The Taper Cometh

  • Talk of the Federal Reserve scaling back (tapering) and eventually ending its bond buying program (QE3) has resulted in a sharp rise in U.S. bond yields since early-May. Most of this can be attributed to an increase in the term premium, and is largely justifiable.
  • The remainder of the rise in yields is related to the pulling forward of expectations for the first rate- hike and anticipation of a faster pace of subsequent monetary policy tightening -- neither of which is warranted.
  • Given that a September-taper is largely priced in, and assuming economic data cooperates, the FOMC is likely to act on September 18. However, risks remain with recent data slightly less supportive.
  • The taper is likely to be modest initially and weighed towards Treasuries, but its course will not be pre-determined. This will leave the FOMC several months of data to adjust policy if required.
  • Tapering does not constitute tightening, with the stance of monetary policy becoming more accom- modative still -- this should be supportive for equities, especially amid a strengthening economy.
  • As it embarks on the taper, the FOMC is likely to concentrate on effectively communicating its forward guidance emphasizing that short-term rates will remain at current levels for a long time -- likely until mid-2015. This could lower bond yields a bit after the September meeting by more closely aligning market expectations to their own.
  • Aligning expectations may require the FOMC to alter its thresholds, or more firmly emphasize the notion that thresholds are not triggers.

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Investor Trust Study 2013

Strong performance alone is no longer enough for investment management professionals to earn investors’ trust. Behavior – and the ability to demonstrate aligned interest – is also of foremost importance.

Investors worldwide say that trusting an investment manager to act in their best interest is the single most important factor in making a hiring decision. Achieving high returns was cited only half as often, and fee amounts or structure only one-fifth.

Though it exists, investors’ trust in the investment management industry is fragile; only half (53 percent) of investors trust investment management firms to do what is right. Retail investors are less trusting of the industry than their institutional counterparts (51 percent vs. 61 percent, respectively). From a global perspective, investors in Hong Kong are far more trusting of the industry than those in the United States and United Kingdom; 68 percent of Hong Kong investors trust investment firms, compared to 44 percent of US investors and 39 percent of UK investors.

This limited amount of trust reflects a lack of confidence in the broader financial services industry. Hit by the shock of the 2008 financial crisis and ongoing scandals around money laundering, rogue trading, rate manipulation, and insider trading, the industry lost the faith of its key constituents – the clients, investing public, and other participants that help it function on a day-to-day basi

 

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Institutional Ownership: Quarterly Highlights - Q2 2013

On the sector-level, the top ten country aggregates were most bullish in the Financials sector and most bearish in the Energy sector. Five of the ten largest increases in individual stock exposure were in the Financials sector, and three were Canadian banks: Royal Bank of Canada (+$3.8 billion), The Toronto- Dominion Bank (+$3.1 billion) and The Bank of Nova Scotia (+$2.6 billion). The Energy sector, on the other hand, suffered from outflows from Royal Dutch Shell (-$4.2 billion from combined class A and B shares), BP (-$2.1 billion), and Eni SpA (-$1.7 billion).

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The Weekly Bottom Line - August 16, 2013

Canada

  • One year following the federal government tightened mortgage insurance regulations, the existing home market has fully recovered
  • In July, existing home sales were up 9.0% from year ago levels and home prices rose 8.1% from year ago levels. From a regional perspective, strength in Greater Toronto, Greater Vancouver, Calgary and Edmonton was offset by weakness in Montreal and most major urban areas in the Atlantic Provinces.
  • Overall, while the housing market has shown some signs of revival in recent months, activity is likely to be tempered by rising interest rates and the market is still expected to achieve its soft landing.
  • In other news, manufacturing shipments fell 0.5% in July – a fourth decline in 6 months. In real terms, sales were down an even larger 1.3%.

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Gold Demand Trends: Second Quarter 2013

In a turbulent quarter, demand fell by 12% to 856.3 tonnes (t). A wave of outflows from ETFs was the principal cause of the decline, although this was mitigated by record demand for gold bars and coins. Continuing the theme of the previous quarter, demand for jewellery grew significantly to reach multi-year highs. Supply declined by 6%, the primary reason being a marked contraction in recycling.

Q2 2013 Gold Demand Overview
 Tonnes
 Q2'12Q2'13Yr on Yr % change5-year average
Jewellery420.8575.537%503.9
Technology103.3104.31%108.8
Investment285.9105.4-63%374.5
Total Bar & Coin demand285.9507.678%297.7
ETFs & similar products0.0-402.2-402%76.8
Central Bank net purchases

164.5

71.1-57%49.9
Gold Demand974.6856.3-12 1,037.1

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Japan: Abenomics Notwithstanding, Demographic Trends Trump Fiscal Sustainability

In December of 2012, Shinz┼Ź Abe led the Liberal Democratic Party of Japan (LDP) to a landslide win over the Democratic Party, which had been in office since 2009. Abe won the election promising to end deflation and revive the economy by deploying a mix of flexible fiscal policies, aggressive monetary easing, and growth-boosting structural reforms.

Thus far, he has delivered on the first two fronts. In January, Mr. Abe launched a fiscal stimulus program worth around 2% of GDP. In April, under a newly-appointed governor, the Bank of Japan introduced its Quantitative and Qualitative Monetary Easing (QQME) program. The program aims to reach stable 2% inflation by doubling the monetary base by the end of 2014. These massive liquidity injections will drive up the size of the BoJ’s balance sheet from roughly 35% of GDP currently, to 60% at the end of 2014.

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Breakfast with Dave

It’s another risk-off day as global stock markets are clearly in the loss column (the third day running) — none more so than the Nikkei which plunged 576 points or 4% to 13,824 and a firmer tone to the yen to a seven-week high is at play here to a very large extent. There were also a pair of disappointing earnings results (IHI Corporation and Pioneer) which accentuated the market falloff. Declines were spread across Asia, in fact, with many other markets off between 1-2%. European bourses are down about 0.5% so the damage is more contained there, where recent signs support the view that recessionary pressures are fading.

Against this background, it is not surprising to see some flight into bonds, but the yield drop thus far has been fairly modest. Gold is struggling still at the 50-day moving average (news that the miners have reinstated their hedging programs has exacerbated the selling pressure) and leading the commodity complex back down in general.

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Assessing The Impact of TheBreak Up of the BPC Cartel

On Tuesday, Russian potash producer OAO Uralkali announced that it would break away from Belaru- sian Potash Co. (BPC) – the marketing organization that previously exported potash for Uralkali and Belarusian producer Belaruskali. Uralkali has alleged that Belaruskali violated the export agreement by making deliveries outside the BPC. Uralkali will now export its products independently – thus, breaking up the potash cartel. Prior to the split, BPC had marketed around 43% of global potash ex- ports compared to Canpotex’s 25% (the international marketing arm owned by Saskatchewan potash producers). The two agencies had accounted for almost 70% of total global potash exports giving them pricing power in world markets.

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Market Indices, Asset & Risk Management Numbers: July 2013

Great summary of investment performance - monthly, quarter, Year to date and 1-year stats. Updated performance data: stocks, bonds, mixed portfolios, etc.

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