US wins as tough year sees end
Global asset markets are quiet on this last trading day before New Year. European stocks are 0.3 percent higher, EURUSD is down 0.2 percent, gold spot is up 1.6 percent, WTI crude is unchanged and Spanish & Italian 10-year bond yields are down eight and two basis points respectively. US equity futures are currently up 0.2 percent.
Looking back at 2011 it has sure been a wild rollercoaster ride as most investors were bullish on the economy and asset markets going into the year. The year evolved very interestingly after a good start with two tsunamis hitting financial markets with the first real tsunami in Japan and then in August when the sovereign debt tsunami hit Europe hard and spilled over to global asset markets.
Measured in USD it was a very tough year for Asian and European stocks ending down 18 and 15 percent respectively whereas US stocks with a good year-end comeback paired earlier losses ending the year slightly up (see chart below). This divergence has primarily been driven by relatively strong economic data out of the US with especially job data showing renewed strength.
2012 will indeed be interesting as Europe’s fight with debt continues
If you think 2011 was exciting, regardless of whether you profited or not, then rest assured that 2012 will provide even more excitement as Europe’s struggle with private sector deleveraging and over-leveraged sovereigns continues.
You have all probably read a thousand times how much debt banks and sovereigns need to roll over in 2012 and how catastrophic it may be. Well banks are in the clear with the European Central Bank’s latest Long-Teram Refinancing Operation auction programme providing extremely cheap three-year funding, but for sovereigns things look more grim. Enough of that.
Instead we want to point your attention to a more underlying development going on within the Eurozone and which could potentially be more destructive by nature. The chart below illustrates the underlying trend in demand deposits in Germany, Italy and Greece. Please note how those three countries followed each other indexed up until the financial crisis broke out. Then the divergence slowly appeared between Germany and Italy compared to Greece as the smart money flowed out of Greece causing extreme pressure – why you might ask? Beacuse in fractional reserve banking less demand deposits means cheap funding in the short disappears and with most money lent out with longer term maturity and no liquidity a bank is squeezed hard, and ultimately forced to restrict lending and to instead sell assets or go bankrupt.
Both Germany and Italy continued to follow each other in demand deposit growth until the beginning of 2009 when the smart money recognised Italy’s vulnerability and shifted deposits into German banks. Italian banks were still able to attract deposits in 2009 but as 2010 went by growth stalled thereby impacting credit formation and businesses. 2011 marked the year where deposits in Italy actually fell seasonally adjusted, escalating the stress in the Italian banking system. Where did the money flow? To Germany of course and more catastrophically Greece saw a clear drain. If this divergence continues we guarantee you that if the banking sector is a train then it’s heading for a crash. Is it really that big a problem? Can’t German banks just lend the money back to their Italian brothers? Yes they could but they are not doing that as the interbank market data shows. So watch deposit trends in 2012.
Another stress indicator worth watching is the one above in the chart. It shows the ECB’s Deposit Facility. This chart basically shows you that all the additional liquidity flushed into the market has been sent back to the ECB earning a fantastic 25 basis point yield. Surprising? No because banks will not lend to each other and credit demand is not exactly exploding in Europe.
Nothing positive going on in Europe?
As we wrote about the other day some positive news is out there and they should be presented as well as all the negative. Otherwise we will just be grumpy old men and women by the end of 2012.
Yesterday, Port of Rotterdam’s CEO was out saying 2011 saw an 0.8 percent increase in throughput and expected unchanged throughput in 2012 signalling that Europe’s economy is not headed towards the cliff.
The chart below shows the combined growth in tonnage handled by the Ports of Rotterdam and Hamburg (representing 26% of overall European port cargo handling). It is clear that there was a recession but the inventory build-up and comeback in 2010 pulled cargo levels up to pre-crisis levels. Given the port’s “finger on the pulse” we believe its expectations are important and indicate that Europe might be in defence mode but the continent is not dead yet; at least not without a fight.
As a closing remark, we wish you a happy New Year!
Peter Garnry
SAXO BANK