This week's thought-provokers for investors
Most equity indices around the world started the week in negative territory and have traded lower over the last few days. EUR/USD managed to defend the level of 1.40 and has been trading above 1.42 again. Commodities slightly advanced, with crude oil above USD100/bbl and gold at USD1520/oz.
Japan reported a trade defi cit for April, driven by falling exports. This is the fi rst decline in the last three months and provides a clear fi gure of the impact of the March earthquake. Exports fell by more than 12% versus the prior-year period and imports rose by more than 8%, driven by demand for fuel. The reported defi cit is lower than analysts had expected. Overall the report did not come as a surprise, as it was widely expected that the earthquake would at least have a strong local impact. Considering that overseas demand is intact, one can expect exports to be boosted once the problems and bottlenecks in Japan are resolved.
US durable goods orders surprised on the downside, falling by 3.6% in April. This is the strongest fall since October and far worse than the 2.5% drop analysts had expected. The March fi gures, however, were revised up from 2.5% to now 4.4%. The Japanese earthquake also impacted the US, with carmakers hit due to disruptions in Japan. Fewer orders for aircraft were the main driver. The upward revision of the March data is a positive sign, but it remains to be seen if the fall in April is a one-off or in fact signals the start of a reversal.
Economic growth is slowing down in Europe, according to data published for May. Germany and France could not keep up the pace, as their respective purchasing managers' indices showed. Higher infl ation, rising oil prices and the resurgent sovereign debt crisis put visible pressure on these economies. The US reported GDP growth of 1.8% for the fi rst quarter, short of the 2.2% pace expected. Sharp increases in imports and a slowdown in personal consumption led to the deceleration in GDP. Whether the reported data signals a healthy slowdown to a sustainable growth pace remains an open question. The problem is that markets might react strongly without waiting for confi rmation of the "healthy slowdown" scenario.
Fitch Ratings downgraded Greece's long-term foreign debt rating to B+ and revised the outlook to negative. This is four steps below investment grade. The move refl ects the scale of the challenges Greece faces in implementing the radical fi scal and structural reform programme necessary to secure solvency of the state and provide the basis for a sustainable economic recovery. Furthermore, Fitch clearly stated that a 'soft restructuring' would trigger a credit event. The interdependencies make a restructuring diffi cult, if not impossible. They may trigger an unexpected and uncontrollable chain of events similar to the Lehman crisis. Contagion remains the biggest risk.
Contrary to expectations, the May Ifo business climate indicator did not correct - it was unchanged versus April. Germany's business optimism stayed close to record highs, and the "economic traffi c lights still signal green", said Ifo President Hans-Werner Sinn. The German statistics offi ce reported that fi rst-quarter growth was mainly based on domestic demand. If Germany keeps up the growth pace and is now shifting to internal demand drivers, this might have a positive impact on Europe.
The OECD sees signs of more self-sustained and less policy-driven growth. But signifi cant downside risks like a Chinese slowdown, higher commodity prices and the eurozone crisis are set to persist. The OECD expects unemployment to stay signifi cantly higher than before the crisis. It urges the US Fed and the Bank of England to follow the ECB in raising interest rates given the self-sustained growth. Structural reforms are needed in developed economies to help speed up fi scal consolidation and fuel growth. If real structural reforms are put in place and budgetary consolidation measures are implemented at the same time, this might help alleviate the negative growth impact of the austerity measures. Without structural reforms, budgetary consolidation can lead to a negative downward spiral.
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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