Bond Outlook by bridport & cie, November 7 2012

This week we have decided to challenge ourselves. We want to highlight the positive news and facts which may help the economy in the future!

From a macro point of view, the most important support is the expansive monetary policies applied by Central Banks across the world. Policy makers and politicians globally have introduced 270 “easing initiatives” in the past 13 months. While in developed economies, tools to boost economies are mainly limited to quantitative easing, Asia’s emerging countries still have room to provide stimulus.

In addition, as studied by the World Bank and International Finance, authorities are eliminating red tape that unreasonably blocks people from starting new businesses:

• The Financial Services Authority relaxed the amount of funds U.K. banks must keep in reserve, in an effort to spur lending and stimulate credit growth.
• Italy’s government is considering tax rebates for export goods to help Fiat with its strategy of building cars in the country to sell in North America.
• The Bank of Thailand has relaxed overseas investment rules for companies and individuals. The new rules will facilitate greater fund outflows and encourage Thai companies and individuals to diversify their investments and strengthen competitiveness.

On government debt, we also noted some improvement in advanced nations. For example, Britain posted its smallest budget deficit since 2008. The shortfall, excluding government support for banks, narrowed to GBP 12.8 billion from 13.5 billion a year earlier. More important is the improvement in Spanish and Italian government debt. The Spanish and Italian governments have not asked for the European Central Bank's bond-buying program, meaning that their financial situation is better than we feared and as a consequence, confidence is creeping back. Overseas investors increased their holdings of Spanish and Italian debt for the first time in almost a year. Government-bond trading volumes jumped to the most since May and domestic banks were able to reduce their holdings of sovereign securities.

We also would like to mention the Portuguese case to illustrate how October was a month rich of ‘good’ news for the sovereign crisis. Portugal, shut out of bond markets for more than a year, as it relied on aid to stay solvent, is scouting private placements after a debt exchange in October. Ireland completed similar transactions in January and July. In addition, Portugal’s trade deficit narrowed to EUR 2.18 billion from 3.46 billion in the same period from a year earlier. Exports rose 10.4% and imports fell 1.5%.

On the micro side, we note that bank debt is the safest relative to corporate bonds in almost 16 months. Basel III regulations and central bank interventions have helped to restore some confidence in the banking sector.

Above all, the accommodative monetary policies have significantly helped companies. Corporate bond sales surged to USD 3.3 trillion this year, challenging the record in 2009, as companies took advantage of borrowing costs at all-time lows. After a period of high uncertainty for companies about their funding, the attraction of the bond market is essential for the real economy.

In conclusion, while October revealed a lot of bad news, behind those, there are some long-term trends which developed. Of course, it will take time to solve all fundamental issues and investors need to be patient.

Macro Focus

United States

Manufacturing expanded in October at a faster pace than projected as orders and production picked up. The ISM Manufacturing index climbed to 51.7, the highest since May. On the other side, service industries also kept growing in October, helped by consumer spending gains. The ISM Non-manufacturing index declined to 54.2 from 55.1 in September.

Consumers’ confidence increased to 72.2, a more than four-year high.

American employers hired more workers than forecast in October while an influx of people joining the labour force pushed the jobless rate higher. Payrolls expanded by 171,000 workers. Unemployment rose to 7.9%.

Europe

Euro-area manufacturing output contracted in October, adding to signs a recession in the currency bloc may extend into next year. The PMI Manufacturing fell to 45.4.

The jobless rate climbed to a record in September. Unemployment in the 17-nation region rose to 11.6%. The data also showed that youth unemployment is at 23%, with Spain’s rate more than double that, at 54.2%.

Inflation cooled to 2.5% in October from 2.6%.

United Kingdom

Consumer confidence fell to a six-month low in October. The GfK consumer confidence survey declined to minus 30 from minus 28 in September.

Services growth cooled more than economists forecast in October. A gauge based on a survey of purchasing managers fell to a 22-month low of 50.6 from 52.2 in September.

Total industrial output plunged 1.7% in September as oil and gas output dropped by a record, manufacturing output gained less than forecast as machinery and chemical production declined.

Switzerland

The UBS Real Estate Bubble Index entered the “risk zone” for the first time since 1991, putting pressure on the Swiss National Bank to take measures to curb the country’s property boom. The index rose to 1.02 point. A reading above 1 indicates “risk”.

The Purchasing Manufacturers Index advanced to 46.1 from 43.6 in September. However, it is the seven consecutive month of a reading below 50, signalling contraction.