If US
stops printing money, we all suffer. 24 June 2013
On 19
June, Bernanke hinted that the central bank could slow its USD 85 billion
monthly asset-buying program. Stock
markets all over the world took a dive.
The US stock market benchmark S&P 500 Index dropped 5% in 4 business
days breaking the 1600 level for the first time since 2 May. FTSE 100 said goodbye to 6400 level and
reached the doorsteps of 6000 level. As
of 24 June, FTSE 100
dropped 12.3% since its 6875.62 high on 22 May.
6,000 level was last seen at the beginning of 2013. Eurostoxx 50 and German DAX took similar
paths and dropped 7% and 6.5% in 4 business days after Bernanke’s
comments. Billions of pounds disappeared
from the stock markets. Gold suffered as well. It dropped below USD
1300 level. China completely fell out of
bed with a 10.2% drop from 18 June closing to 24 June closing.
With
such gesture from FED, for sure, there is no further QE (Quantitative Easing) and the
current program will be in reverse gear.
It is just a matter of time. The
slowing down of bond purchases by the central bank is like your credit card
limit gets cut but you are living off it.
Imagine your household in Canary Wharf costs GBP 8000 a month. Suddenly, you are limited to GBP 6000. It is not a simple switch from Waitrose to
Tesco. It means you cannot spend on
anything other than necessity. The
market reacted violently and institutions are dumping asset.
The
currency world also went yo-yo on Bernanke’s comments. British Sterling went through a month of
correction in May falling from GBP 1 to USD 1.56 level almost touching USD
1.50. Sterling did great in the first
half of June recovering all the losses in May and reached USD 1.5752. Bernanke’s comment on 19 June triggered a
sharp drop from USD 1.567 to USD 1.549 in the early morning in London. As of 24 June, GBP 1 was at USD 1.543. Sterling to Euro has been relatively stable
since April. Range bound between GBP 1
to EUR 1.16 and EUR 1.19. The range has
been further tightened between EUR 1.16 and EUR 1.18 in June. The spotlight is on Japanese Yen that
strengthened from JPY 100.72 to JPY 93.79 (per USD 1) range in the first half of June.
After Bernanke’s comment, it eased back at USD 1 to JPY 97.6 level.
While
USD has been strengthening across all major currencies after Bernanke’s
comments, the US Treasuries bonds are getting sold off. US 10 years treasuries yield has increase
from 2.129% at the end of May to as high as 2.538% on 24 June. In price term, it dropped from 96.62% to 93.15%. Strengthening in USD and falling in bond
prices could reflect overall money withdrawal from the bond market. This is not switching from Dollar bonds
to Euro
bonds. It is taking out cash straight from the
financial system. If you know your
biggest customer, US FED, is going to reduce its shopping spree, you will
reduce your inventory in all products.
Back to
FTSE 100 blue chip stocks in the home market, EasyJet is the winner in the
first half of 2013, up 58% year to date as of 24 June. Up 46%, Persimmon, a residential property
developer, is the runner up. The second
runner up is another airline, International Consolidated Airlines Group that
owns British Airways and Iberia. It is up 37% year to date as of 24 June. Who could have guessed that in a weak
economy, airlines are the leaders of the pack?
Meggitt and Rolls-Royce, suppliers of parts and engines for planes, are
the 4th and 8th best performing stock at +31% and +29%
respectively. At 6th place is
Travis Perkins, a distributor in building
and construction supplies
and materials,
the stock is up 30% year to date. BT,
ITV and William Hill ranked 5th, 7th and 9th
with 30%, 29% and 29% return in 2013 so far.
Holiday, new houses, home entertainment, a few games and putting a few
quid behind your team, it seems the “family” theme is winning so far. The losers in FTSE100 are skewed towards
resources stocks. Tullow Oil, Glencore
Xstrata, BHP Billiton, Petrofac, Eurasian Natural and Rio Tinto are down 20-30%
year to date. Randgold, Anglo American
(a global mining company), Antofagasta (a copper mining company) are down
30-35%. Fresnillo stood out at falling
52% year to date with a worrying drop from 2033 pence at the end of November
2012 to 887.5 pence on 24 June. Worth
mentioning Eurosian Natural was already in the losers list last year with over
50% drop. Resources are likely to
struggle in weak economy especially with China economy stalling.
