Thursday, July 29, 2010

Macronumbers and company figures will sign in for the performance of the European stockmarkets.

No serious news up till now so I don't expect big changes today for Europe.

Ary Ritskes
a.ritskes@havemorefund.nl

Germany, the Euro-Zone's Growth Engine

Germany's export surge has placed it to the fore of the euro-zone's recovery to the delight of the ruling coalition, although ordinary Germans seem still to be mindful of the global economic uncertainties surrounding the second half of the year.

The Berlin-based DIW economic research institute estimated Wednesday that Germany has posted the highest growth in the second quarter in the 16-member euro zone, powering ahead by 1.1% from the previous quarter.

The institute's index is based on industrial production, sales and other data to compose an estimate for gross domestic product. The German government isn't scheduled to issue official GDP data for the past quarter until Aug. 13.

But German Economics Minister Rainer Brüderle said Wednesday that Germany is now riding a enduring recovery and the number of unemployed will fall below 3 million this year.

"We have indeed a sustainable upswing," Brüderle told ZDF breakfast television. "It is driven, as is usual in Germany, by exports, which helps to promote the domestic cycle and generate more income."

Mr. Brüderle said the rebound of the German economy, which contracted by 4.9% last year, is a result of a "huge restructuring effort" at German companies.

Government officials refer to the recovery and low unemployment figures as a "job miracle," but it hasn't won Chancellor Angela Merkel much support among voters.

The latest survey by the Forsa institute for Stern weekly magazine published Wednesday sees Ms. Merkel's conservative parties falling to the lowest level in 10 years, getting just 29% support from those polled. Her coalition partner, the Free Democratic Party, got just 5% support.

"The population isn't aware as much of the economic upswing as the economic data would suggest because the upswing affects only some sectors and many jobs are now temporary or poorly paid," said Klaus-Peter Schoeppner of the polling institute Emnid.

"The uncertainty is still great and there is an erosion of solidarity in companies because they make profits but much of this is not used to secure jobs," he said.

The outlook for Germany's economy depends on favorable monetary conditions and a recovering global economy, economists said.

"The high growth is mainly a result of the positive export development," said DIW's economist Ferdinand Fichtner. The growth pace "will likely not be maintained" because demand for German goods will slow somewhat because the catching-up process will peter out and fiscal stimulus packages will be phased out gradually.
Commerzbank economist Ralph Solveen is optimistic about the second-quarter data, predicting 1.5% quarterly growth, but he also said GDP is still "miles under levels seen before--we are currently catching up with the slump, but it's certainly faster than we all had anticipated."

China Rallies on Growth Hope

China's benchmark stock index lost nearly 27% through the year's first half, but shares have surged 11% since July 5 as investors believe the government won't take more-aggressive moves to rein in the economy. Here, a stock board in Huaibei, Anhui province earlier this year.

BEIJING—China's stock market, one of the world's worst performers in the first half of the year, has rebounded as investors bet that the government's aggressive efforts to tighten the reins on the economy have peaked.

The benchmark Shanghai Composite Index is up 11% from its 2010 low on July 5, including a 2.3% gain on Wednesday to 2633.66, its highest close in two months.

The climb is in line with other major global markets, but is notable because it contrasts sharply with the Chinese index's performance over the first six months of this year. Then, it fell about 27%, descending into a bear market, amid fears that the biggest engine of global growth was cooling.

Investors are responding to government signals that it is backing away from moves made in the first half to cool its economy, such as reining in property speculation and curbing lending. Traders are betting that will translate into greater market liquidity and a boost for share prices.

Investors worldwide have homed in on any signs that China's economic growth is stabilizing. Combined with recent debt flare-ups in Europe, the swings in sentiment surrounding China have in large part dictated the direction of the rest of the world's financial markets, from stocks to bonds to commodities.

Chinese domestic stocks are still largely off limits to foreign investors, with only some big foreign institutions having access with government-issued quotas. But the more positive signals out of China have helped feed into a rebound in commodities in recent weeks. Since the Shanghai index bottomed on July 5, copper prices are up nearly 11%, aluminum has gained 7.4% and lead is up 13%.

In mid-July, Premier Wen Jiabao said China will maintain the "continuity and stability" of its economic policies in the second half of this year. He waded in again last week, signaling that maintaining fast economic growth is now a higher priority for the government than it was earlier in the year.

That has given economists and investors reason to think that, at the very least, China's economic growth may stabilize, if not continue its rapid ascent.

"The subtle change in policy tone should provide support for the market," UBS Securities economist Wang Tao said in a note. "However, we see policy stability, not reversal, as the key phrase here."

While analysts say the market has likely bottomed for now, they also say sentiment is far from bullish.
"I think people need a clearer indication that the external economy has stabilized and that China's economy will have a soft landing" before the market undergoes a sustained rally, said Terrace Chum, executive director for Greater China equities at MFC Global Investment Management in Shanghai.

China's economy grew robustly in the first half of the year, although growth in the second quarter slowed significantly from the first.
For most of its relatively short history, China's stock market bore little apparent relationship to the economy. But in recent years, it has hewed more closely to broader trends, declining from a record in October 2007 as the global recession slowed China's growth and picking up again a year later as China's massive stimulus was rolled out.

China's investors are especially sensitive to policy cues, analysts say. Unlike more-developed economies, where governments regulate the economy by adjusting interest rates at well-marked intervals, Beijing tends to try to manage inflation and the pace of economic growth by using blunt administrative tools that investors watch closely-even though they often aren't publicly announced, but emerge through local media reports and word of mouth.

Still, reading the tea leaves of government policy isn't an exact science, and some investors remain wary of piling back into the market.
Michael Kurtz, China strategist for Macquarie Securities, said interest in the country's stock market has been strongest in recent weeks among fund managers who have been reducing their cash holdings and investing more in stocks.

But he said the number of new trading accounts opened by retail investors has remained subdued in recent weeks, reflecting wariness in the wake of the policy-inspired decline in share prices earlier this year.
"For many retail investors, it's a case of once bitten twice shy," he said

ECB Gets Tougher on Its Bank Lending

The European Central Bank on Wednesday announced big increases to the discounts it will impose on low-rated and illiquid bonds when it accepts them as collateral for its lending operations.

Details
Haircut schedule for assets eligible for use as collateral in Eurosystem market operations
The new discounts, or haircuts, which will come into force Jan. 1, 2011, will make it harder for banks to borrow from the ECB using low-quality bonds. This affects in particular bonds that have only theoretical valuations, meaning bonds for which banks say they can't find a reliable market price.

The ECB had greatly expanded the range and quality of paper it would accept as collateral in the wake of the financial crisis, to ensure that banks retained access to funding as the wholesale money markets seized up.

It said that the new rules won't lead to an "undue decrease" in the overall volume of eligible collateral.
However, it will in some cases sharply reduce the amount that a bank can borrow against illiquid or low-rated bonds.

For example, according to ECB data, more than a quarter of the collateral it loaned against last year was "uncovered" bank bonds, that is, bonds without the backing of any special collateral pool of their own.

Banks can currently borrow 88.5 cents on every euro of such bonds with a 10-year maturity and a fixed coupon, or 83.5 cents if the bond is rated below A3/A-.

From next year, however, they will only be able to borrow 86 cents on the euro, if the bond's rating is above the A3/A- threshold, and 61 cents if the rating is lower.

Most of the extra haircuts apply to bonds rated below the A3/A- threshold.
Collateral Categories

The ECB has a five-tier system for classifying collateral. It is:
• Category 1: Debt instruments issued by central governments or central banks
• Category 2: Local and regional government debt instruments; jumbo covered bonds; agency debt instruments; and supranational debt instruments
• Category 3: Traditional covered bank bonds; structured covered bank bonds; multi-cédulas; and debt instruments issued by corporate and other issuers
• Category 4: Credit institution debt instruments (uncovered)
• Category 5: Asset-backed securities

However, the ECB said it will also increase the discounts it applies to higher-rated paper--even AAA-rated bonds--if they fall into its Category 3, 4 or 5 classifications.

These include banks' covered bonds that don't have the liquidity of the larger and standardized "jumbo" issues, corporate bonds and bonds issued jointly by more than one bank. The last are particularly popular with Spanish banks.

Category 5 is a new classification specifically for asset-backed securities, which will be subjected to a uniform haircut of 16% from next year. Asset-backed bonds rated below A3/A- won't be eligible any longer.

The ECB hasn't placed any additional discounts on its Category 1 and Category 2 collateral, which consists of central and local government debt, agency and supranational debt and jumbo covered bonds, irrespective of their rating.

The ECB originally announced its intention to review this part of its collateral framework in April.

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