The Australian Resources Minister, Mr Ferguson, reports that the global boom in commodity prices is over and that productivity must be improved. Commodities rose sharply following the recent announcement by China of a stimulus programme, but doubts as to its validity continue. In addition, QE3 by the FED and Draghi’s proposed bond buying programme has spurred commodity prices further. However, at the end of the day, its a supply and demand issue and with Chinese demand expected to decline materially, well……..In addition, commodity inventories in China are significant and Chinese buyers have been either deferring and/or defaulting on orders recently, clearly not positive. Mining companies are cutting back on their capex programmes, though a material rise in supply is already in the pipeline. Does not seem positive to little old me;
Tensions rise between the China and Japan over the Japanese buying certain territorially disputed islands in the South China seas from their private Japanese owner. Mobs have burnt a Panasonic factory and a Toyota dealership in China. The Japanese manufacturer Cannon announced that it is to stop production at 3 of its 4 factories in China. China is Japan’s largest trading partner, whilst Japan is China’s third largest partner. Whilst China beat up the Philippines recently in a similar dispute, Japan is a very different ball game, though China is its largest trading partner. Chinese naval vessels conducted live fire exercises in the E China seas. This situation is going to go on and on and………and, in addition, become more fraught. China has disputes with several countries in S E Asia over territorial claims to a number of islands in the South China seas. Finally mob violence against Japan could, quite easily, turn into violence against the Chinese administration some of the demonstrators turned on the Chinese police;
The Chinese reaction towards Japan is fanning nationalist sentiment in Japan. Likely general elections early next year could well see the LDP return to power, most likely in a coalition with the right wing Restoration Party lead by Mr Hashimoto, reports Robert Hardy of Geostrat, which reports on important geopolitical and intelligence issues worldwide (you guys really should subscribe – its a must read). Interestingly Mr Hasimoto favours changing Japan’s pacifist Constitution and allow military force to be deployed outside the country. Not going to good news for China, me thinks;
There is increasing scepticism as to the recent stimulus projects announced by the Chinese authorities. A number of project were already in the pipeline and in addition, the financing of others, particularly by provincial governments, is suspect. Having said that, the Chinese authorities report that GDP will be around 7.7% to 7.8% this year and above the 7.5% forecast. I had, I must admit, expected a major stimulus programme, but this does not appear on the cards for the moment. The Chinese economy remains skewed towards fixed asset expenditure and its shift towards consumption is taking a lot longer to engineer. I have always been bearish on China, though recently I had (wrongly) expected a respite due to the prospect of an anticipated stimulus programme of some size, ahead of the imminent change in leadership. However, it looks as if such a programme is unlikely to materialise (imminently at least) and, as a result, I feel quite strongly that I should remain bearish on the country even in the short term. If I’m right, commodities and the mining sector will under perform, as will the commodity currencies. The Shanghai Composite closed 2.14% lower today. Finally, the Chinese economy is dependent on the US and European economies in particular;
The US is to launch a WTO action against China over alleged subsidies on cars and car parts. Clearly the timing has everything to do with the impending Presidential elections, as the announcement was made by White House officials ahead of President Obama’s trip to Ohio. However, the cost advantage of producing in China is deteriorating to an extent that many foreign businesses are repatriating their production facilities back to the States (and elsewhere), especially if energy, due to cheap gas in the US, remains low. Businesses are also wary of, inter alia, extended supply chains, transportation costs, intellectual property rights and quality issues. With China raising the wages of its workers materially in recent years and with no sign of a slowdown, the process will continue;
India announced a number of material and positive policy actions to stimulate the economy. The Indian PM and the new Finance Minister Mr Palaniappan Chidambaram introduced a number of much needed policies to help stimulate growth in the country. The measures, if implemented given the likely opposition (likely), will represent the most important liberalisation initiatives since the early 1990’s. Growth, which was around 8.0%, has declined materially and was heading to around 5.0%. The PM suggests that India should target a growth rate of 9.0% by 2017. The country is facing threats of a ratings downgrade by S&P and Fitch to junk, from BBB- (with a negative outlook) at present, which some argue were the main reasons for the new policies. The policy initiatives should help in this regard. Whatever, the changes in policy, ranging from the reduction of subsidies on diesel, the privatisation of a number of companies and allowing foreign multi brand retailers to have majority control (51%), are much needed. In addition, India’s fiscal and current account deficit must be reduced, together with measures to control inflation, which continues to rise and which limits the ability of the RBI to reduce interest rates – the measures announced will clearly help. Indeed, the RBI has just announced unexpectedly that it will cut the cash reserve ratio to 4.5%, from 4.75% previously. Bloomberg reports that the RBI’s decision will add Rupees 170bn into the banking system. The poor state of infrastructure in India, which has been neglected for decades, is another critical element that needs to be addressed.immediately.
Ms Mamata Banerjee, chief minister of West Bengal and part of the ruling coalition (in my view the head of the monster raving loony party) opposes the moves, though I believe this time around, few in Congress will listen – not before time – the woman is a complete maniac. General elections in India are due in 2014 and the Government had to take action to have some chance of getting back in. I have been bearish on India for quite some time, though it now looks like its time to get bullish, including on the much beaten up Rupee. The actions by the ECB and FED suggests a risk on mode, which should be good for some EM’s, including, in particular India;
The IMF is expected to cut its forecast for GDP growth in Russia to 4.0% this year. The Russian Central Bank unexpectedly raised its benchmark refinancing rate by 25bps to 8.25% last Thursday to curb rising inflation, the first time in 9 months. Higher food costs have raised inflation in the country, as it has in many EM’s, in particular, given the higher weighting of food in the inflation basket of EM’s. The FED and the ECB policies will increase the inflationary threat;
Disagreements over EZ banking Union. Over the weekend, EU finance ministers expressed very different views on a proposal by Brussels to supervise European banks. The EU proposals only impact the 17 EZ countries, though non Euro members can opt in, but, at present, will not have any voting rights. Lead by Germany, Sweden, Holland and Poland suggested that the deadline to establish a single supervisor (the ECB) could not be introduced by the start of 2013. On the other hand, Belgium, France, Italy and Spain want the ECB to take over as supervisor as rapidly as possible. Germany wants the ECB to supervise just the 20 to 25 most important European banks, though the EU and France wants all 6000 European banks to be supervised by the ECB.
Germany’s regional banks are materially under capitalised, with question marks as to their solvency, though Germany is unwilling to address the issue at present. In addition, Germany fears that its taxpayers will foot a larger element of the bill to bail out European banks. Mr Schaeuble called for a stress test before discussions on banking union could proceed further. The EU’s plan, put together by the French EU commissioner Mr Barnier, is a “dead duck” in terms of timing at the very least. Quite frankly anything that Mr Barnier proposes should be disregarded. The UK will play an active part in the negotiations, given the importance of the banking sector to the UK economy. The Swedish finance minister (a non Euro member of the EU, as is the UK) stated “we can particularly not accept that supervision is based on the ECB, where we cannot become members without joining the Euro and we’d have more banks under supervision by an institution where we had no voting rights”. I’m sure the UK will totally agree with that sentiment. (Source FT);
Large demonstrations in both Portugal and Spain (and planned for Greece) in response to tax hikes and further austerity measures respectively. The latest round of tax hikes has resulted in the Portuguese, who have been relatively sanguine to date, take to the streets. The increase in tax in Portugal is in spite of the Troika increasing the budget deficit targets for Portugal recently, both for the current and next year. The budget deficit targets will, most likely, have to be revised higher for Spain for the current and next year, as well. The Spanish advised EZ finance ministers last Friday that they would set deadlines to introduce structural reforms on the 28th September, which are believed to be in line with recommendations by the Troika. The main aim is to void the stigma of having such measures imposed on the country by the Troika. Furthermore, the finance minister hinted that Spain would not enact any further spending cuts. In addition, Spain will announce their 2013 budget on the 28th September as well, together with the results of the final stress tests on the country’s banking sector. Following these announcements, it is likely that Spain will request a precautionary credit line from the ESM in October;
To date, in the EZ, only Ireland has stuck to its fiscal targets. The Greek government as, so far, failed to agree on further austerity measures to reduce the deficit by E11.5bn this year and next. However, EZ finance ministers and the IMF appear willing to give Greece more time (the Greeks have asked for two more years), though I believe it will be politically impossible to provide more money. A decision on Greece has been postponed till mid to late to late October and after the Troika report on Greece is released – leaked reports suggest that it is “grim reading”;
The EZ July trade surplus rose to E15.6bn (mainly Germany), up from E2.1bn Y/Y. Exports rose by 11% Y/Y, whilst imports grew by just 2.0% Y/Y. However, the June trade balance was revised lower to E13.6bn, from E14.9bn previously. The numbers confirm the weak demand in the EZ, as a result of the EZ debt crisis;
US MBS yields collapse following the FED announcement. The announcement by the FED that it will buy US$40bn of MBS’s per month has resulted in the spread between MBS’s and Treasuries narrowing to the lowest since 1984. However, the rise in Treasury yields will increase mortgage rates, at least initially. Mortgage rates are expected to decline further in due course. The FED move should act as a further stimulus to the US housing market, which has already shown signs of improving. In addition fears of rising inflation will help the property sector. The FED’s actions will shorten duration, which in turn will negatively impact institutional investors and in particular pension funds, as they struggle with duration mismatch. The winners will be businesses who will be able to issue longer term debt at exceptionally low rates – expect the issuance of debt securities in the US to rise even more;
US consumer confidence unexpectedly rose in September to the highest level in four months. Consumers were more positive on their personal situation and the jobs market. The University of Michigan September consumer sentiment index rose to 79.2, from 74.3 in August and well above forecasts of 74.0. Importantly, the expectations component rose to 73.4, from 65.1, though the current conditions declined marginally to 88.3, from 88.7. Only 12% expected unemployment to rise, down materially from the 25% in August and the lowest since 1966. 42% of consumers expect favourable economic conditions, up from 32% last month and the highest for 5 years. OK, one data set, but it suggests to me that the US is going to do far better than most expect. Sceptics suggest that the Republican and Democrat conventions skewed the results;
As an outsider living in Europe, but an interested observer, it certainly looks as if Mr Romney’s campaign is lackluster, indeed it could be argued a bit of a shambles. He does not seem to be gaining much momentum and his message appears confused to say the least. Indeed, an American friend of mine suggested that he was President Obama’s best asset !!!. The US this year is faced with a clear choice and one would hope that Mr Romney’s campaign steps up a gear so as to offer Americans that choice;
The Brazilian Central Bank has cut reserve requirements. The bank eliminated the additional reserve requirement rate for cash deposits which had been set at 6.0% and, in addition, the rate for time deposits by 100bps, to 11.0%. The authorities also urged banks to reduce lending rates. Bloomberg reports that the average rate charged by banks for personal loans was 36% in July;
Asian stocks closed mainly higher other than in China, which was over 2.0% lower. Japan was closed. European markets are marginally lower, having picked up from a weaker opening. US futures suggest a marginally lower opening, at present. The Euro is off marginally and I am far from convinced as to its recent strength. Whilst the US$ weakened following the FED’s QE3 announcement, in the past that effect has worn off pretty rapidly. Gold is flat at US$1769 and Brent oil (November) slightly weaker at US$116.50. PM Netanhayu’s comments about possible military action by Israel against Iran has and will continue to keep oil firm.
The policy action by the FED and the ECB still favours equity markets in my view. However, I believe that the recent sharp rise in the mining sector is overdone – I far prefer the energy and agricultural sectors. In addition,I remain sceptical of the commodity currencies, in particular the A$ and the Rand. Personally, I believe that the UK and US property (London, in terms of the UK) and building materials sector, together with the financials (particularly those with large investment portfolios – fund managers, life insurers) remain attractive. I continue to believe that the US economy will pick up post the impending elections, though I acknowledge that dealing with the fiscal cliff remains critical.
Given the positive decision by the German Constitutional Court, in particular, though also the subsequent FED announcement, I have returned to being fully invested. Funds remain underweight equities and the pressure on them will increase as we get closer to the year end, given significant under performance by many institutions/Hedge Funds YTD.
17th September 2012