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April 27, 2015
"We haven't seen a kopeck since December"
The week in review...
Large banks: Less reserved For the second time this year, the People's Bank of China (PBoC) cut the reserve requirement – the percentage of deposits it requires banks to hold in reserve against loans outstanding. This time the cut was aggressive – one full percentage point, to 18.5%, the biggest single cut since 2008. One estimate of the capital freed to lend: 1.2 tn yuan ($200 bn). A possible objective: help reduce the speed of the current slowdown via increased lending. A second: seek to head off a liquidity crunch in the financial system, a possible side effect of a debt-for-bond replacement program designed to help local governments reduce their own interest payments. All this has provided additional support for an already booming equity market; the Shanghai Composite Index is up 36.5% year to date.¹
Defaults in the stars? Two bond issuers defaulted on payments last week – a real estate developer (Kaisa Group Holdings) missed a payment on its US dollar debt, and state-owned enterprise (SOE) power transformer company (Baoding Tianwei Group) skipped an 85.5 mn yuan ($13.8 mn) payment due on April 21. Despite the novelty, reaction was confined to the lower-rated segment of China's bond market.
US Oil and jobs: The stakes, by state Texas, Oklahoma and Pennsylvania lost the most jobs of any states in March, according to a Labor Department monthly survey. Texas lost 25,400, its first decline since September 2010 and the biggest since August 2009; Oklahoma lost 12,900 and Pennsylvania 12,700. But the unemployment rates for those three states varied: 4.2%, 3.9% and 5.3% respectively – suggesting the economic benefit from the oil industry may still be strongly felt.
Brazil: The devil they know State-owned oil giant Petrobras released its long-delayed audited financial statements for 4Q2014, revealing a R$6.2 bn ($2.1 bn) estimated loss from corruption, and taking a R$44.6 bn ($15.0 bn) overall impairment charge as a result of the scandal. The six-month delay in releasing audited figures kicked off a series of nationwide protests, targeting the newly-elected government of President Dilma Rousseff. Brazilian companies were left hoping that by quantifying the size of the losses could make it possible to regain access to the bond markets to raise capital.
Greece: Shaking the piggy bank Among the measures taken by the Tsipras government to forestall a default: a decree that all local governments move their cash currently held in commercial banks to the Bank of Greece. It's estimated the measure could raise up to €2 bn ($2.16 bn). Separately, the Bank of International Settlements (BIS) reported that as of the end of 2014, Germany had the most cross-border exposure to Greek lenders – $13.3 bn of the $46.8 bn total in cross-border lending.
¹ As of April 23, 2015
Signs of the times:
UK Borrowing Falls, So Do Retail Sales, as Election Approaches – Bloomberg
Germany Raises Growth Forecast for 2015 on Consumer Spending – Bloomberg
At Last, Eurozone Gets Growth in Gear – Wall Street Journal
Spain adds 500,000 jobs as recovery spreads – Financial Times
Sales of Existing US Homes Rise to Highest Since 2013 – Bloomberg
Sources: Bloomberg, Wall Street Journal, Financial Times, New York Times, China Daily, Xinhua, Deutsche Welle, Mainichi Japan
...And the week ahead:
GLOBAL ECONOMIC CALENDAR: April 26 – May2, 2015
Europe, UK, Africa, Mideast
Japan, Asia Ex Japan & Pac Rim
UK: London Marathon
Kazakhstan: presidential election
Germany: retail sales
Japan: retail sales
China: industrial production
FOMC meeting begins; home prices in 20 cities; consumer confidence
France: consumer confidence
GDP; FOMC rate decision (no press conference); Japan Prime Minister Shinzo Abe addresses Congress; pending home sales
Brazil: rate decision
Italy: business confidence
Personal spending; unemployment claims; employment cost index
Mexico: interest rate decision
Eurozone: CPI, unemployment
UK: consumer confidence
Japan: industrial production, monetary policy decision
Manufacturing PMI; construction spending; consumer sentiment
UK: mortgage approvals, manufacturing PMI
China: manufacturing, non-manufacturing PMIs
Japan: inflation, jobless and wage data
S. Korea: CPI, exports
A kopeck is a monetary unit of Russia and some other countries of the former Soviet Union, equal to one hundredth of a ruble. On April 24, 2015, one Russian ruble was worth $0.0195.
The People's Bank of China (PBC or PBOC) is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China.
The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. Please note: an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The Bank for International Settlements (BIS) is an international organization fostering the cooperation of central banks and international monetary policy makers.
The Consumer Price Index (CPI) measures the average change in consumer prices over time in a fixed market basket of goods and services.
Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.
The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.
Discussion of individual securities or sectors are not intended as investment advice and should not be relied upon as the basis for anyone to buy, sell or hold any security.
An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed in come securities falls.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors
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Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
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