Monthly Archives:

March 2013

Should we worry about recent rises in capacity utilisation?

In recent years the use of capacity utilisation (CU) as a leading indicator for inflation, and hence for interest rates, has fallen somewhat out of favour. The large amount of spare capacity in the developed world in 2009-10 failed to translate into the substantial deflation that many had anticipated. Most economists and investors are eagerly focussing on U.S. labour market data instead, given …

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Beware the demise of the Hungarian forint

Guest contributor – Tolani Benson (Financials/Sovereign analyst, M&G Credit Analysis team)

Hungary has a substantial amount of debt outstanding – the IMF estimates levels were around €75bn at the end of last year, corresponding to 74% of GDP. Its local currency debt makes up a decent proportion of emerging market indices, constituting a not insignificant 4.6% of the widely used JPMorgan GBI-EM …

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Germany doesn’t like its own fiscal union, so why would it ever agree upon a European one?

If I asked you how the structural problems of the Eurozone may be resolved, I am sure that the suggestion of a fiscal union in which transfer payments will be made by the “rich” Northern member states to the “poor” ones in the South of Europe would rank amongst the top answers. I’ve been wondering for a while if the member states could ever agree upon major fiscal transfer payments and if it wo…

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UK inflation: the Bank of England would have to generate significant disinflation in the majority of goods we consume to hit the 2% inflation target, killing any recovery. Food and administered price rises are the problems.

With the UK’s 2% CPI inflation target having now been exceeded for 39 consecutive months, last week’s budget formally acknowledged the on-going situation and changed the Bank of England’s remit.

Although chancellor George Osborne maintains that medium-term price stability represents “an essential pre-requisite for economic prosperity”, the updated remit simultaneously introduces the concept of …

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Bond book competition winners: the UK Exchequer 12% 2017-13 is the highest coupon gilt still outstanding

Still outstanding, but probably not for long.  Although this gilt has a maturity date on 12th December 2017, there is a call option for the government at par (100) on 12th December this year (hence the 2017-13 date), and given the current price of the bond is well above par (108-ish) it will get redeemed, unless they forget.  This is what’s known as a “rump” stock.  Although it was once a £1 bi…

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Heinz: Beans, Buffett and the return of animal spirits

After years of inactivity, the combination of strong corporate balance sheets and cheap funding has sparked demand for takeover deals. The largest and highest profile deal this year has been the acquisition of H.J.Heinz by 3G Capital and Berkshire Hathaway. It is exactly the type of business that Berkshire Hathaway’s Chairman and CEO Warren Buffett typically goes for: profitable growth; a very …

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I predict a CypRIOT: Three major implications for the European and UK banking systems

Stefan blogged earlier this week about the landmark sovereign bailout occurring in Cyprus, and about some of the interesting issues this raises. Sure enough, the parliament did not approve the package in the form talked about at the weekend. The reason? The taxes were felt too painful for the poor and too lenient for the more wealthy. This harks back to a blog I wrote about a couple of years ag…

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Insane in the brain. Dangerous precedents being set in Cyprus

Depositors in Cypriot banks awoke on Saturday morning to learn a harsh lesson. A guarantee is only as strong as your counterparty. With the Cypriot banking system requiring €10-12 billion of bailout funds – some 60% of GDP – the government has been forced to accept burden sharing with depositors. Depositors who went to bed Friday night believing their savings were safe awoke Saturday to find th…

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Competition: win one of 20 copies of The Sterling Bonds and Fixed Income Handbook

Mark Glowrey has written an excellent guide to the UK’s bond markets, covering everything from gilts, linkers, corporate bonds and high yield, to dealing, settlement, tax and covenants. There’s also some great bond market history and anecdote – I like the story of the two brothers who worked as bond brokers at the London Stock Exchange. Both had been awarded the Military Cross in World War 2, b…

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HY default rates showing the divergence in the Eurozone

2012 was not a good year for peripheral European defaults in the high yield market. Spain’s default rate doubled from 7% to 14%, while Italy’s went from 5.7% to 9.5%. Clearly, that the Spanish and Italian economies are under stress is not news, but what I thought was interesting though was that German defaults have continued to fall. It is important to point out that this is not just the public…

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