Weekly – Economy and Markets – 28 April 2012

Compiled by – Dilip Dhanaiya, more information –

Global – Economy and Market

==============> Developed Markets <==============

  • U.S. Q1 growth slows on inventories, weak business spending

(Reuters) – U.S. economic growth cooled in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, but stronger demand for automobiles softened the blow. Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday in its advance estimate, moderating from the fourth quarter’s 3 percent rate. Although the details were mixed, the GDP report offered a somewhat better picture compared with the fourth quarter, when inventory building accounted for nearly two thirds of the economy’s growth. In the first quarter, demand from consumers took up the slack.

Consumer spending which accounts for about 70 percent of U.S. economic activity, increased at a 2.9 percent rate – the fastest pace since the fourth quarter of 2010. That compared to a 2.1 percent rise in the fourth quarter.

  • Geithner: U.S. can withstand any Europe stresses

WASHINGTON – U.S. Treasury Secretary Timothy Geithner said on Friday that if Europe mismanages its crisis it could slow U.S. growth but said the U.S. financial system could handle any resulting pressures.

  • Bernanke to Obama, Congress: Don’t send U.S. off "fiscal cliff"

If Congress and President Barack Obama can’t agree on extending some of the tax breaks set to expire at year-end, the U.S. economy will be harmed so greatly that there is nothing the Federal Reserve can do to compensate for it, Chairman Ben Bernanke said. "If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could or would have any ability to offset that effect on the economy," he said.

  • Most new jobs at U.S. multinationals are overseas

Big multinational corporations headquartered in the U.S. are creating jobs faster than other employers, but 75% of those positions are overseas, according to an analysis by The Wall Street Journal. While the 35 firms analyzed added 113,000 workers to their U.S. payrolls between 2009 and 2011, they hired more than 333,000 employees in their foreign operations, the newspaper notes.

  • Falling U.S. home prices put recent borrowers underwater

More than 1 million homeowners who obtained mortgages in the past two years already owe more than their homes are worth, according to data provider CoreLogic. As of December, at least 31% of the home loans with negative equity in the U.S. are insured by the Federal Housing Administration. Reuters

  • Stronger U.S. earnings prove pessimists wrong

(Reuters) – Wall Street may have written off corporate America too quickly.

In the early stages of the first-quarter reporting season, U.S. companies have beaten earnings forecasts at a rate of 79 percent. They have beaten revenue forecasts at a rate of 76 percent and expectations for overall corporate profit growth have climbed in a few short weeks, based on Thomson Reuters data for results through Monday.

  • Big U.S. manufacturers demonstrate new strength, higher earnings

Some of the biggest industrial companies in the U.S., led by 3M, posted higher-than-expected earnings and raised their second-half outlooks, adding to indicators that point to a building manufacturing rebound. Analysts said manufacturers’ forecasts of significantly higher sales this year are credible because they are customarily based on orders already on the companies’ books for products with long lead times. (Reuters)

  • New-home sales in U.S. dropped 7.1% in March

Sales of newly built homes in the U.S. dropped 7.1% in March, the Commerce Department reported. The median price of a new home declined 1% between February and March, to $234,500, the department said.

  • U.K. double-dip recession is a setback, not a crisis

Britain is in its first double-dip recession since the 1970s, but the situation isn’t catastrophic, according to The Economist. The U.K. economy is recovering more slowly than the U.S. one, and the rebound is weaker compared with previous downturns. "Britain’s pursuit of austerity, led by George Osborne, the chancellor of the exchequer, is going fairly well," the magazine notes. "Stimulating growth is going to prove a lot harder." The Economist

  • Dissenters continue to plague Greece’s debt restructuring

Questions remain about what Greece plans to do with dissenters who refused voluntary participation in a debt-reconstruction deal. On Wednesday, Greek officials said the restructuring had been completed, raising concerns that its approach to the dissenters could set a precedent for European sovereign-debt markets

  • Spain proposes severest spending cuts since Franco dictatorship

Spanish Budget Minister Cristobal Montoro asked parliament to approve a budget incorporating the severest austerity measures since the nation was ruled by dictator Gen. Francisco Franco. Montoro said there was no alternative.

  • Companies plan for two-speed Europe

LONDON – Companies are planning for a two speed Europe, devising strategies to take advantage of growth in the northern part of the continent while plotting more corporate austerity for the moribund south. Dismal overall European sales were a recurring theme among big U.S. and European companies reporting first quarter results in the past fortnight.

But beneath the headline numbers was a clear trend of a bifurcated economy – recovery in Germany and the Nordic countries combined with further sales drops in Italy, Spain, Greece and Portugal.

  • Standard & Poor’s downgrades Spain’s debt

Standard & Poor’s downgraded Spanish debt two steps, from A to BBB+. "The downgrade reflects our view of mounting risks to Spain’s net general government debt as a share of [gross
domestic product] in light of the contracting economy, in particular due to the deterioration in the budget deficit trajectory for 2011-2015," the credit rating agency said.

  • Spain proposes severest spending cuts since Franco dictatorship

Spanish Budget Minister Cristobal Montoro asked parliament to approve a budget incorporating the severest austerity measures since the nation was ruled by dictator Gen. Francisco Franco. Montoro said there was no alternative.

  • IMF raises $320 billion in an effort to boost rescue firepower

Christine Lagarde, managing director of the International Monetary Fund, said the fund this week received commitments from Poland and Switzerland, raising the total to $320 billion. The IMF is striving to increase its firepower for dealing with eurozone debt crises. "Ensuring that the fund has sufficient resources to tackle crises and to promote global economic stability is in the interests of all our members," Lagarde said. Reuters

  • Euro zone slump deepens unexpectedly in April

(Reuters) – The euro zone’s business slump deepened at a far faster pace than expected in April, suggesting the economy will stay in recession at least until the second half of the year.

The Markit PMI fell to 47.9 from 49.2 in March, a five-month low and confounding the forecast for a rise to 49.3.

  • Europe’s Rescue Plan Falters, Banks in Troubled Countries Close to Exhausting Money Injected to Ease Crisis

The European Central Bank’s roughly €1 trillion ($1.31 trillion) of emergency loans caused interest rates of troubled euro-zone countries to plummet earlier this year, easing fears about Europe’s debt crisis. But lately rates have again been marching higher.

One big reason: After months of using that cash to buy their government’s debt, banks in Spain and Italy have little left, say analysts and other experts.

The banks’ voracious buying had helped bring down the interest rates, providing relief for troubled countries that need to issue tens of billions of euros of bonds this year. But the banks, lately the primary buyers of Spanish and Italian government bonds, no longer have much spare cash to continue such purchases.

  • Populist surge threatens euro zone consensus

PARIS – A surge of support for Eurosceptic, anti-immigration populists in the euro zone threatens to upend the mainstream political consensus in favour of austerity and budget discipline.

  • Japan’s export growth accelerates at fastest pace in a year

The recovery of Japan’s economy, the third-biggest in the world, appeared to be gaining strength as the nation reported its fastest export growth in a year. The Ministry of Finance reported that in March, outbound shipments rose 5.9% compared with the same month last year. Bloomberg

==============> Emerging Markets <==============

  • Cash pours into Vietnam as investors look past China and India

As manufacturers move production to Vietnam, where labor costs half of that in China, emerging-market investors are moving to buy Vietnamese stocks, putting China and India on the back burner. Stock funds targeting Vietnam obtained $91 million from investors in the past 16 weeks, driving the benchmark VN Index to an 11-month high. Bloomberg

  • Wen reinvigorates campaign for economic reform in China

Chinese Premier Wen Jiabao is bringing new energy to his campaign to reform the economy by rooting out corruption and moving the nation in the direction of Western-style markets. Wen’s aggressive public statements in support of reform, backed by state-owned media, demonstrate that he and other reformers are in clear control of the Community Party, after the ouster of longtime rival Bo Xilai.

  • China: HSBC Flash PMI

The HSBC Flash PMI improved to 49.1 in April, compared to the actual figure of 48.3 in March, though it stayed below the 50 mark for the sixth consecutive month. The moderate rise in the PMI came in as banks showed a willingness to lend and export orders rebounded. Property transactions also saw signs of life after the Chinese New Year. There are more signs suggesting that growth perhaps bottomed out in 1Q2012, though investment activities outside of the local government infrastructure investments still do not seem to have responded to the improved lending environment.

  • China seeks to bolster business and economic ties with Germany

China is using investment to rapidly increase its influence in Europe. China direct investments in the EU totaled $1.2 billion in 2010, triple the figure for the year before, and came at a time when U.S. investment in the region was contracting. China’s large-scale purchases of Germany’s debt have been a key factor in pushing Germany’s cost of borrowing to record lows.

  • S&P cuts India outlook; investment rating in peril

(Reuters) – Standard & Poor’s cut India’s credit rating outlook on Wednesday to negative from stable, reflecting the toll that hefty fiscal and current account deficits and political paralysis are exacting on Asia’s third-largest economy.

The negative outlook jeopardizes India’s long-term rating of BBB-, the lowest investment grade rating, and sent Indian bonds, stocks and the rupee lower.

India has no sovereign global bond issues, but a downgrade would increase borrowing costs for local companies and make it harder to refinance debt, and may have a further chilling effect on foreign investor confidence in the country in general.

  • India: March WPI, Monetary Policy Meeting

Although the headline WPI, at 6.9%, surprised on the upside in March, this was, as in February, entirely the result of higher food price inflation. Meanwhile, core inflation

dropped another full percentage point to 4.7%, and is down 3.5pp in the last four months. The three-month on three-month seasonally annualized rate points to further a weakness in the core rate ahead.

As is its want, the Reserve Bank of India surprised the market by cutting the repo rate by 50bps to 8% – twice the market expectation. At the same time, however, it indicated that the scope for further reductions was likely to be limited. The Cash Reserve

Ratio was left unchanged at 4.75%, as most anticipated.

  • Fund managers are losing patience with India

When it comes to India, fund managers are sitting on their hands. Foreign flows into the country’s equity market have trickled to a halt this month. Ambiguity over tax rules is a major reason why investors are holding back. India’s fragile economy can’t risk an exodus. But it still has time for a re-think.

  • India likely to have normal monsoon in 2012 – farm secretary

NEW DELHI – India is likely to have normal monsoon in 2012 and the government will give a detailed region-wise forecast on Thursday, Farm Secretary P.K. Basu said on Monday.

  • Investment banks reconsider their business strategy in Asia

Investment banks have been rapidly expanding in Asia over the past decade, but their efforts have yet to yield the results they expected, prompting some to reconsider their approach.

But the real question is whether Asia’s importance in investment banking terms can rise to equal its importance in gross domestic product terms – and that depends on the development of capital markets. With Asia excluding Japan accounting for about 10 to 15 per cent of global securities, according to bankers, that still looks some way away.

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