ECR Research - Independent Financial Research

European Sovereign Debt Crisis Wake Up Call for US?

2011-03-01T11:21:00.000+01:00

The American fiscal condition faces a perfect storm. The outlook for the medium term has deteriorated markedly. Some important causes are the Big Recession and the extension of the Bush tax cuts. Nor are the projections cheerful in the long term. In the coming period these issues will come to a head.

Read more on Market Oracle

About the author:
Andy Langenkamp is political analyst at ECR Research in The Netherlands

Inflation or deflation, that is the question

2011-02-14T10:23:00.000+01:00

Will the future be inflationary or deflationary?
Whatever it turns out to be will have great consequences for the financial markets. Inflation and deflation are like day and night. As a rule of thumb: inflation means higher long-term interest rates, deflation lower. Inflation is not unfavorable for asset prices such as stocks, while deflation means profits drop and a rapid decrease in demand, leading for example to lower stock prices. Real estate loves inflation, but hates deflation. The picture for exchange rates is even blurrier, as there also the relative performance of various countries and regions is very important. Not all currencies can become weaker at the same time. Therefore, higher inflation in the US than in the euro area, for example, would send the EUR/USD exchange rate to new heights, everything else remaining equal.So, what will it be?

Read more...

EUR/USD - Egypt effect likely short-lived

2011-02-02T09:38:00.000+01:00

As long as the turmoil in the Mid East stays within bounds, many economists believe that additional dollar weakness is “inevitable”. Mostly on economic grounds. This implies that EUR/USD will keep rising, especially in hopes of a good plan to support the weak euro countries. In addition, the ECB seems more inclined than the Fed to hike its benchmark rate.
Over the coming months to quarters initially we expect EUR/USD to drop toward 1.20. Also because we think that the US economy will continue to improve in the coming period, hand in hand with rising US long-term interest rates (which is good news for the dollar).
Yet higher interest rates could hit stock prices hard (within a few months is our best guess). Owing to an appreciating dollar and falling asset prices we expect many carry trades to unwind. This will boost the demand for dollars. EUR/USD may form a top around 1.38 – or maximally 1.42 – in the near term.

Although many economists expect the EUR/USD to rise further, we believe a drop is immenent. See our reasoning by signing up for a free trial and reading our full report. You can sign up for a free trial here.

Has the correction started?

2011-01-27T09:18:00.000+01:00

The gold price has dropped around $40 in recent days. The start of a temporary correction that is potentially significant? As they say, what goes up must come down. Is that now?

You can read our full publication on the matter at our website - ECRResearch.com

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Our research is read worldwide (literally)

2011-01-21T10:05:00.000+01:00

Edin Mujagic, ECR Research's Monetary Economist has had one of his recent publications published in a few of the countries' national news that wouldn't be the first to come to mind.

Guatemala News
The New Times - Rwandas First Daily

Non-Traditional 'Pull Factors' Benefiting Swiss Franc

2011-01-19T13:09:00.001+01:00

During the last two months of 2010, the Swiss franc (CHF) appreciated 4.5% against the U.S. dollar and 8.5% against the euro. Overall, the broader CHF index has risen approximately 7%. This strength is surprising as the CHF is generally considered a safe haven. Usually the Swiss currency gains when uncertainty and panic reign in financial markets and when asset prices are falling. As investors’ sentiment has become very bullish and asset prices are increasing, the CHF is therefore not supposed to strengthen.

Read more on Seeking Alpha

About the author:
Maarten Spek: Maarten Spek is a financial markets analyst specializing in interest-rate and currency developments within the G10 economies. He is co-author of ECR's publications on interest-rate and currency developments.

Periphery Countries on Safe Footing in Euro Area

2011-01-07T10:44:00.000+01:00

Mention the words "euro area" and "periphery" and immediately almost everyone will associate that with troubles, strikes, indebted nations and rating downgrades, to name just a few flattering possibilities.

Read more on Seeking Alpha.

About the author:
Edin Mujagic is monetary and macro economist at ECR Research and Tilburg University. Specializes in monetary policy and the European Central Bank.

Commodity Prices Will Continue to Rise. Can World Economies Continue to Support That?

2011-01-04T11:45:00.000+01:00

Rising stock prices may be self-sustaining, but rising commodity prices are self-limiting

2010-12-28T14:36:00.000+01:00

The upswing in resource prices continues. From a fundamental perspective this is no surprise. As the US, Japan, and Europe pursue an unremittingly loose monetary policy, credit supply to the “real” economy is more or less stagnant. Therefore a lot of capital is available for speculation. In addition, growth rates (and the anticipated returns) in the emerging economic nations outpace those in the West, whereas the former consume relatively high quantities of commodities. Owing to various capital restrictions it has now become easier and cheaper to speculate on buoyant growth in the upcoming economies through the commodity markets. On top of this US growth is accelerating while resources are becoming more popular as an inflation hedge.

Read more on The Market Oracle

Stop blaming the Germans

2010-12-22T09:38:00.001+01:00

Read Edin Mujagic's new blog at EUobserver:
http://blogs.euobserver.com/mujagic/2010/12/21/stop-blaming-the-germans/

Edin Mujagic is a monetary economist at the ECR Research in The Netherlands and at Tilburg University.

Italy and Belgium - eurozone's overlooked Achilles' heel

2010-12-21T12:11:00.002+01:00

Read political analyst Andy Langenkamp's comment on the eurozone here:
http://euobserver.com/7/31551

Rising real interest rates in US underpin dollar

2010-12-15T10:27:00.000+01:00

The drop in EUR/USD over the past weeks could merely be a correction to the uptrend. Also because the Fed is deliberately trying to weaken the dollar in order to underpin the US economy. In our view EUR/USD will likely continue to fall. Rising real interest rates are helping the dollar and we think this upswing will be on the cards for another while as the US economy continues to pick up. In addition, the eurozone crisis seems far from over. The latter requires further fiscal tightening by the governments and/or a looser monetary policy by the ECB. Both factors will impact negatively on the euro. We expect EUR/USD to drop towards 1.15 over the coming quarters. Any upward corrections will likely stop near 1.35-1.38.

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In the press: Watch U.S. Treasury Yield for Stocks' Sweet Spot

2010-12-07T11:38:00.000+01:00

Maarten Spek is a financial markets analyst specializing in interest-rate and currency developments within the G10 economies. He is co-author of ECR's publications on G10 interest-rate and currency developments.

Read his latest article "Watch U.S. Treasury Yield for Stocks' Sweet Spot" on Seeking Alpha.

EUR/USD – the euro, from life buoy to millstone

2010-12-06T10:29:00.000+01:00

The drop in EUR/USD in November was mainly down to the uncertainty surrounding the European public finances and the associated weaknening of the euro. Once a life buoy for the troubled eurozone countries, the single currency has now become the proverbial albatross. The weak EMU members are unable to devalue their domestic currencies as they could have done before the introduction of the euro. Now, only lower wages and prices can help them become more competitive. Yet this amounts to economic suicide as old debts will start to weigh ever heavier. Therefore the stronger euro economies have no choice but to offer a helping hand, which meets with mounting political opposition and does not really contribute to structural solutions for the underlying problems. In our view the survival of the common currency will continue to hang in the balance. Moreover, the ECB will be forced to keep its monetary policy loose, which will impact negatively on the euro. Over the coming months to quarters EUR/USD could drop towards 1.15. Any intermediate rallies will likely stop near 1.35.

Read the full report here: http://bit.ly/fnpBAp

Room For Additional Economic Stimulus Continues To Shrink, Stock Market Trend

2010-11-29T11:49:00.001+01:00

Most analysts view the current correction on stock markets worldwide as unavoidable. Tensions in Europe linked to the public finances are on the rise, China is trying to restrict domestic credit supply, and the Fed faces a torrent of criticism at home and abroad regarding its policy to increase quantitative easing by $600bn with an option to draw down more. It is feared that further quantitative easing would only weaken the dollar further and push up commodity prices. As a result of the latter the rapidly growing Asian economies would come under additional inflationary pressures.

In response, these countries will tighten their monetary policies as the US and Europe – both major commodity importers – will have to pay more for necessary resources. This would fan inflation expectations, which are already being driven up by the ultra expansionary monetary policy of the Fed. At the same time, in a climate were wage increases are virtually absent and unemployment is high, rising commodity prices will eat up purchasing power that could have been used to buy other consumables. Investors doubt progressively more whether the Fed will continue its policy of QE after the “second round” that started early in November is spent, eight months from now.
Apart from any fundamental reasons, a correction has also been on the cards because the mood turned extremely optimistic, while equities have become overbought following a rally of almost 20% during September and October. The size of the downswing on the stock markets is as yet unclear. Opinions differ about the scope of the expected correction, from approximately 5% (if so, the reaction is already over) to 10%-20%. Should stock prices correct by 20% at the present juncture a double floor could shape up in the S&P 500 near 1,010. From there, the index could once again rise steeply. By far the majority of analysts believe that higher prices are justified in the long term because of:

Favorable valuations, especially compared to (government) bonds.
The impression created by the Fed that the monetary policy will remain loose for now. If so, a lot of liquidity could flow towards the stock markets in the coming period, especially if the economic recovery persists.

We strongly doubt if this confidence is justified in the long term. In the first place we think that it is rooted in the fiscal and monetary stimulus, in the West as well as in China, which has in recent years ordered its national banks to provide credit on a massive scale, regardless of the economic benefits. Such stimulus measures have greatly underpinned the global economy and have staved off negative deflationary spirals, particularly in the West. Nonetheless, the limits to where the authorities can boost the economy “with impunity” are slowly but surely being reached or have already been exceeded in some cases. The European governments are no longer able (or willing) to implement a further fiscal stimulus as rising inflation forces the Asian authorities to cool their economies. In Japan and the US too there seems to be less and less room for boosting growth.

The latter is important. For without such (artificial) impulses, growth in the West – by far the largest market for consumables – is likely to stall. In the US as well as in Europe and Japan property and consumption goods have increasingly been purchased with borrowed money. For many years this helped consumption in the US to outpace wage earnings, which acted as a major source of profits for businesses. The credit crisis put a stop to this. As consumers continue to grapple with negative equity and high jobless rates, this situation is not going to change any time soon. All the more so as the population is aging. This implies that more and more capital needs to be set aside as an old age provision since rising asset prices can no longer be taken for granted. In other words, the focus has shifted towards reducing indebtedness. Banks have taken considerable steps in this direction but many consumers still have a long way to go. This implies that an expanding portion of disposable income (which is hardly growing at all in any case due to high unemployment and low wage rises) is required to pay off outstanding debts and build up savings.

Like many economists we think this process of deleveraging will continue for the time being. In itself this would not be such a problem if either the public sector or customers abroad would make up for declining demand. Yet public sectors in the West no longer really have the wherewithal, while other countries are beginning to face similar problems. Virtually none of the economies is prepared or willing to import more (as was evident from the latest G20 meeting). In other words, as long as debt is being paid down this needs to be compensated through artificial stimuli provided by either governments or central banks. This has created a situation whereby attempts are made to “solve” problems connected with high indebtedness in the private sector by running up even more debt in the public sector. This is not a structural solution. Furthermore, the financial markets are increasingly rebelling against this. As interest rates rise, the advantages of the proposed “solutions” will quickly be eclipsed by the drawbacks.

On top of this, over the past months investors have increasingly priced in consistently high profit growth. The risk is that they will extrapolate this towards the future whereas we think this substantial profit growth was largely due to once-off factors such as high increases in productivity, considerable fiscal stimulus measures, inventory rebuilding, and investment and consumption that had been postponed. The positive effect of such developments is now largely behind us. For instance, increases in productivity in the United States have already started to decline. This does not imply that profits are due to follow suit straight away. Still, we think an expectation of equally high profit growth in the coming period may well be overly optimistic.
For the aforementioned reasons we do not believe that equities are in a new bull market (supposedly from March 2009). A more likely option is that the upswing since March 2009 will turn out to have been a major bear market rally, now is on its last legs, mainly because the western authorities are running out of ammo to support the economies sufficiently to withstand the negative impact of deleveraging. Long-term interest rates are a good indicator when it comes to assessing how much ammunition the governments and central banks still have at their disposal. Quickly rising interest rates suggest that the authorities have less and less room to boost the economy without adverse effects.

Therefore stock prices could drop sharply on balance in the coming quarters (S&P 500 towards 900). Also because bond yields will likely come under additional upward pressure in the near future (see also under “US short-term interest rates and bond yields”). In the short term prices could still hit a floor (S&P 500 near 1,150-1,175) before temporarily rising to new highs.

EUR/USD – On the way down

2010-11-24T10:17:00.000+01:00

We think economic growth and interest rates will pick up in the US in the near future. Simultaneously, the eurozone economy is bound to cool, which will undoubtedly ratchet up the tensions within the Monetary Union. It increasingly remains to be seen if the Fed will be able to apply further quantitative easing whereas the ECB is under mounting pressure to ease its monetary policy additionally. EUR/USD could slide towards 1.15 over the coming months to quarters.

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European short-term interest rates and bond yields – Eurozone: One monetary union, very different economies

2010-11-23T13:15:00.002+01:00

Owing to fiscal tightening in the eurozone we expect decelerating economic growth for the time being. The – temporary – bail-out of Ireland does not change a thing. Both Ireland and the eurozone are still facing the same problems. As the situation in the weak euro countries is quite desperate, long-term interest rates in these member states will likely continue to rise. Simultaneously, the spread between bond yields in the weak and the strong euro states could widen in the coming months. On top of this, the 3-month EURIBOR may be expected to rise in the coming period, whereas the EUR swap spread could continue to widen. The main reasons are slowing economic growth, mounting uncertainty on the financial markets, and fresh banking woes. The 3-month EURIBOR may climb from around 1.04% towards 1.50% as the EUR swap spread widens from near 30 bp to around 50 bp. In the coming months the German 10-year yield (now around 2.7%) could on balance rise towards 3% in the wake of rising US bond yields. Subsequently, it may fall quite sharply.

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EUR/CHF, USD/CHF Swiss Rates - Growing demand for francs

2010-11-17T10:04:00.004+01:00

In the coming months we expect global economic growth to slow. This will create mounting tensions, within the EMU as well as wider afield. In response, we foresee a darkening mood on the markets as investors flee into safety. These developments will benefit the franc. EUR/CHF (now around 1.33) could gradually drop towards 1.20 over the next few months.

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EUR/USD - Months of dollar strength in the pipeline

2010-11-10T15:49:00.003+01:00

The dollar is under downward pressure (for various reasons). However, we expect a marked appreciation in the US currency over the coming period, especially against the euro. Among others because US economic growth could start to accelerate somewhat over the coming months to quarters whereas there is little doubt that tensions within the eurozone will continue to mount. Over that period, EUR/USD (now around 1.38) may peak near 1.43 then fall towards 1.10.

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European short-term interest rates and bond yields – ECB is standing firm …for now

2010-11-09T09:30:00.001+01:00

The ECB is pursuing a considerably more restrictve monetary policy than the Fed. In our view the trouble in the euro area will grow worse over the coming period. This could widen the spreads between bond yields in the weak and the strong euro countries. The 3-month EURIBOR may well rise from near 1.05% towards 1.5% in the coming months as the EUR swap spread widens from 32 towards 50 basis points. In the near future, the German 10-year yield (now around 2.4%) may drop slightly due to the flight to safety as a result of mounting problems in the struggling euro states.

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ECR Research - Summer 2010 Developments

2010-09-21T13:42:00.001+02:00

ECR Research has moved into the modern world. With all of our reports now available via our new website - our clients can access much more information in a much more convenient manner.

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Once logged in, clients will have access to their chosen areas.

Along with our new website, we have released a new notification system to update our clients on all our recent publications. As soon as new research is available to our clients, a short email is sent with a personalised link. This personalised link will also automatically log in clients to their ECR account.

Apply for a free, no obligation trial now for our Independent Financial Research

Bring the IMF to Europe...literally

2010-05-05T13:31:00.001+02:00

Europe could bring not only the IMF money to the old continent, but the institution as well. Just one show of Europeanism would suffice.

It was bound to happen eventually. The share of emerging markets in the world economy is much higher than some ten years ago, let alone half a century ago. Despite their increasing weight, it was as the time stood still at international institutions such as the International Monetary Fund and the World Bank. Sure, last year some emerging markets (by the way, don’t we need another term, as those markets have emerged by now?) got a few more votes at the IMF, but it was nothing spectacular.

It is a different story at the World Bank though. Voting shares of some emerging and developing countries have increased sharply under the new agreement. China now has more to say than Germany, Great Britain or France. In the near future, the gap between young brides in the world economy, i.e. countries like China, and the three grand old ladies of Europe will become even larger. Even with the new agreement, the voting share of emerging markets remains too low given the (fast increasing) size of their economies.

Read our report in full - Click here

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General consensus of the EUR/USD is.. sceptical

2010-04-07T09:47:00.001+02:00

With pressure on revenue and profit margins, currency fluctuations are becoming more important as a source of risk and revenue. Unfortunately for the most important currency pair EUR/USD, consensus offers little guidance. Consensus 'forecasts' a flat 1.35 for the coming 3, 6, 9 and 12 months. This has never happened in history, however, and it is highly unlikely in the near future. Read on to learn why our views differ.

Full report - Click here

Interview with Paul Volcker by Edin Mujagic

2010-03-31T16:27:00.001+02:00

A few months ago our monetary economist Edin Mujagic sat down and had a long chat with Paul Volcker, former chairman of the Federal Reserve and currently the head of the Economic Recovery Advisory Board in the administration of the American President Barack Obama. A short version of this interview was published in December 2009 in the Dutch business and economics weekly magazine FEM Business & Finance. Below you can read the entire interview that took place in the Rockefeller Center in New York.

Full report - Click here

Are Spain and Italy next in line?

2010-03-30T16:20:00.001+02:00

First they were called the PIIGS. Then, various banks and other institutions banned that acronym. So economists opted for Club Med. I have not read or heard any threats of suing the economists from the real Club Med, so that is the name that appears to be able to stick. I am, of course, referring to the southern euro area member states, as PIIGS stands for Portugal, Italy, Ireland (one exception per acronym is allowed), Greece and Spain.

Now, unless you have spent the last few months on another planet, Greece has been the focus of attention. A few days ago Portugal got a, rather unwelcome I might add, boost in that manner when rating agency Fitch Rating lowered its score from AA to AA- and attached a negative outlook for the future.

The currency market reacted to that and other negative news, for example the painfully clear message that Europe cannot even agree to disagree on how to help Greece overcome its troubles let alone to agree on any substantial involvement, by sending the Euro lower against the Dollar and other currencies.

This post is by Edin Mujagic, a monetary economist here at ECR.

ECR Research – Macroeconomic research institute

2010-03-30T16:17:00.001+02:00

ECR Research is a long-standing and continuously growing research institute specialising in currency and interest rate markets. ECR is strictly independent and provides a medium term view on the G-10 economies. In the past 30 years, many professionals in the corporate and financial world have chosen ECR as one of their favourite sources. Today, over 3,500 readers worldwide enjoy our unbiased and provocative market comments every day!

Based in Utrecht, The Netherlands, our analysts publish 3 reports per week. The 3 reports focus on different sectors within the global financial economy.

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