24 Aug 2012

Economic update by Ben Wattam, Investment Manager

ECB yield cap rumours

German magazine, Der Spiegel, published an article early this week suggesting that the European Central Bank (ECB) was considering setting caps on bond yields in order to bring down borrowing costs in the eurozone. The article said that under the plan, the ECB would buy bonds from crisis-hit countries if the yields on those bonds exceeded a pre-set level above the interest rates on German sovereign bonds. The intervention would signal to investors the interest rate that the ECB deem to be appropriate. This plan would be an alternative to quantitative easing by targeting bond yields rather than targeting a precise quantity of bond purchases.

As a result of the news, the euro rose against the dollar by 1.1%, and Spanish borrowing costs fell. The ECB has now denied the claims made by the German magazine, saying it was “absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council.” These comments suggest, however, that the idea of yield caps has not yet been dismissed and could be open for further debate. The ECB has already mentioned that it is ready to intervene in the market if needs be. According to the ECB, yields are excessively high for some eurozone countries and some of these yields are not justified.

The Swiss National Bank (SNB) earlier this year publically stated that it is intervening to restrict the appreciation of the Swiss franc against the euro, which has resulted in a near pegged currency at CHF1.2 to the Euro. To achieve this, the SNB has had to have ‘deep pockets’ but if the ECB does decide internally to attempt to cap bond yields, ‘deep pockets’ will potentially be needed. They have a near unlimited balance sheet but it could severely test the independence of the ECB (something that does not concern the SNB) were the idea to be attempted.

Platinum prices and violence in South Africa

Platinum has generally been seen as a poor performing commodity over the last year. The price of platinum fell by 20% in 2011, mainly as a result of falling demand from European car manufacturers who use the metal in the production of new cars. However, the price of platinum has hit a high of $1,508.25 an ounce this month, which is the highest it has been since early May 2012. The price surge has resulted from the violence in South Africa’s Marikana mine, which is owned by Lonmin. Clashes between unions at the Marika mine have left 44 people dead over the past couple of weeks.

Lonmin is the world’s third-largest platinum miner and UBS estimates that the unrest has brought about a loss of production of up to 70,000 ounces. The fear of contagion and threat of clashes spreading to other mines in South Africa is expected to keep the price of platinum high in the short term.

Thailand beats growth forecasts

Thailand has demonstrated the robustness of its economy with new figures showing that it has exceeded its forecasts for the second quarter of 2012. The economy grew at a rate of 3.3% when analysts had forecast an increase of only 1.7% over the period. Last year, the country saw the worst floods to hit the region in decades, which caused major damage and led to a number of factories being suspended and temporarily shut down.

Whilst some of the growth has been led by the reconstruction following devastating floods, much of the growth has been led by strength in consumption, manufacturing and the tourism sector. Therefore, we are likely to see a boost as a result of these reconstruction projects later on this year. However, it must be noted that Thailand is still vulnerable to the troubles abroad, as the majority of its growth is still export-based. Therefore, the slowdown in world trade growth will have an impact on the economy and Thailand may also struggle to escape from the reduction in demand from Europe.