India - Markets give thumbs up to Budget 2010

Friday, February 26th, 2010

Markets give thumbs up to Budget 2010

Courtesy of Equitymaster.com

The Union Budget 2010 brought some cheers to the Indian markets, which had been reeling under fear for the past few days with respect to the government’s stimulus withdrawal. However, the Finance Minister did not tinker much with the stimulus but for partially rolling back some excise duty benefits. However, much of this seemed in line with what the markets had been expecting. Anyways, realty, auto, and metals stocks led today’s gains.

The BSE Sensex and NSE Nifty closed with gains of around 175 points (1.1%) and 65 points (1.4%) respectively. Mid and small cap stocks also closed with gains. The BSE Midcap and BSE Smallcap indices closed higher by 1.5% and 1.1% respectively. On the broader BSE, one stock lost today for every two that closed in the positive.

Among other key Asian markets, while China closed marginally in the red, Hong Kong (up 1%) and Japan (up 0.2%) were among the gainers. European markets have opened today on a positive note.

Apart from just a small rollback of the stimulus, one of the key reasons for today’s gains was the clear roadmap announced by the government with respect to reducing its fiscal deficit over the next 3-4 years. As against an estimated figure of 6.9% and 5.5% of GDP in FY10 and FY11 respectively, the rolling targets for fiscal deficit are pegged at 4.8% and 4.1% for FY12 and FY13 respectively. Also, as the Budget notes, taking into account the various other financing items for fiscal deficit, the actual net market borrowing of the government in FY11 would be around Rs 3,450 bn, which would leave enough space to meet the credit needs of the private sector.

Auto stocks gained strongly today, Key gainers here included Bajaj Auto, Tata Motors, and Ashok Leyland. A lower than expected rollback of excise duty seemingly enthused investors in these stocks. Then there was the lowering of personal income taxes that we believe might foster increased spending by consumers on discretionary items like automobiles. But for the increase in the ad valorem component of excise duty on large cars and multi-utility vehicles by 2% points to 22%, today’s was a positive budget for the auto sector as a whole. We also believe that the extension of R&D benefits will encourage more investments in the sector and will make it competitive in the long run.

Realty stocks were amongst the biggest gainers on the broader markets today. The BSE-realty index closed up by almost 3%. Key gainers here included HDIL, DLF, and Unitech. These gains were on the back of some relief provided by the Budget to real estate companies. As the Finance Minister announced, with a view to provide one time interim relief to the housing and real estate sector that was impacted by the global recession, the government has allowed pending projects to be completed within a period of five years instead of four years for claiming a deduction on their profits. The Budget has also proposed to relax the norms for built-up area of shops and other commercial establishments in housing projects to enable basic facilities for their residents. The realty firms couldn’t have asked for more!

This is given that these companies have already been amongst the biggest beneficiaries of the government’s fiscal stimulus programme that has helped them restructure their strained balance sheets. The interesting thing is that these realty companies have come back to their greedy ways by not lowering property prices by keeping them artificially inflated through hoarding. Some like Deepak Parekh of HDFC have come out heavily on these companies’ tactics. But now, given that the Finance Minister has allowed them some more time to relax, real estate companies and their investors are making merry.

Key India Budget Highlights

Courtesy of L&T Mutual Funds, India, here are the budgetary highlights for FY11.

• Total expenditure proposed for FY11 stands at Rs.1108749 cr (US$239.6-billion) up by 8.6%. Plan expenditure up by 15%. Non plan expenditure up by 6%.Fiscal Deficit estimated at 5.5% for FY11 (from 6.9%FY10), 4.8% in FY12 and 4.1% in FY13.Direct tax proposals in form of lower income tax slabs would lead to a loss of Rs.26,000cr. (US$5.6-billion)
• Indirect tax proposals would lead to a gain of Rs.46,500 cr. (US$9.8-billion)
• Total tax revenue and other receipts would lead to Revenue Gain of Rs.20,500cr. (US$4.4-billion)
• Corporate Tax: MAT increased from 15% to 18%
• Surcharge on corporate tax reduced from 10% to 7.5%.
• Need to review stimulus, move to fiscal prudence, says FM
• Partial withdrawal of fiscal stimulus measures through roll back of excise duties
• Excise duty on all non oil products increased from 8% to 10%.
• GST and DTC to be introduced together by April 2011.
• Service Tax rate retained at 10%
• Subsidy to oil companies to be given in cash and included in budgetary estimates.
• Subsidy on Fertilisers to be reduced.
• Divestment receipts expected to be more than Rs.25,000 cr (US$5.39375-billion) in FY10. Disinvestment targets for FY11 to the tune of Rs. 40000 crs. (US$8.63-billion)
• To provide Rs 165 bln (US$3.58-billion) to PSU (Public Sector Undertaking, or State-run) banks
• Infrastructure spending pegged at Rs. 1,73,552 crs (US$37.4-billion), which is 46% of plan outlay.
• Net borrowing for FY11 set at Rs 3,45,000 cr (US$74.4-billion) ; Gross borrowing at Rs 4,57,000 cr (US$98.6-billion)

Equity View

• Hike in excise duty has been on expected lines.
• Increase in MAT would impact some corporates.
• Increase in tax slabs for individuals will give more in hand of consumers, key positive as it would enhance consumption.
• Hike in petrol prices by ~Rs. 2.50 on account of increase in duties would lead to inflation spike in near term.
• Overall we believe budget would push higher consumption and over period private capex would pick up. Economy would thrive without the requirement of large government expenditure over medium term.

Fixed Income View

• Net borrowing number of Rs 3.45 lakh crores (US$74.4-billion) a reasonable number. Bond markets expected to take it positively.
• However divestment and 3G auction revenue estimates on higher side for FY11. There could be risk of not meeting these targets as planned. Risk of fiscal deficit slippage (increasing from budgeted 5.5%) exists.
• Discontinuing practice of issuing bonds for oil and fertilizer companies and giving cash a positive fiscal consolidation measure. Will reduce interest burden in the long run.
• Fuel price hike due to increase in duties lead to inflationary effect and negative for bonds
• Continued support to PSU banks through capital infusion to help maintain their credit quality for issuance of CDs and Bonds.

Tags: Ascii, Ashok, Ashok Leyland, Asian Markets, Auto Stocks, Bse Sensex, Cambria, Div, Emerging Markets, Enough Space, European Markets, Excise Duty, Finance Minister, Fiscal Deficit, Font Definitions, Font Format, Footer, Gainers, India, India Markets, Indian Markets, Lt, Midcap, Mso, Orphan, Panose, Paper Source, Personal Income Taxes, Pitch, Props, Rollback, Sans Serif, Small Cap Stocks, Smallcap, Stimulus, Style Definitions, Style Name, Style Type, Tata Motors, Theme Font, Times New Roman, Union Budget
Posted in Emerging Markets, India, Markets | No Comments »

China, The Countervailing Force

Monday, February 22nd, 2010

If the by-products of the western credit crisis - tight credit, stimulus and quantitative easing, zero-percent interest rates,  winning trades in risk - are elemental to the prevailing trend, then China, with its massive $586-billion spending program, its $1.35 trillion in new lending, and its (too?) rapid recovery, should be viewed as a significant balancing concern.

China is the countervailing global economic force, the antithesis of America, its cash-rich economy cantilevered against the weight of its debt-laden counterpart. Whether we believe it or not, China’s decisions do affect us, either balancing in our favour or not.

In a decade, China has amassed the bulk of it $2.4-trillion (U.S.) foreign exchange reserve, making it the lead financier of the spendthrift U.S. economy, owing to blockbuster exports growth to consumers seeking cheap manufactured goods.

In 2008, however, the credit crisis hollowed out the export sector as credit, the global shipping business, and consumption froze, and it’s growth engine seized. China’s reaction was, forcibly, to fix its exchange rate, and subsequently embark on a bold and massive $586-billion spending plan.

Read the full article here.

Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, February 21, 2010.
http://www.globeadvisor.com/advisoranalyst/aa20100221.html

Tags: Antithesis, Blockbuster, Cantilevered, China, Counterpart, Credit Crisis, Economic Force, Emerging Markets, Exchange Reserve, Export Sector, Financier, Global Shipping, Globeadvisor, Hollowed, Prevailing Trend, Rapid Recovery, Rich Economy, Shipping Business, Spendthrift, Stimulus, Tight Credit, Zero Percent
Posted in Markets, Oil and Gas | No Comments »

David Rosenberg: “My Take on the Fed”

Friday, February 19th, 2010

WHILE YOU WERE SLEEPING

The U.S. consumer price data is hot off the press and while the headline came in below expected at +0.2% MoM (so much for the PPI being a leading indicator). The real key was the -0.14% print on the core index (which removes food and energy) - deflation in the core CPI is a 1-in-80 event and should be treated seriously in terms of what it means for bond yields and corporate pricing power in the broad retail sector (there were notable declines in recreation, clothing, new car prices, hotels and air fare).

The theme for 2010 is the return of volatility and the appropriate investment strategy is to minimize it through appropriate hedge funds strategies and portfolios that are negatively correlated to risk. Look at what we have on the worry list that we did not have 10 months and 70% ago on the S&P 500:

• China and India tightening credit policy
• The Fed embarking on an exit strategy
• The peak in fiscal stimulus behind us, not ahead of us
• Iran (see today’s WSJ editorial)
• Greece (Portugal? Spain?)
• Sovereign default risks
• China selling U.S. treasuries
• Stricter capital rules for banks

MY TAKE ON THE FED

The hike in the discount rate from 0.5% to 0.75% was only a surprise because of the timing, but the Fed had been warning for some time that this was going to be part of the process of taking the emergency stimulus out of the financial system. Ben Bernanke mentioned this at last week’s prepared text to Congress and

Wednesday’s FOMC meeting contained recommendations from the Fed staff to start raising the discount rate as soon as possible. (We see in today’s NYT that former Governor Larry Meyer quipped “don’t they [the markets] understand the meaning of soon?” Well, after looking up the word in the dictionary, “soon” was defined as “in the future”, not necessarily next week). A whole array of other emergency measures are slated to end in the course of the next month, so yesterday’s after-market-closing move in the discount rate is part and parcel of the Fed’s long-discussed exit strategy.

Before the crisis intensified in 2008, the normal spread between the discount rate and Fed funds was 100bps, and yesterday it went from 25bps to 50bps. The Fed also reduced the term on discount window loans back to overnight from 28 days - all in an effort to “normalize” policy (notwithstanding how fragile this recovery really is and how abnormal it is to still be over 8 million jobs shy of the former peak at this stage of the policy cycle).

The near-term reaction is predictable with equity futures selling off sharply but this is because Mr. Market has always held the discount rate in high esteem - likely more than it deserves (as we recall that old refrain “three hikes and a stumble”). Also keep in mind that the Fed first cut the discount rate before the market opened back on August 17, 2007, and the Dow rallied 233 points that day. It was hardly the right call and it is very likely the case that the market is over-reacting to yesterday’s hike in the opposite direction.

Not that I’m bullish on equities - from my lens, what was far more important in terms of describing the true economic backdrop was what Wal-Mart had to say yesterday in terms of its -1.7% YoY print on Q4 same-store sales (first decline in history and below the flat reading that was expected), not to mention reduced guidance for Q1. The CEO, Mike Duke, bluntly stated that “The economy remains challenged for many of our customers around the world…we expect first-quarter sales in the U.S. will be difficult.” Mr. Duke, you may run the largest retailer in the world, but the bubbleheads on television are telling you that you don’t know what you are talking about! What else does Wal-Mart represent except that 70% chunk of GDP otherwise known as the American consumer?

If the consumer is “challenged”, then how far is an inventory adjustment going to carry along this post-recession recovery. We know, we know - what about the leftover fiscal stimulus out of Washington? Our take: the drag out of the State and local government sector is going to provide a significant offset and the growing opposition to fiscal largesse from the Tea Party movement is going to put a cap on the White House intervention efforts going forward. The situation is so dire that over half of the States are reducing Medicaid services and payments to health care providers to save money (not that we have claimed sainthood, but for economists on CNBC to talk about the wonders of fiscal stimulus when the nation’s poorest people are facing budget cuts just doesn’t seem appropriate).

Yet Mr. Market was somehow able to ignore the message from Wal-Mart’s miss with the Dow rallying over 80 points. (Though yet again, on lower volume - down 6% on the NYSE!) That reaction basically makes as much sense as the dive that initially followed the discount rate increase - in a sign that this is a market that is manic and increasingly volatile.

Not only did the Fed telegraph the move, but the overall impact on bank funding costs is minimal with discount window borrowing at a mere $14.9 billion (a fraction of the pre-crisis levels of $110 billion) and the commercial banks sitting on a $1 trillion cash hoard as it is.

Moreover, the Fed kept on cutting and cutting and cutting rates all the way from August 2007 through to December 2008 and even at microscopic Japanese-like levels, this traditional mode of central bank stimulus still could not manage to put a floor under the economy, let along the markets. Only when the Fed began to treat this as a credit cycle as opposed to a liquidity cycle by rapidly expanding its balance sheet through quantitative easing measures did the turnaround in most economic indicators and investor confidence turn around.

So, it would stand to reason that the real test for the markets is going to come not from the discount rate, but by what happens when the Fed begins to shrink its balance sheet - particularly the ramifications for mortgage rates.

Bear in mind that the Fed in some sense had already been reducing its support by allowing several programs to run their course - the bond-buying program ended about four months ago too. These are all technical moves that symbolize the end to the emergency liquidity provisioning but the central bank is going out of its way to signal that these are not attempts to actually tighten monetary policy. Of course, Bernanke et al are going to have to walk a fine line and for Mr. Market, what defines “extended period” as far as the more important Fed funds rate is concerned is a key question if “before long” - the words Bernanke used to explain when the discount rate would be hiked - meant little more than a week.

All that said changes in the discount rate still can pack a psychological punch, at least in the near-term. Investors will now be reminded that the exit strategy, while gradual, is about to start in earnest. So don’t look for a lot of talk going forward of a liquidity-driven market. This could have a dampening impact on the market multiple, as has been the case in China where two moves this year to raise reserve requirements have knocked the Shanghai index down by roughly 8%. Those pundits laying claim that what the Fed is doing is great news for the stock market because it is somehow ratification of the view that we are into a sustainable growth phase should heed what has happened in China this year, and also understand that the reason the S&P 500 could muster a 70% rally off the lows of last March in advance of anything beyond ‘green shoots’ in the economy was in large part because of all this Fed- induced liquidity.

While the initial reaction to the Fed’s move may be overdone, we are still at the tip of the iceberg and the one thing Mr. Market does not like is the uncertainty when the game starts to change. I realize that the equity bull market continued well after the first set of policy tightenings in 2004, but credit growth was running rampant then and home prices were skyrocketing - a far cry from today’s landscape, especially the fact that bank lending is contracting at a record 15% annual rate at the current time. For all we know, Bernanke is about to pull a 1937-38 premature exit strategy that ultimately leads to a market and economic relapse. That may not be a base-case scenario but the odds of a policy mis-step are still greater than zero.

To be sure, it does look as though the U.S. economy has moved into an expansion phase, but like the markets, it is volatility around the downward trend. This time last year we are seeing -6.4% GDP growth and then by the fourth quarter of 2009 we are at +5.7%. What a swing. It does remind me of Japan, which has experienced no fewer than 12 quarters of 5%+ GDP growth since its bubble burst in 1990 and one-third of these occurred in the initial years after the crisis began. But there have been twice as many quarters with negative growth. Therefore, volatility is the only certainty in the economy following a credit collapse - and the markets as well.

We recall that that the Nikkei enjoyed 230,000 rally points since 1990 and the market is still down 70% from the peak at that time. It’s no different for the U.S.A. following the prior credit collapse in the 1930s - the decade saw 20 quarters of 5%+ sequential GDP growth! That’s a depression? Of course it was because there were 13 quarters of contractions mingled into those intermittent positive spasms. Real GDP did a bungee jump of 11% in 1934 and yet if memory serves me correctly, the level of economic activity was basically no higher in 1939 than it was in 1929; and because it was deflation and not inflation that predominated in that period (even with the New Deal!) nominal GDP finished the decade with a 13% loss.

It was not until the first quarter of 1941 - with the help of the war effort - that the prior 1929 Q3 peak in nominal economic activity was taken out (despite seven years of massive FDR stimulus and the odd extremely whippy positive GDP quarter). Moreover, the next secular bull market in equities did not begin until 1954 - 25 years after the prior peak. So the message here is to focus on the forest, not the trees … and to look at an inventory-led 5.7% growth rate in Q4 in the context of wiggles around what is still a fundamental downtrend.

So what does the current backdrop resemble in a modern-day sense? The summer and fall of 2007. Think about it. The S&P 500 has been jerking around on either side of 1,100 for five months now. The 10-year note yield has jumped 20 basis points from the nearby low with hardly any reason outside of negative technicals.

Go back to that period between May and October of 2007, and the S&P was just above or just below the 1,500 mark for over five months. Many didn’t know it then, and we should all be taking it into consideration now, but we were in a classic topping formation. Back then, as is the case today, the bond market was getting hit hard with the 10-year note yield surging 50bps, to 5.2%, and the universe of economists and strategists completely bearish on the Treasury market at just the wrong time. What goes around comes around.

Read the summary of today’s report here.

Read the complete report here.

Tags: 28 Days, Bond Yields, Core Cpi, Core Index, David Rosenberg, Declines, Deflation, Emergency Measures, Exit Strategy, Fed Funds, Fed Staff, Fiscal Stimulus, Fomc Meeting, Hedge Funds, Hot Off The Press, Investment Strategy, Larry Meyer, Leading Indicator, New Car Prices, Nyt, Portugal Spain, Ppi, Retail Sector, Stimulus, Treasuries, Wsj Editorial
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David Rosenberg: How to Play Inflation

Thursday, February 11th, 2010

Here is a reprise of David Rosenberg’s thoughts on how to prepare for inflation, from Breakfast with Dave, December 15, 2010.

HOW TO PLAY INFLATION?

There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:

• Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
• An even steeper U.S. yield curve!
• TIPS (or real return bonds) - the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
• Short-term duration corporate bonds (and go out the credit curve).
• Commodity currencies - Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
• Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).

We don’t have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.

Source: Breakfast with Dave, December 15, 2010

Tags: Balance Sheets, Brownie Points, Canada, Commodities, Consumer Expectations, Consumer Staples, Corporate Bonds, Credit Creation, David Rosenberg, Food Beverage, Gold, inflation, Investor Interest, Massive Amounts, New Zealand Kiwi, Norwegian Kroner, precious metals, Real Return Bonds, Runup, Stimulus, Term Duration, Three Decades, Yield Curve
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Fear, Gold and the Dollar

Sunday, February 7th, 2010

By Frank Holmes
CEO and Chief Investment Officer

The U.S. dollar is up this week against the euro out of fear of how debt problems in Greece and elsewhere in Europe will be resolved, and as a result gold has had a tough week.

The dollar’s rally appears to be a short-term safe haven move, rather than a response to improving economic conditions in the U.S.

In fact, Friday’s report of a net loss of 20,000 jobs in December (the expectation was for a net gain in employment) and that many thousands more would-be workers have given up looking for jobs is evidence that the economy remains somewhat weak.

This weakness makes it less likely that the Federal Reserve will play it safe by not raising interest rates, and more likely that Congress and the Obama administration will pump more financial stimulus money into the system.

Both keeping rates near zero and expanding the monetary base are negative for the dollar, and thus positive for gold. We’ve seen that after a period of money-supply tightening in December and January, it appears that money is loosening again.

The federal deficit is pegged at more than $1 trillion this year and more than $8 trillion through 2019—this will slowly weigh on the dollar. On top of that, the TARP money being repaid by banks is not being removed from the monetary base—we shouldn’t be surprised if that money is used as a stimulus booster shot ahead of the 2010 midterm elections.

Our gold-dollar oscillator (above) shows that the dollar is approaching being overbought over the past 60 trading days, while the gold is showing signs of being oversold.

The magnitude of the current spread between gold and the dollar typically means that both could be close to a price reversal—dollar heading back and gold back up toward the mean.

In the 1990s, a strong dollar was associated with a strong U.S. economy, but the current one-month dollar rally has been accompanied by a drop in the S&P 500. With most of the world’s economic growth coming in emerging markets, many U.S. companies are relying on overseas sales to drive revenue and profit growth. A stronger dollar hurts U.S. companies trying to thrive in the global marketplace.

This is clearly evident in the illustration below. Here you can see that the world has changed and a strong stock market is aided by a weaker dollar.

Tags: 1990s, Chief Investment Officer, Debt Problems, Economic Conditions, Economic Growth, Emerging Markets, Expectation, Federal Deficit, Federal Reserve, Frank Holmes, Gold, Gold Dollar, Magnitude, Midterm Elections, Monetary Base, Money Supply, Oscillator, Rally, Safe Haven, Stimulus, Strong Dollar, Trillion
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Emerging Markets Highlights

Monday, February 1st, 2010

Emerging Markets

Strengths

• Fitch raised Indonesia’s long-term foreign and local currency credit ratings from BB to BB+, the highest level in more than a decade and only one level below investment grade. Indonesia’s resilience to the 2008-2009 global financial crisis due to improvements in its public finances was cited as a reason.
• Thailand’s industrial production growth rose to 35.7 percent year over year in December, the highest on record and ahead of market expectations, as continued global recovery drove up exports 26.2 percent during the month.
• The unemployment rate in Brazil in December declined to 6.8 percent from 7.4 percent in November, attributable to seasonal factors.
• Fitch followed S&P in raising Russia’s sovereign credit outlook from negative to stable. Industrial production in the country grew 2.7 percent in December, a second positive monthly reading in a row. The monetary base jumped 25 percent in December, spurred by year-end government spending.
• Bond yields in South Africa fell to their lowest level in three weeks after December inflation came in below expectations at 6.3 percent. Outside of gasoline, most major subcomponents of the CPI decelerated during the month.

Weaknesses

• Continued fears over the prospect of macro tightening in China resulted in an 8.8 percent decline for Chinese domestic A shares and 10.1 percent decline for Chinese H shares traded in Hong Kong in January.
• South Korea’s GDP expanded by a seasonally adjusted 0.2 percent sequentially in the fourth quarter of 2009, slower than expected due to a decline in government spending and household consumption.
• Brazil is to end tax cuts on purchases of cars (effective March 31) and appliances (end of January). According to the government, stimulus is no longer necessary. This move had been anticipated.
• Czech industrial production fell 2.3 percent from the November’s level, suggesting a level of production close to that in the first quarter of 2009.

Opportunities

• While the recent correction in China has been steep and swift, history suggests buying opportunities in the medium term. In early 2004 and early 2007, when tightening fears haunted investors in a policy environment similar to the current one, Chinese stocks underwent a sharp selloff for a couple of months and yet finished the year higher as investors realized the economy was not headed for a hard landing.

• The fixed-line telecom market in Mexico is likely to become more competitive after the government decided to auction the fiber-optic long-haul network of CFE (electric utility). It is expected that Televisa and Megacable will participate in the auction in order to provide triple-play services for their customers.
• After the Central Bank of Russia lowered refinancing rates by 425 basis points within last 10 months to the current 8.75 percent, consumer loan rates followed. The benchmark fixed mortgage is down 300 basis points to 17 percent. These lower rates have begun to translate into an increase in mortgage lending, based on research by Deutsche Bank.

Threats

• The Indian central bank’s surprise increase of cash reserve ratio by 75 basis points and hawkish language regarding inflation may in the short term reinforce investors’ perception of tightening bias among global central banks.
• Lower commodities prices would be a headwind for resource-rich economies in Latin America.
• The inflation report from Central Bank of Turkey (CBT) continues to downplay rising headline inflation, according to Citi. As central banks around the world start tightening, keeping rates on hold could risk the CBT’s credibility and the lira’s performance.

Tags: Bond Yields, China, Commodities, CPI, Credit Outlook, Emerging Markets, Fourth Quarter, Global Financial Crisis, Global Recovery, government spending, Household Consumption, India, Investment Grade, Market Expectations, Monetary Base, Public Finances, Resilience, S Industrial, Seasonal Factors, South Korea, Stimulus, Tax Cuts, Unemployment Rate
Posted in Emerging Markets, India, Markets | No Comments »

China Holds the Trump Card?

Monday, January 25th, 2010

China is trouncing its economic competition when it comes to manufacturing exports. In 2008, China decided to hitch its trailer to the U.S. dollar, fixing its exchange rate at 6.83 yuan. This was a wise move on China’s part considering at the time, its export sector got destroyed by the global credit meltdown, and the shipping business all but died, following the bust at Lehman Brothers.

At the same time, China embarked on a bold $586-billion (U.S.) stimulus in the fourth quarter of 2008 to spend its way domestically out of the credit crisis, and loosened bank lending (which added $1.3-trillion in new domestic bank credit). This initiative on its part meant that China was able to stockpile cheaper commodities, buying them ahead of demand, and pump liquidity into its real estate and equity markets, while waiting patiently for its coveted export sector to return to prominence.

Read the whole article…

Pierre Daillie, (AdvisorAnalyst.com), GlobeAdvisor.com, January 25, 2010.

Tags: Bust, China, Commodities, Credit Crisis, Economic Competition, Emerging Markets, Exchange Rate, Export Sector, Fourth Quarter, Global Credit, Globeadvisor, Initiative, Lehman Brothers, liquidity, Meltdown, Prominence, Shipping Business, Stimulus, Time China, Trillion, Trump Card, Wise Move, Yuan
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Economy and Bond Market Highlights

Sunday, January 24th, 2010

The Economy and Bond Market
Treasury yields rallied again this week as concerns over Chinese attempts to slow their economy may threaten the global economic recovery. It was reported that China’s government ordered banks to slow down their lending to prevent overheating the economy. The Chinese government has enacted several measures in recent weeks aimed at slowing their economy which expanded 10.7 percent on a year over year basis in the fourth quarter.

Economic data was mixed this week and other macro issues were more significant in driving the market. The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December. The chart below plots the LEI index and GDP on a year over year basis since 1980. If economic activity follows historical patterns, GDP is due for a significant recovery as we move through 2010.

Strengths

• The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December.
• China’s GDP rose a very robust 10.7 percent in the fourth quarter.
• 30 year mortgage rates dropped below 5 percent for the first time in four weeks.

Weaknesses

• The Chinese government has enacted several measures in recent weeks aimed at slowing their economy.
• Housing in general appears to be bouncing along a bottom but unable to make sustained improvement.
• The producer price index rose 0.2 percent in December and on a year over year basis has jumped 4.4 percent driven largely by rising energy prices.

Opportunity

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

Threat

• Coordinated global removal of fiscal and monetary stimulus is the biggest threat to the financial markets.

The Economy and Bond Market

Treasury yields rallied again this week as concerns over Chinese attempts to slow their economy may threaten the global economic recovery. It was reported that China’s government ordered banks to slow down their lending to prevent overheating the economy. The Chinese government has enacted several measures in recent weeks aimed at slowing their economy which expanded 10.7 percent on a year over year basis in the fourth quarter.

Economic data was mixed this week and other macro issues were more significant in driving the market. The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December. The chart below plots the LEI index and GDP on a year over year basis since 1980. If economic activity follows historical patterns, GDP is due for a significant recovery as we move through 2010.

Strengths

• The Index of Leading Indicators (LEI) rose more than expected, rising 1.1 percent in December.
• China’s GDP rose a very robust 10.7 percent in the fourth quarter.
• 30 year mortgage rates dropped below 5 percent for the first time in four weeks.

Weaknesses

• The Chinese government has enacted several measures in recent weeks aimed at slowing their economy.
• Housing in general appears to be bouncing along a bottom but unable to make sustained improvement.
• The producer price index rose 0.2 percent in December and on a year over year basis has jumped 4.4 percent driven largely by rising energy prices.

Opportunity

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

Threat

• Coordinated global removal of fiscal and monetary stimulus is the biggest threat to the financial markets.

Tags: 30 Year Mortgage Rates, Banks, Bond Market, China, Chinese Attempts, Chinese Government, Economic Activity, Economic Data, Economic Recovery, Economy, Emerging Markets, Energy Prices, Financial Markets, GDP, Index Of Leading Indicators, Macro Issues, Market Economy, Measures, Producer Price Index, Rising Energy, Stimulus, Treasury Yields, Year Mortgage
Posted in 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
Posted in Bonds, Gold, Markets | No Comments »

Roundup: Energy and Natural Resources

Sunday, January 10th, 2010

Energy and Natural Resources Market

Strengths

• Copper rose to a 16-month high this week on speculation that demand may revive as the U.S. economy improves. Aluminum also climbed to the highest level since October 2008 on concern that snowstorms in China might disrupt production.
• The cash price of iron ore delivered to China, the world’s biggest buyer, rose to the highest in more than a year amid what Goldman Sachs called “panic buying” by steel mills. Chinese mills have stepped up iron ore purchases to meet rising steel demand fueled by the nation’s stimulus spending.
• Reported spot iron ore vessel bookings to China from the world’s three biggest exporters (Australia, Brazil and India) rose by a third in December after falling 50 percent in the previous month.
• U.S. light vehicle sales rose 2.9 percent month-over-month to a seasonally-adjusted 11.25 million in December. Sales of U.S.-produced cars were particularly strong, rising 9.1 percent month-over-month.
• Heavy steel plate price offers for the European market have risen 10.5 percent for February delivery to 420 euros per metric ton in order to cover increased raw material costs.
• China’s power consumption in December increased about 30 percent from a year earlier, the official People’s Daily reported, citing data from State Grid Corp of China.
• Spot prices for thermal coal in Qinhuangdao rose slightly from a week earlier, as harsh weather in parts of China tightened coal and power supplies at the same time that demand rose on dropping temperatures. A cold snap hit parts of northern China over the last week, bringing the heaviest snow and lowest temperatures in decades for some areas, including Beijing.
• Prices of thermal coal in Australia, a benchmark for Asia, hit a 14-month high of above $90 per metric ton in the first week of 2010, jumping more than 7 percent from a week earlier due to robust Chinese demand.

Weaknesses

• Brazilian industrial production fell 0.2 percent month-over-month in November. It was still up 5.1 percent year-over-year.
• Global stainless steel production for the first nine months of 2009 fell 15 percent from the prior year to 17.9 million metric tons, according to the International Stainless Steel Forum.

Opportunities

• China, the world’s second-largest energy consumer, said it will “actively” participate in the global competition for oil, natural gas and mineral resources as domestic demand rises. The country will intensify development of overseas resources to ensure “stable” energy supplies for economic growth, the vice chairman of the National Development and Reform Commission said in a speech.
• Oil producers will need to add 45 million barrels worth of daily crude output capacity in the next 20 years to meet rising demand and offset a steady decline in major fields, the International Energy Agency said this week.

Threats

• China’s central bank raised a key interest rate for the first time in five months, causing the broader Chinese market and base metal prices to decline. While the move in interest rates was a relatively small 0.05 percent, many economists believe that this may be the first move in a broader interest rate tightening campaign.

Tags: Benchmark, China, Chinese Demand, Coal Power, Emerging Markets, Gold, Goldman Sachs, Harsh Weather, Heavy Steel, India, Iron Ore, Market Strengths, Metric Ton, Natural Resources, Northern China, oil, Power Consumption, Raw Material Costs, Roundup, Snowstorms, Steel Demand, Steel Mills, Steel Plate, Stimulus, Thermal Coal
Posted in Emerging Markets, India, Markets | No Comments »

Cheap Goods and Labour are not China’s only leading exports

Monday, December 14th, 2009

In an article published today at GlobeAdvisor.com, Pierre Daillie, Managing Editor, AdvisorAnalyst.com discusses the idea that cheap goods and labour are not all that China is exporting these days.

China is lauded as the most significant contributor to the world’s economy, printing 8.9% GDP growth during the third quarter. Its massive stimulus is helping to lift the world out of its economic funk. Or is it?

China’s chief export may no longer be just cheap goods or cheap labour, but controversy, over whether its policies are inflationary or deflationary for the developed world.

Read the whole story here:

http://www.globeadvisor.com/advisoranalyst/aa200912131.html

Tags: Advertisement, Cheap Labour, Chief Export, China, China Export, China Exports, Contributor, Controversy, Economy, Emerging Markets, Funk, GDP, GDP Growth, Labour, Managing Editor, Stimulus, World Economy
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Paul Kasriel: Waking Up In Recovery

Thursday, December 10th, 2009

“What happens after the stimulus spending wears off?,” asks Paul Kasriel, chief economist of Northern Trust. In this video clip, he shares his prognosis on inflation, the US dollar and the year ahead.

Click here or on the image below to view the video clip.

Click here for the first part of “Waking up in recovery”.

Source: Northern Trust, December 2009.

Tags: Advertisement, Chief Economist, inflation, Northern Trust, Paul Kasriel, Prognosis, Shares, Stimulus, US Dollar, Video Clip
Posted in Markets | No Comments »