Get Ready for a Little Emerging Markets Inflation

Friday, March 12th, 2010

Today I was thinking about tightening cycles in emerging markets, and more specifically about those in China. Because let’s face it, China matters. China matters to the rest of Asia via competition for export income. China matters to Europe via competition for jobs. China matters to Brazil via domestic production via imports. China matters.

The inflation pressures are building in key emerging economies, especially in the BIICs (Brazil, India, Indonesia, and China) - see this previous post regarding my new acronym, and this article at the Curious Capitalist (curiously posted just shortly after my post), which leaves my omitted “R” but relays the intuition behind the second “I”.

Although the inflation is not prevalent in any BIIC except India, really, I wanted to comment about why it will build…quickly.

First round, the construction of consumer prices is heavily weighted towards food and energy costs across the BIICs. Indonesia, India and China are highly susceptible to food price shocks (either driven by shortages or demand growth). Expect this as a first-round driver of inflation as the global economy recovers further. It’s already  happening.

Second round, the BIICs are growing quickly and nearing, or are already at, potential. Annual industrial production growth has recovered or surpassed its pre-crisis rate in China, Brazil and India - 19%, 16% and 17%, respectively. This is expected, given the drop-off in world trade (an illustration can be found from this May 2009 post), but unsustainable as the output gap closes.

Third round, interest rate differentials. This year, the BIICs’ central banks are expected to raise policy rates. In fact, Brazil, China and India have already boosted reserve requirements. But with US rates expected to stay low for an “extended period”, international interest rate differentials will change and monetary flows will shift. Capital inflows can lead to inflation if not properly sterilised.

To date, inflows have not been properly sterilised, as evidenced by the ongoing accumulation of reserves and rising money-supply growth (again, I refer you to my previous post on M1 growth rates.

The chart above illustrates the one-year-ahead nominal interest rate differential between the two-year forward government rate for each respective BIIC country versus the two-year forward US Treasury rate. The forward differentials for China and India are on a steady upward trajectory, while those for Brazil and Indonesia are simply steady. I believe this appropriately represents the sterilisation efforts and monetary policy management on the part of the BIICs’ central banks: more managed in Brazil and Indonesia, not as much in China and India.

So where does this analysis leave us? With a very interesting policy mix in the emerging-market space. In fact, in my view this is the riskiest part of the emerging-market cycle: the recovery. If policymakers get this wrong, we could see a lot of price action, final goods and assets alike, on the horizon.

Source: Rebecca Wilder, News N Economics, March 11, 2010.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Acronym, Biic, BRIC, Capital Inflows, Central Banks, China, Curious Capitalist, Emerging Economies, Emerging Markets, Energy Costs, Export Income, Food Price, Gap, Global Economy, Illustration, India, India Indonesia, Indonesia, Inflation Pressures, Interest Rate Differentials, International Interest, Intuition, Jobs Brazil, Monetary Flows, Output Gap
Posted in Emerging Markets, India, Markets | No Comments »

Crude oil breaks the dollar rule for the summer High Noon

Monday, March 8th, 2010

Crude oil surged to its highest level in almost eight weeks and gasoline also rose to a 17-month high after the U.S. employment declined less than forecast in February. Encouraged by the upbeat news, investors moved into oil on the expectation that fuel demand will climb as economic growth picks up pace.

Extending the impressive gains of 9.3% in February, crude oil for April delivery settled at $81.50 a barrel on the New York Mercantile Exchange (NYMEX), the highest closing price since Jan. 11. The contract jumped 2.3% in the last week alone.

Positive statements from China that it would maintain its economic stimulus, rekindling hopes for accelerating growth to drain excess oil supplies, also helped support the oil market.

Moving on up via currency?
New York crude has been trading in the $69-$83 range since late September as uncertainty over the global economy has contributed to several failed rallies. The close above $81, capping a 14.5% increase from a year-to-date low last month, sparked speculation that oil could be targeting $85 in the near term.

Now, some traders and analysts say currency movements may play an important role in pushing prices beyond those limits…. but will they?

Breaking the dollar rule
Much of the movement in oil over the past year was driven by overall fund flows out of the U.S. dollar as opposed to supply and demand fundamentals of the commodity. Dollar weakness tends to boost dollar-denominated commodities, and this characterized the relationship between crude and the dollar for most of last year. (Fig. 1)

However, just as the Greece debt crisis negatively impacted the euro pushing gold and the US dollar to trade in tandem (see analysis), the dollar’s no longer in the driving seat dictating the direction of crude prices, as crude and the dollar have both advanced since last December. (Fig. 1)

This break in the pattern suggests this year could be a transition where broader market fundamentals begin to take hold, with weekly inventory levels and demand trends becoming a larger factor for the energy market.

Down the contango spread
Meanwhile, the forward curve has flattened out considerably. The spread between the near-month oil in relation to the 12-month forward contract has dropped from $8.32 per barrel three months ago to the current level of around $2.50 per barrel (Fig. 2).

Tanked the floating storage
This narrowing of the contango spread is reflected in the tanker market as well. Since storing oil has actually become less lucrative in recent months, estimates show that floating inventories have been falling just as demand picks up.

Though the floating storage data are sketchy at best, Bloomberg reported the number of tankers used as floating storage for crude oil and diesel fell 20% in January, based on a Feb. 8 report from Simpson, Spence & Young Ltd., the world’s second-largest shipbroker.

Meanwhile, figures presented by Gibson showed 112 ships were storing crude oil and clean products globally by February, down from a high of 149 ships at the end of November.

As for the number of barrels, recently Goldman Sachs calculated that total stored hydrocarbons at sea, including barrels in transit, fell to 636 million barrels in January versus 660 million barrels the previous month. Whereas Research firm JBC Energy estimates some 40 million barrels of middle distillates, such as diesel, stored at sea had been drawn by the end of February. That leaves another 60 million or so still floating out there.

Strong buy-side sentiment
Crude oil prices have also moved in very close unison to stocks and economic sentiment for the last year or so (Fig. 1). It seems investors appear ready to call the worst over as equity investors and oil speculators have both been diving into buying mode.

The disclosure that China’s sovereign wealth fund was the fourth-largest investor in the U.S. Oil exchange-traded fund (USO), and the spat between Argentina and Great Britain over oil drilling near the Falkland Islands, only add additional enthusiasm to an already bullish market psyche.

Buying interest in riskier assets, including oil, should only pick up with more positive economic data coming forward.

Riding into the summer High Noon

The latest weekly data showed U.S. inventories of crude oil climbed to their highest level since August and are still 5.7% above the five-year average. But traders said the market may be ignoring the inventory build because more than half of it occurred in PADD 5 on the U.S. West Coast, where the distribution system is isolated from the rest of the country.

Nevertheless, refinery operating rates climbed to almost 82% at the end of February, the highest level since October, bolstering demand, while total average fuel demand over the past four weeks was up 3% from a year earlier, according to the U.S. Energy Information Administration (EIA) report on March 3.

The EIA now expects the crude oil market to strengthen again this spring, with West Texas Intermediate (WTI) rising to an average of about $81 per barrel over the second half of this year and $84 per barrel in 2011.

JP Morgan Chase & Co. (JPM) also raised its 2010 forecast for crude oil partly because of reduced inventories in floating storage. JP Morgan now expects WTI crude oil to average $83.50 a barrel this year, up from its previous forecast of $78.25. JP Morgan also increased its outlook for global oil demand by 110,000 barrels a day to 86.3 million barrels a day.

With the summer driving season coming into play, this demand-side pressure should give impetus to higher oil prices over the next four months.

Technically speaking
The new development of settling above $81 on NYMEX has left the commodity sitting just below its 2010 high of $83.93. A break above this price point will trigger some buying pressure, and will initiate the next leg up to around the $87.00 levels. A decisive clearance of that level will put the commodity on the path to further upside gains towards the key psychological level of $95.00. (Fig. 3)

On any pullback, the Feb. 22 high of $80.75 is expected to provide the next level of support, thus turning crude oil back up again. If this level of support fails, crude should find support at the Feb. 25 low of $77.02.

OPEC puts floor at $75
The Organization of Petroleum Exporting Countries (OPEC) is scheduled to meet in Vienna on March 17. Saudi Arabia’s King Abdullah has targeted $75 a barrel as a fair price for consumers and producers. This suggests $75 to be essentially the floor that OPEC would defend.

Oil prices should continue to rise during the summer driving season with the yearly high established near the July 4th holiday. After that, many factors will have to be weighed such as, the Federal Reserve policy, inflation concerns, the unemployment rate, consumer sentiment, global growth and geo-political issues.

Furthermore, with paper currencies all over the globe losing their value, commodities such as oil will remain an investment favorite with major capital inflows over the next five years.

“Cycles of shortage and surplus characterize the entire history of oil.” ~ Daniel Yergin

Tags: Crude Oil, Crude Prices, Currency Movements, Debt Crisis, Dollar Weakness, Driving Seat, Economic Stimulus, Excess Oil, Fuel Demand, Global Economy, High Noon, Impressive Gains, Late September, Market Fundamentals, New York Mercantile, New York Mercantile Exchange, Nymex, Oil Market, Oil Supplies, Rallies, York Mercantile Exchange
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Alan Pasnik - Seeking Value Around the World – and Ending Up in Canada

Wednesday, March 3rd, 2010

Alan Pasnik, Portfolio Manager for Mackenzie Saxon Global Explorer Fund, discusses looking for value around the world and ending up in Canada with Dan Richards of Clientinsights.

Pasnik likes Sun Life Financial - Great Canadian and US Insurance operations, plus it distributes mutual funds via MFS - says its trading about 30% below its NAV. In the small-cap area he likes Cangene Corp. which he says is trading at about 5-6X this year’s earnings, “and should trade considerably higher than that.”

Pasnik has half of his holdings in energy and financial services. Pasnik comments that global growth in energy production has been flat for about 4 years, so he anticipates that oil prices will go higher. As for financials, they have always been a good business with a high return on capital, and a high return on equity.

Pasnik says, the growth in oil demand is probably going to come from Brazil, India, and China, which are growing in leaps and bounds. More and more people are buying cars. Pasnik prefers to invest in Canada and the U.S. rather than directly in China if he can. Another financial Pasnik likes is Reinsurance Group of America, trading at about 6 times this years earnings and slightly below book value, and tremendous growth potential.

Pasnik hedges against the Canadian dollar when investing abroad to reduce the dampening effects the rising loonie can have on investment returns.

His outlook for 2010: Reasonably optimistic, but as we’ve seen, things could get bumpy. He thinks the global economy should do well over the next 5 years.

Date: 2010-02-22

Tags: Buying Cars, Canada, Cangene Corp, Compendium, Dan Videos, Energy Production, Global Economy, Global Explorer, Global Growth, Good Business, Hedges, Insurance Operations, Leaps And Bounds, Loonie, Mackenzie Financial, Mfs, Oil Demand, Oil Prices, Portfolio Manager, Reinsurance Group Of America, Return On Capital, Return On Equity, Sun Life, Target
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China PMI - canary in a coal mine?

Tuesday, March 2nd, 2010

China’s PMI numbers for February were released yesterday and received surprisingly little media attention. Although I am usually not keen to slice and dice single-month statistics too intensely, the latest suite of manufacturing indices does seem to warrant more than cursory attention.

Firstly, a summary of the numbers as provided by the China Federation of Logistics & Purchasing (CFLP) and reported by the Li & Fung Group.

PMI Report on China Manufacturing: February 2010

The rate of expansion of China’s manufacturing sector that accounts for more than 50% of the economy has moderated sharply, with the overall PMI falling to 52. Just on its own (excluding the non-manufacturing sector) it seems as if China’s year-on-year economic growth in the second quarter could slow to 10% and even less.

The following graph provides the same information, but over the longer term.

The manufacturing industry has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.

New orders are still expanding but at a significantly reduced pace. However, new export orders fell sharply from 53,2 to 50,3, indicating only marginal expansion. New orders and new export orders lead the Economist Metals Index by approximately one month. The drop in especially new export orders does not augur well for metal prices and downside pressure can be expected.

The roll-over in new export orders is particularly evident and the question is whether this could indicate a trend change.

The drop in both new orders and stocks of major inputs perhaps explains the weakness in the Baltic Dry Index. Imports of raw materials such as ores and metals have probably dropped significantly.

A major question is how the slowdown in China is going to affect the rest of the global economy. The contraction in China’s PMI for imports indicates that the US GDP-weighted PMI for exports could be negatively influenced in especially the second quarter of this year.

Likewise the US GDP-weighted PMI for imports could be under pressure …

The further austerity measures put in place recently by the Chinese authorities still need to rub off on China’s economy. As such the outlook for commodities, the US and global economy has possibly darkened somewhat.

Elsewhere, the PMIs of India and South Korea were also published, with both economies expanding at the fastest pace in nearly two years. There are already calls for India to suspend the stimulatory measures in order to cool the economy.

One swallow does not make a summer, but I will be monitoring the Chinese situation closely to try to gauge the possible impact of any cooling on the developed economies.

Note: The graphs in this post were provided by Plexus Asset Management (based on data from CFLP, ISM, I-Net Bridge and Dismal Scientist.

Tags: Baltic Dry Index, BRIC, Canary In A Coal Mine, China, China Manufacturing, Contraction, Cursory Attention, Downside, Economic Growth, Economist, Economy China, Emerging Markets, Excess Inventories, Export Orders, Global Economy, Manufacturing Industry, Manufacturing Sector, Media Attention, Metals Index, Raw Materials, Second Quarter, Slowdown, Us Gdp
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How China’s Tightening Could Affect Other Currencies

Monday, February 15th, 2010

It is the Year of the Tiger and to celebrate, Chinese markets are closed for the entire week. Here in the U.S., markets are also closed in observation of Presidents Day. As a result, it is expected to be an exceedingly quite trading day, which gives us the opportunity to contemplate the recent actions by the Chinese government. Unlike the U.S. and other economies in Europe for example, growth in China has been piping hot. So hot that the Chinese government has felt compelled to step in and start tightening their economy in fear of developing an asset bubble. China’s economy is expected to grow by as much as 10 percent this year. On Friday, China’s central bank increased the reserve requirement ratio (RRR) of large commercial banks, which basically restricts the amount of money that these banks have available to lend to companies and individuals. This is the third action in 5 weeks and the second time that the PBOC has increased the RRR, which indicates how serious they are about cooling lending growth. Most articles written about these actions center on the consequences that it may have on the global economy. We all know that China is the dominant engine of growth for the world right now and a dramatic slowdown could cause economic unrest in many parts of the world. On Friday, we mentioned how this decision may be related to seasonal flows because the PBOC tends to increase liquidity ahead of the Chinese New Year and extract it shortly after. However given that loan growth failed to slow significantly after the first reserve requirement hike last month, they have felt the need to apply the brakes again sooner rather than later. Lending surged to 1.3 trillion Yuan in January while property prices rose to the highest level in 21 months.

It is no secret that China’s actions move markets and for the purposes of this article, we want to examine how the major currency pairs have traded after China’s prior announcements. This is an isolated sample set since we only have 2 prior and recent developments in China and there y have been other factors impacting the trend in the forex market. Nonetheless, it is still an interesting exercise to see how the dollar has traded since then against the major currencies so we can extrapolate how it could possibly trade following Friday’s announcement.

Based upon the following charts of the EUR/USD, USD/JPY and the AUD/USD, we can see that in all 3 cases, China’s announcement to increase their reserve requirement ratio on January 12th and reports that they have pressed some banks to restrict lending around January 20th have been followed by a wave of risk aversion that has taken all 3 currency pairs lower. This price action is not surprising considering that China’s decision to tighten their economy has negative implications for the global economy. Therefore barring any external factors, the latest announcement from China should have negative implications for the forex markets and keep pressure on the EUR/USD.

EUR/USD Daily Chart

USDJPY Daily Chart

AUDUSD Daily Chart

Tags: 21 Months, Amount Of Money, Chinese Government, Chinese Markets, Chinese New Year, Commercial Banks, Dramatic Slowdown, Economic Unrest, Global Economy, liquidity, Loan Growth, Major Currency Pairs, Move Markets, Pboc, Piping, Presidents Day, Rrr, S Central, Samp, Year Of The Tiger
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David Rosenberg: “Risk Appetite Back on the Front Burner”

Thursday, February 11th, 2010

David Rosenberg writes today that with the Greece issue on the backburner again, benign economic news from China and Australia, it appears that risk appetite is back on. The dollar and yen are selling off:

Global investor risk appetite is back on the front burner with the U.S. dollar and Yen selling off; oil, copper and gold rallying; bonds trading defensively (actually selling off noticeably in Europe); equities firming across the board with Asian markets up 1.8%, emerging markets up 1%, and the global MSCI index up 0.5% at the moment.

EU policymakers are meeting with an aim to backstop Greece’s financial problems — all we need are headlines like that to pop up every day so that investors can keep on breathing a sigh of relief. And, the data were also Goldilocks in nature. China’s inflation rate fell to 1.5% YoY in January from 1.9% and well below the 2.1% consensus estimate, and hence another reason to breathe a sigh of relief since this alleviates concerns over another round of policy tightening.

Then we had Australian employment come out and ratified the view that the global economy is humming along at a very nice clip — jobs rose 52,700 in January, which was more than triple what the consensus community had penned in and the unemployment rate dropped to 5.3% in January from 5.5% the prior month.

The concerns from yesterday over what Ben Bernanke had to say that at some point in the future the Fed will have to start snugging liquidity, and do so without initially touching the funds rate but rather widening the spread between it and the discount rate, conducting reverse repos and raising interest rates on commercial bank deficits at the Fed, has totally dissipated. Meanwhile, the problems in the U.S. housing market continue unabated with the number of foreclosure filings (RealtyTrac data) topping the 300k mark for the 11th month in a row in January (nice to see the Obama modification plan at work) — 315,716 to be exact, up 15% from a year earlier. Banks also repossessed more than 87,000 homes last month, down 5% from December but still up 31% from January 2009.

Moreover, for all those pundits believing that companies are about to embark on a capex cycle, they should consider that the data so far for Q4 show that the reporting S&P 500 companies have thus far boosted their cash holdings by 78% YoY, to $1.2 trillion, and have cut their spending budgets to $30 billion from $41.5 billion.

Source: Breakfast with Dave, February 11, 2010 (free registration required)

Tags: Asian Markets, Australian Employment, Backburner, Backstop, Ben Bernanke, China, Consensus Estimate, David Rosenberg, Economic News, Emerging Markets, Global Economy, Global Investor, Gold, Greece Issue, Housing Market, Inflation Rate, Investor Risk, Msci Index, oil, Repos, Risk Appetite, Sigh Of Relief, Unemployment Rate, Yoy
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Stephen Roach – Spotlight on BRIC Consumers

Monday, January 25th, 2010

Stephen Roach, Morgan Stanley’s Asia chairman, discusses with Demetri Sevastopulo, the FT’s Asia news editor in Hong Kong, whether consumption from China, India and the other Bric countries can ever substitute the US consumer.

He also argues that the centre of gravity in the global economy will never shift to the Brics unless they rebalance their economies toward growth driven by domestic demand.

Source: Demetri Sevastopulo, Financial Times, January 21, 2010.

Tags: Asia News, BRIC, Bric Countries, BRICs, Centre Of Gravity, China, Consumers, Consumption, Demand Source, Demetri, Emerging Markets, Financial Times, Global Economy, Hong Kong, India, Morgan Stanley, News Editor, Spotlight, Stephen Roach Morgan Stanley
Posted in Emerging Markets, India, Markets | No Comments »

Yen Carry Trade Back in Play

Friday, January 22nd, 2010

This article is a guest contribution by Scott Boyd, OANDA MarketPulse FX.

One sure sign that some level of stability is returning to the global economy is an easing of the volatility we have seen with many of the major currency pairs. As any currency trader will tell you, volatility is a double-edged sword – it is possible to earn very attractive returns during periods of high volatility, but losses can be equally as spectacular. On the other hand, when exchange rates remain steady for a prolonged period, it may be easier to keep a lid on losses, but opportunities to profit are also limited. This is why when exchange rate volatility declines, many traders turn to the carry trade.

Bank of Japan

A carry trade strategy seeks to profit from the interest rate differential between two currencies. The approach is to select a currency pair where you sell (go short) a currency with a low interest rate, while simultaneously buying (going long) a currency with a higher interest rate. When you hold this currency pair open in your trading account, you must pay interest on the short position, while you receive interest on the long position. If you receive more in interest than you pay, this difference – known as interest rate carry or simply carry – is retained in your account as profit.

Now before you jump to the conclusion that this is as close as you can get to earning money for nothing, there is one important caveat you must consider. The entire time you hold the currency pair open in your account, the value of the trade itself is subject to changes in the exchange rate; this means that if the exchange rate moves against you, and even if you are earning positive carry during this time, you may actually lose money overall when you close the trade.

For much of the early 1990s, Japan had the lowest interest rates of the major currencies and entering into a carry trade using the yen to buy higher yielding currencies was very popular. The practice became less attractive during the mid 2000s and was put on hold entirely during the current economic crisis. In 2009 however, the carry trade came back with a vengeance, as Australia and New Zealand raised interest rates to 3.75 percent and 2.50 percent respectively, and this had many traders selling US dollars in order to buy aussie and kiwi dollars.

In addition, both currencies also fared vary well against the dollar from an exchange rate standpoint as you can see in the following table:

* reflects the percentage change in the value of the non-USD currency compared to USD

2009 Carry Trade Winners

The chart confirms that both the Australian and New Zealand dollars were clear winners over the US dollar during 2009. If you had held the AUD / USD and NDZ / USD pairs open for the entire year, you would have gained 36.5 percent on the aussie trade, and over 25 percent on the kiwi position just on the exchange rate change alone.

In addition to these impressive returns, you would have also earned the interest differential, which for most of last year, was 3.5 percent for the Australian dollar and 2.25 percent for the New Zealand dollar. Interestingly, the Canadian dollar also earned nearly 16 percent over the US dollar on the exchange rate difference, but with a 0.25 percent overnight rate, the “loonie” offered little in the way of carry over the US dollar.

Now for the big question – is the carry trade still in play for 2010?

This answer depends very much on the strength of the recovery. If the economies of China and India continue to expand at their current rate, and if the US and Europe maintain at least some limited growth, the so-called commodity currencies (Canada, Australia, and New Zealand) are well-positioned to remain strong in comparison to these other currencies. Having said this however, it may well be time to find a new banker to provide the funding for these purchases.

By this I mean, instead of selling US dollars and buying aussie dollars for instance, it may be better to short the yen, and there are very good reasons for making this consideration. Firstly, the US dollar could gain in strength later this year, and if this were to happen, there is a chance that the Federal Reserve could raise interest rates by year’s end. Japan on the other hand, is fully committed to a policy of maintaining a weak yen for the foreseeable future.

Driving the value of the yen downwards is an attempt to make Japan’s exports more attractive to foreign markets – particularly the United States and Europe. The goal is to boost exports to help keep Japan’s all-important manufacturing sector busy and to prevent further job losses. For an export-dependant economy such as Japan’s, the trade-off of a weaker currency to preserve production levels (and by extension reducing unemployment), is a small price to pay.

Obviously, the Bank of Japan has used up its interest rate arsenal and can no longer simply cut rates in a bid to weaken the yen. Thus, the only option left for the Bank is to boost the supply of the currency by dumping even more yen into the system. If you listen carefully, you can hear the humming of the printing presses.

Scott Boyd has produced educational materials and conducted market analysis for several of Canada’s leading financial institutions. Scott now contributes articles to the OANDA blog and is keenly interested in the factors affecting global currency prices.

Tags: Attractive Returns, Bank Of Japan, Canada, Caveat, China, Commodities, Currency Trader, Currency Trading, Differential, Double Edged Sword, Earning Money, Emerging Markets, Exchange Rate Volatility, Exchange Rates, Global Economy, India, Interest Rate, Major Currency Pairs, Marketpulse, Oanda, Prolonged Period, Scott Boyd, Short Position, Trade Strategy, Yen Carry Trade
Posted in Emerging Markets, India, Markets | No Comments »

Roundup: The Economy and Bond Market

Sunday, January 17th, 2010

The Economy and Bond Market Treasury yields rallied as this week’s 10 and 30-year auctions received a good response and concerns of global stimulus removal have highlighted risks in the global recovery story. Economic data was mixed this week as December retail sales were surprisingly weak and seemed to contradict earlier data. On the other hand, industrial production rose for the sixth straight month and is giving a classic sign of economic recovery. The chart below graphs industrial production on a year-over-year basis and makes clear the change in direction of activity. Strengths

• Industrial production rose 0.6 percent in December and has now risen for six months in a row.
• Chinese imports and exports moved sharply higher in December, which implies continued improvement in not only China’s economy but the global economy.
• Consumer prices in December remained muted, rising only 0.1 percent and giving the Fed plenty of room for monetary policy flexibility.

Weaknesses

• Retail sales for December disappointed and appeared to contradict earlier data. One positive caveat was November data was revised higher making the numbers a little more palatable.
• The Obama administration is proposing a tax on big banks as a way to recoup the government’s support. The concern is that this appears somewhat punitive and more taxes and/or regulation are not an effective way to stimulate the economy.
• The Fed’s beige book reported only a modest improvement in the economy around year end, and cited weakness in real estate and labor markets.

Opportunities

• Expectations continue to build for growth in the U.S. in the current quarter, possibly as much as 4-5 percent. The global economic recovery appears to be taking hold.

Threats

• The U.S. is facing a long-term risk as Fitch cited the budget deficit as a threat to the U.S. AAA debt rating.

Tags: Beige Book, Bond Market, Budget Deficit, Caveat, Change In Direction, China, China Economy, China S Economy, Chinese Imports, Economic Data, Economic Recovery, Emerging Markets, Global Economy, Global Recovery, Imports And Exports, Labor Markets, Monetary Policy, Plenty Of Room, Retail Sales, Stimulus, Treasury Yields, Year End
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The Key to Normalcy in World Markets?

Wednesday, January 13th, 2010

The yen must replace the dollar in carry trades to restore normalcy to the global economy and markets, including Canada’s.

For nine months we were trapped in the bizarre world of “bad news is good news.” To the puzzlement of investors, stock markets rallied despite deteriorating economic fundamentals, negative GDP growth, 10%-plus unemployment, and the erosion of the dollar’s value globally.

Here’s why…

Read the whole article here.

Pierre Daillie (AdvisorAnalyst.com) GlobeAdvisor.com, January 13, 2009

Tags: Bad News, Bizarre World, Canada, Dollar Value, Economic Fundamentals, Erosion, GDP, GDP Growth, Global Economy, Globeadvisor, Investors, Nine Months, Normalcy, Puzzlement, Stock Markets, Trades, Unemployment, World Markets, World News, Yen Dollar
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Mark Mobius Threats to Global Economy

Friday, January 8th, 2010

The two biggest threats facing the global economy are the derivatives market and tightening money supply, Mark Mobius, executive chairman at Templeton Asset Management, told CNBC yesterday. “If money supply starts heading down, that would be a bad sign for markets generally,” he said.

Source: CNBC, January 7, 2010.

Tags: Cnbc, Derivatives Market, Executive Chairman, Global Economy, Mark Mobius, Money Mark, Money Supply, Templeton Asset Management
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Roundup: Emerging Markets

Monday, January 4th, 2010

Emerging Markets

Strengths

• South Korean manufacturers’ confidence increased from 85 for December to 90 for January, the first gain in three months, with outlook for exports rising to 104 from 98 and domestic sales to 100 from 98.
• The Russian trade balance widened marginally to $11.6 billon in November on the back of higher energy prices. According to preliminary estimates of the Ministry of Economy, Russian exports grew by 3.9 percent, compared to the previous month.

Weaknesses

• Moody’s Investors Service said the outlook for Hong Kong’s banking industry will remain negative because Hong Kong banks may still be vulnerable to volatility in the global economy.
   
• The flash estimate of November industrial production in Czech Republic was up a tepid 0.2 percent, the first positive annual increase in 13 months. Following Citi’s working day adjustments, output actually decreased by 2.2 percent.

Opportunities

• Thanks to immense mobilization of labor and manual irrigation of around 10 million hectares, China is set to deliver record 114.5 million tons in wheat harvest this year, 15 to 20 percent higher than analyst forecast, despite the worst drought in more than 50 years. This should help keep China’s inflation in check going forward, as food items carry the most weight in the consumer price basket.

  

• Central Bank of Turkey ended the easing cycle in December and removed the easing bias; however, it recently stated that in case the currency were to face appreciation pressures due to FX inflows as part of a carry trade, it would be ready to resume interest rate cuts in 2010.

Threats

• The negative effect from a strong U.S. dollar on Russian equity index comes through two channels: 1) it is inversely correlated with oil prices, with the weaker crude being negative for Russia’s energy stocks; and 2) ruble depreciation relative to the dollar is negative for the telecoms, banking and consumer stocks.

Tags: Advertisement Opportunities, Banking Industry, Billon, Carry Trade, Central Bank Of Turkey, China, Consumer Stocks, Emerging Markets, Energy Prices, energy stocks, Equity Index, Global Economy, Higher Energy, Hong Kong Banks, Interest Rate Cuts, Investors Service, oil, Oil Prices, Ruble, Russian Exports, Russian Trade, South Korean Manufacturers, Trade Balance, Wheat Harvest
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