Things to Watch
On the Menu: This Week in the Public Discourse
“Bad but not so bad” is the new “good”: Most of the positive undertone in equities markets is coming from QE2 expectations, which requires the economy to be in relatively bad shape, but not bad enough to fall back into recession. Watch the CPI numbers at the end of the week.
3Q earnings are underway. Alcoa topped estimates. Of the firms reporting this week GE and Intel are probably most significant as directional bellwethers.
Policymakers ended the weekend’s G20 session with no resolution on the ongoing currency market issues. Meanwhile Thailand joined the party with measures aimed at controlling the recent strength of the baht (Thailand’s currency). Over $7.7 billion of foreign investment has come into Thai bonds this year (a pattern playing out in other emerging markets as well).
All eyes on November: the Fed will determine its stance on QE at the November Open Market Committee meeting. Our most likely scenario has more money coming into equities positions in the meantime as consensus builds towards a new round of easing. However any signals to the contrary – either from Fed policymakers or from unexpected economic signals – could catalyze a trend reversal.
Treasury yields continue to set records: the 2-year note is yielding 0.35% now and the 10-year is down at 2.26%. The US dollar is at 9-month lows although the decline has stabilized so far this week.
Capital flows into emerging markets: “hot money” or structural shift? Probably both – portfolios are re-allocating increased weights to EM (including ours), but the pace has been particularly intense in the past several weeks. Interesting fact: An average increase of 2.5% by developed- market portfolios into EM (e.g. you increase an EM exposure from 5% to 7.5%) implies $500 billion in aggregate. Hence the concerns playing out by policymakers in Thailand, Korea, Brazil and other “hot” markets.