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This week's thought-provokers for investors
The European Central Bank (ECB) kept interest rates at a record low on Thursday, as the sovereign debt crisis has widened economic divergences within the euro area. The ECB is thus doing its part to contain panic in the European fi nancial markets by providing generous liquidity. Note that these record-low interest rates of the bank's one-size-fi ts-all policy are no longer needed in large parts of the eurozone.
Portugal held a successful ten-year bond auction and sold EUR600 million of bonds maturing in June 2020 at an average yield of 6.716% (compared with a yield of 6.806% in November 2010). The government also placed EUR650 million of bonds due in 2014 at a yield of 5.396%, up from 4.041% in October 2010. Spain conducted a successful bond auction as well this week. It sold EUR3 billion of fi ve-year bonds at the top end of the expected range with an improved bid-to-cover ratio (2.1 from prior 1.6), but a signifi - cantly higher yield of 4.542%, up from 3.576%. For both countries, the high borrowing costs will erase part of the deep public spending cuts necessary to restore fi scal sustainability.
Germany seems to be giving up ground on the expansion of the eurozone rescue fund and further fi scal consolidation of union members. There are signs that the country is now backing proposals to give more lending capacity to the European Financial Stability Facility (EFSF), even if doing so increases countries' fi nancial guarantees. Approval of a new approach with a bigger arsenal for fi ghting the continuing eurozone debt crisis at the EU summit in February might signifi cantly help restore confi dence and be a huge support for the weak euro.
Japan promised to make a signifi cant contribution to support the European Monetary Union, pledging to buy 20% of the eurozone's planned joint bond auction later this month to raise funds in association with the Weekly Economic Wrap-Up 14 January 2011 Swiss & Global Asset Management is the exclusive manager of Julius Baer Funds. A member of the GAM group. This week's thought-provokers for investors bailout package for Ireland. Japan thus follows an announcement by China just days ago to support Spain through an estimated EUR6 billion bond purchase. Japan and China are trying to help stabilise one of their most important export markets as well as the currency that is aimed at playing an increasing role in both countries' currency reserves.
China's December trade surplus was much lower than expected at USD13 billion vs. an expected surplus of more than USD20 billion and a USD23 billion surplus the previous month. If you trust the data, it seems that a collapse in export growth (+17.7% compared to +23.3% expected) rather than a major spike in imports is responsible for this surprise. This is another indication of slowing exports despite the undervalued currency. It will now be interesting to see the next trade data from the US to get more clarifi cation on what's going on.
Bank of China opened up trading between the dollar and yuan in the United States for the fi rst time, a step in the currency's move into international markets. The US is the fi rst market after Hong Kong where the currency is being traded. Until the middle of last year, the buying and selling of yuan was largely confi ned to mainland China by the country's strict capital controls. This is a signifi cant step towards making the yuan - whose value is still tightly controlled by the government
- a fully convertible global currency, a prerequisite to becoming a true store of value on par with the USD, EUR and JPY.
The US government is planning a new round of stress tests for the country's banks. The tests will include big banks like JPMorgan, Goldman Sachs and Bank of America. If they pass, the banks will be able to raise dividends and buy back shares. The new tests should unveil how balance sheets would withstand a variety of new economic and fi nancial shocks.
More and more investors are pressuring banks to return part of their surging profi ts, which continue to be subsidised by artifi cially low short-term interest rates and steep yield curves.
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