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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include:  FTSE 100 falls close to year low. The reaction, and  in China. The Eurozone moves closer to crisis point again

FTSE 100 falls close to year low

Last night the FTSE 100 closed at 6,029, the last time it was lower than that was 2 January. In just a few days, the index has pretty much reversed all those gains seen between January and the end of May this year.

In Bull and Bear’s forecast for 2013 it was stated as follows: “Sell in May and go away proclaim the headlines in May after markets see a sell-off. But some say this is no spring time madness, rather we are paying the price for economic madness. Yet by St Leger’s day in September, markets have recovered lost ground, and the FTSE 100 finishes the year within 5 points of the level at which it started the year.”

Don’t make too much of that prediction, it was only meant as a bit of fun, but we have certainly seen a post May sell-off, albeit the falls have occurred in June, with May 22 marking something of a hiatus for many markets.

In the US, the Dow fell to 14,659, compared to 15,409 on May 28. But then it is still some way up on the year: on January 1 it stood at 13,104. But then that does figure. After all, the best economic news of the year to date has come from the US. The world, and particularly the markets, is rarely logical, but it is logical that the Dow has performed better than the FTSE so far this year.

In Germany, the DAX closed at 7,692 yesterday, compared to 8,530 on May 22, and 7,612 on January 1.

The Nikkei 225 closed yesterday at 13,062 after peaking at 15,627 on May 22, and beginning 2013 on 10,406.

The Hang Seng closed at 19,814 after peaking at 23,341 on May 21 and beginning 2013 on 22,860.

In China, the CSI 300 began 2013 on 2,486, peaked at 2,644 on May 28, and last night closed at 2,171.

This morning, at the time of writing, major stock markets in Asia are all down.

In some ways the story of bonds is even more interesting. The yield on US ten years hit 2.58 per cent at the end of last week, the highest level since August 2001. The yield on US bonds fell slightly yesterday, while the yield on the UK equivalents rose, and for ten years now stands at 2.53 per cent, at the time of writing. In fact, at the time of writing the yield on UK ten years is higher than on US ten year treasuries. For most of this year, UK governments bonds have been more expensive than US government bonds.

And finally that takes us to gold. This is at $1,275 a troy ounce at the time of writing, the lowest level since September 2010.

Reaction

Bill Gross, the man the press have christened the Bond King, said he thought Ben Bernanke “might be driving in a fog.” Mr Gross said that Janet Yellin, vice chairman at the Fed and a potential candidate as Mr Bernanke’s successor, (if he does step down next year) was “a Siamese twin in terms of policy.”

Infamous contrarian investor Marc Faber told CNBC: “Technically, commodities look horrible… precious metals look bad. But tech factors would suggest we’re approaching at least an intermediate low. The commercials, which are essentially hedgers, people who produce gold and so continuously hedge, at the present time they have an extremely low short exposure, basically they’re accumulating gold.

“Whereas gold is close to $1,300 compared to say $700 in 2008, conditions in the mining industry are horrible. The exploration companies are running out of money and industry conditions are worse than they were in 2008. So I think that a lot of supply that potentially comes to the market through new exploration will simply not be there. In emerging economies sovereign funds, central banks and individuals will continue to accumulate physical gold.”

As for the Fed and the end of QE, Mr Faber doesn’t buy it. He liked believing that the Fed was going to tighten monetary policy was tantamount to believing in Father Christmas. He said: “As I said already three years ago, we are going to go with the Fed to QE99.”

But while Mr Faber doesn’t seem overly impressed with the Fed, Richard Fisher, president of the Dallas Federal Reserve, does seem overly impressed with Marc Faber, or indeed any of the big investors. He told the ‘FT’: “I do believe that big money does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they go after it.” He then drew a parallel with current market activities and George Soros back when he sold sterling in 1992.

You might also say that Mr Fisher sounds a little like the Eurozone politicians; when credit ratings agencies and the markets punished them for their ineptitude, the politicians responded with name calling. So we have gone from bond vigilantes to feral hogs.

Maybe the accusations are right, but equally the phrase ‘shooting the messenger’ comes to mind.

And in China

China is suffering from its own credit crunch as interbank interest rates soar.

So that is a double whammy for you. As the Fed suggests that QE is drawing to a close, rates are rising in China. It is the end of cheap money, they say.

Notwithstanding Marc Faber’s points about not believing it and that we will have QE99 before the Fed really tightens monetary policy, it does appear that the Chinese government is in fact trying to prick a bubble before it grows bigger.

The markets don’t like it when central banks or, in China’s case, the government tries to reverse irrational exuberance, but then party revellers, who have lost any sense of caring about the next day’s hangover, don’t appreciate it when the punch bowl is taken away.

But yesterday the People’s Bank of China (PBC) posted a note saying: “Liquidity for the banking system as a whole remains at a reasonable level.” In China the PBC does what the government tells it to do.

Mark Williams, chief Asia economist at Capital Economics, said: “Reform-minded members of the leadership appear to be in control of economic policy. There have been other hints of renewed reform momentum…These efforts to rein in credit growth are the first with significant, immediate real-world implications.” He added: “The leadership appears more willing than before to suffer near-term pain if necessary to push through needed change.”

‘CNNMoney’ quoted Komal Sri-Kumar, founder of an eponymous global strategy firm. He said: “China is doing what Alan Greenspan should have gotten to around to doing in 2006.” He added: “The Chinese are getting ahead of speculation that could ultimately result in major economic failures.” See: China: Don’t worry! It’s not 2008 http://money.cnn.com/2013/06/24/investing/china-crisis/index.html?iid=HP_LN

It appears China is trying to learn from the mistakes made by the Fed in 2006. The markets may not like it, but on this occasion the feral hogs, vigilantes or, if you prefer, the messengers may have got it wrong – partially anyway.

The Eurozone moves closer to crisis point again

In mainland Europe, however, rising interest rates may pose a bigger threat, especially when its central bank seems so dead set against QE.

Writing in the ‘Telegraph’, the UK media’s arch bear Ambrose Evans-Pritchard quoted a report from Mediobanca, Italy’s second largest bank. Antonio Guglielmi said: “The Italian macro situation has not improved over the last quarter, rather the contrary. Some 160 large corporates in Italy are now in special crisis administration.” The yields on Italian bonds have soared since the Fed hinted about QE ending.

Meanwhile, in Greece the ruling coalition party has lost one of its members. You probably know that the Greek government closed down State TV recently, and in response the Democratic Left pulled out of the coalition. That leaves New Democracy and PASOK, with 153 of the 300 seats in Greek parliament, so they are just hanging on to a majority. Some think it is a good thing that the Democratic Left have pulled out, as it will leave the government free to pursue its more radical reforms. Nonetheless, it shows that Greece remains a country which seems to be permanently on the edge of crisis. Rising bond yields may just send it over that edge.

And to finish, recent data reveals that German labour costs rose 5.8 per cent in Q1 on the year before. Meanwhile, unit labour costs have risen by 3 per cent in Spain and by 2 per cent in Greece since the beginning of 2012. This is a good thing, a bull point if you like.

But, as Capital Economics’ Roger Bootle and Jonathan Loynes  pointed out recently: “The periphery still has a lot of ground to make up. Even Greece and Ireland, which have seen the sharpest falls in ULCs so far, are only half way to paring back their pre-crisis loss of competitiveness against Germany.”

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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