments with this form of taxation.
The electorates hated the messy and unintended
redistributions of wealth this tax implied — often from
the weak such as pensioners to the wealthy and the
unionized.
In this context bond markets have treated Mr. Obama’s
delays and the UK’s election result as simply policy
deferred.
In that they are likely to be right.
Shaw Capital Management Korea: Portfolio
Recommendations - The state of the eurozone
By contrast the situation in the euro-zone looks
increasingly difficult.
The problem is that Greece and Portugal — the two
main current problem cases — joined the euro in the
expectation that low interest rates would keep their
public finances under control.
Internally these countries have difficulty in raising
taxes and curbing expenditure but joining the EU and
then the euro gave them the authority to insist on fiscal
discipline as the ‘price’ of joining.
Now the discipline is becoming harsh and yet interest
rate premia are rising, as the risk of default increases.
Germany and the other euro-zone countries are
unwilling to transfer resources to them — and even to
provide loans on terms below these market rates.
Germany’s position in particular has hardened
massively under hostile home reactions to perceived
‘bail-out’.
Germany is simply unwilling to make transfers after
the huge costs of its integration policies for East
Germany.
There will come a point where the advantages of being
in the euro are outweighed by the disadvantages for a
country like Greece.
Once interest rate premia get high enough inside the
euro, the attraction of floating the currency down
outside it and still paying similar interest rates will
become overwhelming to governments faced with
public hostility to further sacrifice.
A large devaluation is a way of allowing the economy
to recover and produce extra revenue.
Furthermore reintroducing the local currency will
allow the government to re-denominate the debt in
that new sovereign currency … so effecting a de facto
partial default.
These exits would not spell the end of the euro. But
they will remind markets that the euro is bound
together by political convenience only and not by some
deep commitment to European integration.
Up to now there has been a general belief in such a
commitment; however, Germany’s recent actions have
destroyed this belief.
It was this belief that kept interest rate premia down
on sovereign debt of euro-zone countries; rather like
the debt of UK local authorities — formally underwritten
by the UK government, it was felt that these countries’
debt was being implicitly underwritten by other eurozone
members. No longer.
But of course what can happen to Greece could happen
to any other country. If so its risk premia too would
rise and it too would face the same trade-off between
staying in or exiting with the freedom to float at similar
interest rates outside.
Hence the chances of more break-up would get larger
and the system would become gradually closer to a
system of ‘fixed but adjustable’ exchange rates like the
old European Monetary System.
Shaw Capital Management Korea: Financial Markets
For most of the past month sentiment in the financial
markets continued to improve.
There was further evidence that the global economic
recovery was still on track, and short-term interest
rates remained very low.
But towards month-end the mood changed after the
decision to downgrade Greek debt to “junk” status, and
to reduce the credit ratings of both Portugal and Spain.
There was a fear that the contagion would spread still
further, and that the bond market pressures resulting
from the massive fiscal deficits around the world would
have serious financial consequences.
There was always the risk that some of the measures
that were introduced to counter the recession might
have adverse consequences, and this is now proving
to be the case.
Shaw Capital Management Korea: Major Equity Markets
After moving ahead for most of the month, most of the
major equity markets are ending the period unchanged
or slightly higher, and there have been sharp falls in
many of the minor markets.
Wall Street has been the exception, and is ending
higher, encouraged by some favourable corporate
results.
But markets in Europe, including the UK, are lower,
and there have been falls in the Chinese market, and
other Asian markets, after the measures by the
authorities to reduce the risk of over-heating in the
Chinese economy.
However views about longer-term prospect are still
fairly positive, and the markets seem to be simply
pausing until some of the uncertainties have been
resolved.
Bond markets; have produced a mixed performance,
with the major markets holdings fairly steady, despite
the worsening background situation, but with the minor
markets, especially in Europe, suffering very sharp
falls, and yield spreads between the stronger and weaker
markets opening up to record levels.
The threat of sovereign debt defaults has increased
and urgent action is needed, especially in Europe, if
they are to be avoided.
However there are also warnings that similar conditions
could develop in the UK and in Japan if there are no
early moves to reduce the level of fiscal deficits.
It is still expected that an aid package will be agreed
to avoid a default on Greek debt; but this may only
provide temporary relief.
Shaw Capital Management Korea: Currencies
Movements amongst the major currencies have been
relatively small over the past month.
However the weakness of the euro has enabled both
the dollar and sterling to improve as investors have
rushed to reduce their exposure to the European
currency.
There is a fear that the debt problems affecting Greece
and other countries in the euro-zone will make it
extremely difficult to restore the credibility of the euro,
and that it might make it necessary for some countries
to leave the single currency system, at least on a
temporary basis.
Shaw Capital Management Korea: Short-Term Interest Rates
There have been no changes in short-term interest
rates in the major financial centres over the month.
The Bank of Canada though has indicated that it is
considering pushing rates higher, and this has
encouraged speculation that other central banks may
be planning similar moves.
Shaw Capital Management Korea: Commodity Markets
Moved higher over the past month as sentiment in the
financial markets improved.
markets continued to improve.
There was further evidence that the global economic
recovery was still on track, and short-term interest
rates remained very low.
But towards month-end the mood changed after the
decision to downgrade Greek debt to “junk” status, and
to reduce the credit ratings of both Portugal and Spain.
There was a fear that the contagion would spread still
further, and that the bond market pressures resulting
from the massive fiscal deficits around the world would
have serious financial consequences.
There was always the risk that some of the measures
that were introduced to counter the recession might
have adverse consequences, and this is now proving
to be the case.
Shaw Capital Management Korea: Major Equity Markets
After moving ahead for most of the month, most of the
major equity markets are ending the period unchanged
or slightly higher, and there have been sharp falls in
many of the minor markets.
Wall Street has been the exception, and is ending
higher, encouraged by some favourable corporate
results.
But markets in Europe, including the UK, are lower,
and there have been falls in the Chinese market, and
other Asian markets, after the measures by the
authorities to reduce the risk of over-heating in the
Chinese economy.
However views about longer-term prospect are still
fairly positive, and the markets seem to be simply
pausing until some of the uncertainties have been
resolved.
Bond markets; have produced a mixed performance,
with the major markets holdings fairly steady, despite
the worsening background situation, but with the minor
markets, especially in Europe, suffering very sharp
falls, and yield spreads between the stronger and weaker
markets opening up to record levels.
The threat of sovereign debt defaults has increased
and urgent action is needed, especially in Europe, if
they are to be avoided.
However there are also warnings that similar conditions
could develop in the UK and in Japan if there are no
early moves to reduce the level of fiscal deficits.
It is still expected that an aid package will be agreed
to avoid a default on Greek debt; but this may only
provide temporary relief.
Shaw Capital Management Korea: Currencies
Movements amongst the major currencies have been
relatively small over the past month.
However the weakness of the euro has enabled both
the dollar and sterling to improve as investors have
rushed to reduce their exposure to the European
currency.
There is a fear that the debt problems affecting Greece
and other countries in the euro-zone will make it
extremely difficult to restore the credibility of the euro,
and that it might make it necessary for some countries
to leave the single currency system, at least on a
temporary basis.
Shaw Capital Management Korea: Short-Term Interest Rates
There have been no changes in short-term interest
rates in the major financial centres over the month.
The Bank of Canada though has indicated that it is
considering pushing rates higher, and this has
encouraged speculation that other central banks may
be planning similar moves.
Shaw Capital Management Korea: Commodity Markets
Moved higher over the past month as sentiment in the
financial markets improved.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target
Japanese Finance Minister Naoto Kan has recently exerted pressure
on the Bank of Japan (BOJ) to act more quickly to defeat deflation,
saying he wants the falling price trend to end this year. “Two or
three years is too long. If possible, I hope that the consumer price
index turns positive by the end of this year” Kan told a parliamentary
session.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. The finance minister also said that the BOJ may have to set an
inflation target aimed at dragging the economy out of grinding
deflation … a policy where a central bank declares a target for
inflation and guides actual price levels toward that goal through
monetary policy such as interest rate changes.
BOJ Governor Masaaki Shirakawa made it clear he had no intention
of taking such a step, and explained in detail why he considers it
inappropriate. “There is a mood to reconsider the use of the
framework of inflation targeting following the recent financial
crisis," Mr. Shirakawa said at a recent news conference.
“If a central bank concentrates only on achieving a short-term
price goal, that could have an adverse effect on sustainable economic
growth, which is the final goal of monetary policy”, Shirakawa said.
Moreover, “such a mechanism would reduce the BOJ’s flexibility
on policy”.
Inflation targeting has become a favoured policy among many
central banks worldwide, but since the start of Japan’s deflationary
era in 1999, the BOJ has stoutly resisted calls to set an inflation
target against which it can be judged, and by which it can be
embarrassed if it misses it.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. Instead it has relied on softer price guidance in determining policy.
Its inflation objective is defined in the loosest terms, as a rate
between zero and 2% for the core consumer price index, as one
that meets its “understanding of medium- to long-term price
stability”, with no time-frame to achieve it and no penalty for
failure.
Still, core consumer price index, which excludes volatile fresh food
prices, fell 1.3% on year in December, dropping for the 10th straight
month.
Shirakawa’s comments suggest the central bank will not embark
on any further easing for now to put a stop to deflation. However
the BOJ might be forced to loosen policy toward the middle of the
year if the domestic economy loses momentum from its recent
strong performance … recent data showed the economy grew at a
4.6% annualized pace in the final quarter of 2009.
And with a key upper house election coming up in the summer, at
which the ruling Democratic Party of Japan hopes to win a majority
in the chamber, political pressure on the BOJ to do more to improve
the economic picture could rise.
Can the introduction of inflation targeting under deflation and
zero interest rates contribute to the Japanese economic recovery?
Generally, inflation targeting has been increasingly viewed as a
good monetary policy framework and widely applauded by
economists and policymakers.
In the literature, there are benefits of inflation targeting for both
inflation and output behaviour.
Inflation targeting should stabilise the level of inflation, reduce its
variability and persistence, and also decrease the variability of
output.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. A recent study by Daniel Leigh, an economist at the IMF, shows
that had Japan introduced an inflation target in the 90’s its
economy’s performance would have substantially improved and
the BOJ would have avoided the zero lower bound on nominal
interest rates.
But the essence of the question is to what extent the introduction
of inflation targeting will enhance credibility of the BOJ’s reflation
policy in a deflationary phase and help economic recovery.
More importantly, whether or not the BOJ monetary policy is
credible enough for inflation expectations to be anchored to an
inflation target.
Takehiro Sato of Morgan Stanley says that, unlike the Federal
Reserve, which has won a high degree of respect for its handling
of monetary policy, Japan’s central bank is not yet trusted by
markets because of its past moves. “The BOJ’s policy track record
is bad.
A target for inflation helps to anchor future expectations of
monetary policy, but BOJ lacks credibility.
The mere announcement of an inflation target would not change
expectations”, he said.
Indeed, the introduction of inflation targets among advanced
countries tends to be accompanied by an institutional framework
that makes inflation targeting credible and accountable.
In several countries, including New Zealand and Australia, inflation
targeting is an agreement between the government and the central
bank, and both are committed to policy that is consistent with the
inflation target.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. In several countries, including New Zealand and the UK, when
inflation exceeds the target by a wide margin, the Governor is
required to provide an explanation to the parliament. With
accountability and commitment, inflation targeting does become
credible.
A central bank in a deflationary environment
is subject to a time-inconsistency problem: it
cannot credibly commit to “being
irresponsible” and so continue to shoot for
high inflation.
Furthermore, there is a concern that once the Japanese economy
has emerged from a deflationary spiral and starts to recover, the
central bank will be tempted to renege on its commitment to a
high inflation target, because it would like the economy to return
to an inflation rate consistent with price stability.
Thus a central bank in a deflationary environment is subject to a
time-inconsistency problem: it cannot credibly commit to “being
irresponsible” and so continue to shoot for high inflation.
The result of the time-inconsistency problem is that the markets
would not be convinced that inflation would remain high, and
inflation expectations would not be high enough to lower real rates
sufficiently to stimulate the economy out of the deflation trap.
To overcome deflation and restore economic activity Japanese
policymakers may not need to adopt an inflation target.
They could simply use unconventional instruments, such as
purchases of riskier assets and foreign assets, more aggressively
so to persuade the markets and the public that there will be higher
inflation.
on the Bank of Japan (BOJ) to act more quickly to defeat deflation,
saying he wants the falling price trend to end this year. “Two or
three years is too long. If possible, I hope that the consumer price
index turns positive by the end of this year” Kan told a parliamentary
session.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. The finance minister also said that the BOJ may have to set an
inflation target aimed at dragging the economy out of grinding
deflation … a policy where a central bank declares a target for
inflation and guides actual price levels toward that goal through
monetary policy such as interest rate changes.
BOJ Governor Masaaki Shirakawa made it clear he had no intention
of taking such a step, and explained in detail why he considers it
inappropriate. “There is a mood to reconsider the use of the
framework of inflation targeting following the recent financial
crisis," Mr. Shirakawa said at a recent news conference.
“If a central bank concentrates only on achieving a short-term
price goal, that could have an adverse effect on sustainable economic
growth, which is the final goal of monetary policy”, Shirakawa said.
Moreover, “such a mechanism would reduce the BOJ’s flexibility
on policy”.
Inflation targeting has become a favoured policy among many
central banks worldwide, but since the start of Japan’s deflationary
era in 1999, the BOJ has stoutly resisted calls to set an inflation
target against which it can be judged, and by which it can be
embarrassed if it misses it.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. Instead it has relied on softer price guidance in determining policy.
Its inflation objective is defined in the loosest terms, as a rate
between zero and 2% for the core consumer price index, as one
that meets its “understanding of medium- to long-term price
stability”, with no time-frame to achieve it and no penalty for
failure.
Still, core consumer price index, which excludes volatile fresh food
prices, fell 1.3% on year in December, dropping for the 10th straight
month.
Shirakawa’s comments suggest the central bank will not embark
on any further easing for now to put a stop to deflation. However
the BOJ might be forced to loosen policy toward the middle of the
year if the domestic economy loses momentum from its recent
strong performance … recent data showed the economy grew at a
4.6% annualized pace in the final quarter of 2009.
And with a key upper house election coming up in the summer, at
which the ruling Democratic Party of Japan hopes to win a majority
in the chamber, political pressure on the BOJ to do more to improve
the economic picture could rise.
Can the introduction of inflation targeting under deflation and
zero interest rates contribute to the Japanese economic recovery?
Generally, inflation targeting has been increasingly viewed as a
good monetary policy framework and widely applauded by
economists and policymakers.
In the literature, there are benefits of inflation targeting for both
inflation and output behaviour.
Inflation targeting should stabilise the level of inflation, reduce its
variability and persistence, and also decrease the variability of
output.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. A recent study by Daniel Leigh, an economist at the IMF, shows
that had Japan introduced an inflation target in the 90’s its
economy’s performance would have substantially improved and
the BOJ would have avoided the zero lower bound on nominal
interest rates.
But the essence of the question is to what extent the introduction
of inflation targeting will enhance credibility of the BOJ’s reflation
policy in a deflationary phase and help economic recovery.
More importantly, whether or not the BOJ monetary policy is
credible enough for inflation expectations to be anchored to an
inflation target.
Takehiro Sato of Morgan Stanley says that, unlike the Federal
Reserve, which has won a high degree of respect for its handling
of monetary policy, Japan’s central bank is not yet trusted by
markets because of its past moves. “The BOJ’s policy track record
is bad.
A target for inflation helps to anchor future expectations of
monetary policy, but BOJ lacks credibility.
The mere announcement of an inflation target would not change
expectations”, he said.
Indeed, the introduction of inflation targets among advanced
countries tends to be accompanied by an institutional framework
that makes inflation targeting credible and accountable.
In several countries, including New Zealand and Australia, inflation
targeting is an agreement between the government and the central
bank, and both are committed to policy that is consistent with the
inflation target.
Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. In several countries, including New Zealand and the UK, when
inflation exceeds the target by a wide margin, the Governor is
required to provide an explanation to the parliament. With
accountability and commitment, inflation targeting does become
credible.
A central bank in a deflationary environment
is subject to a time-inconsistency problem: it
cannot credibly commit to “being
irresponsible” and so continue to shoot for
high inflation.
Furthermore, there is a concern that once the Japanese economy
has emerged from a deflationary spiral and starts to recover, the
central bank will be tempted to renege on its commitment to a
high inflation target, because it would like the economy to return
to an inflation rate consistent with price stability.
Thus a central bank in a deflationary environment is subject to a
time-inconsistency problem: it cannot credibly commit to “being
irresponsible” and so continue to shoot for high inflation.
The result of the time-inconsistency problem is that the markets
would not be convinced that inflation would remain high, and
inflation expectations would not be high enough to lower real rates
sufficiently to stimulate the economy out of the deflation trap.
To overcome deflation and restore economic activity Japanese
policymakers may not need to adopt an inflation target.
They could simply use unconventional instruments, such as
purchases of riskier assets and foreign assets, more aggressively
so to persuade the markets and the public that there will be higher
inflation.
Sunday, June 5, 2011
Shaw Capital Management Korea: Competitive tax system in UK
Now consider UK taxation. Already under this current UK
government tax, and stealth taxation in particular, has become the
soft default option. By the mid-2000s the top marginal rate of tax
including all imposts, whether on wages or consumption, had
reached 60%, the average tax rate was 40% and the marginal tax
rate on the average person 43%.
Now that the explicit top rate of income tax has gone over 50%,
the top rate has gone up to around 67%. So far for the average
worker not much has changed since the mid-2000s. However,
further rises in tax rates from these levels are not an option and
indeed they must be cut, for two reasons.
The first reason concerns the ‘Laffer Curve’; which computes the
extra revenue raised for every rise in the marginal tax rate.
This curve reaches a peak at some fairly moderate marginal tax
rate because of the effect on effort and tax evasion.
All informed observers, including the Institute of Fiscal Studies
which is generally in favour of higher taxes and redistribution,
agree that the 50% new top tax rate will not increase revenue and
will probably lower it for this reason.
The second reason concerns growth. Growth comes from the
innovative activities of entrepreneurs, who are extremely sensitive
to marginal tax rates because their activities are risky and any
gains uncertain; the more these are taxed the less the expected
return and if this drops below some threshold they will not bother
at all.
The UK needs both to make the fiscal
adjustment on the spending side by reviving
old-style Treasury control and then quickly
bring their tax system back into the land of
reasonable incentives, following that up with
reforms ‘flattening’ the marginal tax rates
across the economy and income groups.
Estimates of the effects on growth of marginal tax rates are for
obvious reasons uncertain; but the sort of effect that comes out of
empirical studies is an elasticity of one third, i.e. for every 10%
reduction in tax growth would rise by 3% (e.g. a reduction of the
marginal tax rate from 40% to 36% would raise growth from 2.5%
to 2.58%).
This effect seems small but it accumulates into something large.
So in short the UK needs both to make the fiscal adjustment on the
spending side by reviving old-style Treasury control and then
quickly bring their tax system back into the land of reasonable
incentives, following that up with reforms ‘flattening’ the marginal
tax rates across the economy and income groups.
The supporting role of monetary policy
This fiscal adjustment, however gradually brought about, is going
to be a fairly grim process and it will dampen growth further.
It will require the efforts of the monetary authorities to support
the economy through it, without pushing inflation over the target.
At present the bank credit is not expanding, whereas a growing
economy requires bank credit growth usually of twice or more
times the GDP growth rate.
The Bank of England is keeping interest rates low but has suspended
the printing of money (‘quantitative easing’), even though bank
credit growth has not responded.
But it may well need to restart it. This is something the UK will
need to watch and if, as seems likely, inflation falls back to well
below the target and the economy falters under fiscal retrenchment,
the Bank of England will need to take steps to get the broad money
supply growing again.
As we have noted before, other channels for money appear to be
working in substitution … UK equity and corporate bonds issues
have been substantial recently. So liquidity may turn out adequate
even without credit growth revival.
Our forecast for the UK
Though the UK Budget was predictably vacuous, being a pre-election
affair, our forecast assumes that action pretty much along the
above lines will be taken after the election by whatever government
is in power … hung Parliament or not.
The reason is that there is little room for manoeuvre and privately
in fact the parties do not materially disagree, except to some degree
on what modest room there could be for tax rises instead of spending
cuts.
So in short we think there will be fiscal retrenchment, monetary
policy will provide support, and so the UK recovery will slowly
continue.
government tax, and stealth taxation in particular, has become the
soft default option. By the mid-2000s the top marginal rate of tax
including all imposts, whether on wages or consumption, had
reached 60%, the average tax rate was 40% and the marginal tax
rate on the average person 43%.
Now that the explicit top rate of income tax has gone over 50%,
the top rate has gone up to around 67%. So far for the average
worker not much has changed since the mid-2000s. However,
further rises in tax rates from these levels are not an option and
indeed they must be cut, for two reasons.
The first reason concerns the ‘Laffer Curve’; which computes the
extra revenue raised for every rise in the marginal tax rate.
This curve reaches a peak at some fairly moderate marginal tax
rate because of the effect on effort and tax evasion.
All informed observers, including the Institute of Fiscal Studies
which is generally in favour of higher taxes and redistribution,
agree that the 50% new top tax rate will not increase revenue and
will probably lower it for this reason.
The second reason concerns growth. Growth comes from the
innovative activities of entrepreneurs, who are extremely sensitive
to marginal tax rates because their activities are risky and any
gains uncertain; the more these are taxed the less the expected
return and if this drops below some threshold they will not bother
at all.
The UK needs both to make the fiscal
adjustment on the spending side by reviving
old-style Treasury control and then quickly
bring their tax system back into the land of
reasonable incentives, following that up with
reforms ‘flattening’ the marginal tax rates
across the economy and income groups.
Estimates of the effects on growth of marginal tax rates are for
obvious reasons uncertain; but the sort of effect that comes out of
empirical studies is an elasticity of one third, i.e. for every 10%
reduction in tax growth would rise by 3% (e.g. a reduction of the
marginal tax rate from 40% to 36% would raise growth from 2.5%
to 2.58%).
This effect seems small but it accumulates into something large.
So in short the UK needs both to make the fiscal adjustment on the
spending side by reviving old-style Treasury control and then
quickly bring their tax system back into the land of reasonable
incentives, following that up with reforms ‘flattening’ the marginal
tax rates across the economy and income groups.
The supporting role of monetary policy
This fiscal adjustment, however gradually brought about, is going
to be a fairly grim process and it will dampen growth further.
It will require the efforts of the monetary authorities to support
the economy through it, without pushing inflation over the target.
At present the bank credit is not expanding, whereas a growing
economy requires bank credit growth usually of twice or more
times the GDP growth rate.
The Bank of England is keeping interest rates low but has suspended
the printing of money (‘quantitative easing’), even though bank
credit growth has not responded.
But it may well need to restart it. This is something the UK will
need to watch and if, as seems likely, inflation falls back to well
below the target and the economy falters under fiscal retrenchment,
the Bank of England will need to take steps to get the broad money
supply growing again.
As we have noted before, other channels for money appear to be
working in substitution … UK equity and corporate bonds issues
have been substantial recently. So liquidity may turn out adequate
even without credit growth revival.
Our forecast for the UK
Though the UK Budget was predictably vacuous, being a pre-election
affair, our forecast assumes that action pretty much along the
above lines will be taken after the election by whatever government
is in power … hung Parliament or not.
The reason is that there is little room for manoeuvre and privately
in fact the parties do not materially disagree, except to some degree
on what modest room there could be for tax rises instead of spending
cuts.
So in short we think there will be fiscal retrenchment, monetary
policy will provide support, and so the UK recovery will slowly
continue.
Shaw Capital Management Investment Deadlock for Japan
The Democratic Party of Japan’s (DPJ) landslide victory in the Lower House election a year ago ushered in euphoric predictions of bold new policies, and even a transformation of the Japanese political system. There were widespread hopes that the DPJ would end the run of short-lived leaders. Instead, Prime Minister Yukio Hatoyama’s tenure proved to be a slow-motion train wreck. Indeed, the DPJ quickly showed itself to be no more competent in governing Japan than its much-derided opponent, the Liberal Democratic Party (LDP).
After shedding its two albatrosses of Hatoyama and general secretary Ichiro Ozawa, and many of its earlier campaign pledges, the DPJ hoped for a respectable showing in the last Upper House election. Instead, the ruling DPJ suffered a stunning defeat, when voters had the opportunity to show whether they were confident in Prime Minister Naoto Kan’s just over 1-month-old administration. The party ended with only 106 seats, far short of the 122 needed for an outright majority. The gap is too large to be filled by creating a coalition, because the most likely potential partners also lost seats.
As a result, the DPJ coalition can no longer ensure approval of its legislative initiatives. A twisted parliament portends even greater legislative stalemate and political gridlock. Gerald Curtis, a professor at Columbia University in New York and a long-time expert on Japanese politics, said the election had returned Japan to the paralysis and gridlock of the past few years. “You cannot pass a budget now in this political environment. You’ll have weak and unstable government. While the world changes fast, the Japanese government will change very slowly”. Trying to put a good face on the results, Kan said he viewed the election as a “starting point” for his push for a more responsible government ... The policy implications of the election outcome do not suggest an aggressive approach to monetary, fiscal or structural policy over the next few months.
Indeed, the attention of the large parties will most likely be focused on internal matters, leaving less time for focus on the economy. Gridlock is bad for the economy and for investor sentiment if policy drift continues for a prolonged period. According to Alan Feldman, managing director at Morgan Stanley in Tokyo, there are so many pressing problems in the Japanese economy that the costs of gridlock could be very high. In particular, pressure on the Bank of Japan for more aggressive monetary policy will likely be minimal, at least until political disarray ends. Without strong political leadership little progress is likely on budget priorities. The same goes for tax decisions.
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
After shedding its two albatrosses of Hatoyama and general secretary Ichiro Ozawa, and many of its earlier campaign pledges, the DPJ hoped for a respectable showing in the last Upper House election. Instead, the ruling DPJ suffered a stunning defeat, when voters had the opportunity to show whether they were confident in Prime Minister Naoto Kan’s just over 1-month-old administration. The party ended with only 106 seats, far short of the 122 needed for an outright majority. The gap is too large to be filled by creating a coalition, because the most likely potential partners also lost seats.
As a result, the DPJ coalition can no longer ensure approval of its legislative initiatives. A twisted parliament portends even greater legislative stalemate and political gridlock. Gerald Curtis, a professor at Columbia University in New York and a long-time expert on Japanese politics, said the election had returned Japan to the paralysis and gridlock of the past few years. “You cannot pass a budget now in this political environment. You’ll have weak and unstable government. While the world changes fast, the Japanese government will change very slowly”. Trying to put a good face on the results, Kan said he viewed the election as a “starting point” for his push for a more responsible government ... The policy implications of the election outcome do not suggest an aggressive approach to monetary, fiscal or structural policy over the next few months.
Indeed, the attention of the large parties will most likely be focused on internal matters, leaving less time for focus on the economy. Gridlock is bad for the economy and for investor sentiment if policy drift continues for a prolonged period. According to Alan Feldman, managing director at Morgan Stanley in Tokyo, there are so many pressing problems in the Japanese economy that the costs of gridlock could be very high. In particular, pressure on the Bank of Japan for more aggressive monetary policy will likely be minimal, at least until political disarray ends. Without strong political leadership little progress is likely on budget priorities. The same goes for tax decisions.
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
Shaw Capital Management Investment Equity Markets 2010 Part 2
For the moment attention is focused on the strength of the German economy, and the beneficial effects that will be felt elsewhere in the zone; and there has also been a relaxation of tension about debt defaults, after the rescue package agreed by the member countries, and the intervention by the ECB to support the weaker bond markets. The German export performance depends of the maintenance of strong growth in the global economy that may not be sustained; and the odds still suggest that one or more of the weaker countries will at least be forced to defer interest payments on its sovereign debt, and may even default. The latest improvement in the markets therefore seems likely to need further support from Wall Street if it is to be sustained. The best performance amongst the major markets over the past month had occurred in the UK market. The measures announced by the new Coalition government to reduce the size of the fiscal deficit have been well received by the market, despite the fact that they will slow down the pace of the economic recovery over the coming months; and the latest estimate of a 1.1% growth rate in the second quarter of the year suggests that the effects of the fiscal retrenchment might even be less than had been expected, and has removed most of the fears about the possibility of a move into a “double- dip” recession.
The improvement in sentiment amongst investors is therefore easy to understand. Even before the announcement of the estimate of growth in the second quarter of the year, there had been further evidence of an improving economic situation. The unemployment rate fell; retail sales volumes rose by 1%, the strongest monthly increase in almost a year; and the latest quarterly survey from the CBI reported that manufacturing output increased at its strongest rate since 1995.
The 1.1% estimated rate was well above most forecasts. It was the result of expansion in both the manufacturing and services sectors of the economy. But the most surprising figure was the estimated 6.6% rate of growth in the construction sector that accounted for around one third of the overall growth in the period. It has also produced considerable interest regarding the reaction of the Bank of England to these figures. The bank has previously been mainly concerned about the risk of slower growth, and had even considered at the last meeting of its Monetary Policy Committee “arguments in favour of a modest easing in monetary policy” because “prospects for gross domestic product growth had probably deteriorated a little over the month”.
The mood will have changed now; but the governor, Mervyn King, has recently indicated that there will be no early changes in policy as a result of one set of figures. The background factors affecting the market therefore remain. Short-term interest rates will remain low, and the economy is performing better than expected; but the austerity measures that are to be introduced, and especially the increase in VAT in January, will depress demand over the coming months. It therefore seems likely that the UK market, like the markets in mainland Europe, will need further support from Wall Street if the recent strength is to be sustained.
The Japanese market is lower over the past month. There has been further evidence that the pace of the recovery in the Japanese economy is weakening; andthe poor performance by the ruling Democratic Party in the recent election seems likely to lead to a period of political uncertainty that will make it difficult for action to be taken to reverse the trend.
The earlier decision to introduce measures to reduce the massive fiscal deficit was a major reason for the government’s poor election performance in the election, and may well be reversed; and the Bank of Japan’s action to try to increase the rate of bank lending, especially to smaller companies, also seems unlikely to have much of an effect on the economic situation. The background situation in Japan is therefore very disappointing, and this is reflected in the performance of the equity market. It seems unlikely that there will be any early improvement in the situation, and so the Japanese market weakness looks set to continue.
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
The improvement in sentiment amongst investors is therefore easy to understand. Even before the announcement of the estimate of growth in the second quarter of the year, there had been further evidence of an improving economic situation. The unemployment rate fell; retail sales volumes rose by 1%, the strongest monthly increase in almost a year; and the latest quarterly survey from the CBI reported that manufacturing output increased at its strongest rate since 1995.
The 1.1% estimated rate was well above most forecasts. It was the result of expansion in both the manufacturing and services sectors of the economy. But the most surprising figure was the estimated 6.6% rate of growth in the construction sector that accounted for around one third of the overall growth in the period. It has also produced considerable interest regarding the reaction of the Bank of England to these figures. The bank has previously been mainly concerned about the risk of slower growth, and had even considered at the last meeting of its Monetary Policy Committee “arguments in favour of a modest easing in monetary policy” because “prospects for gross domestic product growth had probably deteriorated a little over the month”.
The mood will have changed now; but the governor, Mervyn King, has recently indicated that there will be no early changes in policy as a result of one set of figures. The background factors affecting the market therefore remain. Short-term interest rates will remain low, and the economy is performing better than expected; but the austerity measures that are to be introduced, and especially the increase in VAT in January, will depress demand over the coming months. It therefore seems likely that the UK market, like the markets in mainland Europe, will need further support from Wall Street if the recent strength is to be sustained.
The Japanese market is lower over the past month. There has been further evidence that the pace of the recovery in the Japanese economy is weakening; andthe poor performance by the ruling Democratic Party in the recent election seems likely to lead to a period of political uncertainty that will make it difficult for action to be taken to reverse the trend.
The earlier decision to introduce measures to reduce the massive fiscal deficit was a major reason for the government’s poor election performance in the election, and may well be reversed; and the Bank of Japan’s action to try to increase the rate of bank lending, especially to smaller companies, also seems unlikely to have much of an effect on the economic situation. The background situation in Japan is therefore very disappointing, and this is reflected in the performance of the equity market. It seems unlikely that there will be any early improvement in the situation, and so the Japanese market weakness looks set to continue.
At Shaw Capital Management we give you the information and insight you need to make the right investment choices.
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