Syria will fan flames of September volatility

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The focus on Syria in the coming week will be another factor fanning market volatility as investors debate the next step of the Fed.

President Barack Obama addresses the nation Tuesday to lay out his case for why the US should launch a missile strike on Syria, after its government used chemical weapons on its citizens. A Senate vote on Syria could come midweek, and the House of Representatives should vote several days later.

In a month that was already expected to be eventful, Syria has moved to the front burner and has ramped up volatility across markets, not least of all the oil market. West Texas Intermediate (Exchange: .OWTI-XX) jumped more than 2 percent Friday, to finish at USD 110.63 per barrel, its highest close since May 2011.

There is also a smattering of economic data, but nothing of the magnitude required to sway the Fed`s thinking on whether it will wind down its USD 85 billion-a-month bond-buying program. The retail sales number Friday should be an important look at consumer spending, and traders will be watching weekly jobless claims to see if they remain at a six-year low.

“Syria could take a lot of our attention away from what we should be focused on,” said Art Hogan of Lazard Capital Markets. “I think it`s hard not to think that most of the economic data next week takes a backseat, as we watch Congress get back in session and we watch the resolution to use military action get voted on.”

Markets are also debating what the Fed will do at its meeting Sept. 17 and 18, after Friday`s mediocre August report of 169,000 nonfarm payrolls. Economists and strategists say the weak report suggests the Fed could now pare back less of its bond purchases than originally expected.

Mark Zandi, chief economist at Moody`s Analytics, said Syria is a wild card and could also be a factor for the Fed.

“I think they desperately want to get it going,” Zandi said of tapering. “The only thing that might derail it is if the bombing of Syria happens at the same time as their meeting.”

Now, traders say a USD 10 billion to USD 15 billion tapering in September appears the likeliest scenario, and the probability of a September move by the Fed has fallen just slightly.

“We`re going out at a two-year high on a closing basis on the 10-year note,” said Peter Boockvar, chief market analyst at the Lindsey Group. “That just tells me the jobs number didn`t change expectations on what the Fed will do. If they`re going to do it, it is going to be USD 10 billion to USD 15 billion. … I think it comes down to what bonds have priced in and what stocks have priced in. … I think bonds have priced in a USD15 billion taper, and stocks are still delusional.”

Stocks ended Friday mixed, after a day of up-and-down trading. The Dow (Dow Jones Global Indexes: .DJI) was up 0.8 percent for the week at 14,922, and the SandP 500 (INDEX: .SPX) was up 1.3 percent at 1,655.

Barry Knapp, head of U.S. equity portfolio strategy at Barclay`s, said he expects the market to trade with typical volatility for September, historically the market`s worst month. This year, instead of the Fed talking about stimulus, as it has done in the past three years, it is talking about reducing stimulus.

“That just changes the psychology and increases the probability of having a standard volatile September. I still think the stock market has additional downside to something below 1600,” Knapp said. “I`m not surprised we got a little bounce this week. I definitely think this move is not complete and it won`t be complete until the Fed`s actual event, and then I think it will bottom pretty quickly. We`re going to be stuck in a range for the balance of the year.”

In the week ahead, the Treasury auctions $65 billion in notes and bonds, and at the same time, credit markets are expected to see the biggest corporate bond offering ever with $20 to $30 billion of Verizon bonds coming to market as early as Wednesday, according to IFR. Verizon is selling the bonds to buy the share of Verizon Wireless it does not own.

Following a week where Treasury yields zipped to two-year highs and the 10-year broke the psychological 3 percent level, the Treasury auctions are being closely watched to see if investors will be tempted by cheaper prices.

“Right now, it`s going to be waiting for the Fed,” said John Briggs, head of cross-asset strategy at RBS. “I think the markets are going to be a little jumpy. Fixed income is going to be jumpy for supply.”

The Treasury auctions 3-year and 10-year notes and 30-year bonds Tuesday through Thursday. Briggs said the Verizon (NYSE: VZ) offering is in a sense competing with the government auctions. “A lot of people are going to be watching that Verizon deal because in this environment, the question is what`s the ability to take down that size deal. What has to be done to get that deal completed. I think it`s going to be a bellwether for the corporate bond market,” he said.

The fixed-income markets will be watching Syria, but markets are also focused on the coming need for Congress to pass a budget resolution and deal with the debt ceiling, Briggs said. But the top concern is the Fed.

“We have these two uncertainties,” he said. “How does Sept. 18 play out? And how do they communicate rising yields? How do they reconfirm their forward guidance? The efficacy of the forward guidance, when you`re unsure who the next Fed chairman is going to be reduced.” The Fed`s guidance has been that it will not move to raise short-term rates until 2015.

But the market has also become nervous as it became clear in recent weeks that Fed Vice Chair Janet Yellen would probably not be the next chairman, as originally expected. That has added pressure to shorter-term rates, which have moved higher on speculation a different chairman could move to lift rates sooner than Ben Bernanke or Yellen, with whom he is closely aligned.

Fed head bargaining chip

Speculation in the past week also focused on how the Fed chairmanship could become a game piece in Obama`s negotiations with Congress over Syria. The speculation was that the president would give up on trying to name his reportedly preferred candidate former Treasury Secretary Larry Summers to the post in exchange for buy-in on Syria. Yellen had been the clear favorite on Wall Street, but Obama has also said that former Fed vice chair Donald Kohn was a candidate. The same scenario circulated with Summers being bargained away for a deal on the debt ceiling.

But Knapp sees it differently. He thinks Republicans would like Summers, even though he is a Democrat, and would view him as much more hawkish than Bernanke. “He needs Republican votes,” said Knapp of Obama. Summers, therefore, could be made the Fed chairman candidate to gain Republican support, Knapp said.

“For me, that`s how Syria changes the calculus, and so far gasoline prices have not moved up enough to impact consumer spending,” he said.

Briggs said yields are not likely to move much lower until Obama names a replacement for Bernanke. “Underlying the whole thing is the ongoing uncertainty about the Fed chairman, and until you alleviate that … and even if the Fed is really dovish, it`s going to be hard to get back to below 2.7 percent until you get clarity on the Fed chairman.”

-By CNBC`s Patti Domm. Follow here on Twitter @pattidomm.

What to Watch

Monday

Congress returns for Fall session

11:00 am: San Francisco Fed President John Williams

3:00 pm: Consumer credit

Tuesday

President Obama addresses nation on Syria

7:30 am: NFIB small business survey

10:00 am: JOLTs survey

1:00 pm: $31 billion 3-year note auction

Wednesday

10:00 am: Wholesale trade

1:00 pm: $21 billion 10-year note auction

Thursday

8:30 am: Initial claims

8:30 am: Import prices

1:00 pm: $13 billion 30-year bond auction

2:00 pm: Federal budget

Friday

8:30 am: Retail sales

8:30 am: PPI

9:55 am: Consumer sentiment

10:00 am: Business inventories

Copyright 2011 cnbc.com

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Fed can’t afford to ignore emerging markets: Lagarde

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Federal Reserve cannot afford to ignore the risk of fallout in emerging markets from the winding down of its USD 85 billion-a-month bond buying program, said Christine Lagarde, managing director of the International Monetary Fund.

“Very negative spill-over effects on the emerging market economies could very much backfire on other economies. So to assume that [the] domestic economy is totally isolated, that a country is an island, would not be the right approach,” Lagarde told CNBC on the sidelines of the Ambrosetti Forum in northern Italy over the weekend.

“Without necessarily changing the mandate, without reviewing the terms of references, and maybe without even acknowledging it, I cannot believe that central bankers do not take into account what`s happening elsewhere in the world,” she said.

Policymakers at the Group of 20 (G20) summit held in St. Petersburg, Russia on September 5-6 were heavily engaged in discussions over the consequences of ending ultra-loose monetary policy in advanced economies, alongside a divisive debate over military action in Syria that took center stage.

To the surprise of many, Lagarde said that emerging markets did not “complain heavily” about the possibility of tapering. Instead, policymakers of developing economies acknowledged that the slowdown in their growth is the result of a combination of factors including capital outflows, a lack of structural reforms, and insufficient international trade, she said.

“On the other hand, the advanced economies acknowledged that the tapering of the unconventional monetary policies, though left to the central banks, had to be orderly, well communicated and had to be done in dialogue with other economies of the world,” she added.

Another key achievement of the G20 was a commitment by policymakers to extend a moratorium on any new protectionist measures from 2014 to 2016, said Lagarde.

“The leaders agreed to not enter into any protectionist measures for the next two years, until 2016. That was a matter for debate; not everyone agreed. Some were prepared to commit until 2015 but no further. They agreed to rally around 2016, no protectionist measures. That`s a big achievement as well,” she said.

Europe getting back on track

Responding to criticism that European policymakers have wasted an opportunity to carry out structural reforms, Lagarde said “the window is not closed.”

“The ECB [European Central Bank] still has room to maneuver, they have space. And my hunch is that there will continue to be [loose] monetary policy on the part of the ECB with insistent and friendly pressure on policymakers to take the right measures both in terms of structural reforms and in terms of appropriate fiscal consolidation pace,” she said.

Lagarde praised the progress that has been made in Europe thus far, pointing to the return to positive growth in the single currency bloc during the second quarter of 2013 after six quarters of contraction.

“Look back at three years ago when I was finance minister for France, huge changes have taken place since the financial crisis, in terms of fiscal consolidation, in terms of collective discipline, in terms of European Stability Mechanism, in terms of path that is identified with a precise steps and a time line for a European banking union,” she said.

“Yes, we will talk about hiccups on the road, we will talk about bumps and we will talk about difficulties and there will be little casualties here and there but there has been huge progress,” she added.

-By CNBC`s Ansuya Harjani; Follow her on Twitter @Ansuya_H

Copyright 2011 cnbc.com

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For foreigners, grass still greener in the US

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A new global study reveals that foreigners are more upbeat about economic prospects in the US than Americans are, and it indicates that the Great Recession has been especially prolonged and widespread for Americans.

The Boston Consulting Group found that nonresidents cited economic opportunity, material well-being and cost of living as key reasons for wanting to live in the United States. Nonresidents ranked America No. 3 on the list of best countries to live, behind Australia and Canada.

Not surprisingly, survey respondents in the US chose English-speaking countries as their favorite places to live. US residents ranked it as their first choice, followed by Canada, Australia and the U.K. But unlike foreigners, Americans placed a much higher value on noneconomic reasons for living stateside, including political freedom, and cultural and religious tolerance.

“It`s revealing that nonresidents feel more positive about the economic opportunities in the US than residents,” said Christine Barton, a Dallas-based BCG partner who led the research on consumer attitudes and top places to live. “What the research may suggest is that the recession has tempered Americans` enthusiasm for economic opportunity,” she said.

While the BCG study uncovered pockets of economic doubt, it found that Americans broadly are optimistic compared with people in other developed nations. People globally have responded to hard times by becoming more resilient and adapting to a new “baseline” that includes nagging worries about retirement, job security and caring for aging parents, Barton said.

The study also unearthed generational differences about where to live and work. US millennials are looking abroad for opportunities; older people, anchored by families and other commitments, want to stay home and pin their hopes on the US economy.

Just ask John Bragg.

Bragg, 62, is general manager at Barn Light Electric, a small business in Titusville, Fla., that makes porcelain enamel fixtures-a rarity in U.S. manufacturing. He served in the army and Vietnam War, then transitioned to West Virginia`s coal mines. He worked there for 29 years, weathering strikes and unsteady paychecks before eventually making his way to Florida.

If his nephew hadn`t offered him a job at the lighting company, Bragg would be retired, he said. He counts himself among the lucky working Americans and is hopeful about the future-but with caveats.

“There is a lot of unemployment in the state, homes up for sale,” he said. The region, east of Orlando, has been hit by cutbacks at the nearby Kennedy Space Center. “I think the economy will come back, but I don`t think it will be high-paying jobs,” he added.

In fact, roughly 58 percent of jobs recovered from the recession are low wage, according to the National Employment Law Project. Low-tier positions grew 2.7 times as fast as mid- and higher-wage occupations.

Feeling hopeful

The BCG report is based on a survey of nearly 28,000 residents in 11 countries: the US, Canada, Germany, UK, France, Spain, Italy, Japan, Australia, Brazil and India. Global attitudes naturally have shifted in the recession`s wake.

In some southern European nations hit hard by the downturn, a minority ranked their native country as the top place to live. In contrast, Americans, as well as Australians, Canadians and the Japanese, wanted most to live in their home country.

But all is not rosy on US soil. The government reported Friday that 169,000 jobs were added in August, lower than expected. According to Pew Research Center analysis , the percentage of millennials (those between roughly 18 and 34) still living at home is the highest in four decades.

Despite such tepid economic news, people in the U.S. as well as globally are a hearty bunch. Consumers overall report an improvement in their emotional lives, peace of mind, optimism and stability from 2012 levels, Barton said.

Notable exceptions are France, Italy and Spain, where sentiment is down. As context, Spain`s unemployment rate was 26. 3 percent in the second quarter, down from 27.2 percent in the first quarter. The U.S. unemployment rate dropped to 7.3 percent last month-its lowest level since December 2008-but because of fewer people in the labor force.

Generational gap?

Younger people usually are optimistic, and millennials are contributing to the buoyant mood, Barton said.

But they don`t want just any opportunity to pay the bills. Instead, they seek enriching, international experiences. For example, American millennials show a strong preference for living in Europe and Japan, according to BCG research.

After five years of negotiating strategic partnerships at Google (NASDAQ: GOOG), Cynthia Yeung, 29, quit to join an entrepreneurship accelerator on a ship. The program, called Unreasonable at Sea, focuses on solving social and environmental challenges.

Working for corporate America, “it`s very easy to feel like you`re a cog in the wheel,” she said. “I didn`t want to solve first-world problems like `Do I need a second computer screen?` ” she said. “I want to have a direct, meaningful impact on people`s lives, their needs-not their wants.” The sea program ended, Yeung is hunting for her next adventure.

Meanwhile, you can often find Bragg working on the shop floor of the lighting company in eastern Florida. When he`s tinkering with a manufacturing process he`s unfamiliar with, he`ll huddle with colleagues around a YouTube video for tutorials.

Unlike millennials, American baby boomers and those older showed a strong preference for living in the US, according to BCG.

“I do think America is still a land of opportunity,” Bragg said. But that economic potential needs policy support focused on creating jobs, he said. “We need to get the politics out of it and get back to making and selling American products.”

–By CNBC`s Heesun Wee . Follow her on Twitter @heesunwee .

Copyright 2011 cnbc.com

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US recovery will aid emerging markets: StanChart CFO

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A US economic recovery would benefit – not hurt – emerging markets, the group finance director of Standard Chartered Bank told CNBC, but he stressed that it was wrong to view Asian economies as one homogeneous bloc.

Standard Chartered makes around four-fifths of its operating profit in Asia and the Middle East, and with fears of a slowdown in the region this year and beyond, analysts have grown concerned about the bank`s emerging market exposure.

(Read more: India and Indonesia:who has it worse? )

However, the firm`s group finance director Richard Meddings argued that, “what`s driving this reflection on Asia is actually rising dollar rates in the US, and therefore a move away from investing in Asia and investing more in the US to pursue those rates.”

He continued: “As the US recovers, steadily, the U.S. is 25 percent of global gross domestic product (GDP), and much of what Asia produces and manufactures or assembles is actually sold into the U.S., so actually you have a benefit lifting Asia as the U.S. recovers.”

Standard Chartered took a $1 billion hit on the value of its Korean business in August, pulling its first-half profit down over 15 percent from a year ago. It reported pre-tax profit of  USD 3.3 billion for the six months to the end of June, compared with USD 3.9 billion a year earlier due to the Korea write-down.

The bank also faced shareholder fury in March when it announced a profit fall, but said it was on course to achieve an eleventh consecutive year of record profits.

Meddings said the ongoing recovery in the US would guarantee Standard Chartered`s future, arguing that the firm would become a “more profitable franchise.”

He did add, however, that, “the next three to six months are likely to be a period of some turbulence across the markets until we get through this transition period.”

Standard Chartered was aided by a diversified portfolio, Meddings said, which was important amid the ongoing concerns about an Asian slowdown , as all economies were different.

“I think the concerns are too uniform. I think the overall market mood is to see Asia as one full block. In fact it`s not correlated. Different economies react differently according to their own individual shape,”he said.

Copyright 2011 cnbc.com

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Why Indonesia could be worse off than India

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The whipping boys of emerging Asian markets in recent times – Indonesia and India – have their fair share of problems, but analysts are singling out Southeast Asia’s biggest economy as the one in a more precarious position.

While both countries have wide current account deficits, analysts argue that Indonesia’s external situation is worse as the economy has moved quickly from a current account surplus just a couple of years ago into a hefty deficit.

Indonesia’s current account deficit widened to 4.4 percent of gross domestic product (GDP), or USD 9.8 billion, in the second quarter, compared with 2.6 percent of GDP in the previous quarter. In 2011, it recorded a current account surplus of USD 1.7 billion.

(Read more: RBI’s Rajan takes a deep dive to save the rupee)

By contrast, India’s improving current account deficit is expected to narrow considerably over the coming months led by a decline in non-oil imports and a rise in exports and remittance flows. Barclays forecasts the current account deficit will shrink to 3.7 percent of GDP, or USD 68.2 billion, from 4.8 percent last year.

“In Indonesia, on a 12-month basis, the current account deficit is actually increasing. Whereas in India, it is shrinking and we expect it to continue to narrow further,” Krishna Hegde, head of Asia Credit Research at Barclays told CNBC.

Hegde pointed to the high level of foreign ownership in Indonesia’s domestic bond markets, which makes its current account balance more vulnerable to a capital flight.

“Both current account deficits are funded to an extent by portfolio flows. While equity outflows are a risk for both countries – in the case of Indonesia, foreign investment in bond holdings is substantial,” he said.

About 30 percent of Indonesia’s onshore government debt is owned by foreigners, compared to 3 percent in India, which is among the lowest in Asia.

(Read more: Indonesia is latest emerging market whipping boy)

Also, unlike India’s economy, whose exports are likely to benefit from the plummeting rupee, Hegde said a significant portion of Indonesia’s exports are dollar-denominated commodities, which will not benefit much from a weaker rupiah.

The prospect of a scaling back of US monetary stimulus has battered both currencies in recent months, with the Indian rupee diving 17 percent in the last three months, and the Indonesian rupiah tumbling 13 percent in the same period.

“In India, currency depreciation is filtering into increased export volumes as is visible from the anecdotes we have seen from textiles and automobiles sector. We would expect to see the effect of the sharp depreciation in the rupee to translate into lower trade deficits after a couple of months,” Hegde noted.

From a growth perspective, Robert Prior-Wandesforde, director for Asia economics at Credit Suisse, expects India’s economy to begin recovering this year as Indonesia’s slowdown deepens.

“India has been slowing for three years. That makes me more optimistic that it can start to recover earlier,” said Prior-Wandesforde.

(Read more: Four reasons not to ‘throw in the towel’ for India)

India’s growth slowed to a four-year low of 4.4 percent year-on-year between April and June, from 4.8 percent in the previous three months. Indonesia’s economy expanded 5.8 percent during the same quarter, its slowest pace in nearly three years.

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European stocks looking good; The US? Not so much

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Citigroup’s global equity strategists see improvements in Europe’s economic outlook as a reason to be more optimistic on European stocks, but they are underweighting the US market, which is now seen as too richly valued.

Citi strategists have upgraded Europe’s equity markets to neutral and the UK to overweight. Economists at the bank have upgraded their 2014 GDP growth forecasts to 0.6 percent for Europe and to 2.1 percent for the UK

“[Emerging markets] and UK appear the cheapest of regions across the world, trading at 11.8 times and 13.3 times trailing PE, respectively,” they said.

Europe’s stock markets have been outperforming the U.S. since the SandP 500 hit a two-month low on June 24. The SandP is up 4.8 percent since then, but the Spanish stock market is up 12 percent, and France and the UK have gained 10.3 percent and 7.3 percent, respectively.

Of the BRICs, Brazil is up 12.5 and China is up 8.4 percent in that period, while Russia is up 4.3 percent and India just 0.1 percent.

September is typically the roughest month for stocks, and the Federal Reserve is preparing to taper its bond-buying program-seen as a positive for stocks. The S&P 500, up 16 percent year-to-date, also faces headwinds this fall because of the politics surrounding the budget and debt ceiling debates, earnings estimates that will likely be reduced and possible military action against Syria, Citi analysts say.

Bank of America Merrill Lynch analysts in a note this week pointed out that European equity funds had a record-breaking $12 billion in inflows over the past two months.

Citi strategists pointed to the euro zone and UK PMIs, both above 50 and showing expansion.

“We would caution against getting too excited,” the Citi analysts wrote. “Recovery is likely to be modest. Headwinds from de-leveraging and modest external demand are likely to limit the pace of recovery. Many challenges remain for politicians and policy makers. But the outlook across Europe looks brighter. Investor interest appears to be growing too.”

Other strategists have been moving money into Europe, as well as looking at ways to play Europe through U.S. stocks with exposure there.

Citi analysts are cautious about emerging markets and continue to lower GDP expectations. They also say risks to EM are possible U.S. military action against Syria and the Fed’s potential tapering, which has driven interest rates higher.

Copyright 2011 cnbc.com

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To taper or not taper: Jobs scrutinized for next Fed move

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Good news on the jobs front Thursday could sour the stock market`s early September rally.

ADP`s private sector payroll number at 8:15 am and weekly jobless claims at 8:30 am will be watched as key indicators on the employment picture ahead of Friday`s August nonfarm payrolls. The Friday jobs report is seen by some traders as make or break for the Fed`s decision later this month on whether to taper back its USD 85 billion monthly bond purchases.

Stocks rose Wednesday, with the Dow up 96 at 14,930 and the SandP 500 up 13 at 1653. The Nasdaq was up 36 at 3649.

“I think the market`s still vulnerable to further pull back here,” said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer Asset Management. “It`s good news is bad news for the stock market here near term. I think that still puts pressure on the market.” Stronger economic data and the potential for a Fed tapering of its bond buying has pushed rates higher along the curve.

Also read: Upbeat Fed outlook suggests QE tapering is near

“The 10-year is at 2.9 percent. Psychologically, as you get closer to 3 percent, it puts pressure on the market,” he said.

The ISM manufacturing survey helped lift yields Monday when it was reported at a surprisingly high 55.7. ISM non-manufacturing data is due for release at 10 am Thursday, and it is expected to come in at 55, weaker than the 56 last month. Economists will be watching the labor component of that number for clues on hiring in August.

ADP is expected to show creation of 178,000 jobs, a rough indicator for the jobs report. Economists are looking for a consensus 180,000 nonfarm payrolls for August and an unemployment rate of 7.4 percent.

Claims are expected to come in at 330,000, just below last week`s 331,000, signs of an improving job market. The report is relevant to the jobs report only in that it will tell whether the trend of lower claims is continuing. There is also factory orders at 10 am and chain stores are to report monthly sales.

Rate Watch

As the 10-year Treasury note hovered around 2.9 percent Wednesday, the 2-year rose to 0.47 percent, its highest level since July, 2011. “When the short end is moving like this, you’re pricing in rate hikes sooner,” said Burkly.

Also read: Where did earnings go? Profit outlook gets gloomy

Tom Simons, money market economist at Jefferies, said the 2-year is sensitive to the expectations for Fed tapering but also the ultimate move by the Fed to raise rates, which it is not expected to do until 2015.
But uncertainty around who the next Fed chairman will be and the composition of the future Federal Reserve board has also contributed to some selling at the short end.

“We`re looking at that point where Obama is going to have to submit his nomination for Fed chairman, and it`s looking more and more like Larry Summers. I don`t think it`s a bargaining chip in the whole Syria debate but it`s one more thing on the plate,” said Simons.

Simons said a new Fed led by Summers could alter the Fed`s current policy on forward rate guidance, and there is speculation that a Summers` Fed may move faster to raise the Fed funds target rate than the time frame that is currently expected.

“We`re looking for the October meeting to be when they announce tapering…I `m thinking now it`s starting to matter much less when they decide to taper. It`s become evidently clear it`s coming at some point,” he said.

Also read: Saving habits backslide as recession`s impact fades

However, Jack Ablin, CIO at BMO Private Bank, and other strategists do see a chance that President Obama backs down on his expected nominee, former Treasury Secretary Summers, opposed by some Democrats in Congress. Fed Vice Chair Janet Yellen had been Wall Street`s favorite candidate and was once seen as the front runner by a large margin.

“I think the Syria debate, in my view, probably helps Janet Yellen`s chances. He`s right to get Congressional votes and he might throw in a chip on that one,” said Ablin.

Simons said the board could also change dramatically, and Yellen`s seat may become open if she is not named. Besides Bernanke, Fed Gov. Elizabeth Duke has resigned, as has Cleveland Fed President Sandra Pianalto. Fed Gov. Sarah Raskin was named Deputy Treasury Secretary and is also leaving.

As markets adjust to the view the Fed will cut its bond purchases, Ablin said he thinks stocks are starting to tolerate higher yields.

“I think if you look at correlations over the last couple of months, there is a shift and we are now seeing an environment where we have higher stock prices with higher yields. I`m encouraged by that. It probably represents to me a very healthy bond market at the expense of bond holders,” he said.

Also read: Labor outlook: `It`s just a very tough job market`

What Else to Watch

Both the European Central Bank and the Bank of England hold rates meetings Thursday, and will release decisions ahead of the US market open.

Minneapolis Fed President Narayana Kocherlakota speaks at 9 am

Syria

President Obama and other leaders of the G20 nations gather in St. Petersburg Thursday. Investors will be watching for any reaction to the President`s proposal to strike Syria for using chemical weapons on its citizens. Russia opposes the move. Obama canceled his meeting with Russian President Vladimir Putin in Moscow.

Congress will continue to consider whether to approve the Administration plan for a missile attack on Syria. The Senate Foreign Relations Committee Wednesday approved a resolution for an attack against Syria in retaliation for its use of chemical weapons but it prohibited the use of troops.

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Emerging Asia rout start of a multi-year bear market?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Emerging markets in Asia appear to have stabilized in recent days, but market watchers believe the sell-off is far from over, with one analyst warning that the rout may be just the beginning of a multi-year bear market in the region.

According to Paul Krake, founder of Hong Kong investment firm View from the Peak: Macro Strategies, the winding down of the Federal Reserve’s monetary stimulus, widely expected to begin this month, would likely be accompanied by a dovish statement saying monetary policy will be kept easy for a long period.

“That leaves us with developed market central banks that are extremely dovish – Japan, the Fed, the ECB,” which will continue to encourage investors to stay exposed to these markets at the expense of emerging markets (EMs), he said.

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This will exacerbate outflows from EMs, drag their currencies down further and force central banks to keep their monetary policy tight. “Currency weakness will mean they have to stay hawkish,” he added.

The tight monetary policy in EMs, which could hamper growth, adds to concerns over their wide current account deficits and gives investors more reason to sell.

“That’s a toxic mix for emerging markets over the medium to long term,” he said, expecting the turmoil to last for three to five years.

“This is just the beginning of something very, very structural,” Krake, added. “It means a continuation of the developed market over the emerging market theme.”

He doesn’t expect emerging markets to find valuation support any time soon. “Ex-Korea, you haven’t had earnings estimates come down anywhere near enough. You’re going to have negative profit growth in India this year; consensus is still 10 to 15 percent. It’s just not going to happen.”

Problems in the longer term

Kumar Palghat, managing director of Australia-based fixed-income focused Kapstream Capital, also expressed concerns about the longer-term prospects for EMs.

“Our major concern is, how do you protect [against] capital losses not for the next three months or six months, but for the next 12 to 18 to 24 months,” said Palghat, which has about A$6 billion ($5.39 billion) under management.

Since the tapering move indicates interest rates are set to rise, Kapstream has gone “quite defensive,” putting 25 percent of client portfolios into cash, he told CNBC.

But not all of Asia is getting tarred with the same brush. “The ultimate driver is actually the fact that the U.S. economy, the European economy and lately the Chinese economy are doing better than investors had thought,” Michael Kurtz, global head of equity strategy at Nomura, told CNBC.

“That growth recovery is clearly creating new opportunities in Asia in more externally focused markets,” such as Korea, Taiwan and China, he added.

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Why oil prices may remain strong, war or no war

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Uncertainty over rising tensions in Syria has driven oil prices to fresh highs in recent weeks, but analysts say the bullish sentiment is expected to stay regardless of whether or not the scenario escalates into a full blown war.

“Even if there is a war in Syria or no war in Syria I think oil will remain strong,” said Sean Hyman, editor of Moneynews at the monthly newsletter Ultimate Wealth Report. “WTI could go from USD 108 to USD 117 [a barrel] and Brent could go from USD 115 to USD 125 [a barrel] very easily.”

“You’ve got strikes of oil workers in Libya…you’ve got Egypt really still in limbo with their government…and you’ve also still got what could turn into a war in Syria. I believe you’ve got a big case for oil and oil stocks to go higher,” he said.

Syria tensions were renewed this week after key US Congressional leaders voiced their support for President Barack Obama’s call for a military strike against Syria to retaliate against its use of chemical weapons against civilians, making the likelihood of action look more imminent.

Libya’s oil production has fallen to about one sixth of its pre-2011 civil war levels in recent weeks due to a month-long disruption by armed security guards who shut the country’s main export ports. Meanwhile an attack on a ship passing through the Suez Canal over the weekend has flagged continued geopolitical risk in Egypt.

Han Pin Hsi, global head of commodities at Standard Chartered, said if Syria tensions ease, he doubted Brent would spike as high as USD 125 a barrel. It would likely trade in a USD 105-USD 115 a barrel range, while WTI would trade at a USD 5 discount to Brent, he said.

“Oil will remain firm because of risks to supply from other oil producers: Iran is not coming back quickly, there are issues with Libya and tensions in the Middle East North Africa area will keep oil firm,” he said.

However, oil could reach USD 125 a barrel if tensions in Syria escalate, Hsi added.

“It’s anyone’s guess what would happen to oil then, but we would probably see a spike. But oil at USD 125 a barrel would be a significant headwind for the already fragile global economy, causing a lot of problems, so it would not be sustainable for long,” he said.

Last week, Societe Generale analysts laid out a case for Brent to spike to USD 150 a barrel temporarily if Syria’s supporters seek to punish the U.S. and its allies for a military strike, a development many industry watchers see as a worst case scenario.

Last week US crude reached its highest level in over two years, while Brent crude moved to its highest level since February. They have since pulled back; on Wednesday, Brent traded at USD 115.77 a barrel at mid-morning in Asia, while WTI traded at USD 108.29 a barrel.

Copyright 2011 cnbc.com

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Baptism of fire for India’s new central bank chief

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Raghuram Rajan becomes India’s central bank chief this week and the well-respected economist is expected to come under immediate pressure to restore confidence in the country’s battered currency.

Rajan succeeds Duvvuri Subbarao as Reserve Bank of India Governor under bleak circumstances: the Indian rupee has shed over 25 percent of its value against the US dollar in the space of three months, the economy is growing at its slowest rate since 2009 and inflation is high.

Also read: Goldman upgrades China growth, cuts India outlook

India, Asia’s third largest economy, is facing its worst predicament since 1990-1991 when a balance of payments crisis led to a sharp devaluation in the rupee, economists say.

Rajan officially becomes RBI Governor on Wednesday and will take charge operationally on Thursday.

“In some ways you could argue that Rajan has made his first mistake before he’s formally started in not being active enough in reassuring markets about his commitment to stabilize the rupee,” Robert Prior-Wandesforde, director for Asia economics at Credit Suisse, told CNBC Asia’s “Squawk Box.”

“The market has been crying out for some jaw-boning from him. I hope the RBI and government together set currency stability as their chief priority. If they do not, the rupee could continue to drop, inflation will rise and rates will be forced higher,” he added.

The middle of a storm

The rupee closed at about 67.63 per dollar on Tuesday, off last week’s record high of 68.8. Analysts say that steps such as last week’s decision by the RBI to provide dollars directly to state oil companies have helped shore up the battered rupee, but more needs to be done to restore confidence.

India’s wide current account deficit and the slow pace of economic reforms have put the country at the center of the storm sweeping through emerging markets, as investors brace for an unwinding of the US monetary stimulus that has pumped liquidity into global markets in recent years.

Worries about Fed tapering have led to an exit of cash from emerging markets. India’s stock market, for instance, has tumbled more than 10 percent since late July and the broader MSCI emerging markets stock index has shed about 4 percent over the same period.

Also read: Emerging Asia rout start of a multi-year bear market?

“The market is saying all the money that flooded into India has been misspent, funding a credit bubble, so when that is being unwound you have to kill domestic demand in order to come back to a surplus,” independent economist Andy Xie told CNBC.

“India is facing the same situation as Thailand did 15 years ago when it tried to hold onto growth,” he added. “It is very dangerous to change the captain in the middle of a huge storm.”

The right guy?

One thing that Rajan, a former chief economist at the International Monetary Fund, has in his favor is that he is viewed with credibility in financial markets.

“One is tempted to say that if Rajan can’t help restore confidence in India’s battered currency, nobody can,” Nicholas Spiro of Spiro Sovereign Strategy said in a note.

Others add that the sell-off in the rupee has been blown out of proportion and Rajan would do well to turn the market’s focus to how the central bank will help boost economic growth.

Data last week showed India’s economy expanded 4.4 percent year-on-year in the April to June period, well short of analyst forecasts for a 4.7 percent rise.

Economists have slashed their forecasts for the full year growth ending in March 2014, highlighting just how much India’s economy has slowed from the 8 percent plus growth rates enjoyed just a few years ago.

Also read: The rupee rout will be over soon

“The best thing he [Rajan] could do is call the currency speculators’ bluff and say: we’re not focused on every day currency moves but long-term growth,” said Stuart Oakley, managing director for Asian currency trading at Nomura.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow