Major Equity Markets 2010: Fisher Capital Management Part 2

The euro-zone economy improved much faster than expected in thesecond quarter of the year. Growth is estimated to have been around the 1% level, the fastest quarterly level for three years; and this has eased the fears about a move into a “double-dip” recession, at least for the moment. But it is a two-speed recovery, with the German economy estimated to have grown by 2.2% during the quarter, the Netherlands economy by 0.9%, and the French economy by 0.6%, but with Spain and Portugal basically unchanged and the Greek economy falling further into recession. With domestic demand weak, it is therefore essential that overseas demand remains buoyant if German exports are going to continue to drive the overall economy forward; but this is now very uncertain, and so growth projections for the rest of this year and for 2011 are still fairly cautious.

However the European Central Bank is maintaining its optimistic view of prospects. Speaking before the latest figures were announced, the chairman, Jean Claude Trichet, argued that the second quarter outturn would be better than expected, that there would also be an encouraging result in the third quarter, and that there was no prospect of a move into a “double-dip” recession.

He also defended the bank’s actions during the recession, suggested that the economy has responded well to those actions, and was anxious to ensure that “perhaps part of the credit could come to the central bank”.

There is an obvious risk that his comments will prove to be premature. Since the latest downgrade in Ireland’s credit rating has provided further evidence that the problems in the European banking system are far from resolved, and that the threat of sovereign debt defaults remains. It is not surprising therefore that markets have been unable to resist the downwards pressure despite the relatively good corporate results from European companies.

The UK market has also fallen sharply over the past month. The UK economy is currently performing better than expected, with consumer spending holding up well so far; and the markets are continuing to give the latest measures by the new UK government to reduce the fiscal deficit the benefit of the doubt. But there are fears that those austerity measures with have a significant effect on growth in the second half of the year, and into 2011, and that corporate activity will be badly affected. The mood amongst investors has therefore become much more cautious.

The latest news on the UK economy has been encouraging. The Office of National Statistics has recently estimated that retail sales volumes were 1.1% higher in July than in the previous month, and 1.3% higher than in July last year, the strongest monthly gain since February; unemployment remains much lower than might have been expected; the latest Purchasing Manager’s index for July confirms that manufacturing activity is continuing to expand; and exports also appear to strong.

There are weaknesses in the housing sector, and apparently some loss of momentum in the services sector, and bank lending remains low; but overall there are hopes that growth in the current quarter will be at reasonable levels. But there are already indications that the austerity measures announced by the government are beginning to have an effect on activity, and so the situation remains very uncertain.

This uncertainty is reflected in the minutes of the latest meeting of the Monetary Policy Committee of the Bank of England. They state that the economy is “on a knife-edge”, with “substantial risks” of a relapse balanced against signs of “gathering momentum” in the recovery. This uncertainty persuaded the majority of the members of the committee that policy should remain unchanged for the present; but the minutes indicated that “the risks were substantial, and that members stood ready to respond in either direction as the balance of risks evolved”. The subsequent Inflation Report from the bank was also a cautious document, with growth forecasts revised lower, primarily because of the expected effects of the austerity measures, and with the governor of the bank, Mervyn King, stressing the need for “continuing monetary stimulus” in the face of the “choppy recovery”. Interest rates are therefore likely to remain low for some considerable time, despite the fact that the inflation rate is well above the bank’s target rate, and so monetary policy will continue to be supportive. But will this be enough to justify the present market level? Global growing is slowing, and this will add to the downward pressures on the economy resulting from the austerity measures as they are introduced. The odds therefore seem to favour further UK market weakness in the near-term, even though we believe that the economic recovery will continue, and eventually lead to higher equity prices.

The Japanese market has also moved lower over the past month. Recent figures have shown that economic growth in Japan slowed very sharply in the second quarter of the year because of weak domestic demand and falling exports; and as a result China has replaced Japan as the world’s second largest economy for the first time. Growth is estimated to have been at a 0.4% annualised rate in the second quarter, after a 4.4% rate in the first three months of the year, and this has increased the fears that the country may once again be slipping back into recession. The dependence on exports has been an important adverse factor, as overseas markets have weakened, and this has encouraged speculation that the Bank of Japan will be forced to intervene in the currency markets to prevent further appreciation of the yen; but even this might not be enough to avoid a recession. In this situation, it is particularly unfortunate that an impasse exists at the political level that is making it extremely difficult for the government to take effective action. The background situation therefore remains very disappointing, and the weakness in the equity market looks set to continue.

Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.

Major Equity Markets 2010: Fisher Capital Management Part 1

Sentiment in the equity markets has been steady over the past month. Markets in Europe have been unable to resist downward pressure. The Japanese market is also lower; but there has been resistance amongst the emerging markets in South East Asia that are supported by more favourable economic conditions.

The Chinese authorities are obviously determined to prevent their economy from overheating. The global recovery will therefore only proceed at a very slow pace, and there may well be setbacks along the way, although a move into a “double-dip” recession still seems unlikely. There is also an increased danger of a sovereign debt default by Greece, and possibly even by Ireland. But the swing in sentiment should not go too far. So long as monetary policy remains supportive, the global economic recovery is likely to continue, and this will eventually produce a sustainable improvement in equity prices. Patience will therefore be the most important requirement amongst investors until some of the uncertainties have been resolved.

The Fed is in a very difficult position. The statement after its latest OMC meeting was cautious about economic prospects, conceding that “the pace of recovery in output and in employment has slowed in recent months” and was likely to be “more modest” than anticipated in the near-term. But monetary policy was left basically unchanged at the meeting, perhaps because of the “unusual uncertainty” about prospects, and this caused some disappointment. However there is little doubt that further monetary easing will be introduced if the position continues to deteriorate, because the bank’s main priority is to try to maintain some momentum in the economy. And fiscal policy is also likely to remain supportive, despite the massive size of the existing deficit. Congress has been reluctant to authorise additional spending programmes; but there is intense political pressure ahead of the elections in November, and further programmes seem likely.

The critical question for investors therefore is whether the continued monetary and fiscal support will be enough. They have been prepared to adopt a bullish attitude to the situation, and this mood has been helped by an encouraging flow of corporate earnings results that have often exceeded expectations, and confirmed that the corporate sector has been coping well so far with a difficult situation.

The gloom should not be overdone. So long as monetary policy remains supportive, we believe that the odds favour the continuation of the slow recovery, and that this will eventually produce better market conditions.

Mainland European markets have fallen back sharply over the past month, after the strong rally. There has been evidence of a further improvement in the economic background in the euro-zone, and second quarter corporate results have generally been encouraging; but the signs of weakness in the US economy and the slowdown in China has raised doubts about whether the German export performance that has been providing most of the momentum for the recovery can be maintained; and there have also been renewed concerns about the possibility of debt defaults amongst the weaker member countries of the zone. The markets have therefore been unable to resist downward pressure.

The euro-zone economy improved much faster than expected in the second quarter of the year. Growth is estimated to have been around the 1% level, the fastest quarterly level for three years; and this has eased the fears about a move into a “double-dip” recession, at least for the moment. But it is a two-speed recovery, with the German economy estimated to have grown by 2.2% during the quarter, the Netherlands economy by 0.9%, and the French economy by 0.6%, but with Spain and Portugal basically unchanged and the Greek economy falling further into recession. With domestic demand weak, it is therefore essential that overseas demand remains buoyant if German exports are going to continue to drive the overall economy forward; but this is now very uncertain, and so growth projections for the rest of this year and for 2011 are still fairly cautious.

However the European Central Bank is maintaining its optimistic view of prospects. Speaking before the latest figures were announced, the chairman, Jean Claude Trichet, argued that the second quarter outturn would be better than expected, that there would also be an encouraging result in the third quarter, and that there was no prospect of a move into a “double-dip” recession.

Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.

World Trade 2010: Fisher Capital Management

One of the more encouraging developments has been the rapid recovery in the level of world trade. The recession in 2009 had a dramatic effect, and the volume of world exports dropped by around 12%.

But largely because large parts of the global economy, and especially China and other countries in South East Asia, were relatively unaffected by the recession, the rebound in trading volumes had been very impressive. There is already talk of reviving the Doha round of trade liberalisation talks that collapsed in 2008. However it will be necessary for relations between the US and China to improve substantially before any real progress can be made, and present disagreements suggest that progress will only be possible at a very slow pace, even if the global economic recovery remains on track.

Major Equity Markets

Sentiment in the equity markets has been steady over the past month. Markets in Europe have been unable to resist downward pressure. The Japanese market is also lower; but there has been resistance amongst the emerging markets in South East Asia that are supported by more favourable economic conditions.

The Chinese authorities are obviously determined to prevent their economy from overheating. The global recovery will therefore only proceed at a very slow pace, and there may well be setbacks along the way, although a move into a “double-dip” recession still seems unlikely. There is also an increased danger of a sovereign debt default by Greece, and possibly even by Ireland. But the swing in sentiment should not go too far. So long as monetary policy remains supportive, the global economic recovery is likely to continue, and this will eventually produce a sustainable improvement in equity prices. Patience will therefore be the most important requirement amongst investors until some of the uncertainties have been resolved.

The Fed is in a very difficult position. The statement after its latest OMC meeting was cautious about economic prospects, conceding that “the pace of recovery in output and in employment has slowed in recent months” and was likely to be “more modest” than anticipated in the near-term. But monetary policy was left basically unchanged at the meeting, perhaps because of the “unusual uncertainty” about prospects, and this caused some disappointment. However there is little doubt that further monetary easing will be introduced if the position continues to deteriorate, because the bank’s main priority is to try to maintain some momentum in the economy. And fiscal policy is also likely to remain supportive, despite the massive size of the existing deficit. Congress has been reluctant to authorise additional spending programmes; but there is intense political pressure ahead of the elections in November, and further programmes seem likely

Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.

Fisher Capital Management News: Commodity Markets 2010

The performance of the commodity markets remains very impressive. Speculative activity is a major factor, and supply shortages, often the result of adverse weather conditions, are also providing considerable support; but there is clearly a view amongst both traders and investors that the general level of prices is too low, and that they will move higher. Over the longer-term that view is likely to prove to be justified. Commodity markets have been extremely volatile over the past month, rising strongly in the early part of the period, but falling back sharply towards month-end concerns about the effects of the austerity measures being introduced in Europe, and indications of a continuing slowdown in China, have combined to increase fears but for most of the past month traders and investors apparently decided that the gloom was overdone; and commodity prices also benefited from some “safe haven” buying by investment funds.

Base metal prices are still ending the month higher overall, but below recent levels, with the further sharp rise in the tin price as the outstanding feature; and food prices have also moved higher, with the continuing surge in wheat prices as the outstanding feature of these markets, to provide further support for the view that the era of cheap food is coming to an end. The gold price has also improved, as investors have sought “safe havens in the present storm”; but oil prices have fallen back.

Base metal prices are closing higher again over the past month. Zinc and tin prices still ended sharply higher, but overall improvements elsewhere were fairly modest.

Chinese demand remains a critical factor in these markets. It is this demand that has been the main driving force over recent months, and that has pushed iron ore prices to record levels and enabled other metal prices to recover from the lows of the recent recession.

Soft commodity markets have provided a mixed performance over the past month, but prices are generally higher. The exceptions have been the cocoa price, which has continued to fall as weather conditions in the Ivory Coast have improved, crop estimates have been pushed higher, and the effects of the technical squeeze created by the decision by Armajaro, the London-based hedge fund, to take delivery of around 7% of the world’s annual cocoa bean production last month, have eased; and soya-bean prices are also basically unchanged over the month. But elsewhere there has been a sharp rise in Arabica coffee prices, and a further improvement in the sugar price.

However the main interest over the month has been in the wheat market, after the massive price gains, and also in other grain markets. The most significant events during the month were the decision by the Russian authorities to ban the export of wheat and other grains until year-end because of the drought that has devastated crops and caused widespread fires across the country; and to ask other neighbouring countries to take similar action.

It is not yet clear how they will respond; but the action has already created widespread concern.

Russia was the world’s third largest wheat exporter last year, sending 18.3 million tons abroad, and so the decision to ban exports for the rest of the year has had a dramatic effect on prices. Attempts have been made to limit the price gains, with the US Department of Agriculture in particular indicating that US stockpiles of wheat are close to 30 million tons and at a 23 year high, and the UN Food and Agriculture Organisation insisting that global stocks are more than adequate to cope with the shortfall, even if other neighbouring countries join the Russian ban.

But these countries were expected to supply around one quarter of total global wheat exports this year, and so the panic conditions in the markets have not been significantly eased. Evidence of significant purchases of US grain by China for the first time in a decade have also added to the concerns about the availability of global supplies, and made it even more difficult to assess the full consequences of the Russian decision; but it seems unlikely that the surge in the prices of wheat and other grains in over.

After rising sharply in late-July and early-August, oil prices have subsequently fallen back towards the $70 per barrel level. There have been warnings from the International Energy Agency that “the short- term global economic outlook is highly uncertain, presenting significant downside risks to future oil demand growth”; there has been a cautious view of future oil demand from OPEC; and also a report from the US Department of Energy that US stockpiles of crude oil and refined products have risen to their highest levels since weekly records began in 1990. Much will depend on future demand in the US and in China; but the fundamentals do not seem to point to an early and sustained improvement in prices unless there is a serious deterioration in political conditions in the Middle East.

The swing in sentiment towards a more cautious view of global economic prospects, and the renewed concerns about sovereign debt defaults in Europe, have provided further encouragement for investors to seek “safe havens” in the present uncertain situation, and this has led to a significant rally in the gold price over the past month.

The dollar has recovered well from weakness earlier in the month, and so the fear of dollar weakness has not been a factor pushing the gold price higher this month. The evidence that the sovereign debt crisis is far from being resolved, and the indications of increased Chinese buying of gold, have all helped to push the price higher. The latest strength may well lead to a further period of profit-taking; but given the present international situation, it would be unwise to assume that the improving trend in precious metal prices is over.

Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.

Fisher Capital Management News: Equity Markets

Equity Markets: All the major equity markets, and most of the emerging markets, Are stable over the past month. There had been expectations that the Fed might introduce further quantitative easing measures at its recent OMC meeting, and this provided some support for the markets in the early part of the month; but it made only very modest.

Government Bond Markets: The major government bond markets have made further significant gains over the past month, despite the funding pressures resulting form huge fiscal deficits, and the renewed concerns about debt defaults.

Short-term interest rates have remained low, and monetary policy has been supportive; but it has been the enhanced “safe haven” status of these markets that has provided most of the momentum, as investors have sought “shelter from the current storm”. However the moves have surprised most commentators, and this has led to warnings about “bond bubbles” that will not be sustained.

Financial Markets: Sentiment in the financial markets has deteriorated. Signs of slowdown in the Chinese economy, have produced a much more cautious view of prospects for the rest of this year and in 2011; and there have been renewed fears about banking problems in Europe, and the likelihood of sovereign debt defaults. There have also been further indications of the conflicting views of central banks about the most appropriate response to the current problems.

Currency Markets: Uncertainty has been the main feature of the currency markets over the past month. The dollar has recovered from earlier weakness after the Fed made only very modest changes in its monetary policy at the latest OMC meeting, and is ending the period basically unchanged; sterling has weakened slightly against the dollar but is higher against the euro; and the euro has also fallen back against most other currencies as the fears about sovereign debt defaults in Europe have increased.

But the feature of the currency markets over the month has been the sharp appreciation of the yen because of its enhanced “safe haven” status. The move is obviously an unwelcome development for the Japanese authorities, and there has been considerable speculation about intervention by the Bank of Japan to reverse it; but there has been no action so far.

Short-Term Rates: There have been no changes in short-term rates in the major financial centres this month. Commodity markets have followed the trend in the other markets, improving in the early part of the period, but falling back towards month-end. The main features have been the continued strength of wheat prices after the Russian decision to suspend wheat and grain exports, and the sharp fall in oil prices.

Fisher Capital Management Korea is a leading global financial institution holding extensive relationships with financial institutions, institutional investors and corporations across the world. As a full service company Fisher Capital Management Korea provides a full range of investment banking services including advanced risk management, corporate strategy and structure, plus raising capital through debt and equity markets. With this as our backbone we continue to provide a client service second to none.

Fisher Capital Management - Japan Elects a New Premier Part 2

Fisher Capital Management Eight and a half months after riding the Democratic Party of Japan’s

(DPJ) historic lower house victory into office, Prime Minister Yukio Hatoyama announced his resignation, having haphazardly frittered away a chest brimming with political capital.

Major newspapers said that Hatoyama was resigning mainly for two reasons: his failure to keep his promise to relocate the functions of US Marine Corps Air Station Futenma, Okinawa, out of Okinawa Prefecture, and a political funding scandal that included his mother’s provision of some ¥1.26 billion to him over years.

Fisher Capital Management - Japan Elects a New Premier Part 2: Instead of deregulation and lower corporate taxes, he envisions increased employment and consumption through focused government spending in nursing, medicine and other social welfare fields. But some economists expressed doubts; they say there is no guarantee that the positive effect of government spending can steadily outpace the negative effects of tax hikes.

Kan seems to be open to the idea of raising Japan’s consumption tax from its current level of 5%, though the approach of the upperhouse election on July and concerns over a political backlash suggest caution will be the government’s modus operandi.

“Any rise in the consumption tax rate must be offset by lower levies on daily goods as well as refunds for low-income households”, he recently said. But he also hopes to reduce corporate taxes from the current 40% rate to around 25%, in line with other major countries. In the foreign exchange market, Kan has earned a reputation as a weak-yen advocate. “The business community says that a yen in the mid-90s against the dollar is appropriate, so it would be better if it weakens a bit further”, he said in January, shortly after becoming finance minister.

Fisher Capital Management - Japan Elects a New Premier Part 2: Market observers believe that Kan still supports a weaker yen and that the Japanese currency could depreciate against the US dollar. Regarding monetary policy, Kan is generally considered an advocate of inflation-targeting and quantitative easing. As finance minister, he has put some political pressure on the Bank of Japan (BOJ) to fight deflation more aggressively, he nudged the BOJ to double a special bank lending program introduced in December. The bond market believes Kan is a wise choice to manage the sustainability of Japan’s government debt.

The DPJ had promised to unveil a long-term plan to improve public finances. However, “postponement is likely because of the current political churn, and any real ‘meat’ in the plan will probably not be disclosed until after the Upper House election” … says Flemming Nielsen, senior analyst at Danske research.

Kan is a self-made man, ascending into politics after years toiling in citizen movements and he has a reputation as a quick learner and a pragmatic politician, with sharp elbows and an aversion to any criticism.

The country he now leads is facing dire long-term problems that beg for strong leadership, including a staggering level of public debt, a stagnant economy, and an ageing population. He has a few weeks to fix the impression left by nine months of incompetent DPJ governance.

If he fails, the party will be routed in the elections for the Diet’s upper house.

Fisher Capital Management - Japan Elects a New Premier Part 1

Fisher Capital Management Eight and a half months after riding the Democratic Party of Japan’s

(DPJ) historic lower house victory into office, Prime Minister Yukio Hatoyama announced his resignation, having haphazardly frittered away a chest brimming with political capital.

Major newspapers said that Hatoyama was resigning mainly for two reasons: his failure to keep his promise to relocate the functions of US Marine Corps Air Station Futenma, Okinawa, out of Okinawa Prefecture, and a political funding scandal that included his mother’s provision of some ¥1.26 billion to him over years.

Following Hatoyama’s resignation, Minister of Finance Naoto Kan was elected as the new Prime Minister, the fifth in four years. At his inaugural press conference Kan proposed a comprehensive reconstruction of the economy, public finance, and social security as his priority, in addition to reforming public administration, and conducting responsible diplomatic and defence policy.

Fisher Capital Management Report- Japan Elects a New Premier Part 1: The biggest question surrounding the once-popular new government is whether Kan can really turn over a new leaf for the DPJ. In his first policy speech to the Diet as prime minister, Kan sought to set his administration apart from the previous one by vowing to build “a strong economy, strong finances and strong social welfare”.

Kan stressed the need to jolt Japan out of its currently weak state, which he attributed to “anaemic economic growth, ballooning public debt and dwindling public trust in the viability of Japan's social security system”.

Observers and practitioners believe that the government is unlikely to announce any significant new policy initiatives, as Kan was already one of the main architects behind the previous administration’s economic policy, although some changes have just been announced in the DPJ election manifesto for the Upper House election. For instance it drops the promise of doubling monthly child allowances to ¥26000 next year.

“I hope to carry over the torch of rebuilding Japan passed on to me by Hatoyama”, he observed at a press conference after his election. Alan Feldman, chief economist at Morgan Stanley in Japan, says that “although Kan’s initial speech did include some new elements, the main message was continuity with Hatoyama’s economic policies. Investors are likely to welcome the innovations, but to remain sceptical of the overall philosophy”.

However, economists believe Kan will face a mountain of challenges both at home and abroad in the near future. First, he needs to rebuild that political capital ahead of the upper house elections. Public support for the DPJ has recovered sharply after his appointment suggesting that voters have, for now, forgiven the ruling Democrats for the previous leaders’ policy mistakes. But it remains to be seen whether the initial popularity of the Kan administration will translate into a strong performance, and whether Kan will ultimately be given a strong enough mandate to push through difficult policy decisions.

Major newspaper polls give Prime Minister approval ratings of between 60 and 70 percent; but such ratings can be very fickle. The election will be an uphill battle for the DPJ. The DPJ is without one of its coalition partners, the Social Democratic Party who left the ruling camp over Hatoyama’s failure to remove the US base from Okinawa, as demanded by its leader, Mizuho Fukushima. The two parties that remain, the DPJ and the People’s New Party, hold 122 of the upper house’s 242 seats, the slimmest majority possible. Should the coalition lose that majority in the coming election, it would mean a split Diet — its majority would only remain in the lower house. And that would make passing bills extremely difficult.

Fisher Capital Management Report- Japan Elects a New Premier Part 1: Kan will have plenty on the economic front too. In terms of fiscal policy, as a former Finance minister he has turned into a fiscal conservative, having been a champion of funnelling revenue from higher taxes toward government spending in order to achieve economic growth. “Economic growth, fiscal reconstruction and social welfare reform will be achieved together”, he told reporters.