Emerging Markets Radar (January 23, 2012)

Sunday, January 22nd, 2012

Emerging Markets Radar (January 23, 2012)

Strengths

• China’s fourth quarter GDP growth was 8.9 percent, better than the expected 8.7 percent.
• China’s December retail sales were up 18.1 percent, better than the estimated 17.2 percent. For 2011 it was up 17.1 percent year-over-year, showing strong consumption demand.
• Disposable income for urban residents grew 14.1 percent in 2011, and 8.4 percent. In 2011, China’s urban population increased by 21 million to 690.79 million at the end of last year. For the first time in China’s history, urban population has exceeded the rural population, the National Bureau of Statistics said.
• December industrial production was up 12.8 percent, higher than the estimate os 12.3 percent. Industrial production grew 13.9 percent in 2011, better than estimated.
• HSBC China’s Flash Purchasing Manager’s Index (PMI) is 48.8 for January, higher than 48.7 in December last year. PMI below 50 indicates manufacturing activities are in contraction. The HSBC Flash PMI is a survey among small and medium sized enterprises (SME) in China, which means it reflects part of the industrial activities in China. In China, as in many other countries, SMEs are mostly disadvantaged for financing. We hope Wen Jiabao’s SME loan policies can eventually help resume their growth.
• Chinese bank lending in the first quarter may exceed the 2.26 trillion yuan from a year earlier.
• China’s central bank, PBOC, injected Rmb 183 billion into the system via reverse repos on Wednesday, and Rmb 200 billion again on Thursday while urging more lending.
• China is said to consider relaxing capital requirements for banks. The China Banking Regulatory Commission is delaying implementing the most stringent capital adequacy ratios and may lower risk weightings for loans to small businessmen and companies.
• The Chinese banks totally issued Rmb 16.5 trillion worth of wealth management products, of which listed companies spent Rmb 30.4 billion buying these bank products. This was one reason that deposit growth was slowing.
• China’s National Social Security Fund has won approval to invest Rmb 100 billion from local pensions in stocks and bonds.
• Online advertising spending in China will rise 33 percent to Rmb 63.8 billion ($10 billion) this year from last year, the South China Morning Post said citing a broker report.
• Moody’s just upgraded Indonesia’s sovereign credit to investment grade after Fitch did the same in December last year. This will reduce borrowing costs for corporations and help stabilize currency.
• The Philippines’ central bank cut its benchmark rate by 25 basis points down to 4.25 percent. It was the first rate cut since July 2009. The Philippines runs an independent monetary policy since its economy is mostly domestic. Philippines overseas remittance rose 10.6 percent year-over-year in November to $1.78 billion, the biggest increase in three months.
• Thailand’s exports dropped 2 percent on a year-over-year basis in December as factories and supply chains began to recover from the flooding. The result was much higher than expectations for a 10 percent drop and a significant improvement from November’s 12.4 percent decline.
• Malaysia’s CPI rose 3 percent year-over-year in December, slowing to a nine-month low.
• Government statistics show that Colombia’s industrial production rose 6.5 percent in November from a year earlier.
• Indonesia received its second investment-grade rating from Moody’s this week, raising the country’s sovereign credit rating to Baa3. A month prior, Fitch had upgraded Indonesia’s credit rating as well.

Weaknesses

• Taiwan’s December export order declined 0.7 percent, for the first time since mid 2009.
• Due to housing market tightening and postponement of high speed rail projects by the government, China fixed asset investment still grew 23.8 percent, lower than 2010 and providing some clue to 2012’s slower investment growth. CITIC Securities predicts housing investment will decline in the first half of this year before the government lifts its control on the real estate market.
• China’s December home prices posted their worst performance last year, with only two of the 70 cities tracked posting gains, as the government reintegrated its plans to maintain housing curbs. In fact, sales transactions dropped sharply, between 15 to 20 percent on average, but the price drop was still very mild.
• China’s foreign direct investment declined 12.7 percent in December after a 9.8 percent drop in November on a year-over-year basis, a further reason for moderate money supply growth.

Opportunities

• The fiscal deposit decrease since September, particularly in December of last year, indicated that the Chinese central government had started fiscal expansion to fine-tune the economy. Evidence such as improved PMI and industrial production in December proved the government has changed its policy focus to supporting growth from economic adjustment (tightening).

• Barclay’s Capital reported that China may allow its local pension funds to be invested in its stock market in the first quarter of this year, according to the China Securities Journal. The report said that a province in southern China was approved to transfer 100 billion Yuan of local pension funds to the National Council for Social Security Fund (NCSSF) for operation. In view of the NCSSF’s assets structure, about 30 percent to 40 percent of such capital will be invested in the stock market.
• A BCA credit cycle lead indicator is giving a positive signal for European equities and risk assets in the first half of 2012. Shaded areas in the chart below denote periods of anticipated market weakness, while clear bars forecast market strength based on an upturn in the global credit conditions six months previously. With the second 3-year LTRO tranche due in February, the ECB’s balance sheet is expected to expand by 1 trillion euro, amount almost identical to the U.S. Fed’s balance sheet expansion of $1.4 trillion in 2008/09.

Threats

• Two major sets of economic data that can continue to decline are GDP growth and property investment in the first half. Before the economy touches its lowest growth rate, hopefully by the middle of the year, the market may have to adapt to a lot of bad news in the property market, such as a sales contraction and sharp price fall.
• A number of upcoming important economic data will be released next week, including Turkey’s monetary policy decision, Poland’s 2011 GDP data, and Russia will report December industrial production.
• The World Bank warned on Tuesday that developing countries should brace for a growth slowdown stemming partly from Europe’s debt woes. Furthermore, the bank also warned that political tensions in the Middle East and North Africa could disrupt oil supplies and add another blow to global prospects. The World Bank cut its outlook for global growth in 2012 to 2.5 percent and 3.1 percent in 2013, down from 3.6 percent for both years.

Tags: Bureau Of Statistics, Capital Adequacy, China Banking Regulatory Commission, Chinese Bank, Chinese Banks, Consumption Demand, Disposable Income, GDP Growth, Listed Companies, Loan Policies, Medium Sized Enterprises, National Bureau Of Statistics, Purchasing Manager, Quarter Gdp, S Central, Small And Medium Sized Enterprises, Time In China, Urban Population, Urban Residents, Wealth Management Products
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Oil Consumption Demand Destruction vs. Speculative Futures Positions

Friday, May 6th, 2011

by Michael ‘Mish’ Shedlock

Commodities got smacked hard across the board on Thursday with silver and crude leading the way. Silver is now down close to 30% from the peak, and crude is down close to 13% from the peak four days ago. The rest of this post deals specifically with crude.

West Texas Intermediate Daily Chart

click on chart for sharper image

Discounting the civil war in Libya and Mideast disruption concerns in general, there is no fundamental reason for crude to be above $100.

Oil Consumption Demand Destruction

My friend Tim Wallace follows petroleum distillates usage closely. He is concerned over what demand destruction says about the economy. Tim writes …

Attached please find some charts on petroleum distillates demand. These are based off peak demand, which for the USA was Feb ’07 to Jan ’08. Those are the highest months of demand in our history. Demand has never approached those numbers again.

As you can see on the first chart, titled “Year-Over-Year vs. Peak”, the months of January through May are measured against the peak years for 2008 to 2011. Note that except for April, this year is by far the biggest drop off peak in this depression. This May has begun with a significant drop off last year after a big rise off 2009.

Last May more than likely reflects the rebound on “shovel ready” paving projects that ate up a lot of distillates products. This May has begun with the first week showing scary down numbers! Needless to say we need to look again at the rest of the month, but this is the worst week of the year to date.

The second chart shows each month by year off the peak period. May is off to a rocky start. It will be very interesting to see how this May ends up.

The third chart shows how the historic petroleum distillates demand has trended since the early ’90′s. I learned back in the ’70′s in my days at Exxon that any demand growth of less than 0.8% showed a weak economy, anything less than 0.5% was recessionary as you can see in the recession of 2001/2002 on the chart.

Look at the numbers now and tell me where we are headed.

Oil Consumption Year-Over-Year vs. Peak

click on chart for sharper image

Oil Consumption Drop From Peak Usage

click on chart for sharper image

Oil Consumption Historical Growth vs. Peak

click on chart for sharper image

2010 Rebound in Oil Usage Collapses

For all the brouhaha over the “recovery” one cannot see it in oil usage. However, you can see it at the pump!

You can also see it in oil futures speculation.

Oil Futures Speculation

Here is a chart of oil futures Commitment of Traders courtesy of SentimentTrader.

click on chart for sharper image

Annotations in blue on the chart are mine. Jason Goepfert at SentimentTrader was kind enough to allow me to post the chart.

Volume Spike on Mideast Disruption

Note that futures volume went through the roof earlier this year as shown by the blue oval.

For those not familiar with futures, for every long there is a short. Big Speculators (typically hedge funds, pension plans, etc), are long record numbers of futures.

The commercial traders have taken the other side of the bet. Rules of the game are simple: someone has to take the other side of the trade because for every long there is a short.

The commercial traders may be producers willing to sell into the spike or they may be market makers.

Expect Trade to Unwind

One certainly cannot use this information as a timing device, but it is interesting to see everyone plow into this “sure thing” trade right as demand has collapsed.

Unwinding this trade can easily collapse the price of oil and send the US dollar higher, and I think it will.

For more on the US dollar and currencies in general, please see Trichet Backs off Rate Hikes; US Dollar Up Sharply; Currency Fundamentals

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Commodities, Consumption Demand, Crude Oil, Disruption, Exxon, Friend Tim, Fundamental Reason, Leading The Way, Michael Mish, Mish Shedlock, Oil Consumption, Paving, Peak Demand, Peak Period, Peak Years, Petroleum Distillates, Rebound, Rocky Start, Sharper Image, Shovel, Tim Wallace
Posted in Markets, Oil and Gas | Comments Off

Jim Rogers on China, Trade War, and the Loonie

Saturday, March 20th, 2010

By Dian L. Chu, Economic Forecasts & Opinions

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In a Business News Network interview on Mar. 18, Jim Rogers, famous investor and creator of the Rogers International Commodities Index (RICI) speaks about the recent currency and trade confrontation between the US and China:

“If [you] slap somebody in the face, they are going to take a defensive attitude to save the face…I do not know why the United States is doing this in public, ..that never worked, especially with Asians.”

Rogers – Float to Grow

Rogers thinks the U.S. should try to explain to the Chinese that it is to their benefits to allow some flexibility in their currency. For instance, yuan’s appreciation will in turn lower the cost of China’s imports and its supply chain.

He acknowledges that the Chinese understand that their currency policy will need to change eventually in order to become a major player on the world stage.  Although the yuan has appreciated some in the past few years, but it is just not up to the expectation of the U.S.

Rogers estimates Chinese renminbi (yuan) could replace the dollar as the next reserve currency of the world in the next 10 to 20 years.

My Take – Yuan Appreciation Could Increase U.S. Deficit

It is consensus that the United States has strong economic fundamentals attracting high rates of capital investment. On the other hand, the U.S. has a chronically low household saving rate, and recently a negative government saving rate as a result of the budget deficit.

As long as Americans save relatively little, foreigners will use their savings to finance profitable investment opportunities in the United States; the trade deficit is the inevitable end result.

As pointed out in my previous article, renminbi appreciation will unlikely achieve the intended effect of reducing the bilateral trade deficit, and could instead have a negative impact.  Unless there is a significant shift in the domestic consumption/demand levels, the U.S. will need to procure either still from China, or from some other sources, but now at higher prices due to the yuan revaluation.

Rogers – A Non-American Style China Real Estate Bubble

Currently, the excessive liquidity trapped in the reserves is essentially causing various bubbles developing in many Chinese coastal and urban real estate sectors. Rogers sees the real restate bubble in China is one of price instead of credit. As such, a bubble burst will likely have a much more muted effect in China than the housing crisis in the U.S.

Rogers – Long Loonie, Short U.S. Bond

Rogers believes the Canadian dollar (loonie) is “one of the soundest currencies in the world on a fundamental basis.” He has owned the Canadian loonie “for years” as a long-term play, with his recent dollar positions as a short-term momentum play.

He also says the only other bubble in the world he sees right now is in the U.S. long bond market, and he expects to short that market in the “foreseeable future.”

“The concept of how anybody would lend money to the United States government for 30 years, in U.S dollars, is just incomprehensible to me…even at 6%, it’s just staggering.”

My Take – Many Bubble Candidates Ahead of China

I’ve dismissed the so-called “Chinese real estate bubble crash” catastrophic scenario in several of my articles.  Admittedly, China’s real estate sector is currently in the overheating zone; however, a U.S.-style bubble is less likely primarily due to a much lower buyer leverage as compared with the U.S. and a market structure null of debt securitization.

As for a bubble burst, there is currently no shortage of highly qualified candidates in the Western Hemisphere, with more up-and-comers waiting in the wing.  For instance, Europe’s PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), the U.S. and the Great Britain, based on recent rating agencies’ warnings, just to name a few.

Rogers – Protectionism = End Game

“Nobody has ever wanted a trade war, as it is the end of the whole game and disastrous for everybody’s concerns.”

Rogers thinks current protectionism originated in the U.S. has a contagion effect, which will likely exacerbate global geopolitical and trade tensions. He cautions that just as the U.S. protectionism in the 30′s did not help with the Great Depression, the current protectionist measures will unlikely have that much positive effect on the economy.

My Take – Serious Trade War Brewing

A synchronized recovery in China and the U.S., as we are presently witnessing, will undoubtedly heighten the competitive currency devaluation. It appears Washington will argue in perpetuity that the renminbi is undervalued as long as U.S. imports from China exceed our exports to China.

Meanwhile, Paul Krugman’s call of labeling China as a “currency manipulator” is being increasingly speculated to be included in the Treasury Department’s semi-annual report on foreign-exchange-rate practices, due to be released in April.

Tensions and trade feuds are bound to persist since the U.S. places more emphasis on the short-term “fixes” through price and the yuan exchange rate; whereas the Chinese put more emphasis on medium and long-term structural and institutional change.

眼中有敵，天下皆敵；眼中無敵，天下無敵 (One’s attitude determines how one sees things) ~ Chinese proverb

Video Source: You Tube

Tags: Bilateral Trade Deficit, Budget Deficit, China, China Trade, Chinese Currency, Chinese Renminbi, Commodities, Consumpt, Consumption Demand, Currency Policy, Defensive Attitude, Domestic Consumption, Economic Forecasts, Economic Fundamentals, Emerging Markets, International Commodities Index, Jim Rogers, Loonie, Network Interview, Profitable Investment Opportunities, Renminbi Yuan, Reserve Currency, Rici, Rogers International Commodities Index, S Rogers, Trade War
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