23 Singapore Business Times Investment round table – Equities: what’s on the horizon

OVERVIEW

STOCK prices around the world recently hit their highest levels for this year, buoyed by a wave of optimism about prospects for a global economic recovery – only to fall back to a three-month low this week on fresh doubts about the sustainability of that recovery. So, is it ‘for real’ or is it destined to run out of steam? The Business Times empanelled a team of key experts to answer this critical question, and to tell us whether the world faces a threat of inflation, deflation or stagflation in the coming months. There were mixed views on the prospects for equity markets, but interestingly, everyone on the panel was bullish about gold.

Panellists

Mark Mobius, executive chairman, Templeton Asset Management

Eisuke Sakakibara, former vice finance minister for international affairs, Japan, and now Professor at Waseda University, Tokyo

Jesper Koll, president and CEO, Tantallon Research, Japan

The Hon Robert Lloyd-George, chairman of Lloyd George Management, Hong Kong

Ernest Kepper, former senior official of the International Finance Corporation (IFC) and Wall Street investment banker who now heads an Asian financial consultancy

William Thomson, chairman, Private Capital Ltd, Hong Kong and senior adviser to Axiom Funds, London and formerly a Vice President of the Asian Development Bank

Christopher Wood, managing director and equity strategist, CLSA Asia-Pacific Markets, Hong Kong

Moderator: Anthony Rowley, Tokyo correspondent, The Business Times

Anthony Rowley: Let me start by asking: is the apparent recovery in the global economy for real, or a ‘phony’ one? And, are stock markets justified in behaving the way they have been doing lately?

Eisuke Sakakibara: I don’t understand why equity prices are so high – in Japan the US and elsewhere. In China’s case, there is obviously a very major bubble in the equity market. Also, I don’t see any reason why the US Dow Average should be more than 9,000 (as it is now)or why the Japanese Nikkei average is more than 10,000. I just cannot understand it.

Ernest Kepper: This is a phony recovery. A turn-up in the economy is not the same as the economy recovering all lost ground. To keep rising in the future, markets need a sign of real economic recovery, and that requires a surge in consumer spending, business investment and home buying, combined with a reduction in government spending.

I fully expect to see the markets rise for a while longer, even as high as Dow 10,000 or S&P 1,100. After that, I think that we are going to see another leg down when the current rally ends, just as the powerful rally following the initial crash in 1929, ended up dealing out severe losses to those who held onto their shares.

William Thomson: In the wake of Lehman’s failure the global financial system was staring into the abyss of a systemic meltdown. Governments then junked their economic philosophies and threw fiscal and monetary assistance at the problems on an unimaginable scale, just to keep things afloat. It has worked to the extent the system limps on and there has been a rally in the markets. But there has been no recovery in the real economy yet in the West. The pace of decline has slowed and the second half of 2009 could be modestly positive. But modest is the operative word since unemployment is likely to continue to grow well into 2010, reaching double digits even on the official count.

With housing foreclosures likely to keep climbing in the wake of extended unemployment, the consumer is likely to keep his wallet shut and try and repair his balance sheet. Modest economic recovery should continue as long as neither fiscal or monetary conditions become restrictive too quickly. But markets need a period of consolidation whilst they assess future prospects, so a broad trading range may be possible for the rest of the year. Dips can bought and rallies sold.

Anthony: Are any of you gentlemen more optimistic about the global outlook?

Robert Lloyd-George: This is not a ‘phony’ recovery. It may be slower and weaker than usual because of the debt super-cycle. But it is a real recovery – in trade, auto sales, consumer spending, corporate capital spending and so on.

We are ‘climbing a wall of worry’ because many economists (and hedge fund managers) do not believe in the recovery and still have 50 per cent cash, awaiting a correction, which may never come. Earnings, and GDP, figures will slowly improve and equity markets will strengthen well into spring of 2010.

Mark Mobius: The financial crisis was real in the banking system but not in the industrial economy. It impacted the economy because the banking system froze. However, markets are leading indicators and they are telling us the recovery is on the way now.

Jesper: I agree. There is nothing ‘phony’ about the recovery; globally, the policy response was swift and massive and very correct. Since the start of 2009, slowly but surely, global money and credit have started to flow again.

Markets have, of course, been pulled by the massive liquidity creation; the tell-tale sign was the US banks raising massive amounts of private capital this spring without much problem; and beyond financial companies, corporations in general have been very fast in cutting costs and slashing inventories. Many CEOs used the crisis as an opportunity to do all the harsh and hard things they had been wanting to do for years, but could not ; corporations are now mean and lean. Corporate profits for many companies are poised to explode in the coming two years; global stock markets are – right now – transitioning from a ‘liquidity market’ to an ‘earnings market’ ; in this phase, stock selection will become increasingly important.

Anthony: What is driving recovery in the markets – emerging markets especially?

Mark: In a word, money is what is driving the recovery. The money supply in most countries is rising at a very rapid pace. This money is finding its way into the economic system and is driving prices and economic activity. Added to this are the US$600 trillion in financial derivatives which amplifies money supply.

Jesper: In a word – growth. There is no question that the structural growth potential of ‘Chindonesia’ – China, India and Indonesia – is easily about two times, if not three times higher than that of the US, Europe or Japan. Even so, it will be interesting to see how long emerging markets sustain their growth premium. Valuations are now very stretched and if the US and Japanese recovery continues to gain visibility, these two markets could well start to outperform the emerging world for a couple of quarters.

Robert: Emerging Markets – Brazil, India and China anyhow – have clearly risen faster and stronger from the crisis, for good fundamental reasons – young consumers in hundreds of millions, and governments following ambitious infrastructure plans (in turn), driving demand for commodities.

Christopher Wood: Recovery is partly driven by the hope of a US restocking cycle and partly by the fact that Asia and emerging markets in general are becoming more domestic-demand driven.

William: We are in the midst of a historic shifting of economic power globally from a worn-out, complacent, over-leveraged, demographically challenged and decrepit West to a youthful, striving, high savings and increasingly well educated and confident Asia eager to take its place at the top table internationally.

Emerging markets cannot decouple completely in a globally integrated world but they do have greater flexibility to develop their own internal markets – as we have seen with the Chinese stimulus programme. This growth of emerging markets at the expense of the West is the story of the next 50 years.

Anthony: Let’s focus on China especially for a moment since that is where most of the action continues to be. How do you see prospects in the China market?

Mark: Excellent. Chinese stocks have already gone up a lot and they will correct downwards but that will be temporary.

Robert: I remain bullish on China. Their macro-economic planning and management during the crisis continues to defy the Western pundits. They have plenty of cash (US$2 trillion reserves) and plenty of confidence. The younger generation will consume and borrow more. Economic relations with Taiwan improve. Overseas trade will recover. The renminbi is internationalising.

Jesper: China is one of the countries most exposed to rising cost pressures. Profit margins are already very thin, competition keeps intensifying across most sectors, and skilled labour is scarce. The key to success in the Chinese equity market will be an intense focus on stock selection – the gap between winners and losers is poised to widen sharply.

We will see the rise of true multinationals from China, true global players who do not just manufacture, but actually control the distribution channels and branding across the globe. These will be the real winners emerging from China over the next couple of years.

Ernest: China took aggressive measures to increase bank lending which in turn supported a strengthening of the stock market and is producing what looks like the start of a bubble, which the authorities are now trying to contain.

The Chinese government’s stepping up bank lending was necessary but it’s time for the excessive lending to be scaled back now. China’s stimulus adds its own risk, including those of asset bubbles, overcapacity and non-performing loans.

Christopher: It is possible that the Chinese economy will grow by around 9 per cent in the second half of this year, after 7.1 per cent (year on year) growth in the first half of the year, due to surging public-sector and private-sector fixed-asset investment and resilient consumption. This assumes no real recovery in the West and a negative contribution to growth in terms of net exports. I am still overweight on China equities.

Eisuke: China will continue to grow at a fairly high rate of 7 or 8 per cent for some years to come and next year I think that China will be number two in terms of GDP.

That is only natural (because) China is a big country with a big population. China will need to emerge as a major economic power in the world.

William: The Chinese stimulus programme has been successful but the question is whether it is sustainable. It has involved a rapid expansion of bank balance sheets that could result in substantial losses a few years from now. As long as China’s export markets stabilise then China’s growth rate can be maintained at levels well above the West’s rates. China recognises the old reliance on exports must change and it will. The real question is how fast that transformation can occur. Chinese equities have had a great run and are overdue for a breather but they have a core position in any long-term growth portfolio.

Anthony: Let’s turn to wider issues. Is the world facing a risk of inflation as a consequence of all the liquidity that has been injected into economies, or deflation because of the global recession?

Eisuke: The global inflation threat is almost zero but there are some asset bubbles. If you think in terms of prices of goods, inflation fear is groundless but in terms of the prices of assets, there is a danger of bubbles in China, and even in Japan and the US. I don’t think there will be hyper-inflation.

Robert: I expect inflation to rise within 12 months. Deflation is politically unacceptable in Western democracies and monetising debt is the only way out. This is very bearish for government bonds but mildly bullish for equities, property, and commodities, provided that inflation remains below 10 per cent.

William: We have been printing money like never before: the Fed’s monetary base more than doubled in three months in late 2008. However, this has been going to fill up the black holes in balance sheets created by the credit implosion and velocity has dropped sharply. As a consequence it has yet to create inflation.

As things stand, we still need more quantitative easing and ultimately we need some inflation to reduce the real burden of our excessive debts. Renewed inflation would most likely come from currency depreciation especially the dollar which looks very weak at present and headed further south, possibly disastrously. I believe US government bonds are unattractive under such circumstances, selected equities are relatively more attractive, especially emerging markets on pull backs, as well as some commodities, including gold, silver and oil. Income producing property should also be attractive after the falls of the last two years.

Christopher: The risk in America and the West remains deflation. There remains almost zero evidence of re-leveraging in America.

Mark: Inflation is good for equities but not for bonds because bond rates must go up. Depending on how fast the money supply brakes are applied then the impact on equities could be positive or negative.

Anthony: While we’re talking about inflation, the gold price continues its upward climb. Where is it headed and why?

Mark: Gold has probably already discounted a lot of inflation expectations but when hyperinflation hits then gold could move much higher.

Robert: Gold is going to a minimum of US$2,000 an ounce by 2011, in my view, for all the reasons above. World money supply has doubled in the last two years. No new gold supply, plus dwindling faith in ‘fiat’ currencies all around the world. Neither the dollar, nor the yen, nor the Euro will fill the bill.

Christopher: I maintain a long-term bullish view on gold bullion, with my long-term target price set at US$3,360 an ounce.

William: Gold has been tracing out a huge consolidation pattern since it first crossed the US$1,000 mark in March 2008. The demand for physical gold has been huge during this period of financial crisis as gold performs its familiar role of asset of last resort as governments around the world have engaged in unprecedented levels of quantitative easing. I am looking for a significant breakout to higher prices in the coming months: US$1,200 by the end of the year is not impossible with higher prices next year.

Jesper: Gold is the best hedge we have to the principal risk, which is inflation; so I like gold and also inflation linked bonds as a hedge.

Ernest: Psychology is the driving force behind the price of gold. Unless you have a clear idea who is going to come and rescue your portfolio of paper investments, owning gold and silver is important. Gold is still the only asset class which has risen in price every year since 2001. In fact, it is a bargain for gold to be selling for less than US$1,000 per ounce!

Anthony: In conclusion, what could go wrong to derail the present recovery?

Mark: Money supply has had fed the markets. Excess money supply begets inflation and that is what could go wrong but that is something we don’t have to worry about for probably another year.

Robert: The only real problem I see is the high level of European government debt, which should not affect Asian markets.

Christopher: What can go wrong, and will go wrong, is that Western growth will remain anaemic in 2010 as a result of continuing de-leveraging.

Jesper: The biggest threat is inflation; if we get a new round of cost-push inflation we would be forced to call for a negative earnings cycle coming as soon as 2011. Another big threat is protectionism. Personally, I am hopeful this threat is low; I am very encouraged by the well coordinated response we have had to the global financial crisis, which suggests that global policy makers actually act rationally.

William: Many problems have been swept under the carpet and so a sustainable recovery to former growth rates does not seem to be on the cards for the US, the EU and Japan. The de-leveraging process still has a way to go and consumers, especially, have to continue to rebuild their balance sheets. Governments will have to restrain their expenditures and increase taxes, which will be neither easy nor popular.

Central banks also have to walk a fine line between taking away the punchbowl of quantitative easing and creating the fuel for future large scale inflation.

Ernest: There are two major things that could go wrong – the commercial property mortgage market and stimulus spending which could cause a bubble. Years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

Throwing billions of stimulus dollars at the banks is unlikely to produce a healthy economy because households are broke. At best, it may only lead to a temporary pickup in growth. Stimulus packages around the world are ultimately going to cause more damage than they prevent. These packages have simply delayed the coming downturn, and by adding significant numbers to the massive debt bubbles of the world’s nations, will ultimately make the downturn worse than had governments not injected massive amounts of money into the economy.

When the (current) debt bubble bursts, the world will enter a serious downturn. The bailout is much bigger than the dot-com and real estate bubbles which hit speculators, investors and financiers the hardest. When the ‘Bailout Bubble’ explodes, the system goes with it because neither the US President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another bubble.

Treasury Bonds – Private Buyers Pulling Out, Leaving Foreign Powers as Buyers of Last Resort.

By Ambrose Evans-Pritchard
The Telegraph, London
Sunday, May 24, 2009

The U.S. Treasury is facing an ordeal by fire this week as it tries to sell $100 billion of bonds to a deeply sceptical market amid growing fears of a sovereign bond crisis in the Anglo-Saxon world.

The interest yield on 10-year U.S. Treasuries — the benchmark price of long-term credit for the global system — jumped 33 basis points last week to 3.45 percent on contagion effects after Standard & Poor’s issued a warning on Britain’s “AAA” credit rating.

The yield has risen over 90 basis points since March when the U.S. Federal Reserve first announced its controversial plan to buy Treasury bonds directly, a move designed to force down the borrowing costs and help stabilise the housing market.

The yield spike may be nearing the point where it threatens to short-circuit economic recovery. While lower spreads on mortgage rates have kept a lid on home loan costs so far, mortgage rates have nevertheless crept back up to 5 percent.

The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900 billion by September.

“The dynamic is just getting overwhelming,” said RBC Capital Markets.

The U.S. Treasury is selling $40 billion of two-year notes on Tuesday, $35 billion of five-year bonds on Wednesday, and $25 billion of seven-year debt on Thursday. While the U.S. has not yet suffered the indignity of a failed auction — unlike Britain and Germany — traders are watching closely to see what share is being purchased by U.S. government itself in pure “monetisation” of the deficit.

Don Kohn, the Fed’s vice-chair, said over the weekend that Fed actions would add $1 trillion of stimulus to the US economy over time and had already prevented “fire sales” of assets.

“The preliminary evidence suggest that our programme has worked,” he said.

The U.S. is not alone in facing a deficit crisis. Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe. Kyle Bass from the U.S. fund Hayman Advisors said the markets were choking on debt.

“There isn’t enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there,” he said. “If the U.S. loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.

“The bottom line is that there is no global ‘get out of jail free’ card for anyone,” he said.

The U.S. is acutely vulnerable because it relies heavily on foreign goodwill. China and Japan alone hold 23 percent of America’s $6,369 billion federal debt. Suspicions that Washington is trying to engineer a stealth default by letting the dollar slide could cause patience to snap, even if Asian exporters would themselves suffer if they harmed their chief market.

The dollar has fallen 11 percent against a basket of currencies since early March. Mutterings of a “dollar crisis” may now constrain the Fed as it tries to shore up the bond market. It has so far bought $116 billion of Treasuries as part of its “credit easing” blitz, out of a $300 billion pool.

When the Fed first said it was going to buy Treasuries in March the 10-year yield to dropped instantly from 3 percent to near 2.5 percent, but the shock effect has since worn off. Any effort to step up purchases might backfire in the current jittery mood.

In the late 1940s the Fed was able to cap the 10-year yield at around 2 percent, but that was a different world. The US commanded half global GDP and had a colossal trade surplus. The Fed could carry out its experiment without worrying about foreign dissent.

Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds “at essentially no cost.” His frequent writings rarely ask whether foreign investors — from a different cultural universe — will tolerate such conduct.

Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences. This assumption may be tested.

It is not clear where the capital will come from to cover global bond issues. Asian central banks and Mid-East oil exporters have cut back on their purchases of US and European bonds as reserve accumulation slows. Russia has slashed its holding by a third to support growth at home. Even Japan’s state pension fund has become a net seller of bonds for the first time this year as the country’s population ages.

Japan’s public debt will reach 200 percent of GDP next year. Warnings by the Japan’s DPJ opposition party that, if elected this autumn, it would not purchase any more U.S. debt unless issued in yen is a sign that the political mood in Asia is turning hostile to U.S. policy.

There is no evidence yet that foreigners are in the process of dumping U.S. Treasuries. Brad Setser from the U.S. Council on Foreign Relations said global central banks added $60 billion to their U.S. holdings in the first three weeks of May.

This is bittersweet for Washington. It suggests that private buyers are pulling out, leaving foreign powers as buyers of last resort.

We just have to hope that G20 creditors agree to put a clothes peg on their nose and keep buying Western debt until the crisis passes, for the sake of the world.

Economic Update – Stagflation Coming?

Here’s an economic recap by Chris Gaffney of Everbank World Markets. Chris and his team provide solid economic analyses; with an emphasis on the impact to the currency markets, but also providing valuable information for anyone interested in economic affairs.

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A shrinking US economy puts pressure on the US$…      

Good day… Yesterday was a big day in St. Louis as President Obama came to visit on his 100th day in office.  I can’t believe it has been 100 days since the inauguration.  Time sure does fly!  I’m sure Obama and the rest of his administration would like the calendar to move even faster as this recession will likely last through the end of 2009.  While the government has thrown trillions of dollars at the markets in an attempt to turn them around, the key ingredient for recessionary cycles to reverse is time.  There is now ‘quick fix’ for the problems we are in, and the policies the administration has begun will take time to have an impact on our shrinking economy.  Obama said as much in his nationally televised press conference last night.

Speaking of shrinking economies, US GDP showed an even steeper contraction in the first quarter than that predicted by economists.  US GDP fell 6.1% compared to the 6.3% fall during the last quarter of 2008.  This drop confirms that we are now in the worst recession since the Great Depression.  There report showed a record slump in inventories and  further declines in housing.  But another report released by the Commerce Department showed a surprising 2.2% gain in consumer spending in the first quarter, the most in two years.  So we have consumers who increased their spending and confidence, while the US economy was contracting at near record pace. 

Another report which didn’t get much press was the GDP Price Index and the Core PCE which are measures of price inflation.  These numbers rose more than expected, with the GDP price index rising 2.9%, nearly doubling economists predictions of a 1.8% increase, and substantially higher than last quarters .5% rise.  This sets up the possibility that we could see what many consider the worst case scenario, falling GDP with rising inflation (STAGFLATION).  With inventories at very low levels, a slight increase in consumption can lead to a very quick rise in prices.  But the Fed doesn’t seem to be bothered too much by that scenario, as they continue to focus on efforts to get the economy growing, with no apparent concern about inflation.

The Fed’s Open Market Committee voted unanimously yesterday to leave its target interest rate unchanged at between 0 and .25% (they really can’t go much lower!!).  They also voted to continue to their purchases of long-term Treasuries and housing debt which they began last month.  The FOMC statement said the contraction has slowed and the outlook “improved modestly” but the economy may “remain weak”.  Job losses and a very tight credit market will likely inhibit consumer spending in the coming quarters. 

As I said earlier, there was no mention whatsoever of an exit strategy on how the Fed plans to pull in the record amount of money supply it has unleashed on the economy.  The Fed said they will continue to monetize the debt at an unbelievable pace: as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt, and $300 billion of Treasuries.  They are making these purchases in an attempt to keep interest rates at below market levels to fabricate a refinancing boom.  While they have been somewhat successful in keeping rates lower than they would be under normal market conditions, these purchases are extremely inflationary and won’t be easily reversed.  But the FOMC believes they will have plenty of time to worry about inflation and have decided to basically ignore it for now.  Problem is, inflation can spike pretty quickly, and the FOMC will be hard pressed to raise interest rates just as the economy is starting to pull out of recession.  I just don’t believe they will have the guts to be proactive with inflation, and will probably see a major spike in prices on the other side of this recession.  

Inflationary concerns are at the forefront of the ECB as they prepare for next weeks policy meeting.  ECB President Jean-Claude Trichet has imposed a gag order on council members as they argue over what to do next to rescue the European economy.  Some members had been taking their cases to the media recently in an attempt to push the ECB into following the UK, US, and Japan down the quantitative easing path.  But more conservative members don’t believe the ECB should use these untested methods, and are worried about the eventual inflationary impact of them.  The ECB cut rates less than expected in April, and pushed a decision to use other methods off to next week’s meeting.  Germany’s Axel Weber wants to make 1% the floor for the benchmark rates, and is against buying debt to pump additional money into the economy, while other council members want to begin asset purchases to force rates lower.

Data released this morning show Europe’s unemployment rate rose to the highest in more than three years, and inflation held at a record low, which will increase pressure for the ECB to continue to cut rates.  The March unemployment rate jumped to 8.9% in the Euro area, and inflation held steady at .6% in April.  Other reports released this week suggested confidence in Europe is stabilizing which could counter some of the pressure to take additional measures.  Chuck will bring you the details of the ECB meeting, which will occur a week from today.

The dollar sold off on safe haven reversals, but then moved back up in European trading.  So after a bit of a roller coaster ride, we are pretty much right where we started yesterday morning.  But the overall market sentiment seems to be shifting back to dollar negative.  Two separate reports released by currency trading desks yesterday revised their currency forecasts down for the US$.  Bank of America – Merrill Lynch revised their forecasts for the dollar, yen, euro, and pound on the ‘rising probability’ the global recession has passed its lowest point.  Their report stated the euro would recover faster than previously predicted as the global economy turns.  A separate report by Citigroup said the dollar would fall if/when the 10 year Treasury note yields rise above 3.06%.  Technical analysts at Citigroup wrote that past trading patterns look like they are repeating.  “Buying the dollar and US Treasuries was the trade of choice toward the end of 2008 and is now unraveling,” they said. 

Global deleveraging pushed investors back into US$, but as the global economy recovers (led by an increase in consumption in China), investors will move these funds out of this safe haven.  Yield differentials will again determine investment direction, and growing economies will be able to attract more speculative capital.  The US$, which has benefitted from the global downturn, will be sold.  In order to protect your portfolio, investors should have some exposure to the currencies and metals.

One currency which has turned in one of the best performances vs. the US$ this week has been the Canadian dollar.  The loonie touched the strongest level in two weeks on a move up in the price of oil.  Equity markets are up, as investors have become much more confident regarding a global turn around.  This confidence has carried over to the commodity markets, where oil and some of the industrial metals have been rising again.  Canada relies on shipments of raw materials including oil, natural gas, copper, and lumber for more than half of its export revenues. 

A report released by TD Securities, a large Canadian trading desk, predicted the Canadian dollar would appreciate by as much as 14 percent by November if it breaks through a key technical level.  If the US dollar breaks below 1.1764 CAD$/$ (or above .85 UScents/CAD$) the upside opens up hugely over the next few months.  The report puts a target of 1.04 CAD$/US$ (or .9615 US$/CAD$) for the loonie, a 14% increase from today’s levels.

As I touched on above, the commodity currencies turned in one of their best performances in weeks as the price of oil shot back above $50.  Both Norway’s krone and the Australian dollar rallied along with the Canadian dollar.  The AUD$ actually rose to the highest level in more than six months against the US$.  The Norwegian krone, Australian dollar, and Canadian dollar are three of the best four currencies vs. the US$ on a YTD basis.  The top performer vs. the US$ in 2009 has been the South African Rand, but recent rate cuts there may start eating into its recent strength.

South Africa cut its benchmark rate a full percentage point, the fourth reduction since December to help spur their economy.  New Zealand’s central bank also cut rates to a record low yesterday.  Reserve Bank Governor Alan Bollard reduced the overnight rate by 50 basis points to counter the nation’s worst recession in more than three decades.  He indicated that rates may go lower, and will stay down for the foreseeable future.  The kiwi sold off after the announcement.

Good economic news out of Japan has been rare, so yesterdays report that Japan’s factory output rose for the first time in six months was a surprise.  And even more surprising was the fact that the pace of the output rise was nearly double that predicted by economists.  Factory production climbed 1.6% in March from February, when it dropped 9.4%.  In a separate report, the Bank of Japan said the world’s second largest economy will resume growth in 2010 after shrinking 3.1% this fiscal year.  But I still caution investors regarding investments into the yen.  The Japanese yen benefitted from the reversal of the carry trade, but global markets seem to be substantially less leveraged than before.  The Japanese yen is not going to be able to benefit from another large push by additional deleveraging.