markets presentation sep.2011
TRANSCRIPT
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CJs
Markets Discussion
September 2011
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Table of Contents
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Section 1 The Current Situation
Section 2 Implications
Markets Discussion
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Section 1
The Current Situation
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Fixed Income & Currency
Euro Debt Crisis In the bond market, market anxiety about asovereign bond is measure against the spread againstthe safest bond (the German bund in this instance)and credit default swaps (cost of insuring the bond)
Irelands Vicious Cycle: Mortgage bubble burst in 2007 Investors
stopped trusting Irish banks Dublinguarantees all bank debts in 2008 Bank lossesmount Dublin puts in more money Financesare stretched Investors dont trust the govt Bond yields rise Dublin puts in more money tocover the interest
In return for bailing out Greece and Ireland,creditor nations are asking for tough restructuringcalled austerity measures What an austerity measure does:
Increases tax = hurts consumer spending Cuts govt spending = hurts public projects and
social benefit programs Restructuring the economy = massive layoffs
(think: 1998 Korea)
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German Bund 10yr Irish 10yr Yield Spread
Around Christmas Last Year, This Is What I Had Said
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Fixed Income & Currency
Euro Debt Crisis (continued)
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Italy 10yr
Belgium 10yr
Spain 10yr
The Euros problem as a currency: European Central Bank(ECB) controls the overall monetary policy, but each nation getsto control its own fiscal policy
This means that Euro countries cannot coordinate
monetary+fiscal policies
European Power Dynamics: Germany is the biggest nationin the Eurozone, followed by France, Italy, and Spain Germany, therefore, has the biggest voice, but needsFrances agreement to reach any conclusions
Germany has made a move to take a haircut from investorsfrom any bailout funds starting from 2013
Haircut: if govts were bailed out, ECB (or IMF) willprovide money to govt and they will pay out fully to theinvestors. Now, with haircuts, investors will not beguaranteed the full compensation for sovereign default
This is making the investors nervous, as seen fromSpanish, Italian, Belgian bond yields, and this anxiety willcontinue into 2011, with Germany refusing to expand thebailout facility
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Fixed Income & Currency
Euro Debt Crisis:So What Does This Mean To Us?
This years Korean equity market rally can bedefined by large buy-ups from foreign investors Always be reminded: foreign capitals enter Koreafor its strong fundamentals, but also a lot of them are
speculative capital looking to cash in from liquidityfluctuations European banks are heavily loaded with debt ifinvestors in European assets have to write off theirlosses in Europe, they might have to pull back theirinvestments elsewhere to balance things out We have to pay close attention if EuropeanFinancial Stability Facility functions properly and if
Portugal and Spain can hold its ground
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KOSPI 200
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The Great SelloffWhy?
Markets DiscussionTHE CURRENT SITUATION
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Outflow of foreign funds the
biggest cause behind Augustscrash
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Problems in the Eurozone
Markets DiscussionTHE CURRENT SITUATION
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The problem has persisted
Greek debt problem has blownout of proportion since lastApril, when the Greekparliament narrowly passed theausterity plan
Contagion is spreading tobigger economies because of
the enormous amount ofexposure and complexinterconnectedness betweenthe Eurozone
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Loss of Confidence in European Sovereigns
Markets DiscussionTHE CURRENT SITUATION
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France has been Taking a Beating
Markets DiscussionTHE CURRENT SITUATION
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Investors are speculatingFrance, with its 100% debt-to-GDP ratio, could be the nextone to collapse
Belgium is also under threat butdue to its small economy, itsnot under the spotlight as muchas France
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European Banks Under Fire
Markets DiscussionTHE CURRENT SITUATION
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Problems in the U.S.
Markets DiscussionTHE CURRENT SITUATION
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The last two QE programs haveput the Fed as the biggestdebtholder of its own countrysdebt
Note that Chinas debt holdinghas flattened out since mid-2010: a result of adiversification of its foreign
reserves
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A Look at the Economic Forecasts
Markets DiscussionTHE CURRENT SITUATION
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Economic indicators in Augusthave been very mixed
Growth has come to a halt
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A Jobless Recovery Cannot Last Long
Markets DiscussionTHE CURRENT SITUATION
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The Obama administrationcould not come up with asolution to the unemploymentproblem
For an economy largelydependent on consumerspending, the current level ofunemployment is unsustainable
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Inflation is Creeping Up
Markets DiscussionTHE CURRENT SITUATION
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Also Pushing Up Commodities Prices
Markets DiscussionTHE CURRENT SITUATION
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Result: Stagflation
Markets DiscussionTHE CURRENT SITUATION
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Concerns about American Financials
Markets DiscussionTHE CURRENT SITUATION
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The Obama administrationcould not come up with asolution to the unemploymentproblem
For an economy largelydependent on consumerspending, the current level ofunemployment is unsustainable
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A Different Crisis, Increasingly Becoming Similar
Markets DiscussionTHE CURRENT SITUATION
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A Different Crisis, Increasingly Becoming Similar
Markets DiscussionTHE CURRENT SITUATION
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Section 2
Implications
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Korea is Clearly Slowing Down
Markets DiscussionIMPLICATIONS
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Event
Survey
Actual
Consumer Price Index (MoM) JUL 0.30% 0.70%
Consumer Price Index (YoY) JUL 4.40% 4.70%
Core Consumer Price Index(YoY) JUL - - 3.80%
HSBC Manufacturing PMI JUL - - 51.3
Unemployment Rate (SA) JUL 3.40% 3.30%
Bank Lending to HH (KRW Tln) JUL - - 445.5T
Industrial Production (MoM) JUL 0.50% -0.40%
Industrial Production (YoY) JUL 6.20% 3.80%
Industrial Production Mfg(YoY) JUL - - 3.80%
Service Industry Output YoY JUL - - 3.80%
Leading Index (YoY) JUL - - 2.00%
Consumer Price Index (MoM) AUG 0.40% 0.90%
Consumer Price Index (YoY) AUG 4.80% 5.30%
Core Consumer Price Index(YoY) AUG - - 4.00%
HSBC Manufacturing PMI AUG - - 49.7
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Its Not Only Asia
Markets DiscussionTHE CURRENT SITUATION
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