Gary Dugan: IMF global growth upgrade provides hope; buy gold below US$1,600
Source: Private Banking, Emirates NBD , Author: Gary Dugan
Posted: Thu April 26, 2012 10:34 am

INTERNATIONAL. Equity markets received some welcome support in recent trading sessions when the IMF upgraded its global growth forecasts and US corporate profits came in ahead of expectations.

Although the IMF upgraded their 2012 global growth forecast by only 0.1% to 3.5% it does reflect a better confidence that the world is not falling back into trouble for the moment. Good Chinese economic data has allayed fears of a slip into a hard landing and US data has continued to come in at or around market expectations. Even in Europe the IMF saw fit to reduce the scale of the recession expected in 2012. The financial markets remain schizophrenic seeing the upside from the current bout of good news but still fearful of a melt-down in the Euro zone.

As we have argued before, the markets need surprise cuts in interest rates or other forms of monetary policy easing to make progress. Last week the Reserve Bank of India (RBI) surprised the markets by cutting interest rates by 50 basis points. Despite the surprise the Indian equity market made little progress from its recent trading range as the RBI also indicated that the cut in interest rates would be the last for some time. The RBI remains concerned with the still elevated level of inflation.

The US Federal Reserve meets this week and is unlikely to spring any surprises. The Fed funds will remain at 0.25% and there is unlikely to be any sense that the Fed is about to embark on a fresh wave of quantitative easing.

The Spanish bond market came back from the brink in recent trading sessions as their bonds found favour with investors. Recent Spanish bond auctions received sufficient support to lead to a near term peaking of yields and an appreciation in bond prices.

Do note however that the Spanish and Italian debt markets are becoming more and more like ponzi schemes. Although there is no fraud involved, the support for the bond markets is unsustainable. It is largely Spanish and Italian banks financed by the ECB that are buying Spanish and Italian government debt.

French and German banks have been heavy sellers of their holdings in Spanish and Italian debt, in some cases reducing their exposure by 50% in the last six months. Spanish and Italian banks have drawn on the European Central Bank‟s scheme that allows them to swap poor quality assets for a three-year loan from the ECB at an interest rate of just 1%.

It is too tempting for the banks – they take the cheap funds and invest them in their own government bond market achieving yields of 2% to 3.5%. Isn't it quite ridiculous that the only way Spain and Italy bond markets perform is that the ECB gives money to the Spanish and Italian banks to buy their government's bonds? The Euro zone remains in trouble.

Whilst there remains a lot of focus on the problems of Spain and Italy, Northern Europe in the form of France and Netherlands have challenging political issues at the moment. French presidential elections are likely to eventually deliver a left leaning President who has far less experience in international or indeed Euro zone affairs at a time when Europe needs continuity and cohesiveness. By the way the second round of voting in the French Presidential election is on May 6th the same day as the next Greek general elections.

Recent problems in the Netherlands only serve to show that almost every European country is struggling to cope with reducing government deficits. The Dutch government has fallen as it failed to build a consensus around a budget to cut the deficit from 4.6% to 3.0% of GDP by 2013. Mr. Gert Wilders withdrew his far-right party from the coalition government saying “we don‟t want to follow Brussels‟ orders, we don‟t want to make our retirees bleed for Brussels‟ diktats” – a sentiment that resonates with many in Europe.

It is tempting to take profits on technology shares given the absence of good news; however we are more inclined to hold for long-term growth. Technology shares have performed well since the start of the year but have lost some momentum in April.

The latest corporate results from the sector heavyweights are unlikely to drive much further significant outperformance as profit forecasts remain largely unchanged for 2012. Google‟s results were strong although the company did not guide analysts to increase their forecasts. Intel reported profits that were below market expectations.

Qualcom the manufacturer of digital wireless communications equipment hit problems as production issues are likely to lead to a weak first half to the year. Finally IBM‟s results were somewhat below expectations however software sales are seeing some re-acceleration and even in hardware the company is expecting a recovery in the second half of the year. Apple shares have also come under some selling pressure after their spectacular run since the start of the year.

Recent trading volumes have been heavy suggesting that there may still be some downside risk. If the shares break the US$570 there may be further downside to the next support at US$530. Key data for the sector this week will be the US durable goods orders. The market is expecting orders to be up just 0.5% month-on-month in March after the strong gain of 1.6% in February.

The Gold price remains in a tight trading range with little news to drive the price either lower or higher. With Euro zone still buying time and reducing the fear factor in the market the upward pressure on the gold price has abated. Gold traders have also cut back their positions either long or short.

Few traders believe there will be a significant move in the price for the moment. Key levels to watch for the gold price are the support at US$1,560 and the key resistance at US$1,700. We remain buyers of gold below US$1,600.

Note: This is the CIO Weekly Economic Review for April 26, 2012 by Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD.

About Emirates NBD
Emirates NBD (DFM: Emirates NBD) is a leading bank in the region. Emirates NBD have a leading retail banking franchise in the UAE, with 132 branches, 705 ATMs and SDMs. It is a major player in the UAE corporate banking arena, and has a strong Islamic banking, investment banking, private banking, asset management and brokerage operations.

The bank has operations in the UAE, the Kingdom of Saudi Arabia, Qatar, the United Kingdom and Jersey (Channel Islands), and representative offices in India, Iran and Singapore.

For more information about Emirates NBD, please visit www.emiratesnbd.com.

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