The Race for Resources

Sunday, August 5th, 2012

The Race for Resources

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time. I’ve read he’s been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It’s inspiring to see the incredible results of his tremendous sacrifice and commitment.

Investing in global markets requires the same sort of stamina, especially at times like this week, when the month’s reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.

However, I believe there are encouraging pockets of strength to energize and inspire investors.

For example, we’re coming up on the anniversary of the first stimulus move that kicked off the global easing cycle. On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.

In June and July alone, there were nearly 70 moves—the most since the world began this massive easing.

Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred. Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.

But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they’ve recently announced acquisitions of Canadian resources companies.

In my presentations, I’ve discussed how resources companies have significantly underperformed their underlying commodities. During 2009 and most of 2010, the performance between oil and the S&P 500 Oil & Gas Exploration and Production Index was closely correlated. By the middle of 2011, oil and oil stocks started to separate, with crude continuing to rise while stocks deteriorated. Even with the recent drop in oil prices, oil stocks have continued to lag.

I’ve also discussed the strikingly similar trend occurring between gold and gold stocks. There’s been a spectacular pop in gold stocks recently, but it hasn’t been enough to catch up to gold’s performance.

The disparities mean that the cheapest resources are not found in the ground—they’re listed, and it’s been confirmed by recent energy company acquisitions.

Chinese oil company CNOOC put in a bid of $15 billion to purchase Canada’s Nexen. This was at a 61 percent premium to Nexen’s share price on July 20, according to Bloomberg. As you can see below, not only did the takeout announcement close the gap, now the company is outperforming the price of oil.

If CNOOC’s deal is approved, the state-run oil giant gets even bigger, gaining access to significant energy stores in several areas of the world, including Canada, the Gulf of Mexico, Colombia and West Africa, as shown below.

With a rapidly growing middle class and rising urbanization, Chinese leaders know they need to fill their country’s tremendous energy demands and are continually finding innovative ways to keep their country powered. CNOOC’s acquisition is one way China continues to acquire not only the resources needed to power the country, but also the technological innovations that come from countries with free markets and lower barriers to entry. According to The New York Times, China “has been garnering advanced production technologies to better draw oil and gas from nontraditional areas like deepwater fields and hardened rock formations.”

The other announcement came from Malaysia’s state-owned and natural-gas giant Petronas, which will purchase Canada’s Progress Energy Resources Corp. Petronas is one of the largest producers and shippers of supercooled LNG fuel in the world. According to the Vancouver Sun, the company is “anxious to increase its market share in Asia, where analysts expect demand to surge 75 percent by the end of the decade.”

After Petronas’ original bid was announced, Progress increased 74 percent—a record gain for the company, says Bloomberg. As shown below, Progress now dramatically outperforms the underlying commodity.

Ready to be a Buyer like Asia?
If you’re contrarian investor, there may be an additional reason to jump into the market today. According to research from J.P. Morgan, institutional investors have become extremely negative, as hedge funds “essentially short the market,” meaning that their expectation is that stocks will fall.

J.P. Morgan looked at the rolling 21-day beta of macro fund returns compared to the S&P 500 Index returns and found that the ratio is at an extreme level of -0.26. Research shows that the last two times the ratio fell this low—in September 2010 and February 2012—stocks rallied. In 2010, the S&P 500 climbed 26 percent in five months; in 2012, stocks rose 8 percent in two months.

These signs the market is sending out make it an especially attractive time to “mine” for investment opportunity. In July, we began to see energy stocks and oil get recharged, as the energy sector in the S&P 500 was the second best performer, increasing 4.17 percent and crude oil rose 3.68 percent. Unlike the start of an Olympic race, in investing, there isn’t a signal sounded to let you know when to dive off the starting block into the markets. Just make sure your portfolio is poised to participate in the race for resources.

Tags: American Swimmer, Basis Points, Canadian, Canadian Market, Canadian Resources, Central Banks, Chief Investment Officer, Deep Dive, Economic Deterioration, Frank Holmes, Global Markets, J P Morgan, Manufacturing Industry, Michael Phelps, Monetary And Fiscal Policy, Pmi, Policy Moves, Stamina, Stimulus, Training Day, U S Global Investors, Wades
Posted in Markets | Comments Off

The Economy and Bond Market Radar (July 30, 2012)

Sunday, July 29th, 2012

The Economy and Bond Market Radar (July 30, 2012)

After hitting a new low on Tuesday, Treasury yields bounced back sharply on Friday as ECB president Mario Draghi vowed to do whatever it takes to save the euro. This news sparked a “risk on” rally driving risky assets higher and bond prices lower. Yields on Spanish 10-year government bonds reversed course and dropped sharply on the news as it appears the likelihood of a sovereign default has diminished.

Strengths

• In addition to the ECB news discussed above, there was a front page story in the Wall Street Journal earlier this week that was widely believed to be leaked from the Fed to prep the market for potential Fed policy actions as soon as next week. Monetary policy-makers are taking action around the globe.
• Second quarter GDP grew 1.5 percent. While this is a slow level of absolute growth, it modestly beat expectations.
• Several homebuilding companies reported earnings this week which indicated orders in the second quarter were very robust.

Weaknesses

• June durable goods orders ex-transportation fell 1.1 percent, indicating broad-based weakness.
• The U.K. economy contracted by 0.7 percent in the second quarter, while Mexico’s economy shrank by 0.36 percent in May.
• Markit’s July eurozone manufacturing Purchasing Managers Index (PMI) fell to the lowest level since June 2009. The more traditional PMI reports will be released next week, but the indications obviously look weak.

Opportunity

• The Fed and ECB are both talking about additional monetary stimulus. Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.

Tags: Bond Market, Bond Prices, Durable Goods Orders, Ecb President, Fed Policy, Government Bonds, Homebuilding Companies, Mario Draghi, Market Radar, Markit, Monetary Policy, Pmi, Policy Actions, Purchasing Managers Index, Quarter Gdp, Risky Assets, Shifting Focus, Stimulus, Treasury Yields, Wall Street Journal
Posted in Markets | Comments Off

Global PMI: The Trend is Your Friend

Tuesday, July 10th, 2012

by Frank Holmes, CEO, CIO, U.S. Global Investors

Manufacturing around the world weakened in June, according to the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI). Its reading of 48.9 was the lowest in three years and the first dip below 50 since September 2011. The current reading is also below the three-month moving average for the second month in a row. As you can see on the chart, PMI crossed below the three-month in May.

While Europe, China and the U.S. were primarily responsible for the slowed activity, we believe the trend is your friend. In April, global PMI crossed above the three-month moving average, and historically, when a “cross-above” has happened, it’s signaled higher prices for many commodities. Take a look at the chart below which shows the following:

Ninety percent of the time, copper rose 10 percent over the following three months. Eighty-five percent of the time, West Texas Intermediate oil has also increased. Its median three-month change has been an increase of 11 percent.

Materials and energy were also positively affected, with modest results: When the PMI crosses above the three-month average, 70 percent of the time, the S&P 500 Materials Index rose, with a median return of about 3 percent. The S&P 500 Energy Index had a median three-month return of about 5 percent, with an 80 percent chance of the three-month change being positive.

Using history as a guide, this suggests that by the end of July, we could see strength in these commodities and energy and materials stocks. Although volatility and uncertainty rule the markets these days, we believe that the world’s central bankers are taking note of slowed activity and will act if deemed necessary.

The trend is your friend only if your portfolio is “resourceful” enough to benefit. Read the Financial Planning article, which showed how U.S. Global Investors’ Global Resources Fund strengthened a diversified portfolio over the past 10 years. Read the article.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Diversification does not protect an investor from market risks and does not assure a profit.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.

Tags: Amp, Commodities, Copper, Diversified Portfolio, Energy Index, Financial Planning, Frank Holmes, Global Resources, Jp Morgan, Moving Average, Nbsp, Pmi, Purchasing Managers Index, Resources Fund, S Central, Three Months, U S Global Investors, Uncertainty, Volatility, West Texas Intermediate
Posted in Markets | Comments Off

The Economy and Bond Market Radar (June 11, 2012)

Sunday, June 10th, 2012

The Economy and Bond Market Radar (June 11, 2012)

After hitting record lows last week, bond yields moved higher this week in what could be best described as a mini “risk on” trade. Economic data remains weak, Europe is still in turmoil and we saw interest rate cuts in China and Australia. It is somewhat counterintuitive that bonds would sell off under such a scenario but this is a similar pattern to other periods when the Federal Reserve enacted quantitative easing. The market has already priced in the easing, and by the time it actually happens, the market is already looking ahead.

Strengths

• China surprised the market by cutting interest rates by 25 basis points on Thursday. It has been speculated the rate cut was a preemptive move, anticipating weak economic data that China is scheduled to release over the weekend.
• Australia cut interest rates by 25 basis points to 3.5 percent, which is the lowest since 2009.
• The ISM Services Non-Manufacturing Index remained solidly in growth territory in May at 53.7.

Weaknesses

• Factory orders fell 0.6 percent in April and have been very weak so far this year.
• The eurozone Purchasing Managers’ Index (PMI) in May fell to the lowest level since June 2009.
• Both the Fed and European Central Bank (ECB) did not offer any additional monetary measures for the market this week, which disappointed the markets.

Opportunity

• Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
• The Fed appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.

Threat

• China’s economy is slowing faster than expected and government policy makers responded this week by cutting interest rates. This likely indicates weak economic data in the near term.
• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: Austerity Programs, Basis Points, Bond Market, Bond Yields, China, China Economy, China S Economy, ECB, Economic Data, Federal Reserve, Government Policy Makers, Interest Rate Cuts, Ism, Market Radar, Monetary Measures, Pmi, Preemptive Move, Purchasing Managers Index, Record Lows, Turmoil, Wildcard
Posted in Markets | Comments Off

Eurozone Composite PMI Near 3-year Low – Sharp Declines in France, Italy, and Spain

Tuesday, June 5th, 2012

- France, Italy, Spain Services PMI Show Continued Sharp Decreases
- Eurozone Composite PMI Near 3-Year Low
- Germany Services PMI at 6-Month Low

The Markit PMI data from Europe shows still more deterioration led by France, Italy, and Spain. Let’s take a look at a few countries.

France: Business Activity Continues Contraction at Marked Pace

Key points:

• Final Markit France Services Activity Index at 45.1 (45.2 in April), 7-month low.
• Final Markit France Composite Output Index at 44.6 (45.9 in April), 37-month low.

Summary: French service providers registered another sharp decrease in business activity during May. Underlying the weak performance was a second successive fall in incoming new business, while backlogs of work fell further. Companies responded by cutting employment. Input price inflation eased to the slowest for over two years, allowing companies to reduce their charges further.

Italy: Services Activity Continues Contraction at Sharp Rate in May

Key Points:

• Business activity and new work both decrease markedly
• Employment falls at slowest rate for seven months
• Cost inflation weakest since last November

Summary:

The health of the Italian service sector deteriorated during May, with steep falls in both output and new business recorded. Confidence with regards to activity in the forthcoming year dipped further, though employment levels fell at a slower rate. Cost inflation meanwhile eased to the weakest in six months, but still contrasted with a sustained drop in output prices.

Spain: Activity and new business both decline at faster rates

Key points:

• Activity and new business both decline at faster rates
• Job shedding intensifies
• Sharp cuts in output prices as cost inflation eases

Summary:

The Spanish service sector fell further into contractionary territory during May as the economic crisis showed no signs of easing. Rates of decline in activity, new orders and employment all accelerated during the month. Meanwhile, input prices rose only slightly as companies attempted to reduce costs, and output prices were cut sharply again in response to strong competition and weak demand.

Germany: German Composite Output Index in Contraction

Key points:

• Final Germany Services Business Activity Index(1) at 51.8 in May, down from 52.2 in April.
• Final Germany Composite Output Index(2) at 49.3 in May, down from 50.5 in April.

Summary:

May data pointed to a renewed slowdown in German service sector growth, as falling levels of incoming new work continued to weigh on business activity levels. At 51.8, down from 52.2 in April, the final seasonally adjusted Germany Services Business Activity Index pointed to the slowest pace of expansion since November 2011. Higher levels of output have now been recorded for eight months running, but the pace of expansion in May was below the average seen since the survey began 15 years ago (53.0).

Eurozone: Composite PMI near-three year low in May

Key Points:

• Final Eurozone Composite Output Index: 46.0 (Flash 45.9, April 46.7)
• Final Eurozone Services Business Activity Index: 46.7 (Flash 46.5, April 46.9)
• Widespread weakness across the currency union, with output falling across the big-four nations

Summary:

At 46.0 in May, down from 46.7 in April, the Markit Eurozone PMI® Composite Output Index signalled the steepest rate of decline in manufacturing and services output in the single currency area since June 2009. The headline index came in slightly above its flash estimate of 45.9, but remained below the neutral 50.0 mark for the fourth month running.

Comment:

Chris Williamson, Chief Economist at Markit said: “The final Eurozone PMI edged up on the flash reading in May, but nevertheless indicates that the economy is contracting at the fastest pace for around three years. Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield. Based on these numbers, it would not be surprising to see GDP for the region contract by 0.5% in the second quarter, though an even steeper decline could be seen if the June data disappoint.”

If the ECB is looking for an excuse to cut rates, it sure has one.

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

Tags: Activity Index, Backlogs, Business Activity, Composite Output, Contraction, Economic Crisis, Employment Levels, France Business, French Service, Input Price, Italian Service, Last November, Markit, Output Index, Pmi, Price Inflation, Service Sector, Seven Months, Spanish Service, Steep Falls
Posted in Markets | Comments Off

Will the ECB and Fed Follow Where China Leads?

Monday, June 4th, 2012

Will the ECB and Fed Follow Where China Leads?

By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors

Every month, policymakers track purchasing managers’ indices (PMI) around the world as they consider fiscal and monetary actions. To us, a PMI is a measure of health of companies around the world, because it includes output, new orders, employment and prices across manufacturing, construction, retail and service sectors.

Today, the J.P. Morgan Global PMI for May came in lower at 50.6—just above the level indicating expansion—and China’s HSBC Manufacturing PMI fell to 48.4. Both numbers were below their respective three-month moving averages. Historically, we’ve seen China’s PMI number leading the year-over-year change in exports by three to four months, so when the PMI has increased, a few months later, Chinese exports have historically risen, and vice versa.

China’s HSBC PMI tends to be more reflective of export demand, as it is compiled by private parties, covers a smaller survey sample and is weighted toward smaller businesses. Therefore, a lower PMI number indicates lower export demand.

With Europe’s growth in a deep freeze, China is feeling Europe’s pain. While many think the U.S. is receiving most of the Chinese-made goods, Europe is actually China’s largest export partner. Nearly 22 percent of China’s exports head to Europe, contributing nearly 6 percent to China’s GDP; only 17 percent of exports from China are shipped to the U.S.

With fewer exports to Europe, China’s GDP growth could be affected, but probably much less than one might think. Listeners of our webcast a few months ago heard Andy Rothman from CLSA explain how China has become less dependent on the world for its growth. As you can see from the chart below, CLSA had already assumed net exports of goods and services out of China to be negative this year because of slower growth from Europe and the U.S.

Yet, China clearly has the upper hand in controlling growth. Take a look at what happened in 2009 when exports declined dramatically: The government stepped in with a massive stimulus package devoted to bank lending and infrastructure construction. This effort significantly boosted overall GDP growth and “pushed the Chinese economy out of a deep slump,” says research firm BCA Research.

Despite net exports falling about 4 percent in 2009, GDP actually grew more than 12 percent.

China won’t put the pedal to the metal like it did in 2009, though. Premier Wen Jiabao recently said that the government “should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” according to Bloomberg News. China is more like Goldilocks: The government wants the economy to be not-too-hot or not-too-cold.

The important thing to remember is that the government will want to avoid the expansion that was “associated with the earlier plan that led to higher CPI, asset price inflation and a surge in lending to non-priority projects,” says J.P. Morgan. Rather, the focus is on making sure the country shifts to a “more sustainable trajectory of growth,” says the research firm.

With the renewed eurocrisis, “Chinese authorities are currently facing an extremely complex and unpredictable situation,” says BCA. They’ll continue to monitor the situation and not make any drastic moves; rather, “Chinese authorities will stay on high alert and act promptly to rescue growth in case of external shocks,” says BCA.

Tags: Chief Investment Officer, China Gdp, Chinese Exports, Construction Retail, Deep Freeze, ECB, Export Demand, Exports From China, Four Months, Frank Holmes, GDP Growth, Hsbc, J P Morgan, Moving Averages, Pmi, Private Parties, Purchasing Managers, Rothman, Service Sectors, U S Global Investors
Posted in Markets | Comments Off

China and EU Concerns Lifts Bonds (May 28, 2012)

Sunday, May 27th, 2012

The Economy and Bond Market Radar (May 28, 2012)

Treasury yields were little changed as mixed economic data here in the U.S. and lots of back and forth speculation in Europe led to an overall muted reaction. New home sales were a bright spot and as can be seen in the chart below, have been steadily trending high since last summer. A similar pattern is taking place in the existing home market and real market recovery appears to be underway.

Strengths

• The University of Michigan Confidence Index hit the highest level since October 2007, citing lower gasoline prices.
• April new home sales rose 3.3 percent, beating expectations.
• Existing home sales grew 3.4 percent in April and the median priced jumped 7.6 percent.

Weaknesses

• Durable goods orders in April were weak, with “core” capital goods orders falling 1.9 percent, the third decline in four months.

• HSBC’s flash Purchasing Managers’ Index (PMI) for China fell to 48.7 in May and disappointed hopes for a rebound.

• Markit’s eurozone PMI told a similar story as this indicator fell to the lowest level in nearly three years.

Opportunity

• Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
• The Federal Reserve appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.

Threat

• China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: Austerity Programs, Bond Market, Capital Goods, China Economy, Confidence Index, Core Capital, Durable Goods Orders, Economic Data, Eurozone, Existing Home Sales, Federal Reserve, Four Months, Gasoline Prices, Government Policy Makers, Market Radar, Pmi, Purchasing Managers Index, Rebound, Treasury Yields, University Of Michigan Confidence, Wildcard
Posted in Markets | Comments Off

The Economy and Bond Market Radar (May 7, 2012)

Monday, May 7th, 2012

The Economy and Bond Market Radar (May 7, 2012)

Treasury yields have had a slight downward bias the past couple of weeks and that trend accelerated this week as yields fell across the board. U.S. economic data continues to be a mixed bag. The unemployment report was released on Friday which was lackluster at best with non-farm payrolls growing a modest 115,000. The recent trend does not inspire a lot of confidence as can be seen in the chart below. The Federal Reserve remains in play and may enact additional quantitative easing or other stimulative policy measures if the economy does not improve.

Strengths

• The ISM Manufacturing Index rose to 54.8 in April, showing surprising strength amid weakening manufacturing data in many parts of the globe.
• The HSBC Purchasing Managers Index (PMI), which is a gauge of China manufacturing, also improved but still indicated contraction.
• Australia cut interest rates by 50 basis points as inflation expectations moved lower.

Weaknesses

• Non-farm payrolls only rose a modest 115,000 and the recent trend has been disappointing.
• April same-store sales have disappointed as the consumer appears to have slowed down after a several months of beating expectations.
• The European Central Bank indicated that additional easing is not likely.

Opportunity

• Bonds continued to grind higher and appear to be forecasting a benign inflation and slow growth.

Threat

• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: Austerity Programs, Basis Points, Bias, Bond Market, Contraction, Economic Data, Federal Reserve, Gauge, Inflation Expectations, Ism Manufacturing Index, Market Radar, Non Farm Payrolls, Parts Of The Globe, Pmi, Policy Measures, Purchasing Managers Index, Quantitative Easing, Treasury Yields, Unemployment Report, Wildcard
Posted in Markets | Comments Off

Emerging Markets Radar (May 7, 2012)

Monday, May 7th, 2012

Emerging Markets Radar (May 7, 2012)

Strengths

• China’s April PMI went up 20 basis points from the previous month to 53.3 percent, a fifth month-over-month increase. In spite of improved reading, the PMI is below market expectation for 53.6 percent, which caused investors to expect a bank reserve ratio cut to help economic growth. China HSBC April final flash PMI was 49.3 versus the previous 48.3, indicating small business activities are improving, but still in contracting mode. (PMI below 50 indicates manufacturing activities are contracting.)
• The Philippine’s Government Economic Planning Secretary opined that first quarter indicators are good, and growth could reach the upper range of their 5 to 5 percent target for 2012.
• China’s Securities Regulatory Commission cut trading transaction fees by 25 percent, which is beneficial to equity market liquidity.
• Korea’s Consumer Price Index (CPI) rose 2.5 percent in April, declining to a 21-month low.
• The Russian manufacturing sector registered a positive start to the second quarter.  April PMI rose to 52.9 from 50.8 in March, signaling the best overall performance of the sector in twelve months.
• Turkish PMI also rose in April, registering 52.3, above the 50 no-change threshold for the first time since January.  Output, new business and buying activity all returned to growth.

Weaknesses

• China’s April home prices fell to a 14-month low as the government pledged property curbs, according to SouFUN.
• The Philippine’s CPI rose 3 percent in April, rebounded from March’s 2.6 percent advance which was a 30-month low. April’s appreciation was still lower than 4.0 percent in January, due to higher utility, fuel and food costs. Indonesia’s CPI accelerated to a seven-month high in April, increasing 4.5 percent, in line with market expectation. Thailand’s CPI rose 2.47 percent in April, the lowest increase in more than two years due to state subsidies and easing food prices.
• Temasek raised $2.48 billion selling stakes in Bank of China and China Construction Bank, a selling trend by early foreign institutional investors that is possibly approaching an end.
• Korea’s exports fell 4.7 percent in April, declining for a second month and exceeding estimates of a 1.1 percent drop.
• Manufacturing data in Central Europe followed the eurozone’s into contraction territory in April. Polish PMI fell from 50.1 in March to 49.2 in April; Czech PMI fell from 52.1 in March to 48.7 in April, reflecting lower new orders, employment, and stocks of purchases.

Opportunities

• Turkey’s hopes for investment grade were dashed this week by S&P downgrading its outlook from positive to stable.  Still, a tighter bias to central bank policy should help the lira strengthen from here, according to the HSBC foreign exchange strategy team.
• The chart below by Bloomberg shows increasing trading volume in the Philippine stock exchange, explaining why the Philippine market has outperformed Asian peer’s year-to date and the last year. Morgan Stanley research shows $829 million new money has flowed into the Philippine stock market so far this year, encouraged by better macro economic indicators and strong corporate growth prospects.

Threats

• Developers in China may need to raise money to improve liquidity and continue projects under construction due to tightening policy by the government.
• Policymakers in countries such as Brazil and India have been pursuing stimulative measures to boost their economic growth rates.  However, their equity markets in general and bank stocks in particular have de-rated significantly as a result of such activism. Indonesia will likely be the next one affected, according to BCA research.

Tags: Basis Points, BRICs, Consumer Price Index, Curbs, Economic Growth China, Economic Planning, Emerging Markets, Food Costs, Food prices, Hsbc, Improved Reading, Index Cpi, Manufacturing Sector, Market Liquidity, Pmi, Reserve Ratio, Securities Regulatory Commission, State Subsidies, Target, Transaction Fees, Utility Fuel
Posted in Markets | Comments Off

The Economy and Bond Market Radar (April 30, 2012)

Sunday, April 29th, 2012

The Economy and Bond Market Radar (April 30, 2012)

Treasuries were more or less unchanged for the second week in a row. U.S. economic data offered a mixed bag and the Fed essentially stayed the course with regard to monetary policy. First quarter GDP was released on Friday and the economy grew 2.2 percent, modestly below estimates. The key takeaway from the report is that the economy is not strong enough for the Fed to seriously consider shifting policy but it is weak enough to keep the possibility of additional QE or other stimulative measures alive.

Strengths

• The housing market continues to show signs of life as new home sales and pending home sales trend higher. In addition, months of supply of new homes has fallen to 5.3 months, back to 2006 levels.
• The HSBC China flash PMI index improved to 49.1, still indicating contraction but moving in the right direction and rising for the fourth month in a row.
• With the economy still showing tepid growth, the Fed will remain accommodating.

Weaknesses

• The U.K. economy contracted by 0.2 percent in the first quarter and is now technically back in recession.
• Weekly initial jobless claims remain elevated at 388,000 this week, continuing the recent trend of higher readings.
• Consumer confidence indicators ticked lower in April even as gasoline prices fell.

Opportunity

• After a disappointing first quarter GDP result, the Chinese are likely to ease monetary policy as soon as this quarter.

Threat

• Rising oil and gasoline prices combined with liquidity implications of global easing, led by Europe, may raise the prospect of a reappearance of higher inflation going forward.

Tags: Bond Market, Consumer Confidence, Contraction, Economic Data, Gasoline Prices, Home Sales Trend, Housing Market, Hsbc, Initial Jobless Claims, liquidity, Market Radar, Monetary Policy, Moving In The Right Direction, Pmi, Qe, Quarter Gdp, Recession, Signs Of Life, Takeaway, Treasuries
Posted in Markets | Comments Off