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Michael Baxter

Bull and bear: Markets think they have spotted green shoots

Written by: Michael Baxter on December 19th 2012

Category: Bull & Bear, News

It has not exactly been a runaway boom, but little by little markets across the world have been creeping up of late. And yesterday saw three developments to add to that sense of relief. There was good news from the US about its fiscal cliff, and there is also increasing evidence that China’s economy is in recovery mode; there was even an improvement in Greece’s fortunes.   Are these  real reasons for optimism?

Markets think they have spotted green shoots

At the time of writing, the FTSE 100 is just a whisker away from passing 6,000. We have been here before;  it’s not like the 6,000 mark is a barrier that has proven to be unbreakable, but nonetheless the index is only 150 points or so short of hitting its highest level since the finance crisis started, and it is some 7 per cent up on the opening position this year.

But – and maybe this should not come as a surprise – of all the major stock indices of the world, the FTSE 100 has been one of the worst performing this year. The Dow, for example, is up 9 per cent, and the NASDAQ by an impressive 17 per cent – but then the NASDAQ’s good year is really a sign of how technology and the rest of the economy seem to have moved out of alignment. In Germany the DAX is up 30 per cent, while both the Hang Seng and Nikkei 250 have enjoyed strong rises this year.

QE may provide partial explanation for the rises, but at least the strength in stocks has helped to lift US consumer confidence, which recently went close to a five year high.

But this week has seen signs that the markets like.

Obama and Boehner start negotiating

We all know the tactic. You offer far less than you are willing to pay, and the seller counters with far more than they would be willing to accept.

Theoretically, you finally meet somewhere in the middle. It’s called negotiation.

Not so long ago, leading economists representing the US Republicans were making some concessions. They were not in favour of upping taxes paid by the rich, but were in favour of removing the very richest people’s entitlements to some tax credits.  It’s the US equivalent of the UK debate about free bus passes for millionaire pensioners. You know the kind of argument. Not that free bus passes is an issue in the US; no, the focus there is on tax credits such as those on mortgages.

Meanwhile, economists from the other side of the political spectrum – the likes of Paul Krugman – called for Obama to be tough, not to compromise, not one iota.

So that was the starting position.

Then, a few days ago, US House Speaker John Boehner made the first concession. He was willing to contemplate tax rises for those earning more than $1 million a year. Or to be more precise, he was willing to contemplate the partial reversal of tax cuts implemented by George Dubya Bush.

To which Obama responded: “no”. Tax rises must apply to all those earning more than $250,000 a year.

But this morning, a rumour is flying around that Obama has now made a counter offer. He is willing to accept limiting tax rises to those earning more than $400,000.

So now it’s back to Boehner: how will he respond?

Markets have reacted to this by daring to think that maybe, just maybe, US politicians will not act like lemmings following each other as they fall off the fiscal cliff.

So that’s a big relief. Maybe the US won’t crash into oblivion after all.

Of course, some might respond that this type of horse trading is no way to run an economy.

Is China turning the corner?

The latest Purchasing Managers’ Indices out of China have been good (ish). Interest rates have been cut, and the government is spending money again. Is China turning the corner?

The World Bank thinks it might be, and has upgraded its forecasts for China’s growth next year.

It now foresees that China’s growth will be 8.4 per cent in 2013, from 8.1 per cent previously estimated.

The World Bank said in a statement: “The impact of easing credit conditions and public investment in infrastructure is beginning to show…The impact is expected to continue to be felt into 2013, as the authorities have accelerated the approval of large projects.”

Moving away from the World Bank report, various surveys have been looking distinctly more upbeat of late. Chinese households are reportedly more confident, for example.

However, business confidence has only risen marginally, and many firms have cited weak oversees demand as an ongoing problem.

But one interesting thing emerged from the latest consumer survey in China.

When asked how they would spend any extra money, most Chinese households still say that any pay rise or windfall would be saved, parked in their bank account.

Just as consumers in the West have been too willing to spend and run up debts, in China the opposite is the problem. What the global economy needs is a happy medium.

The challenge here runs deep, it starts with the attitude of consumers, and there is no easy fix.

Credit rating agency gives Greece the thumbs up

And then Standard and Poor’s came along and decided that things weren’t really, really bad in Greece; they were merely really bad.

It’s not often one of the cursed credit ratings agencies run by those doubled cursed Anglo Saxons, has good news for southern Europe, but that’s what happened yesterday.

Standard and Poor’s only upped Greece’s credit rating by six notches, from selective default, to B minus.

It’s the herculean effort by Greece’s European friends that has impressed the credit ratings agency. In a statement it said: “The upgrade reflects our view of the strong determination of European Economic and Monetary Union (eurozone) member states to preserve Greek membership in the eurozone. The outlook on the long-term rating is stable, balancing our view of the government’s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so.”

So, well done to the EU for being so bold, and for helping those Greeks despite all their laziness.

Mind you there are some who might point to the fact that Greek working hours are among the longest in Europe. They might point to sky high Greek unemployment, the rise in Greek suicides, rioting in the streets, the rise of fascism, and they might say that maybe all this austerity being forced upon Greece might have side-effects that are not altogether desirable – not for Greece, not for the rest of Europe, and certainly not for the long term survival of capitalism.

UK Bonds yield rises

Well, the UK has been warned that its credit rating might be cut. Who cares? Apparently the markets do – or at least they care a bit.

The yield on UK ten year government bonds has risen from 1.47 or so back in July to 1.9502. UK ten year yields are now just a smidgen short of 2 per cent.

You would need to rewind the clock back an awfully long way to find the last time yields were at such dizzy heights. In fact, the last time they were over 2 per cent was back in the dim and distant past of May. Why, that was even before the London Olympics!

Watch the trend, but recent rises are hardly the stuff that panics are made of.

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

Tags: China hard soft landing, China recovery World Bank, China saving, fiscal cliff, FTSE 100 6000, Obama and Boehner, Standard and Poor’s Greece, UK Bonds yield

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