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February 8, 2011
Host Paul Wilson International Head of Client Management and Sales, Financing and Markets Products, J.P. Morgan Featured Guest Speaker David Mackie Head of Western European Economic Research, J.P. Morgan Speakers John Shellard Global Head Equities Lending, J.P. Morgan Robert Taub U.S. Fixed Income Desk Manager, J.P. Morgan Matthew Sarson Trading Manager, Securities Lending Investment Desk, J.P. Morgan
THE OUTLOOK FOR THE GLOBAL ECONOMY David Mackie Head of Western European Economic Research .
no tightening in the G3. THE OUTLOOK FOR THE GLOBAL ECONOMY 1 . Divergent inflation pressure at the core level: upward in EM.Overview of global economy in 2011 2011 should be a solid year for global growth. Divergent central banks: modest tightening in EM. with good performance everywhere except the Euro area periphery. steady to down in G3.
0 7. Japan GDP growth 2Q09 – 3Q10 %q/q.9 0.S.7 5. THE OUTLOOK FOR THE GLOBAL ECONOMY 2. U. Spain EM Germany Sweden Switzerland Japan 2 . Germany. saar U.In the first year of recovery.0 3.7 U.. Those that don’t have baggage: EM.K.K.S. Scandinavia.4 3. in terms of growth the world was divided into: Those that have baggage (the need to repair household. Euro area periphery.3 3. bank and public sector balance sheets): U.9 1. Switzerland..
US policymakers go “all in”. mild fiscal tightening in Western Europe. THE OUTLOOK FOR THE GLOBAL ECONOMY 3 . A change in the household deleveraging process eases the drag in economies with baggage. Non-financial corporates provide the engine for growth even in economies with baggage: boosting demand directly and generating income for households. Monetary policy easy everywhere and the traction builds over time.Key themes for global growth in 2011 Ongoing strength in those economies without baggage.
Ongoing growth in economies without baggage Euro area domestic final sales 101 100 99 Germany 98 97 THE OUTLOOK FOR THE GLOBAL ECONOMY 96 Euro area ex. Germany 95 2008 2009 2010 *1Q08 = 100 4 .
S. household saving and the stock of debt outstanding 8 % of GDP % of GDP 100 6 Financial position Debt 90 4 80 2 70 0 THE OUTLOOK FOR THE GLOBAL ECONOMY 60 -2 50 -4 80 85 90 95 00 05 10 40 5 . the stock adjustment is ongoing U.The household deleveraging process: the flow adjustment is complete.
positive indicates net lending 6 . private non financial corporations net lending 6 5 4 14 3 2 1 12 0 -1 -2 THE OUTLOOK FOR THE GLOBAL ECONOMY 10 -3 -4 -5 *8 65 70 75 80 85 90 95 00 05 10 * -6 87 92 97 02 07 * Nominal share. % * % of GDP. business investment share in GDP 16 U. but cashflow is very elevated U.K. nonfinancial corporates do not have any baggage: not only is corporate spending at a low level.In general.K.
Divergent resource utilization drives divergent core inflation outlook Resource utilization 3 Global core inflation 6 EM 5 EM DM excl US 1 4 -1 3 2 THE OUTLOOK FOR THE GLOBAL ECONOMY Global -3 1 DM US * -5 91 93 95 97 99 01 03 05 07 09 11 *0 04 05 06 07 08 09 10 11 * Standard deviations from long-term average * %oya 7 .
Scenario 2 assumes market rates are capped at 350bp above the German borrowing cost from now through 2020." Global Issues. December 16.To exit the current crisis. See "A way out of the EMU fiscal crisis. the region either needs sovereign debt restructuring or a long period of liquidity support at very low interest rates Gross debt under alternative interest rate subsidies relative to German borrowing rates % of GDP 2015 Scenario 1 Esp Grc Ire Prt THE OUTLOOK FOR THE GLOBAL ECONOMY 2020 Scenario 3 79 142 121 89 Scenario 1 89 184 155 95 Scenario 2 87 153 136 95 Scenario 3 78 125 113 80 Scenario 2 83 151 129 95 84 161 135 95 Note: Scenario 1 assumes borrowing rates are capped at 6% through 2012 but then move to market rates thereafter. 8 . Scenario 3 assumes market rates are capped at 100bp above the German borrowing cost from now through 2020. 2010.
P. Fixed Income Desk Manager.P. Morgan Robert Taub U. Morgan Matthew Sarson Trading Manager.2011 SECURITIES LENDING OUTLOOK Speakers John Shellard Global Head Equities Lending. Securities Lending Investment Desk. J.P. J. J.S. Morgan .
S. Sectors in demand included financial. Year finished with a strong equity market rally in December. returning 7-9% on average. Hedge funds still lacking direction and conviction. However wide variance between strategies and individual funds. Uncertain environment contributed to risk aversion amongst investors. Securities lending balances came down in the run up to year end. especially in the U. Main revenue generating markets were France and Italy. having taken risk off the table. . consumer and industrial. In general hedge funds had a good year. O U T L O O K Active quarter for yield enhancement trading. L E N D I N G 2 0 1 1 S E C U R I T I E S Heavy lobbying from industry on the European Commission short selling regulatory proposals.Securities Lending Equities Q4 – Market Environment Another volatile quarter for equity markets. Demand continued to come from directional and capital raising trades. with activity also in Netherlands and Spain.
and continued improvement in the global economy. Continued focus on collateral. Expect continued strong investment inflows into hedge funds. L E N D I N G Continued discussions with regulators and Governments on the regulatory environment. balances likely to struggle in Q1. offset by higher dividend payments. Expect continued strength in equity markets as EU works towards a more robust solution to the Euro Sovereign debt crisis. 2 0 1 1 S E C U R I T I E S . both by clients and borrowers. Strong equity markets resulting in greater long bias from hedge funds and lack of appetite to go short. O U T L O O K However. Increased M&A activity as cash rich companies look to grow through acquisitions. Initial yield enhancement indications are mixed.Securities Lending Outlook for Equities Q1 2011 Optimistic that 2011 will see an increase in hedge fund activity as they look to put money to work and generate returns for investors. Tax changes and lower than expected demand.
net issuance declined from its 2009 peak. J. The Debt Ceiling On 1/27th Treasury announced their plan to decrease the issuance of US treasury bills in the Supplementary Funding Program from $200bn to $5bn. The decrease may lead to O U T L O O K downward pressure on repo rates temporarily and lower yields on UST bills and discount notes. Morgan is expecting the treasury to issue additional $1.The Change to Treasury Supply and the Impact on Treasury Repo Rates Treasury Issuance As the budget deficit narrowed.5trillion in CY2010.1 trillion Treasuries in CY 2011 as opposed to $1. 2 0 1 1 FDIC changes to fee calculations . also known as quantitative easing (QE2) S E C U R I T I E S At the last FOMC meeting. L E N D I N G The Federal Reserve Bank’s Large Scale Asset Purchase (LSAP) program. The Fed announced their commitment to continue to buy back $600bn in treasuries from the market by June 2011.P.
But Headwinds Prevail Challenges remain on the Distribution side of the Securities Lending business Balance sheet constraints Treasury supply Short-end Investor demand continues to exceed available supply Favorable market conditions for issuers Collateralized Commercial Paper/non-traditional repo balances Concerns remain around the Euro-zone Spain/Italy O U T L O O K Regulatory impact current market environment Strong Floater demand Step-up putable structures Collateralized CP 2 0 1 1 S E C U R I T I E S L E N D I N G .The Storm Has Passed.
Morgan believes no Fed move until Q1 2013 Short-end participant behavior-recap 2 0 1 1 S E C U R I T I E S L E N D I N G O U T L O O K .P.The Storm Has Passed. But Headwinds Prevail Early rumblings of the Fed Exit plan Market generally believes no Fed action for 2011 Beginnings of differences in opinion J.
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