Friday, 29 June 2012

Euro, oil, stocks rally after euro zone deal

A woman carrying an umbrella passes an electronic board displaying a rise in Japan's Nikkei share average (top C), along with other global market indices, outside a brokerage in Tokyo June 18, 2012. REUTERS/Yuriko Nakao
NEW YORK | Fri Jun 29, 2012 7:35pm BST
(Reuters) - The euro jumped nearly 2 percent, oil prices surged and world stocks rallied on Friday after euro zone leaders agreed on measures to cut soaring borrowing costs in Italy and Spain, in addition to directly recapitalizing regional banks.
Spanish and Italian government bond yields fell sharply, while safe-haven U.S. and German government debt sold off after the region's leaders agreed that European Union bailout funds could be used to stabilize bond markets to support countries that comply with EU policy recommendations.
EU leaders also agreed after 14 hours of intense talks that creation of a single supervisory body for euro zone banks, housed under the European Central Bank, would be discussed by year-end - a first step toward a banking union in the euro zone.
Markets rallied on the news, which caught investors by surprise, as expectations for meaningful steps to tackle the debilitating debt crisis had all but disappeared in the run-up to the two-day EU summit.
"We've gotten used to being underwhelmed by the outcomes, so with little to no expectations for success, the fact that it appears we are going to get something substantial is a real important positive for the market in the near term," said Art Hogan, managing director of Lazard Capital Markets in New York.
"It's inching closer to a banking union and the closer we get to a banking union would put (the EU) well on the road to a fiscal union."
The euro surged against the U.S. dollar, climbing as high as $1.2692 (0.808 pence) on Reuters data, the strongest since June 21. It was last at $1.2657.
Stocks on Wall Street rose almost 2 percent, following a jump in Europe that pushed indexes up more than 2 percent, spurred by soaring bank shares.
The Dow Jones industrial average was up 232.72 points, or 1.85 percent, at 12,834.98. The Standard & Poor's 500 Index was up 27.43 points, or 2.06 percent, at 1,356.47. The NasdaqComposite Index was up 74.85 points, or 2.63 percent, at 2,924.34.
In Europe, the FTSE Eurofirst 300 index closed 2.6 percent higher, with banks up 4.1 percent. MSCI's all-country world equity index gained 2.7 percent and its emerging markets index climbed 3.4 percent.
The price of safe-haven German bonds headed lower - briefly pushing yields above their U.S. equivalents for the first time since early February - while prices for gold, oil and copper all rose.
Yields on 10-year German debt rose as high as 1.691 percent, before paring gains to 1.584 percent. Their U.S. counterpart, the benchmark 10-year U.S. Treasury note, was down 22/32 in price to yield 1.6569 percent.
Yields on Italian 10-year debt fell to 5.832 percent from 6.192 percent the previous night, while yields on the Spanish equivalent fell to 6.346 percent, down from the close of 6.915 percent on Thursday.
"EU support for Spain and Italy looks more real today than it has any time the last three years," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York. "This is not a 'buy some time' fix. It's big."
Despite the market euphoria, some remained sceptical.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among lingering questions is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy it will be to agree on the banking supervisory mechanism.
"Our initial view is this deal is no game-changer."
Andrew Milligan, head of global strategy at Standard Life Investments, said that bond yields in many European countries are still too high and growth rates too low.
"We really didn't see any actions by the authorities last night which are going to have a material impact on either of those," Milligan said.
Oil prices rallied, but were still set for the deepest quarterly loss since 2008.
Brent crude for August was up $5.68 to $97.04 a barrel. U.S. crude was up $6.24 a barrel at $83.93 a barrel, up from an eight-month low hit on Thursday.
Copper rose more than 4 percent to hit a 1-month high, while gold prices rallied almost 3 percent.
Spot gold prices rose $48.47 to $1,599.70 an ounce. The Reuters/Jefferies CRB Index, a benchmark of 19 commodities, was up 4.1 percent at 282.81

Wednesday, 27 June 2012

Australian, New Zealand dollars stage surprise rally ahead of EU summit

28 JUN, 2012, 11.23AM IST, REUTERS

SYDNEY/WELLINGTON: The Australian and New Zealand dollars hit four-month highs on the euro on Thursday just ahead of a crucial EU summit, and scaled a one-week peak against a broadly weaker greenback thanks in part to a short squeeze. 

The euro fell to A$1.2331 and NZ$1.5689 , before recovering some ground to last trade at A$1.2361 and NZ$1.5728, a touch softer on the day. 

Against the greenback, the Antipodean currencies climbed about 0.3 percent on the day to $1.0113 and $0.7951 respectively. 

There was talk a buy order from a U.S. name had triggered stop-loss buying in a thin market, sending the Aussie up as high as $1.0126 and towards resistance at $1.0128, the 61.8 percent retracement of its June 20-25 fall. 

Traders said month-end and quarter-end flows might also have played a part, but there was no news that prompted the surprise rally with many players actually reluctant to take big positions heading into the two-day summit. 

"With thin volumes and no participation, plus stops, we've a perfect excuse for a short term rally," a trader said.

European Union leaders go into the meetings more openly divided than at any time since the debt crisis erupted in Greece in 2010 and expectations of a breakthrough are very low. 

Traders said any positive surprise could fuel risk trades, although the pre-summit rally probably means further gains could be limited. 

Conversely, a lack of progress in resolving the euro zone debt crisis could push the single currency towards lifetime lows around A$1.2124 and NZ$1.5575 set early in the year. 

The kiwi gains came despite data showing a drop in business confidence and inflation expectations, which only added to the outlook for prolonged low interest rates in New Zealand. 

"We're in a bit of a wait-and-see mode, which keeps pressure off the RBNZ to have to do something," said Bank of New Zealand economist Craig Ebert. 

The central bank left its key rate steady at a record low 2.5 percent earlier this month and is expected to hold it there until next year. 

The weak domestic outlook and an uncertain future for the euro would likely cap the kiwi around $0.8020, the high on May 2, and support around $0.7810. 

The Antipodean currencies were steady on the yen, with the Aussie buying 80.33, and the kiwi fetching 63.15 as investors focused on brewing political rift within the Japanese ruling party over sales tax increase. 

New Zealand government bonds were flat on the day, although the latest auction for 2019 and 2023 bonds drew strong interest. 

Australian government bond futures were also subdued with the three-year contract flat at 97.670 and the 10-year up just 0.005 points at 97.040.

Asian shares, euro edge up but EU summit worries cap gains

Posted: Thu, Jun 28 2012. 10:48 AM IST  Chikako Mogi / Reuters

MSCI Asia ex-Japan up 0.3%, Nikkei rises 1.4%; euro up tepidly on speculation ECB to act next week; nervous markets may falter ahead of divided EU summit

Tokyo: Asian shares rose on Thursday on encouraging US economic data, but prices were capped with investors tense ahead of a European Union summit of leaders deeply divided on how to tackle the long euro zone debt crisis and stop it from spreading.

European shares were likely to extend Wednesday’s gains modestly, with spreadbetters predicting that region’s major markets would open as much as 0.3% higher. US stock futures were up 0.1%.

On Wednesday, European shares rebounded and Wall Street stocks logged their largest gain in a week after data showed stronger-than-expected demand for long-lasting US manufactured goods in May, a rising gauge of planned business spending and increased pending home sales in May.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose as much as 0.7% before paring gains to trade up around 0.3% while Japan’s Nikkei average advanced 1.4%.

“It’s completely a reflection of the fact the European markets rebounded a bit yesterday,” said Guy Stear, head of research with Societe Generale in Hong Kong.

“People don’t want to go short into the meeting, that’s why we have a bit of a short-covering bounce. There’s always a potential in Europe for a surprise,” even if there were few signs for any agreement to be reached at the meeting, he said.

The bright sentiment may evaporate later on Thursday, however, when the two-day EU summit starts in Brussels, with Germany, France and Italy openly divided over putting the priority on the bloc’s long-term fundamental problems ahead of calls for emergency action.

German chancellor Angela Merkel offered no immediate moves to ease the tension, while EU Economic and Monetary Affairs Commissioner Olli Rehn said Europe would work at the summit on short-term steps to relieve market pressure on countries at risk.

EU leaders have met 20 times to try to resolve a crisis that has spread across Europe since beginning in Greece in late 2009.

Euro floats aimlessly

The euro rose 0.4% to $1.2514, still not far from its lowest in more than two weeks at $1.2441 hit on Tuesday, underpinned partly by speculation the European Central Bank would take action next week to ease European banking and debt market strains.

“European policymakers have a good track record for underwhelming with their response to the banking and sovereign crisis to date,” ANZ Bank said in a research note.

“Spanish and Italian bond yields will remain vulnerable to whatever is delivered. Even if there is a good outcome, the uncertainty surrounding the ability to implement will be high. The Europeans need a strategy to cap bond yields or else another sovereign will be in need of a rescue package,” it said.

If the EU summit disappoints, focus may turn to the ECB to deliver action, such as an interest rate cut.

“The market is already expecting disappointment from the summit. But I think the euro will be supported by expectations that the European Central Bank will take some measures next week,” said a currency trader at a Japanese bank.

Italy’s six-month borrowing costs rose to 2.957% at auction on Wednesday, their highest since December. Rome faces a more challenging test of investor appetite when it offers five-year and 10-year debt for up to €5.5 billion on Thursday.

Europe’s debt turmoil pushed Japanese fund managers’ weightings in domestic stocks and bonds to record highs in June.

Commodities can wait

US crude futures extended gains from Wednesday, rising 0.4% to $80.55 a barrel, but Brent futures pared earlier gains to stand nearly flat at $93.48.

London copper was up 0.2% at $7,420 a tonne on the upbeat US data, which supported demand for industrial metals sensitive to the economic outlook.

Naohiro Niimura, a partner at Tokyo-based research and consulting firm Market Risk Advisory Co, said investors should not necessarily rush to buy commodities yet because prices could test lower still depending on the EU summit’s outcome.

“Policymakers won’t opt for the worst case scenario if they are rational, but over the past year, politicians in each country showed they don’t or can’t make economically viable decisions,” Niimura said.

“So, if there is no urgent need to tap raw materials or commodities products, then one should wait at least until the ECB’s meeting,” he said, adding that investors can use put or call options to hedge against price swings.

Asian credit markets firmed slightly, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 3 basis points.

Tuesday, 26 June 2012

Euro dips, EU summit seen giving little relief

The map of Europe is featured on the face of a one Euro coin seen in this photo illustration taken in Paris, January 31, 2012. REUTERS/Mal Langsdon
The map of Europe is featured on the face of a one Euro coin seen in this photo illustration taken in Paris, January 31, 2012.
Credit: Reuters/Mal Langsdon
TOKYO | Wed Jun 27, 2012 7:51am IST
(Reuters) - The euro inched lower on Wednesday and held near a two-week low hit the previous day, as hopes faded that a European summit would deliver concrete measures to ease the region's sovereign debt crisis.
A quick move toward the issuance of common euro-zone bonds looked increasingly unlikely after German Chancellor Angela Merkel was quoted saying Europe would not share total debt liability "as long as I live".
The summit is unlikely to alter the single currency's downtrend, said Daisuke Karakama, market economist for Mizuho Corporate Bank in Tokyo.
"I think the euro could see a break below $1.20 by year-end," Karakama said. "I'm focusing more on just how far it might go if it drops below $1.20," he added.
The euro eased 0.1 percent to $1.2485, inching back in the direction of Tuesday's trough of $1.24413 on trading platform EBS, which was the euro's lowest level since June 8.
The next major downside target is a two-year low of $1.2288 hit on June 1.
"Since short positions have piled up, the euro could rise sharply at some point, but I think you have to be careful not to be fooled by such a move," Mizuho Corporate Bank's Karakama said.
Against the yen, the euro dipped 0.2 percent to 99.12 yen, having hit a two-week low of 98.74 yen on Tuesday.
In addition to Merkel's comments, the euro had come under pressure the previous day after Spanish bond yields rose as demand at a bill sale fell despite the significantly higher returns on offer to investors.
The dollar dipped 0.2 percent to 79.39 yen, well below a two-month high of 80.63 yen hit earlier this week.
The yen held its ground although some market players say political uncertainty may weigh on the Japanese currency.
Gareth Berry, associate director of G10 FX strategy for UBS in Singapore, said investors outside of Japan so far seemed unsure about how Japanese politics might affect the yen.
"I guess international investors have been burned so many times by trying to trade dollar/yen around Japanese political events," Berry said.
"They are happy to watch the story unfold but unwilling to take positions, in FX at least," he added.
Japanese Prime Minister Yoshihiko Noda faces the risk of a split in his party that could trigger a snap election after his signature tax-increase plan cleared parliament's lower house on Tuesday despite its rejection by a group of ruling party rebels.
(Editing by Eric Meijer)

Monday, 25 June 2012

Germany's euro debate turns constitutional

A European flag waving before the German parliament buildingGermany is ceding more and more power to the EU. But how far is that compatible with the German constitution? Now senior politicians are proposing a referendum to change Germany's Basic Law.
The constitutional objections are coming with increasing frequency. Every law that parliament passes in connection with the European debt crisis is met with a constitutional challenge from someone, and the court usually finds, at least partly, in favor of the complainant.
This month, the court ruled that the government must consult more with parliament over the euro crisis and criticized the government's inadequate information.
And last Friday the court issued a new kind of warning. A spokesman said that the court would ask the president not to sign two laws on the euro rescue fund which were due to be passed by parliament this coming Friday.
The court said it needed more time to consider the new European Stability Mechanism (ESM) and the EU fiscal pact that goes with it. President Joachim Gauck was quick to declare that he would follow the judges' request.
The judges of the court in their red robes
The constitutional court is insisting that parliament gets to decide
Parliamentary control at risk
What lies behind all this is not a lurking euroskepticism on the part of Germany's most senior judges - or even, as often rumored, a rivalry with the European Court in Strasbourg. When the judges speak about the matter, they always emphasize how favorably the German constitution, adopted in 1949, regards European integration. The first sentence of the preamble talks about the desire "to serve the peace of the world in a unified Europe."
But at the same time, a basic theme of the constitution is the principle of the supremacy of parliament - and that's what the court sees at risk in the measures being taken to deal with the crisis.
Originally, the European currency union was supposed to come together with a new EU constitution. The fact that this never came about has turned out to be a real problem. German Chancellor Angela Merkel has been calling for some time for further steps to be taken towards a greater political union, in order to give the common currency a more stable foundation.
The fiscal pact, which requires EU members to adopt a new budgetary discipline, is clearly seen by the German government as a step in this direction. All the same, the pact could be seen as removing the national parliament's right to decide its country's budget, without replacing it with an equivalent parliamentary control at EU level.
Referendum on a new constitution
It was in order to deal with this issue that German Finance Minister Wolfgang Schäuble proposed at the weekend that the Germans would have to vote on a new constitution - and they'd have to do so sooner rather than later. If authority is increasingly to be handed over to Brussels, he said, there will come a point when Germany simply reaches the limits of its constitution.
Schäuble and Steinbrück sit beside each other, Steinbrück gesticulating
Both Schäuble, left, and Steinbrück agree about a referendum
He called for the EU institutions to be completely reconstructed and to include an elected president. A few months ago, he said, he thought that a referendum could wait for another five years, but now, he believes "it will come more quickly than that."
Schäuble's predecessor, Peer Steinbrück of the opposition Social Democratic Party, agreed with him. He too thought there would have to be a referendum in the next two years. "Anyone who has been listening to the judges of the constitutional court will know that there isn't any alternative," he said.
Another senior Social Democrat, Kurt Beck, premier of the state of Rhineland-Palatinate, also says that this is the right way to go. But he warns that a referendum would have to be prepared "very thoroughly," since it might otherwise lead to "an anti-European mood."
Fear of euroskeptics
This may be the reason for the reluctance of the liberal Free Democrats, junior partners in the government coalition. Their General Secretary Patrick Döring said, "We shouldn't be discussing new visions in this time of crisis; we should rather be stabilizing our currency." His party may be worried about the plans of the so-called Free Voters to stand on a euroskeptic platform at the next general election in 2013.
Merkel also distanced herself cautiously from Schäuble's proposal. Her spokesman Steffen Seibert said, "These are steps for tomorrow or the day after tomorrow - actually rather the day after tomorrow - and they're not for decision now."
Even so, Seibert has hinted that the limits of the constitution were already causing problems for the government. He said the government wanted to get a two-thirds majority in parliament for the ESM rescue fund, but so far it had only said that this would be necessary for the fiscal pact.
But Seibert argued, as had the parliament's president Norbert Lammert a few days earlier, that this would avoid any constitutional risk. He failed to say precisely which paragraph of the constitution he saw as giving rise to the risk, but there is clearly the impression that the government knows it's skating on ever thinner ice.
Author: Peter Stützle / mll
Editor: Ben Knight

Japan’s Big Car Makers Grapple with Strong Yen

June 26, 2012, 12:01 AM

By WSJ Staff
Getty Images

A Toyota assembly line in Iwate prefecture, Japan.

TOKYO—Japan’s three largest auto makers are signaling plans to shift more production overseas to deal with the strong yen, moves that may mark the end of the country’s role as one of the world’s biggest auto export hubs.
Toyota Motor Corp., long the country’s biggest auto exporter, is turning to an underutilized factory in northern France to build a version of its Yaris subcompact for the U.S., cutting exports from Japan. It is the only model from any of the Japanese Big Three to be exported from continental Europe to the U.S., reflecting the plunge of the euro versus the yen and dollar.
All three of Japan’s biggest auto companies—Toyota, Nissan Motor Co. and Honda Motor Co.—have been slowly shifting production abroad over the past decade, reflecting the yen’s rise against other currencies and faster growth in overseas markets. But in recent weeks those efforts have accelerated. Last month, a Honda executive said it isn’t pushing some exports to the U.S., including its Honda Fit subcompact, because the strong yen has rendered the exports barely profitable.
“The era of wait-and-see is over. Japanese manufacturers realize they need to move quickly or risk losing competitiveness,” said Satoshi Komiya, a managing director at Boston Consulting Group in Tokyo. “In one sense, the recent surge in the yen’s value has given them cover to reduce their manufacturing footprint as they’ve long wanted to do.”
The yen’s rise has been steep over the past four years. The dollar has weakened 28% against the Japanese currency since 2008, while the euro has fallen 39%. Despite efforts to wring savings out of their domestic manufacturing operations, Japanese auto makers have struggled to compete on price and profitability with their U.S., German and South Korean rivals.
Many of Europe’s big auto makers are investing heavily outside of the euro zone to reduce their exposure to exchange-rate fluctuations. Volkswagen AG, which last year opened a $1 billion U.S. plant to build passenger cars, now plans to make Audi luxury cars for North America in Mexico beginning in 2016. BMW AG is increasing capacity in the U.S. and has plans to build a new factory in Brazil. Daimler AG recently expanded its U.S. production of Mercedes-Benz. Meantime, Europe’s mass-market auto makers are suffering from excess capacity.
Akio Toyoda, Toyota’s president, has warned the strong yen is threatening to hollow out Japan’s industrial might. Trade group Japan Automobile Manufacturers Association, which Mr. Toyoda leads, calculates auto shipments from Japan shrank to 4.4 million last year from 6.5 million vehicles in 2007. Estimates for 2012 aren’t available.
Toyota has long positioned itself as a bulwark of Japan-centric manufacturing and has said it remains committed to keeping production of at least three million vehicles a year in Japan. But the toll of the yen has been high, shrinking profits and blunting the price competitiveness of its Japanese-made models. In May, the auto maker posted a ¥207 billion operating loss ($2.6 billion) for its export-heavy Japanese operations in its most recent fiscal year.
As recently as 2005, Toyota’s average exchange rate was ¥113 to the dollar. But by 2010 the exchange rate averaged ¥86 to the dollar. This year, the company forecasts an average of ¥80 to the dollar. The company has said it expects to maintain domestic production at about three million vehicles a year by expanding its share of the local market to make up for shifts abroad.
Toyota is more exposed to currency risk than rivals with 41% of its global volume last year manufactured in Japan, compared with 28% for Honda and 35% for Nissan. The auto maker said exports from France to North America would begin in May 2013. “The guiding principle is to ensure maximum capacity utilization,” said Didier Leroy, president of Toyota Motor Europe. “We have excess capacity in Europe, and less in Japan.”
Nissan said this month it would end mass production at one of two assembly lines at its factory in Oppama, Japan, that makes several Japanese-market vehicles. Nissan hasn’t decided the fate of those two cars, according to a spokesman. But Japan’s Nikkei newspaper reported on Thursday the company will completely replace one vehicle with a Thai import and procure all core parts of another from Thailand.
The No. 2 Japanese auto maker has already relocated production of some Japan market models to overseas plants, including a Thai-made subcompact, and has plans to move more, such as its Rogue crossover, to Canton, Miss. In February, Nissan began building its first luxury car outside of Japan, the Infiniti JX crossover, in Smyrna, Tenn. CEO Carlos Ghosn has hinted more models will move offshore if the yen stays at current levels.
Honda, the fastest of the three to build up manufacturing operations outside Japan, plans to export up to 150,000 vehicles a year from its North American plants by 2017, according to a spokesman. Meantime, the spokesman said the car maker is considering abandoning domestic production of the Japan-market equivalent of the U.S. Acura RL when that sedan is replaced with the RLX model in early 2013. It recently began exporting Chinese-made Fits to Canada.
That comes after Honda President Takanobu Ito announced a new strategy last year to cut the percentage of exports from Japan to between 10% and 20% of its domestic production, down from about between 30% and 40% currently. The shortfall will be made up by lifting exports from the U.S. and other markets to between 10% and 20% of annual output.

Wednesday, 20 June 2012

Analysis: Greece may still become an emerging market - again

LONDON | Wed Jun 20, 2012 12:31pm BST
(Reuters) - Greece is still at risk over the long term of becoming the first economy to be relegated from developed to emerging market status within investment indices, even if it has fended off any immediate exit from the euro zone.
The unprecedented switch, reversing a path Greece trod only 11 years ago, would cut the country off from investors in more sophisticated markets although it would open it up to fund managers who are more comfortable with risk.

Stock index compiler MSCI, which has $7 trillion benchmarked against its indices globally, has classified Greece as a developed market since 2001, based on criteria of market size and liquidity, investor access and the country's overall wealth.
A Greek exit from the euro, still viewed as a possibility after a narrow weekend election victory for parties which back the country's EU/IMF bailout deal, would not mean an instant demotion. But if a currency devaluation drastically reduced the country's wealth in dollar terms, or if Greece were to set up curbs on capital movement, an ejection could follow.
The normal process of shifting a country from one MSCI index to another can take years. South Korea, for example, has been under consideration for an upgrade to developed market status for four years with no change to date.
A sudden crisis, on the other hand, could accelerate things.
"If countries start to impose stringent accessibility restrictions, these may force us to act more quickly," said Sebastien Lieblich, head of index management at MSCI.
A sharp devaluation could also bring Greece's annual per capita income far below its 2010 levels of around $27,000.
MSCI's income criterion for a developed market is currently 25 percent above a World Bank threshold of $12,276, or a little over $15,000.
"Greece would have quite a long way to go before it fell below the threshold, but these days anything is possible," Lieblich added.
Greek debt has been in no-man's land for the past two years, after its bonds were thrown out of flagship global bond indices following a downgrade of its sovereign credit ratings to "junk".
Because most of Greece's debt is euro-denominated, it lacks a stock of liquid dollar bonds that might enable it to gain access to emerging market bond indices compiled by JPMorgan and so attract investors who favor riskier emerging debt.
In equity markets, plunging prices mean Greece currently makes up only 0.1812 percent of MSCI's EMU index and a tiny 0.0193 percent of the MSCI global markets index .MIWD00000PUS.
Even without Greece's economic woes, this means it is unlikely to attract much of the $250 billion held in Europe-focused mutual funds, according to data from Lipper Global.
MSCI says a Greek exit from the euro would trigger an automatic ejection from the company's EMU index. But the process of transition to emerging market is a slower one.
It would involve a review by MSCI, which would be likely first to designate Greece as a Standalone Market.
Something similar happened to Pakistan, which was kicked out of the MSCI Emerging Markets indices in Dec 2008 following the introduction of restrictive rules on stock market trading. Pakistan first became a Standalone Market and was only included in the frontier markets index some months later.
Greece would need to reach the emerging market index before its assets attracted attention from many emerging equity funds.
But a relegation to emerging market status might not be all bad news for the country's stocks despite the loss of prestige. Greece actually lost investors when it was upgraded 11 years ago, as its share of developed market indices was much smaller - 0.13 percent, against nearly 5 percent of the emerging index.
Israel also lost out when it secured developed market status in 2010, seeing foreign investment flows into its stock market dwindle from $2 billion in 2009 to almost zero a year later.
Some active fund managers might not even wait for official reclassification of Greece as an emerging market to invest.
"As stock-pickers, we do not care which country a company operates in, we look at the cost of equity," Kim Catechis, emerging market fund manager at Martin Currie, told a briefing this week.
"If Greece were to come out of the developed index, we would look at the companies in the same way as we look at any other equity."
Veteran emerging market investor Mark Mobius told a briefing last week that Greece could become an emerging stock market: "It's quite possible if it goes back to drachma it may qualify, if the per capita income goes down."
Mobius said Greek companies that would be a good fit for emerging stock indices included those with operations in emerging markets such as luxury retailer Folli Follie (HDFr.AT).
But the country's high debt levels may also be enough to deter die-hard emerging market investors, who have seen fundamentals in many traditional emerging markets vastly improve in the past decade or more.
"The likelihood of sensible emerging market investors investing in Greece right now is close to zero," said Jerome Booth, head of research at Ashmore Investment Management.
"In a few years' time, after a devaluation, it might make more sense, but I wouldn't invest in it. I don't invest in risky markets where the risk is not priced in."
(Additional reporting by Sujata Rao and Joel Dimmock; Editing by Catherine Evans)

Greek Socialists say government agreed

Leader of conservative New Democracy party Samaras is cheered by supporters after his statement on election results in Athens
Leader of conservative New Democracy party Samaras is cheered by supporters after his statement on election results in Athens (JOHN KOLESIDIS, REUTERS / June 17, 2012)
ATHENS (Reuters) - A conservative-led Greek government has been agreed and will form a team to "renegotiate" the EU/IMF bailout saving the country from bankruptcy, Socialist PASOK leader Evangelos Venizelos said on Wednesday.

Venizelos, whose PASOK party will enter alliance with the larger conservative New Democracy, said cabinet posts would be decided by Wednesday evening. He said the key issue would be to form a team to renegotiate the 130 billion euro ($164.79 billion) bailout.

"Greece has a government and this is the message that the outgoing finance minister (George) Zanias will take to the Eurogroup," Venizelos told reporters.

($1 = 0.7889 euros)

(Reporting by Harry Papchristou and George Georgiopoulos; Writing by Matt Robinson)

Tuesday, 19 June 2012

IMF team to head to Greece as soon as government is formed

Posted: Jun 20, 2012 8:21 AM ASTUpdated: Jun 20, 2012 8:21 AM AST
Source: AFP

LOS CABOS, Mexico -- The International Monetary Fund (IMF) will send a team to Greece to review the country's stumbling rescue program as soon as a new government is formed, IMF managing director Christine Lagarde said Tuesday. 

"We will wait until a government is announced," Lagarde said at the G-20 summit in Mexico's Los Cabos seaside resort, and two days after Greeks voted in their second national election in six weeks. 

"As soon as a government is announced, I will send a team of our experts to Greece. I'm sure that the two other members of the troika will do that as well," she said, referring to the European Commission and the European Central Bank. 

"I think it's in everybody's interest to move fast, because we have been delayed by the electoral process. 

"And we will see on the ground, in the fields, with the administration ... what progress has been made, whether there are shortfalls, what needs to be addressed as a matter of priority." 

The New Democracy party was close Tuesday to forming a coalition with socialist Pasok and a smaller party, both having said they want to renegotiate the unpopular the €130 billion (US$165 billion) joint IMF-EU bailout program. 

Many Greeks are deeply angry by the harsh austerity terms that have been pressed on them by the bailout, which aims at closing a massive fiscal gap and reducing the country's debt load. 

Lagarde made no mention of renegotiating terms. She said that the IMF team first needs to report back to the IMF management and board. 

"We will continue to operate on that basis with the real facts. That's what we need to do first," she said. 

Copyright 2012 AFP. All rights reserved.

G20 summit can help Greece by looking at host Mexico

Mexico's own recovery from a currency crisis has enabled it to play host to this year's G20 summit. What lessons can eurozone countries draw from that?

By the Monitor's Editorial Board / June 19, 2012

President Felipe Calderon of Mexico arrives for the opening session of the G20 summit in Los Cabos, Mexico, June 18.
Eduardo Verdugo / AP Photo

Saving the euro was the hot topic at this week’s summit of the Group of 20 nations. Just 18 years ago, the world was trying to save another currency from collapse: the Mexican peso. But guess what? Mexico has since recovered to the point that it could proudly host this year’s G20 gathering in the Baja city of Los Cabos.
Mexico’s comeback should give hope to GreeceSpain, and other ebbing economies that reform is possible. Mexico still has plenty of troubles, such as high poverty, a large gap in income, and an economy too influenced by organized crime, but it can be grateful for the progress so far achieved.
Take the drug violence that erupted after 2006 when a new president, Felipe Calderón, sent the military to take on the drug cartels. Drug-related murders have fallen 21 percent this year, according to Mr. Calderón, the first decline since the internal war began.
And as he prepares to leave office later this year, Calderón will hand over his reform effort to improve the once-hopeless federal police and judiciary. Cleaning up those pillars of democracy will allow the Army to slowly withdraw from the drug fight and return to the barracks where it belongs. This is the wish of many Mexicans

Another sign of progress is the fact that Mexicans will vote July 1 for a new president in a very competitive contest. Before 2000, Mexico didn’t have much political competition. But in that year voters finally ousted the entrenched Institutional Revolutionary Party, or PRI. That historic event has since changed the nation’s political culture.
Now, Mexicans are confident enough after 12 years to possibly elect the PRI’s candidate, Enrique Peña Nieto, who is ahead in the polls. (Calderón is constitutionally barred from running for reelection.) Even if Mr. Peña Nieto turns out to be under the thumb of the party’s old elite, as some predict, he’ll face a tough time governing unless he brings results.
Mexico’s economy now outpaces that of Latin America’s other giant, Brazil. That feat should entitle Mexico to join the so-called BRICS countries (Brazil, RussiaIndiaChinaSouth Africa) – even if “BRICSM” doesn’t quite slip off the tongue.
The Mexican economy is now strong enough to welcome back the hundreds of thousands of migrants who left the United States in the past few years. This reverse exodus helps explain why Asians became the largest group of new immigrants in the US two years ago, surpassing the number of Hispanics, according to the latest census data compiled by the Pew Research Center.
The G20 summit has helped put Mexico on the international stage for a couple days. Who knows, perhaps in a few years Greece might be able to host a big international summit that shines a spotlight on its reformed economy.

Risk appetite rising on expected global central bank actions

Posted in Currencies 


The NZD/USD continued its steady march towards 0.8000 overnight.

A more conciliatory attitude towards ‘risky’ assets allowed the currency to breeze through the 200-day moving average at 0.7955.

Investors were definitely in a mood to play up the positives overnight. Not only did expectations of more Fed policy easing juice up risk appetite, but investors were also encouraged by chatter a workable Greek government is close to being announced. And instead of worrying about weak European data, this was seen as increasing the chances of more policy easing there.

Global equity markets rallied, commodity prices rose, and ‘growth-sensitive’ currencies like the NZD and AUD outperformed at the expense of the ‘safe-haven’ USD.

A fairly positive result from last night’s global dairy auction probably helped shore up NZD sentiment. Milk prices eased 0.5% from the previous auction. Importantly, this means prices held onto nearly all of the previous auction’s 14% surge.

Keep an eye out for today’s March quarter NZ balance of payments data (BoP). We’re expecting a year-to-March current account deficit of 4.7% of GDP, from 4.1%.

The growing picture of imbalance in the NZ economy is one that may attract increasing attention over the coming year. However, for now, the BoP data will likely be glossed over as investors look ahead to tomorrow morning’s FOMC policy meeting. Some expectation of additional quantitative Fed easing is now priced into markets.

So if the Fed disappoints we’ll likely see a stronger USD knock the NZD/USD back below 0.7900. However, full blown QEIII from the Fed would likely pave the way for an eventual retest of 0.8200.