Growth Assets Challenged
Risk continued to struggle overnight as major European bourses are still trading in the red, following a very tame session in Asia, driven by weak indices across the Greater China region. Clearly, growth concerns are now becoming the dominant driver and the commodity bloc in particular is being hard it. Our global Mining and Metals teams have revised to the downside their guidance for commodity prices for 2012, largely reflecting demand pressures, especially in emerging markets. QE being priced out for now is also a part of the equation, while we are also attentive to changes in credit conditions, which remain benign for now but could take a turn for the worse. This story matches the plight of some trade-dependent cyclical currencies, even including the euro, which are already showing signs of a turn in demand starting to impact forward looking indicators. Although central banks globally appear to be resisting fresh stimulus, they are aware that any form of credit contraction will lead to pro-cyclicality in the trade cycle and will need to be avoided at all costs – the memory of Q1 2009 is still fresh, but there is a strong need to differentiate credit allocation and monetary conditions. The former is more linked to risk preferences in the risk sector and the latter to the real economy, but weakness in credit will almost certainly aggravate weak conditions in the real economy. As such, credit surveys globally are being closely watched and so far the outlook is mixed. Overnight, the Bank of England published its own credit conditions survey and banks are already warning that some loan spreads may widen in the second quarter, while mortgage losses would be an issue as defaults were seen to rise in Q2. These trends could yet weaken forward looking indicators, which has been a major downside catalyst of late. If credit allocation or availability is the problem, the central bank response need not be outright policy steps but in the post-crisis environment, the line in between is already blurred. The Eurozone has been more attentive to banking sector concerns, mostly for structural reasons, for the US, if steps are necessary the question of ‘how’ credit easing is done will be more important than ‘if’. Ahead today, US GDP figures are due, while Fed Chairman Bernanke will continue his college lecture series today, and speeches are due from Fed Presidents Lacker, Lockhart and Plosser.
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