This week's thought-provokers for investors
Spain's GDP growth accelerated to a modest 0.6% year-on-year in Q4 2010, according to the Bank of Spain. The better-than-expected growth is based on improvements in the export sector: Spanish exports rose by 13% from a year earlier in the fi rst 10 months of the year, according to Eurostat. Manufacturing and agriculture also performed somewhat better than expected.
This sounds like good news after the Spanish government imposed signifi cant austerity measures by trimming public wages, social benefi ts and pensions. Yet the unemployment rate remains above 20%, and the outlook is still uncertain with the risk of renewed tensions in the sovereign debt markets.
Speculation is growing that the next Irish government may attempt to restructure some of the nationalised banks' senior debt. Holders of Anglo Irish and other troubled banks' subordinated bonds have already had to accept losses, but senior debt holders, who have a greater level of protection, have so far been spared. Forcing senior bond holders to shoulder some of the cost of recapitalising Ireland's banks would be a reasonably unprecedented step. During the current crisis, only the Icelandic government has allowed a major bank to default on senior debt.
Keep in mind that such a move, while no doubt popular with taxpayers, would do little to improve the public fi nances. In fact, the whole banking system may fi nd it more costly and diffi cult to issue senior debt if investors fear that restructurings could be carried out again in the future.
The Bank of England maintained its key interest rate at 0.5% despite more and more voices calling for an increase in rates to combat infl ation. The Monetary Policy Committee also voted to maintain the stock of asset purchases fi nanced by the issuance of central Weekly Economic Wrap-Up 11 February 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 bank reserves at GBP200 billion.
The Committee's next infl ation projections will be published on Wednesday, 16 February. Maybe the Committee already knows that the latest infl ation fi gures will be less worrying?
In his testimony to the US House Budget Committee, Federal Reserve Chairman Ben Bernanke said that unemployment in the United States was likely to remain high for some time. This statement followed a signifi cant drop in the jobless rate in December and January. Ben Bernanke said these latest fi gures did provide some grounds for optimism. However, he cautioned that with output growth likely to be moderate for a while and with employers reportedly still reluctant to increase their payrolls, it would be several years before the US unemployment rate returned to a more normal level.
One should not expect a signifi cant change in the Fed's supportive monetary stance any time soon.
China hiked its key interest rates again this week, moving the benchmark one-year lending rate from 5.81% to 6.06%. The deposit rate increased as well, from 2.75% to 3.0%. This is already the third rate hike since October and comes amid accelerating infl ation. This is yet another sign that Chinese policy makers expect growth momentum in the economy to continue.
Indonesia's central bank raised interest rates last Friday in an eff ort to combat infl ation, highlighting the diffi cult position the world's emerging markets face in managing growth. In the central bank's fi rst move since August 2009, the target rate was lifted from a record low of 6.5% to 6.75%. So far, Indonesia has resisted raising interest rates, fearing that higher rates may put pressure on its currency to rise and attract even more capital infl ows.
Investors are increasingly worried that some central banks in emerging economies - Indonesia is one example - already got behind the curve and that monetary authorities could easily get the delicate balancing act badly wrong.
Stefan Angele, Member of the Executive Board Head Investment Management
Stefan Angele is Head of Investment Management at Swiss & Global Asset Management (formerly Julius Baer Asset Management) and member of the Executive Board. He joined Julius Baer Asset Management in September 2006 as Managing Director and Head of Asset Allocation & Fixed Income. Before joining Julius Baer, he held various positions including Head of Institutional Asset Management at Zürcher Kantonalbank. He also worked in Portfolio Management and Private Banking at Credit Suisse. He graduated in economics from the University of Zurich. He also holds a Swiss Federal Diploma for Financial Analysts and Portfolio Managers and is a Certifi ed European Financial Analyst (CEFA).
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