Beyond QE3

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Beyond QE3

Last week the Fed delivered its new round of QE3, while the German Constitutional Court finally approved the European Emergency Fund, smoothing the German participation within the fund, but not without setting tough conditions.

According to the Fed’s statement, the central bank will purchase $40 billion worth of mortgage debt each month until the labor market shows sustainable progress. The aim of this action is to suppress the cost of borrowing to buy a home as prices rise and yields fall. Falling yields in mortgage may push investors to leave the mortgage bonds and turn towards buying other assets. As demand goes elsewhere, such as corporate bonds, these bond prices will go up and yields will go down. Hence, borrowing costs will fall, enabling individuals or companies to borrow at cheaper price.

To conduct this operation, the Fed credits accounts of the banks from which it purchases the debts. In effect, money is added into the system. Afterwards, it will be up to the banks to lend the money to businesses and/or individuals who in turn, will use the money for spending. More spending, more hiring, and thus, more economic activities.

While studies show that the Fed’s move may reduce borrowing costs, how such condition would impact the economy remains unclear. The $600-billion-QE2 for example, according to studies, created 700,000 new jobs. The question is, however, how long would it take to effect and how long (should it take effect) would it last?

No Surprises from Vosskuhle

As the top German of the week last week, Andreas Vosskuhle handed out a somewhat win-win decision on the European bailout fund ruling. The constitutional court approved the European bailout fund which cleared the throat for a while but not necessarily the cure for European crisis. At least, that cleared one fog over the matter as the zone can now move on to decide how they can make use of the fund to end the crisis.

The German ruling was not without a catch, however. The court stated that Germany’s involvement in the fund will be strictly limited to $244 billion. If the amount should be increase beyond that threshold, the parliament should approve it with both upper and lower houses must be kept fully informed. Germany must also ensure that it is now entirely bound by the ESM Treaty and that some reservations must exist should the ESM do not serve the German public interest.

Uncharted Territories

Nevertheless, the markets cheer the Fed’s move as well as Vosskuhle’s ruling, and Jakarta Composite Index zoomed to uncharted territories on Friday. The new week also potentially bullish for the moment as the residual euphoria remains intact, although at a reduced rate.

As the key resistance level at 4,235 had been broken, the JCI leaped past its subsequent Fibonacci target at 4,263.65 and went to as high as 4,269.05. So, this brings the next target into the radar: 4,652.06. Of course, it’s a long shot at the moment, but its 10% distance from the current level seems to be attainable this year. On the flip side of the coin, the support for JCI is seen at 4,235 as prior resistance turns into support.

Portfolio Update

BMTR continued to climb higher, but somewhat stalled at 1,900. The position remains on hold for now, but we ought to stay cautious. Near-term target is seen at 1,910, and subsequently 2,180. Other components of the portfolio remain in the red, however, but the positive development on Friday improved the total portfolio by 1.19%.

By: Unknown On 19.12

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Readying Its Bazooka

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Readying Its Bazooka

At its monthly meeting Thursday, the European Central Bank President Mario Draghi had announced the central bank’s initiative to rescue the euro through its plan dubbed Outright Monetary Transactions (OMT).

Under the plan, the ECB will purchase unlimited amount of government bonds with one to three years of maturities, as well as longer-dated ones with one-to-three years of maturities left. To neutralize the impact of such move on the money supply, the operation will be sterilized, which means that the ECB will take away the same amount of money it brings to the system through the purchases. There’s another catch: in order to have the ECB make the move, the troubled governments would have to request the aid, and they will have to play by the rules. If the rules are broken, the ECB will stop the purchases or it will sell the bonds it had bought previously.

The ball is then, at the governments’ courts. Draghi himself in turn, has readied the ECB’s bazooka while the IMF will assist in designing and monitoring each applicant country’s specific plans. ECB alone will decide how the program will be executed.

Despite that investors are cheering the ECB’s bold move, in the long-run the policy risks pulling the entire system down, especially if the troubled countries fail to produce something positive out of the austerity program. In the meantime however, the decision seemed to have put off some pressure from the ECB and somewhat transferring the pressure on to the governments of the troubled countries. Spanish PM Mariano Rajoy for example, said that Spain will examine the details of the government plan before deciding to take on the OMT.

In the end, the problem lies within the fiscal area and trying to cure it by using monetary tools may be a bit of a stretch. After all, Hans-Werner Sinn of the Ifo Institute might have been right after all, Greece should’ve been left out long ago when the  country was caught “cheating”.

Awaiting the Fed’s Move

A mixed bag of economic data released this week could prolong the timing of Fed’s move on monetary policy. ISM Manufacturing for August showed a further drop towards the contraction zone, from 49.8 to 49.6 while the market had expected it to improve to 50. From the service sector, the ISM figure showed improvement from 52.6 to 53.7, better than what the market had expected. Construction spending on the other hand, showed a decline of 0.9% in July after a 0.4% increase in June. Strong auto sales however, provided a bit of relief on the consumption side as total vehicle sales reached 14.46 million in August, better than 14.05 million booked in July and also better than the consensus number of 14.2 million. Domestically, sales also exceeded the 11.03 million expected by analysts as it reached 11.54 million in August, better than July’s sales of 11 million units.

Another batch of data showed that non-farm productivity estimate has been revised upwards from 1.6% to 2.2%, better than 1.8% expected by economists. Unit labor costs also moderated from 1.7% to 1.5%. Elsewhere, ADP employment change showed a strong figure in August, adding 201k jobs in the private sector. The data – which is considered as a guide to the U.S. NFP scheduled for release on Friday – outpaced July’s figure of 173k as well as exceeding the market’s expectations of 140k. More good news came out of the labor market as initial jobless claims for the week ending September 1^st slipped to 365k, less than 370k expected and also came in lower than 377k registered during the prior week.

Friday will see the release of the NFP data. Expected at 130k, down from 163k scored last July, the data will be accompanied by the unemployment rate data which is seen stable at 8.3%. While the expectations are on the lower side, the data has the potential of giving out an upside surprise. If the payrolls turn out to be better than 163k, or even higher than 200k, we could see stocks advance in celebration. Yet, this could be a double-edged sword as strong data ease off the pressure on the FOMC to launch another round of stimulus.

Back to Square One

After made a strong rally last week, ELSA failed to maintain its gains and crashed back below 170 and just above its recent low at 162. BMTR on the other hand, remains the better performing stock as it keeps on knocking on the heaven’s door. A clean breakout will catapult the stock higher towards its technical objective at around 1900-1920. This will be considered as a potential exit point. On the other hand, GZCO and RAJA remain in the doghouse for now as both still struggling to claw their ways back up. Nevertheless, there’s no plan in changing the portfolio composition except eyeing for an exit for BMTR at around 1900-1920.

Jakarta Composite Index (JCI) itself seems to be building up its own momentum to launch another attack to the upside. Recent low at 4065 will be the key anchor to the index’s structure. A failure to hold this support line could risk a straight decline towards the primary support at 3978. On the other hand, the success in breaking through the resistance at 4128 today has triggered the Fibonacci projections at 4158 (practically reached as the current intraday high is at 4154), 4215 and 4308.

By: Unknown On 02.18

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Nothing New at Jackson Hole

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Nothing New at Jackson Hole

One of the most anticipated events last week was the Jackson Hole summit where the Fed boss Ben Bernanke delivered his speech. Some had expected some new hints over the Fed’s new policy measures, but going into the event such optimism dimmed and revised to “nothing new” expectation. Indeed, as I had expected too, there were nothing new delivered at the summit as Bernanke only re-emphasized his and his fellow FOMC members’ earlier statements. In the end, the Fed Chairman simply concluded that the Fed will provide policy accommodation as needed. The implication of the statement should be non-negative as the markets had already plunged prior to the event and rebounded just before and after the event.

All Eyes on Payrolls

Payrolls will set the tune for the week. After adding 163k jobs in July, the U.S. economy is expected to add another 125k in August. A worse-than-expected figure would add pressure to the FOMC to deliver its stimulus sooner rather than later, while a better-than-expected result could diminish a swift move by the FOMC, especially if the figure proves to be too strong (i.e. over 200k). Unemployment rate, which was based on a different set of respondents, is seen as staying at 8.3%. The U.S. markets will be off on Monday however, to observe the Labor Day holiday. Another key upcoming event will be the FOMC meeting which could be pivotal or just like usual, ended with nothing new.

Europe Back in Business

Coming into September, the European officials will return to meet and discuss about dealing with the current crisis. Greece and Spain will be under the spotlight. While Greece will continue to need more time to deal with its reform efforts, Spain will try not to use the European funds to deal with its bank recap. Recent remark by PM Mariano Rajoy stated that the country will wait until more details over terms and conditions of a full-fledged bailout are clear. If it’s for the best interest of the country then Spain will take the bailout.

European Central Bank’s upcoming meeting will also be a key event as the market wants to hear something new from Mario Draghi. Again, this meeting could prove to be giving out nothing new as well as the ECB will want to wait first for the German court decision over the European funding. With Chancellor Merkel’s recent remarks, it is likely that the court will deliver positive result, enabling the ECB to make its next move, possibly with additional bond purchases. One concern is coming from Bundesbank chief Jens Weidmann who reportedly threatened to resign should the ECB proceed with its bond-buying plan.

China’s Production Stayed Soft

At least in August the PMI for manufacturing sector has fallen below the key 50-mark, which is the borderline between expansion and contraction. The National Bureau of Statistics reported on Saturday that PMI fell from 50.1 to 49.2. For the fourth consecutive month, new orders index fell to 48.7 while export stayed at 46.6. Although the data was soft, the result should be a non-surprise event as it had been indicated by the flash PMI released earlier by HSBC. August decline could as well put more pressure on to the Chinese authorities to ease further in order to stabilize the currently slowing growth. However, the latest decision on repurchase agreement suggested that China is trying to avoid unleashing aggressive policy action for the moment.

Has ELSA Seen the Bottom?

The strong boost in the portfolio was more or less contributed by the jump in ELSA. Whether the rally can finally put an end to a miserable run recently is remain to be seen. Clearing the 200 hurdle is expected to be a good sign for the stock to advance even higher, back to our entry point. Others have shown no or little improvements recently as the entire market seemed to have waited for September for policy hints from U.S., Europe and China.

Days Ahead

September has arrived and various events will put the market on guard as surprises may show up along the way. The Fed is expected to deliver its decision on monetary policy in its FOMC meeting this month while the same also applies to the European Central Bank. Draghi may have to clear out the resistance coming from the Bundesbank first before delivering another bond-purchase program. Yet, a surprise may come from the German court over the ruling on the European fund although this is considered as somewhat less likely to happen considering the impact of such ruling. Spain has opted to wait until they have all the details clear before taking on a full-fledged bailout. Spain is also considering doing Bankia’s recap without using the European fund available to them. If Spain is able in doing so, it should be a major boost of confidence for Europe. Elsewhere in Asia, China remains the key hotspot as the market will want to see what the Chinese government do as data has continued to show that the economy continues to slow down. Locally, market sentiment towards the Bakrie-7 stocks, especially BUMI, remains an issue alongside the previously mentioned global factors.

By: Unknown On 17.22

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Close To QE3?

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Spain deficit target in doubt

Differing opinions between government, regions and towns over deficit reduction in Spain are threatening the country’s attempt to cut its budget deficits. Spain’s target of budget deficits of 6.3% of GDP this year and 4.5% in 2013 may not be achieved and PM Mariano Rajoy is staring at the possibility of taking up the full bailout option from Europe.

There are some regions that refuse to cut free health care on illegal immigrants while some towns subsidize schools and providing compensations for wage cuts on civil servants. If these matters cannot be solved, the 100 billion euros of aid from Europe may not be enough and this could send the budget gaps to 8.9% this year. As a result, Spain’s 10-year yield which has recently rallied to 6.2% from 6.9% could run into brick wall and fizzled.

Fortunately, Standard & Poor’s said that should Spain ask for a full sovereign bailout, its credit rating may not be affected as such aid may actually help the ailing economy to continue its reforms. At the moment, Spain is rated BBB+ by the S&P, BBB at Fitch and Baa3 at Moody’s.

Fed members tilted towards more easing

FOMC minutes released recently pointed at the possibility of additional stimulus from the Federal Reserve if the economy continues to show sluggish improvements. According to the minutes, many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.

The kind of stimulus that the minutes referred to is a new large-scale asset-purchase program. While some members of the FOMC were concerned over the impact of such purchases of Treasury securities, the minutes noted that a staff analysis showed substantial capacity for additional purchases without disrupting the debt markets. At the previous occasion, the FOMC stated that economic conditions warrant exceptionally low levels for the fed funds rate at least through late 2014.

On the policy guidance, the FOMC members decided to wait until September meeting when they have new economic data to update their economic forecasts. Based on the minutes, there were a few who suggested that the committee switched the date with changes in the economy which would be the trigger for the FOMC to raise the fed funds rate. Other idea was to eliminate guidance entirely.

China unleashed reverse-repo, Japan’s exports faltered

Through its seven- and 14-day reverse-repo agreements, PBOC has added 220 billion yuan in its bid to ease a cash squeeze in the financial system. While other tools are also available to loosen up its monetary policy, the PBOC seems to keep its options such as reserve requirement ratio and interest rates intact. It remains to be seen whether this policy will bring any significant impact to the economy. China was seen as the most likely one of the three (along with Europe and U.S.) to respond to the recent slowdown in the economy.

Elsewhere in Asia, data from the Japanese Finance Ministry showed that Japan scored a 517.4 billion yen of trade deficit in July, partly caused by European crisis and Chinese slowdown which dragged down exports. In June, the economy scored a surplus of 60.3 billion yen while the median forecast was at 270 billion yen.

  

Days Ahead

While the China finally made its move to ease up the monetary policy, the Fed may wait until September before taking an action, if and only if the economy fails to show improvements. Europe may wait for September as well until the authorities start to meet again over their efforts in finding the solutions for the current fiscal crisis. Greece will be under the spotlight as PM Antonis Samaras will meet euro zone leader Jean-Claude Juncker next Wednesday and then Chancellor Angela Merkel afterwards on Friday. Then, Samaras will also meet up with French Francois Hollande a day afterwards. Samaras will talk about giving Greece more time for reforms. In the meantime, the global market may consolidate until more significant news are available or crawls higher on positive expectations over Fed’s decision. On the domestic front, the market is likely to edge higher, catching up with the global market’s movement after a long holiday break.

By: Unknown On 21.02

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Policy Conundrums

Still stuck in the rut, Jakarta Composite Index (JCI) remains caged within its familiar range between 4060 and 4150. The policy conundrums in the U.S. and Europe have shifted the markets’ attention towards China.

China’s PM Wen Jiabao’s recent comment suggests that the next easing may come from China. Slowing growth coupled with timid inflation are seen as providing room for the PBOC to either slash interest rate or reserve requirement ratio.

While Wen’s comment provides some boost for stocks, for local stocks the impact may be limited considering the market will be off for public holiday for a few days.

Our portfolio remains stuck with no significant progress. On Wednesday the portfolio lost 0.62% from its position on Tuesday. The best performing stock remains BMTR which is still struggling to break its stiff resistance at around 1800. BHIT saw occasional forays above 400 but repeatedly pushed back below the 400-mark.

No change on the portfolio for now, all remain on hold until the holiday ends. The market will resume trades on next Thursday.

By: Unknown On 22.05

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Fiscal Cliff On The Horizon

Returning to its state of directionless, the markets seem to be both reluctant to push stocks higher as well as unwilling to squeeze them lower. As a result, the Jakarta Composite Index is expected to gyrate between 3950 and 4150 in the near-to-medium term.

After a better-than-expected nonfarm payrolls data last Friday, the market went higher but only for a limited duration and finally the euphoria got dissipated rather quickly. Recent developments in Europe were also seen as insignificant, especially without collective statements from European leaders who are mostly on vacation until September.

Sure, ECB President Mario Draghi’s words may cool down some tension among investors, but without action, words are just words. Sure, the creditors and the Greek governments agreed to stick to the bailout conditions, but that was after a rather lengthy meeting between them. Furthermore, the agreement cannot guarantee that the Greeks will be able to escape bankruptcy next year as their economic outlook remains precarious.

Essentially, we’re back in a wait-and-see mode, but with the focus set upon the central bankers such as the Federal Reserve and the European Central Bank.

In the meantime, the governments in Europe and the U.S. also have their homework to do. As we all know, European governments must forge a stronger cooperation between them in dealing with the European debt crisis, especially over the Spanish and Italian ones. As for the Greek issue, the current precarious situation may need a long time to fix and it remains to be seen whether the creditors’ patience could match that amount of time needed to fix the Greek economy.

Across the Atlantic, the so-called fiscal cliff looms large on the horizon. Despite being able to avert another crisis when the U.S. fiscal year ends on September 30, the recent deal is seen as having no impact on putting off the fiscal cliff from the table.

About Fiscal Cliff

In short, fiscal cliff is the predicted reduction in budget deficit which is seen as crippling the economy as some laws are about to expire at this end of the year while at the start of 2013 there will be the auto-spending cuts of $1.2T over 10 years. Recently, the House and the Senate struck a deal which will fund the government for six months after the fiscal year ends on September 30. The funding amounts to $1.047T should dodge the shutdown from happening for now until next March. Yet, this deal is not affecting the fact that the Bush tax breaks will expire this year-end and the spending cut will be automatically triggered early next year. Combined, both have the capability of choking the economy pretty bad and could potentially throw the U.S. economy into recession.

While the fiscal cliff is a serious matter for the U.S. economy, the solution is not expected soon. The U.S. election in November will set the stage for another showdown between the Democrats and the Republicans should there’s no decisive victory in the election. Without such decisive victory, we will see another 11^th hour deal just like what happened last year. In the meantime, there’s a risk that a slow decision-making could lead to another S&P downgrade of US debt rating.

To some people, fiscal cliff is seen as more hazardous than the European debt crisis, but both added with the risk of China’s hard landing could be a dangerous combination should all three happen simultaneously.

In the meantime the fiscal cliff is still rather low on the investors’ radar, but as we approach the year-end the matter will become increasingly talked about.

Overall, the global market is seen consolidating for now, but in September the market’s focus on Europe is expected to intensify while in November the U.S. election will be the main theme. Come December we may see another dogfight between the Democrats and the Republicans which is expected to end with an 11^th hour deal.

By: Unknown On 23.47

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Payrolls Factor

U.S. Nonfarm Payrolls data turned out to be better than what the market had expected. There were 163k jobs added to the U.S. economy compared to 100k expected. However, June’s figure was revised down from 80k to 64k while the unemployment rate which was based on a different survey showed that the rate ticked up from 8.2% to 8.3%.

Earlier last week, the market had been disappointed by both the Federal Reserve and the European Central Bank’s decision which provided no fresh clues for investors. The Fed was expected to provide some new stimulus to re-boot the ailing (that’s what the pessimists have been saying for some time) U.S. economy while the ECB was expected to deliver a decisive action – or at least, a plan – to save the euro zone from the current crisis.

Somehow, the market suddenly forgot the ‘ailing U.S. economy’ when the payrolls data was released as the Dow soared over 200 points. European stocks were also turning higher after the released NFP data, suddenly forgetting the impending doom of euro should the crisis resolution remains uncertain. After all, all eyes look on ECB as euro’s sole salvation. The ECB itself seems to be tossing the role towards the respective European governments such as Germany (as the key decision maker), and the troubled Spain, Italy, Portugal, Ireland and Greece (as the ‘trouble-makers’).

As a personal opinion, I believe that the ECB should keep its primary duty of ensuring price stability instead of intervening in the bond market. Discipline should be applied on these troubled countries, especially on capping their spending to prevent excessive and unnecessary deficits. In the short-run, many will protest and get themselves upset, but in the long-run, a successful application of austerity program will definitely benefit the euro as a whole. 

The portfolio slipped 1.57% on Friday, but this Monday the outlook seems to be okay so far. 

Unfortunately, how long the payrolls euphoria will last? Once the market realizes that the bigger problem is in Europe, stocks may start heading south again…

By: Unknown On 21.41

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