martedì 25 settembre 2012

Central bank steroids may breed addiction


September has lived up to its billing as the month of reckoning for both the European debt crisis and the US struggle to boost jobs ahead of presidential elections.
In the first week of the ninth month, returning holiday makers were faced with important meetings by European policy makers, a central bank meeting and a constitutional court judgment in Germany over the legality of the region’s rescue fund.
If the outcomes weren’t what markets were looking for, the tensions over the future of the 13-year euro project were set to escalate even further and quickly. The cost of debt for struggling nations Spain and Italy would have accelerated to unsustainable levels and fast.
But outcomes on most of the important dates provided relief. While there is still some political wrangling over Greece and Spain, as the region’s fourth-biggest economy, Spain, tries to avoid a bail-out, the court judgment in Germany was in favour of the fund.
The biggest boost to the three-year struggle to get back investor confidence in the region was the European Central Bank (ECB) policy meeting, when president Mario Draghi promised to ensure the debt levels of struggling nations would not become unsustainable. The condition being that affected countries must request help and agree to necessary reforms. (This explains Spain’s difficulty with requesting a bail-out; there’s an element of sovereignty to be lost.)
The ECB decision may have come just in time to prevent a recession in Germany, the biggest economy in the 17-member common monetary union, economists from German private bank Berenberg said in a note last week.
Across the Atlantic, a US Fed unimpressed by economic data, especially on the job front, decided on a third round of quantitative easing or bond purchasing to reduce a jobless rate that has stayed above 8% for three years.
Ahead of the big bazookas from Europe and the US central banks this month, equity and commodity markets have rallied. The Marikana tragedy, where 46 mineworkers lost their lives, boosted the price of not only platinum, but other metals that have a South African presence, because of contagion fears.
Judging by market performance last week, that rally has run its course, for now anyway. Resource shares were weaker, with investors moving back into retailers.
We’re back to focusing on the global economy and if economic indicators in the weeks and months to come point to weakening growth, the case for even further central bank intervention will get built again.
It’s the solution that markets have settled on. Steroids.
IN A week when we were supposed to get some direction on just where the government sees Telkom fitting into its long-term goal of extending access to broadband to the wider populace, we got none.
Communications Minister Dina Pule was expected to table a turnaround strategy for the struggling company to the Cabinet.
According to reports, options for the telecommunications firm, close to 40% owned by the government, weren’t even discussed at a Cabinet meeting.
We’ll just have to live with more uncertainty around the ailing company, which recently warned that interim earnings may decline as much as 45%. It’s been about six years since the one-time monopoly gave shareholders a healthy looking report card.
On Friday, the company’s shares fell as much as 8,1% as markets reacted to the profit warning and the disappointment of no further detail on just what its biggest shareholder thinks of its future.
In June, the government rejected a bid by South Korea’s KT Corporation to buy a 20% stake in the company, arguing that it’s a "strategic asset" in its plans to expand broadband infrastructure. The purchase would have diluted the government’s stake, unpalatable to some in the ruling party.
After nine years of being listed, five different CEOs and many expensive and quite frankly embarrassing failures such as Telkom Media and a Nigerian venture, how plausible is it to believe the government is now brewing a better plan? Why would anyone believe (given its record) that the company’s biggest shareholder is going to find a tangible turnaround plan?
Perhaps it shouldn’t come as a surprise that no announcement was made this week. I am convinced that, like most decisions these days, we are going to have to wait till the end of the African National Congress’s elective conference in December before any announcements are made, along with government’s future role in mining.