Saturday, December 6, 2014

Weekly Commentary, February 15, 2013: Hedge Funds Gone Wild

I posited that Mario Draghi this past summer “singlehandedly” altered the global financial landscape. This miraculous feat was made possible with his bold guarantee of unlimited ECB bond purchases to backstop troubled euro-zone bond markets and system liquidity more generally. As soon as the marketplace became comfortable that his backstop was credible, the “Draghi Plan” fundamentally altered the risk vs. reward calculus for holding and shorting European periphery debt. This abrupt change in debt market perceptions then worked to reverse the crisis of confidence imperiling the soundness of Europe’s banking conglomerates, the region’s economic prospects and the euro currency.

Importantly, the global leveraged speculating community was forced to cover short (bearish) positions in Europe - and many reversed course and established long holdings. Illiquidity and capital flight risk were transformed into liquidity abundance and major financial inflows. An impending catalyst for a problematic bout of global de-risking/de-leveraging (“risk off”) was quashed. For “global macro” and global risk markets, this proved a game changer.

During bouts of acute financial stress over the past few years, European officials repeatedly protested that they were under the attack of the hedge fund community. It is, then, ironic that the Draghi Plan incentivized leveraged player purchases that boosted marketplace liquidity and dramatically lowered market yields in Spain, Italy, Portugal, Greece and Ireland. Following in the footsteps of the Federal Reserve, to stem Europe’s deepening crisis Draghi had to create an enticing backdrop for leveraged speculation.

Last summer’s crisis was rapidly becoming a global systemic issue. The global move to more open-ended quantitative easing – especially by the Federal Reserve and Bank of Japan – was part and parcel to a concerted global central bank response to systemic fragilities. And I recall clearly how the Mexican bailout in 1995 emboldened the speculator community and spurred dangerous Bubble excess in South East Asia, Russia and the developing markets throughout 1996. The late-1998 LTCM bailout and Fed reliquefication emboldened the speculators and played an integral role in the 1999 Bubble melt-up in technology stocks and the U.S. equities more generally. I’m monitoring for indications that the “European” bailout might spur a major bout of speculative excesses in 2013.

Granted, a billion dollars just isn’t what it used to be. But according to The Wall Street Journal, George Soros’ hedge fund “has scored gains of almost $1 billion” shorting the yen over the past few months.

From the WSJ (Gregory Zuckerman and Juliet Chung’s “U.S. Funds Score Big by Betting Against the Yen”): “Some of the biggest U.S. hedge-fund investors have made billions betting against the yen, exploiting Japan's determination to weaken its currency and boost its economy. Wagering against the yen has emerged as the hottest trade on Wall Street over the past three months… The growing trade has itself helped pressure the yen, which has slid almost 20% in about four months. That, in turn, is helping fuel what could become a world-wide currency war. Countries such as Germany and France have criticized Japan's policies, while others have threatened to take action to reduce the value of their own currencies to remain competitive with Japan.”

And from the Financial Times (Sam Jones and Dan McCrum’s “‘Abe Trade’ Revives Macro Hedge Funds”): “Shorting yen and buying Japanese equities, inspired by the dovish monetary bent of Japan’s new prime minister, Shinzo Abe, has been one of the most successful hedge fund wagers in years. And many believe it is a harbinger of greater macroeconomic dislocations and greater opportunities. Since 2010, the blue-bloods of the world’s $2tn hedge fund industry – so-called global macro managers – have been cowed by rangebound markets that have been dominated by choppy ‘risk on, risk off’ movements. Global macro stars, who specialize in trading interest rates, bonds and currencies to play the ups and downs of the world economy have not just struggled to make money, they have struggled not to lose it.”

I posed the question last week, “New Bull or Bigger Risk On, Risk Off?” Europe fragilities were instrumental in the “choppy ‘risk on, risk off’ movements” throughout global markets over the past two years. This highly unsettled backdrop forced the big macro hedge funds – and traders/speculators more generally – to keep trades on short leashes (risk control measures that chipped away at performance). We now see indications that the big players have been unleashed, at least as far as taking – and winning – huge bets against the yen.

More from the FT: “For many of them, the prospect of ‘currency wars’ and a breakdown in the international economic consensus will make for the kind of investment opportunities they have been desperate for since 2008. The next few months are rich with potential opportunities, they believe, whether shorting sterling in anticipation of laxer monetary policy…; buying up equities to trade on institutional investors’ rotation away from bonds; or investing in commodities such as palladium to capitalize on a race for devaluation among the world’s big currencies. ‘I think it’s the rebirth of global macro,’ says the head of one of the world’s top five global macro hedge funds. ‘For the last three years we have had this rangebound environment, and now it looks like individual currency actions, individual countries acting, are going to start to dominate.’”

The “rebirth of global macro”? “Greater macroeconomic dislocations and greater opportunities”? There are different angles of the analysis to contemplate. First of all, we’re seeing important confirmation in the thesis that heightened global fragilities and aggressive policymaker responses have incited only more aggressive risk-taking. There is, as well, support for the view that currency markets have become a key battleground for the speculator community. Policy measures have been unprecedented – and I would argue Bubble excesses have been commensurate. With the euro situation seemingly stabilized in the short-term, the backdrop became ripe for a big bet against the yen. And with the new Abe government supportive of aggressive Bank of Japan money printing and a weaker currency, some of the “community” of big funds pounced.

The bearish yen trade has been a big winner. Will the speculators pile on? Will proceeds from yen selling provide liquidity for bullish “risk on” market bets globally? Could indiscriminate selling potentially risk inciting a free fall in the yen? If yen weakness turns disorderly, could this negatively impact Japan’s vulnerable bond market? Or could developments elsewhere (Europe?) shift the backdrop away from today’s global “risk on,” in the process inciting an abrupt reversal in the yen and another painful short squeeze? This yen situation has potential to be an integral facet of a “Bigger Risk On, Risk Off” global market dynamic.

From a “risk on” perspective, the big macro funds holding onto gains would ensure that they’d be on the receiving end of fund inflows. They would enjoy greater firepower – and confidence – for which to pursue bigger macro bets. And their success would have the leveraged speculating community and global traders alike determined/desperate to participate in the next big trade. The big win on the yen could have important financial and psychological ramifications for an expanding global Bubble backdrop.

Lurking Big Risk Off is a potential consequence of unfolding Big Risk On. The Europeans today have no qualms with the global leveraged speculators actively buying their bonds. But many are increasingly frustrated by the strong euro - and they’ll be mad as hell again when the speculators start liquidating and shorting their debt. The Japanese are these days fine with the hedge funds pushing the yen lower. Yet with Japan’s stupendous debt load, it brings to mind the old “be careful what you wish for.” An attack on Japanese bonds would be problematic.

Meanwhile, much of the world is increasingly fretting “currency wars” and “competitive devaluations.” No one seems to have an issue when speculators bid up stock and bond prices. Increasingly in the currency markets, however, countries are looking at the situation as a zero sum game. “Developing” policymakers, in particular, are about fed up with “hot money” inflows inflating their currencies. Yet global central banks have created such abundant liquidity conditions that currency speculation seems likely to gain further momentum. In our unstable financial and economic worlds, policy measures have come to dictate currency and risk market behavior. This plays right into the hands of a global pool of speculative finance that – bull market, bear market, crisis or recovery – only seems to inflate larger by the year.

And Friday from Bloomberg: “Billionaires Soros, Bacon Cut Gold Holdings as Price Slumps.” The big hedge funds have been major operators in the gold market. As “risk on” has gained momentum, so-called “safe haven” assets have lost some luster. Gold, Treasury bonds and German bunds have all stumbled in early-2013. And in this trend-following and performance chasing financial landscape, funds are compelled to sell the under-performers and buy what’s inflating in price in order to survive. With safe havens out of fashion and cash a total loser, “money” flows freely to the inflating riskier assets. Funds aggressively playing “risk on” attract strong inflows and greater financial power, while those cautiously positioned lose assets and are forced to liquidate lower-risk assets. Meanwhile, buoyant risk markets work wonders on bullish market sentiment.

At the same time, there is also ongoing confirmation that the incredible global policymaking and liquidity backdrop is much more successful in inflating asset markets than it is in boosting economic performance. In particular - and especially considering policy environments - economies in Europe, Japan and the U.S. continue to un-impress. This bolsters the view of a widening global gap between inflating financial asset prices and underlying economic fundamentals.

This begs the question: how might the emboldened “global macro” community play this divergence? Will they play policymaking and the inflating Bubble for all it’s worth? Or will they begin to approach speculative markets with a more contrarian bent? With some funds emboldened and still so many others desperate for performance, it seems reasonable to assume that markets become even more speculative – a game of trying to catch folks on the wrong side of trades (i.e. Apple, gold, etc.), underexposed to outperforming sectors (i.e. homebuilders, high-beta and “short” stocks) and overexposed to the underperforming (i.e. “defensive”). Most call it a “new bull market”. I’ll stick with “inflating speculative Bubble”.

For the Week:

For the week, the S&P500 added 0.1% (up 6.6% y-t-d), while the Dow slipped 0.1% (up 6.7% y-t-d). The broader market outperformed. The S&P 400 MidCaps gained 0.6% (up 9.3%), and the small cap Russell 2000 gained 1.0% (up 8.7%). The Banks increased 0.2% (up 7.5%), and the Broker/Dealers jumped 2.1% (up 15.8%). The Morgan Stanley Cyclicals gained 1.2% (up 8.5%), and Transports increased 0.6% (up 12.1%). The Morgan Stanley Consumer index rose 1.2% (up 9.4%), while the Utilities dipped 0.3% (up 4.1%). The Nasdaq100 declined 0.4% (up 3.9%), while the Morgan Stanley High Tech index added 0.2% (up 6.6%). The Semiconductors gained 0.9% (up 11.6%). The InteractiveWeek Internet index rose 1.0% (up 10.6%). The Biotechs slipped 0.4% (up 8.8%). With bullion slumping $57, the HUI gold index sank 6.0% (down 14.6%).

One-month Treasury bill rates ended the week at 8 bps and 3-month rates closed at 10 bps. Two-year government yields were up about 2 bps to 0.27%. Five-year T-note yields ended the week up 3 bps to 0.86%. Ten-year yields gained 5 bps to 2.00%. Long bond yields added a basis point to 3.18%. Benchmark Fannie MBS yields rose 4 bps to 2.62%. The spread between benchmark MBS and 10-year Treasury yields was about a basis point narrower at 62 bps. The implied yield on December 2014 eurodollar futures increased 2 bps to 0.63%. The two-year dollar swap spread was little changed at 15 bps, while the 10-year swap spread narrowed about 2 to 6 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 3 to 87 bps. An index of junk bond risk fell 10 to 438 bps.

Debt issuance was steady. Investment grade issuers included Dupont $2.0bn, Citigroup $1.5bn, Praxair $900 million, Walt Disney $800 million, American Honda Finance $750 million, Discover Bank $750 million, Kellogg $650 million, Airgas $600 million, Arrow Electronics $600 million, Starwood Property Trust $600 million, Emerson Electric $500 million, National Fuel Gas $500 million, and John Hopkins $355 million.

Junk bond funds saw outflows slow to $165 million (from Lipper). Junk issuers included Polyone $600 million, Delphi $800 million, RSI Home Products $525 million, American Axle & Manufacturing $400 million, Triumph Group $375 million, Burlington $350 million, Fairpoint Communications $300 million, Neovia Logistics International $125 million, and Speedy Group $125 million.

Convertible debt issuers included Molina Healthcare $400 million.

International issuers included Vodafone $6.0bn, Hungary $3.25bn, Romania $1.5bn, Flextronics $1.0bn, International Finance Corp $1.0bn, NII International Telecom $750 million, and Kommunalbanken $600 million.

Spain's 10-year yields this week fell 17 bps to 5.16% (down 11bps y-t-d). Italian 10-yr yields fell 17 bps to 4.37% (down 13bps). German bund yields added 4 bps to 1.65% (up 33bps), and French yields increased 4 bps to 2.27% (up 27bps). The French to German 10-year bond spread was little changed at 62 bps. Ten-year Portuguese yields dropped 34 bps to 6.05% (down 70bps). The Greek 10-year note yield dipped 2 bps to 10.68%. U.K. 10-year gilt yields were up 10 bps to 2.19% (up 37bps).

The German DAX equities index declined 0.8% for the week (down 0.3% y-t-d). Spain's IBEX 35 equities index slipped 0.3% (down 0.2%). Italy's FTSE MIB fell 0.9% (up 1.3%). Japanese 10-year "JGB" yields dipped a basis point to 0.74% (down 4bps). Japan's volatile Nikkei added 0.2% (up 7.5%). Emerging markets were mixed. Brazil's Bovespa equities index declined 1.0% (down 5.0%), and Mexico's Bolsa dropped 2.1% (up 1.0%). South Korea's Kospi index jumped 1.5% (down 0.8%). India’s Sensex equities index dipped 0.1% (up 0.2%). China’s Shanghai Exchange was closed for the holiday week (up 7.2%).

Freddie Mac 30-year fixed mortgage rates were unchanged again this week at 3.53% (down 34bps y-o-y). Fifteen-year fixed rates were unchanged at 2.77% (down 39bps). One-year ARM rates were up 8 bps to 2.61% (down 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 3 bps to 4.12% (down 39bps).

Federal Reserve Credit surged $26.1bn to a record $3.018 TN. Fed Credit has increased $232bn in 19 weeks. Over the past year, Fed Credit expanded $100bn, or 3.4%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $708bn y-o-y, or 6.9%, to $10.958 TN. Over two years, reserves were $1.666 TN higher, for 18% growth.

M2 (narrow) "money" supply rose $7.8bn to $10.421 TN. "Narrow money" has expanded 6.9% ($669bn) over the past year. For the week, Currency declined $4.7bn. Demand and Checkable Deposits jumped $15.9bn, and Savings Deposits increased $5.7bn. Small Denominated Deposits declined $2.7bn. Retail Money Funds fell $6.3bn.

Money market fund assets declined $12.3bn to $2.679 TN. Money Fund assets have expanded $20bn y-o-y, or 0.8%.

Total Commercial Paper outstanding fell $26.5bn to $1.085 TN CP was up a notable $122bn in 14 weeks and $123bn, or 12.8%, over the past year.

Currency and 'Currency War' Watch:

February 11 – Bloomberg (Jana Randow and Jeff Black): “European Central Bank council member Jens Weidmann said the euro isn’t seriously overvalued and warned governments against trying to weaken the currency. ‘Latest indicators don’t signal a serious overvaluation of the euro despite its recent appreciation’ and ‘politicians should hold on to the established division of labor,’ Weidmann, who heads Germany’s Bundesbank, said… ‘An exchange-rate policy to specifically weaken the euro would lead to higher inflation in the end.’ French President Francois Hollande last week urged government leaders to steer the value of the euro lower to boost growth, a proposal rejected by German Chancellor Angela Merkel.”

The U.S. dollar index increased 0.4% to 80.58 (up 1.0% y-t-d). For the week on the upside, the Swedish krona increased 2.0%, the South Korean won 1.6%, the New Zealand dollar 1.1%, the Taiwanese dollar 0.6%, the South African rand 0.3%, the Mexican peso 0.3%, the Brazilian real 0.2%, and the Singapore dollar 0.1%. For the week on the downside, the British pound declined 1.8%, the Japanese yen 0.9%, the Swiss franc 0.5%, the Canadian dollar 0.4%, the Australian dollar 0.1%, and the Norwegian krone 0.1%. The euro was unchanged.

Commodities Watch:

The CRB index declined 0.9% this week (up 1.2% y-t-d). The Goldman Sachs Commodities Index slipped 0.3% (up 4.5%). Spot Gold dropped 3.4% to $1,610 (down 3.9%). Silver sank 5.1% to $29.85 (down 1.3%). March Crude added 14 cents to $95.86 (up 4%). March Gasoline jumped 2.5% (up 14%), while March Natural Gas fell 3.6% (down 6%). May Copper slipped 0.6% (up 3%). March Wheat declined 1.9% (down 5%), and March Corn fell 1.4% (unchanged).

U.S. Bubble Economy Watch:

February 15 – Bloomberg (Renee Dudley): “Walmart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails… ‘In case you haven’t seen a sales report these days, February MTD sales are a total disaster,’ Jerry Murray, Walmart’s vice president of finance and logistics, said… ‘The worst start to a month I have seen in my ~7 years with the company.’”

February 12 – Bloomberg (Oshrat Carmiel): “Michael Stern was prepared for a gradual real estate rebound after buying a New York office tower in December 2009, with plans to convert it to condominiums following a housing plunge that sent prices down 31%. Now, long before the final floor tile is laid or the first resident moves into the Walker Tower development… Stern’s firm… and its partner have increased prices on units at the building 13 times. ‘I didn’t let the market conditions of the day dissuade me,’ Stern said of his 2009 deal. ‘But I can’t say I thought prices would be quite as lofty as they’ve proven to be.’ Manhattan condo developers, in a construction revival after the credit crisis, are raising prices on their unbuilt units as often as twice a month as buyers return from the housing slump to find there’s little on the market. The borough’s inventory of homes for sale fell to the lowest in at least 12 years in the fourth quarter… Sales, meanwhile, were the second-highest in a decade in 2012.”

February 11 – Bloomberg (Prashant Gopal and John Gittelsohn): “Prices for single-family homes climbed in almost 88% of U.S. cities in the fourth quarter as the housing recovery broadened. The median sales price increased from a year earlier in 133 of 152 metropolitan areas measured, the National Association of Realtors said… U.S. home prices rose 8.3% in December from a year earlier, the biggest jump since May 2006… CoreLogic Inc. reported… At the end of the fourth quarter, 1.82 million existing homes were available for sale, 22% fewer than a year earlier…”

Fiscal Watch:

February 13 – Bloomberg (Roxana Tiron and Kathleen Hunter): “Democrats and Republicans in the U.S. Congress are nowhere near a plan to avert $1.2 trillion in spending cuts about two weeks before they are set to begin. It’s the latest in a series of fiscal deadlines created by Congress that in the past two years took the U.S. to the brink of a debt default, a government shutdown and middle-class tax increases that neither party wanted. Unless lawmakers act, the across-the-board spending reductions will begin March 1. Leaving the cuts in place would shave U.S. economic growth this year by 0.6% and cost 750,000 jobs by the fourth quarter, Congressional Budget Office Director Doug Elmendorf said… About half the cuts would affect defense spending, and military leaders are pressuring lawmakers to avoid them.”

Global Bubble Watch:

February 14 – Bloomberg (Simon Kennedy): “Call them the ‘whatever-it-takes’ central bankers. As the world’s advanced economies grow at half the speed of the pre-crisis years amid persistently high unemployment, governments are turning to a new set of monetary-policy makers who in word -- and they hope deed -- are more aggressive than their predecessors. A revolution that began with the arrival in November 2011 of Mario Draghi at the European Central Bank now is gathering speed as Canada’s Mark Carney joins the Bank of England and the Bank of Japan awaits a new governor. The shift could culminate a year from now if Federal Reserve Chairman Ben S. Bernanke is succeeded by someone even bolder. The changing of the guard reflects both a need for central banks to offset fiscal paralysis and a bet that monetary policy remains a potent force.”

February 15 – Bloomberg (Spears, Jodi Xu and Jeffrey McCracken): “Mergers and acquisitions have surged this month with mega deals for iconic companies such as Dell Inc. and H.J. Heinz Co., fueling optimism that more buyers are ready to embrace $10 billion price tags. Almost $40 billion in deals were announced yesterday, led by Heinz’s $23 billion takeover… Transaction volume has increased by 27% so far this year compared with the same period a year earlier… Record corporate profits and cheap borrowing costs are attracting buyers even as stock prices soar to a five-year high, with more than $140 billion of announced M&A deals this month…”

February 12 – Bloomberg (Kelly Bit): “Bridgewater Associates LP, the $140 billion hedge fund founded by Ray Dalio, is betting on global stocks and oil as it expects money to move into equities and other assets amid increased economic confidence. Bridgewater, the world’s biggest hedge fund, is bullish on stocks, oil, commodities and some currencies as it expects cash to shift to riskier assets, co-chief investment officer Bob Prince said… ‘You want to be borrowing cash and hold almost anything against it,’ Prince said… ‘We are at a possible inflection point right now with respect to the pricing of economic conditions in markets and then the actual conditions that are likely to occur.’”

February 12 – Bloomberg (Ambereen Choudhury, Michael J. Moore and Stefania Bianchi): “Global investment banks based in Europe and the U.S., facing regulatory and cost-cutting pressures at home, are losing market share in emerging economies to smaller domestic competitors. Credit Suisse Group AG, Morgan Stanley and Citigroup Inc. are among Western securities firms seeing the biggest erosion in some developing markets… Their share of investment-banking fees is being diluted by local banks… The share of fees for U.S. and Western European firms in Latin America, the Middle East, China, India, Russia and Eastern Europe plunged to 43% last year from 69% in 2005, according to Freeman.”

Global Credit Watch:

February 14 – Financial Times (Henny Sender and Vivianne Rodrigues): “Some of the world’s most sophisticated credit investors have been ramping up their bets against junk bonds even as retail investors have been pouring money into the asset class. The list of junk-bond bears includes GSO, the credit arm of Blackstone; Apollo Global Management; Centerbridge Partners; Oaktree Capital; and a host of credit and so-called ‘macro’ hedge funds… ‘To be long fixed income – and particularly high yield – doesn’t make a lot of sense,’ said a senior executive in the credit arm for a major New York alternative investment firm. ‘If you miscalculate on either side you lose. You lose if things are bad and there is a sell-off and you lose if things are better and there is a sell-off. The balance beam is very narrow.’”

February 15 – Bloomberg (Lisa Abramowicz): “The biggest buyers of junk bonds are in retreat as exchange-traded funds suffer unprecedented withdrawals with the debt facing its first losses in eight months. The outflows sent the combined value of the five biggest junk-debt funds down 7% from a four-month high in January to $29.8 billion, according to data compiled by Bloomberg. State Street Corp.’s $11.9 billion fund reported withdrawals of about $988 million in the 12 days ended Feb. 13, the longest stretch since August 2011.”

February 13 – Bloomberg (Boris Korby and Julia Leite): “The collapse of two junk-bond offerings in Brazil shows Latin America’s largest economy is getting hurt more from the global pullback in high-yield demand than other markets. Sales of speculative-grade dollar debt from Brazil are falling about twice as fast as the rest of the world this month… After selling $4.25 billion of the debt in January, Brazilian companies are on pace to issue just $400 million this month, a drop of 91%. J&F Participacoes SA, parent of the world’s biggest beef producer, and rig operator Schahin Oil & Gas Ltd. pulled deals in the past week as borrowing costs rose…”

February 11 – Bloomberg (Lisa Abramowicz and Krista Giovacco): “A Federal Reserve governor is joining those warning that junk-debt investors are poised for losses, while his institution’s policies spur them to keep buying the debt. Yields on a record 38% of the $1.1 trillion of notes sold by the neediest U.S. borrowers were trading below the 10- year average rate for investment-grade debentures last month, Barclays Plc data show… The central bank’s policy of keeping benchmark borrowing costs at about zero for a fifth year is pushing investors into riskier debt, even as Fed Governor Jeremy Stein warns that the market for speculative-grade debt may be overheating.”

China Bubble Watch:

February 11 – Bloomberg: “China surpassed the U.S. to become the world’s biggest trading nation last year as measured by the sum of exports and imports of goods… U.S. exports and imports of goods last year totaled $3.82 trillion… China’s customs administration reported last month that the country’s trade in goods in 2012 amounted to $3.87 trillion. China’s growing influence in global commerce threatens to disrupt regional trading blocs as it becomes the most important commercial partner for some countries.”

Japan Watch:

February 13 – Bloomberg (Shigeki Nozawa and Brian Fowler): “Japan is likely to face criticism from its trading partners for guiding the yen weaker to the detriment of economies in developing Asia, said Eisuke Sakakibara, a former Ministry of Finance official. Prime Minister Shinzo Abe’s drive for a weaker yen comes as monetary easing in Japan, the U.S. and Europe is already pushing currencies from those regions lower, according to Sakakibara, known as ‘Mr. Yen’ for his efforts to control exchange rates through market and verbal intervention in the late 1990s. An official from a Group of Seven nation said Japan will be in the spotlight at the Group of 20 gathering this weekend… ‘Guiding the yen lower is a policy that punishes neighboring nations. It goes against international rules,’ Sakakibara, 71, said… ‘Because there’s such a strong impression that Japan is guiding the yen lower, I’m sure it will be criticized by the G-7, as well as the G-20.”

India Watch:

February 13 – Bloomberg (Tushar Dhara): “India’s trade deficit in January was $20 billion… one of the nation’s widest monthly shortfalls. Exports climbed 0.8% from a year earlier to $25.6 billion while imports advanced 6.1% to $45.6 billion… India’s exports have been hampered by an uneven global recovery even as demand for oil and gold have stoked inward shipments. Reserve Bank of India Governor Duvvuri Subbarao said… the ‘external sector is very vulnerable,’ adding the current-account gap may widen to a record in the year through March 2013 from about 4.2% of gross domestic product…”

February 12 – Bloomberg (Unni Krishnan): “India’s industrial output unexpectedly slid in December for a second month as demand falters in an economy expanding at the weakest pace in a decade. Production at factories, utilities and mines fell 0.6% from a year earlier… India’s elevated inflation of more than 7% has limited the extent its central bank can cut interest rates to boost demand, while an uneven global recovery has hurt exports.”

February 14 – Bloomberg (Anoop Agrawal): “Rupee debt sales slumped 75% this year as LIC Housing Finance Ltd. and Rural Electrification Ltd. delay issuance saying borrowing costs are too high even after the central bank cut rates for the first time since April.”

Latin America Watch:

February 13 – Financial Times (John Paul Rathbone): “Latin America is going Brazilian. Previously, it was only Brazil, the region’s biggest economy, that complained about the competitive devaluations generated by money-printing in the west, the so-called currency wars. Now, however, as Japan joins the rush to print money and devalue, the more orthodox and free-trading Latin economies – investor darlings such as Mexico, Chile, Colombia and Peru – also fear catching a bullet. The issue may well dominate this week’s G20 meeting in Moscow, given that Asian exporters such as South Korea are also worried about currency appreciation."

Global Economy Watch:

February 11 – Bloomberg (Greg Quinn): “Bank of Canada Deputy Governor Timothy Lane said that a long period of rising consumer debt and low interest rates are a major risk to the country’s economy. ‘Consumers have taken advantage of the stimulative financial conditions, including low borrowing costs and easy availability of financing,’ Lane, 57, said… at Harvard University… ‘In doing so, they have pushed household debt to levels that pose a significant risk.’”

Central Bank Watch:

February 12 – Dow Jones (Ben Kesling): “The lone dissenting voice on the Federal Open Market Committee defended her hawkish philosophy… and reiterated her call for the Federal Reserve to proceed cautiously with easy money policies. Kansas City Federal Reserve President Esther George laid out her reasons for dissenting from current Fed monetary policy… ‘While I share the objectives [of the FOMC]… I dissented because of possible risks and the possible costs of these policies exceeding their benefits...While I have agreed with keeping rates low to support this recovery, I know keeping interest rates near zero has its own consequences.’ …She continues the hawkish legacy of her immediate predecessor, Thomas Hoenig who was known for his long-time disagreement with easy money policy in his 20-year tenure at the head of the bank. …She warned that by keeping rates low, the Fed is pushing banks and investors to seek out high-yield investments that can be risky, especially as those investments take up more and more space on financial institutions’ balance sheets. ‘It is very difficult to identify the point where a healthy shift towards risk becomes excessive and potentially damaging…’”

February 11 – Bloomberg (Craig Torres and Jeanna Smialek): “Federal Reserve Vice Chairman Janet Yellen said the central bank may hold the benchmark lending rate near zero even if unemployment and inflation hit its near-term policy targets. The Federal Open Market Committee said in December it will hold the main interest rate in a range of zero to 0.25% so long as inflation isn’t forecast to rise more than 2.5% in one to two years and unemployment remains above 6.5%. Yellen said… those objectives are ‘thresholds for possible action, not triggers that will necessarily prompt an immediate increase’ in the FOMC’s target rate. ‘When one of these thresholds is crossed, action is possible but not assured,’ she said… Yellen’s comments reflect the view of some policy makers that there is a risk of damaging the expansion by raising rates too early… ‘With employment so far from its maximum level and with inflation currently running, and expected to continue to run, at or below the Committee’s 2% longer-term objective, it is entirely appropriate for progress in attaining maximum employment to take center stage in determining the committee’s policy stance,’ Yellen said…”

February 11 – Bloomberg (Caroline Salas Gage and Craig Torres): “Federal Reserve Chairman Ben S. Bernanke says the end of the central bank’s bond buying won’t constitute a move toward tighter policy. He may have a tough time convincing stock and bond investors that’s true. The Fed is acquiring $85 billion of securities each month, and policy makers are grappling with how to condition markets not to interpret a stop in those purchases as a prelude to the exit from easy credit. Bernanke said Dec. 12 in Washington that he ‘would emphasize’ the end won’t be ‘a turn to tighter policy.’ If the Fed fails, interest rates may climb prematurely, as traders arrange positions for the withdrawal of unprecedented monetary stimulus, according to Dean Maki, chief U.S. economist at Barclays…”

February 13 – Bloomberg (Aki Ito): “Federal Reserve Bank of Philadelphia President Charles Plosser said he expects the unemployment rate to decline close to 7% by the end of this year, warranting a reduction in the Fed’s monthly bond purchases. ‘If my forecast is right, then I think we should at least have begun backing off on our asset purchases,’ Plosser told reporters… ‘As a practical manner, we will taper’ bond buying before halting the quantitative easing program, he said… St. Louis Fed President James Bullard said this month he expects U.S. economic growth to gain enough momentum to let the central bank reduce the pace of asset purchases as early as the middle of this year."

Europe Watch:

February 14 – Financial Times (Michael Steen): “Europe’s brittle economies shrank at their fastest rate since the collapse of Lehman Brothers four years ago, official data for the fourth quarter of 2012 showed…, with both strong and weak countries falling short of expectations. News of the eurozone’s 0.6% quarter-on-quarter drop, deepening the bloc’s recession, and the woeful country-specific performances hit the euro, which fell 1% against the dollar. The single currency’s recent strong appreciation has fueled fears that a nascent recovery for the bloc may be dead in the water… Germany and France, the eurozone’s two biggest economies, both saw output shrink. German GDP shrank 0.6% in the period while France contracted 0.3% compared with the previous three months.”

February 13 - International Herald Tribune (James Kanter): “Concern over the euro moved to the forefront Monday as finance ministers of the countries using the currency held their monthly meeting. But this time, with the European Union’s recession continuing, the topic was the strength of the euro rather than its many weaknesses. As confidence has grown that the Union will be able to manage its sovereign debt crisis, the euro has made significant gains against the dollar and other foreign currencies. That is making Europe’s exports more expensive, a factor that could hamper growth. On Monday, France, which traditionally favors market intervention, renewed its calls for remedial steps that could include establishing a target level for the euro’s value. Exchange rates need ‘to reflect the economic fundamentals of our economies of the euro zone,” said Pierre Moscovici, the French finance minister. ‘Exchange rates should not become subjected to moods or speculation.’”

February 14 – Bloomberg (Simone Meier and Zoe Schneeweiss): “Switzerland’s central bank has a message for lenders: act now to stem surging credit growth or face further restrictions. The government, at the urging of the Swiss National Bank… ordered banks to hold additional capital as a buffer against risks posed by the country’s biggest property boom in two decades.”

February 13 – Bloomberg (Svenja O’Donnell): “Bank of England Governor Mervyn King said Britain faces a further bout of inflation and a muted economic recovery, and pledged officials will look through the volatility in prices to keep nurturing growth where they can. ‘Inflation is likely to rise further in the near term and may remain above the 2% target for the next two years,’ King said… ‘The MPC’s remit is to deliver price stability in the medium term in a way that avoids undesirable volatility in output in the short run. The prospect of a further prolonged period of above-target inflation must therefore be considered alongside the weakness of the real economy.’”

Germany Watch:

February 15 – Bloomberg (Jeff Black and Jana Randow): “European Central Bank Governing Council member Jens Weidmann said Ireland’s promissory note transaction comes dangerously close to contravening a ban on the monetary financing of governments. The transaction ‘has a fiscal nature, as stated by the Irish government, that’s clear enough,’ Weidmann… said… The ECB will re-examine the issue and ‘has to make sure that its actions are in conformity with its rules and statutes… I’m very concerned about monetary policy being too closely intertwined with fiscal policy and crossing the line to monetary financing.’”

Spain Watch:

February 11 – Bloomberg (Angeline Benoit): “Spanish Prime Minister Mariano Rajoy’s results from his first year in office are about to get a close inspection by credit rating companies and investors. Deficit data due this month will show how far the government reduced its budget shortfall in 2012, a year when Spain came close to needing a bailout. While 10-year borrowing costs are down more than 200 basis points from their July peak, two ratings companies grade Spanish bonds one level above junk and another cut may make them too risky for some investors. ‘Spain’s budget deficit numbers are crucial,’ said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group… ‘A number near and certainly above 8% of gross domestic product in 2012 will raise the risk of a ratings downgrade, and while we expect near 7% , the regions have delivered late surprises in the last couple of years.’”

February 14 – Dow Jones (David Roman and Jonathan House): “Spain’s bank bailout fund warned of significant losses for Bankia SA shareholders as part of the European Union-financed clean-up of the nationalized lender at the heart of Spain’s banking collapse. The bailout fund known as FROB said… it hadn’t yet completed its valuation exercise of the ailing lender… However, it added that Bankia's negative value of EUR4.15 billion points to a ‘significant reduction in the nominal value of its shares’ in the restructuring exercise.”