Friday, June 20, 2014

Economic Summary for the week ended 20th June 2014

China - Foreign investment in China fell in May to its lowest level in 16 months, partly due to slowing growth. The government says China attracted $8.6bn in foreign direct investment (FDI) in May.
That is a 6.7% fall from the same period last year and marks China's weakest FDI report since January 2013.
Economists say prospects of slower growth in the world's second-largest economy may have deterred foreign investors.
China's economy expanded at the pace of 7.4% in the first three months of this year, down from 7.7% growth in the previous quarter.
U.S. - The International Monetary Fund (IMF) has slashed its U.S. growth forecast, urging policy makers to keep interest rates low and raise the minimum wage to strengthen its recovery.
The crisis lender said it expects 2% growth this year, down from its April forecast of 2.8%, after a "harsh winter" led to a weak first quarter. However it expects 3% growth in 2015.
It also said the U.S. should increase its minimum wage to help address its 15% poverty rate.
"Given its current low level (compared both to US history and international standards), the minimum wage should be increased," the IMF said in its annual assessment of the U.S. economy.
Argentina - Argentina's stock market closed 4.9% lower on Thursday after the country's cabinet chief said there would be no delegation to the US to negotiate with bondholders over a $1.3bn (£766m) debt.
Earlier this week, a US Supreme Court ruling sided with bondholders demanding Argentina pay them the amount in full.
Argentina defaulted on debts in 2001 following a severe economic crisis.
It has been in a legal battle with a number of US hedge funds which lent money to the country.
Many hedge funds have agreed to accept a partial repayment, but others, led by NML and Aurelius Capital Management, are demanding payment in full.
Commodities - India has taken over from the U.S. as the largest importer of Nigerian oil, the West African state's national oil company has said.
The US has "drastically reduced" its demand for Nigeria's crude oil in recent months, the Nigerian National Oil Corporation said. The country is currently buying about 250,000 barrels a day.
India now buys considerably more - about 30% of the country's 2.5 million barrels of production.
U.S. demand for imported oil has fallen sharply because of increasing domestic shale gas and oil production - so much so that the International Energy Agency and oil giant BP both forecast that the country will be largely energy independent by 2035.
Commodities - Investors are moving back towards safe haven assets such as gold as ongoing violence in Iraq hits markets.
Gold climbed to a three-week high of $1,282 an ounce on Thursday, a 0.6% increase and the fifth day of gains as Iraqi insurgents seized control in parts of the country. The metal has risen 6.7% this year on tensions between Russia and Ukraine.
Silver, palladium, and platinum also saw a rise, with silver reaching a one-month high of $19.8 last week.
On Friday, Brent crude oil passed its previous high of $114 per barrel after Iraqi militants threatened to halt repairs to an oil pipeline.
Spotlight on: Will ISIS push oil prices to critical point?
Escalating violence in the Middle East could impact global economic activity as oil prices continues to climb.
In the past week, the Islamic State of Iraq and al Sham has taken several northern Iraqi cities by force and despite the fact the majority of Iraqi oil fields are located in the south of the country, this violence has already made investors nervous.
Capital Economics chief emerging markets economist Neil Shearing says: “The unfolding crisis in Iraq has cast a shadow over the region, causing equity markets to tumble. As it happens, the largest Middle-east and north African economies have only limited trade and financial ties with Iraq, meaning that, in aggregate at least, the economic spillovers should be fairly small.
“But some countries, such as Jordan, do have relatively large trade ties with Iraq while in others, such as Lebanon, the crisis could exacerbate existing sectarian divisions.”
Outside of the region, the price of oil is being negatively impacted by this surge in Iraqi violence and could impact global investors.
The Brent Crude oil benchmark currently pegs the price of oil per barrel as $115.06, very close to the “critical” $120 per barrel level according to Old Mutual Global Investors fund manager Richard Buxton.
Buxton, who manages the £1.4bn Old Mutual UK Alpha fund, says: “Ongoing conflicts in the middle east are absolutely at the top of the worry list. We have been concerned all year about this but this is clearly spilling out in a much more dramatic fashion.
“Oil is currently hovering below that critical $120 per barrel level which we have seen several times in recent years. If it goes over this it slows in terms of economic activity. We have to keep a very close eye on this and it would have a very material impact.”
BlackRock global chief investment strategist Russ Koesterich argues a prolonged price rise in oil would pile additional pressure onto the global economy as it suppresses stocks and raises volatility.
As a result, Koesterich says: “Higher oil prices, coupled with still reasonable valuations in the sector, support a continued overweight to energy stocks.
“At the same time, higher oil and gas prices represent yet another headwind for a consumer already struggling with slow wage growth and high personal debt. In a world of modest growth and a strapped consumer, we believe a cautious view toward consumer discretionary companies is warranted.”
With debate now raging as to the possibility of western intervention into Iraq, Ashmore head of research Jan Dehn sees a resolution to this crisis via this route as unlikely due to past geopolitical crises.
Dehn says: “The west’s loss of moral authority to act has already inflicted diplomatic defeats on western powers in the Syrian conflict and over Crimea and in Georgia. “We see very little chance that the west will be able to significantly ramp up its influence in the region from current levels, which means that the west’s most important allies increasingly have to rely on their own financial and military means to see off the threat to their rule from militants.”

Wednesday, June 11, 2014

Economic Summary for the week ended 9th June 2014

China - China's service sector grew at its fastest pace in six months in May, helping allay fears of a sharp slowdown in its economy.
The non-manufacturing Purchasing Managers' Index (PMI) rose to 55.5 in May from 54.8 in April. The PMI is a key indicator of the health of the sector and a reading above 50 indicates expansion.
It comes just days after China reported that the manufacturing sector grew at its fastest pace this year in May.
China's service sector, which includes construction and aviation, accounts for nearly 43% of its overall economy.
Spain - Spain is set to introduce a new stimulus package totalling €3.6bn ($4.9bn) in a bid to bolster the country’s nascent economic recovery.
Spanish prime minister Mariano Rajoy has announced that the new measures will be brought in next week in an attempt to create jobs and encourage the competitiveness in the economy.
“Next Friday, the government will present a package of measures to increase competitiveness and productivity,” he said.
“The plan will include investments totalling €3.6bn, of which €2.67bn will come from the private sector and €3.63bn from the public sector.”
As part of the new package, Spain’s main rate of corporate tax will be cut to 25% from 30%.
Middle East - Qatar’s shares fell for a third day on Wednesday and bonds dropped on concern that the Persian Gulf nation may lose the right to host the 2022 soccer World Cup, potentially jeopardizing some of its $200bn investment plans.
Qatari stocks, among the world’s best performers this year, have lost 4.1% in the past three days after the U.K’s Sunday Times reported that payments were made to soccer officials in return for allowing the Arab country to host the tournament. Rashid al Mansoori, chief executive officer of the Qatar Exchange, maintaining that the nation won the bid with “credibility” and corruption allegations were“noise.”
“If countries are asking for a re-vote, this will hurt the market further,” Hisham Khairy, the Dubai-based head of institutional trade at Mena Corp. Financial Services LLC, said. “I would stay away at the moment and wait for things to settle.”
Japan - Japanese shares gained this week, with theTopix index rising for a tenth day on Wednesday, its longest winning streak since August 2009, as the yen weakened and steelmakers advanced.
The Topix rose 0.4% at the close of trading in Tokyo after falling as much as 0.1% throughout the day. About three shares rose for every two that fell. The gauge posted its longest winning streak since the 13 days through Aug. 4, 2009.
“The future is looking brighter for Japanese shares,”said Hiroichi Nishi, an equities manager in Tokyo at SMBC Nikko Securities Inc., citing factors such as a weaker yen and the relative cheapness of stock prices. “However, the danger of overheating is increasing.”
Brazil - Brazil’s industrial production in April contracted for the second month in a row, as output of capital goods and consumer durables fell.
Production dropped 0.3% from the previous month after contracting 0.5% in March, the national statistics agency said Rio de Janeiro. The decline was smaller than the the median estimate of a 0.4% fall from economists surveyed by Bloomberg. Production declined 5.8% from the year before, versus a 6.1% fall forecast by analysts.
Brazilian industry has sputtered as the central bank raised borrowed costs over the past year to combat above-target inflation, leading to a slide in business and consumer confidence. Manufacturers have also been hit by economic troubles in Argentina, Brazil’s third-biggest trading partner. Analysts expect the currency to weaken by year-end, improving the outlook for exporters.
Today’s data “add to the building sense of concern in this sector,” Daniel Snowden, emerging markets analyst at Informa Global Markets, said. “No matter what the government seems to do, no matter what the central bank seems to do, the sector just doesn’t want to put together any kind of consistent run. It’s been lifeless.”
Spotlight on: More life left in the U.S.?
Fidelity Worldwide Investment's Dominic Rossi says questions over the ability of the U.S. to keep leading global indices higher are misplaced, with the region in the middle of a bull market and capable of climbing another 25% from here.

Some investors are beginning to question whether the U.S. economy and its stock markets can continue to provide leadership to global equity markets after a strong run during which valuations have re-rated.
In my view, the answer is a firm yes. While the U.S. economy has had a subdued start to 2014, the strength and duration of its resurgence will surprise investors.
Market volatility remains anchored, valuations are not expensive, and profits can move higher despite concerns over ‘peak’ profitability.
With the prospect of supportive liquidity conditions, a return to the ‘cult-of-equity’ could drive a multi-year bull market in stocks.
Anchored volatility allows valuations to expand
It has been a solid first quarter for equity markets after a strong 2013. The resilience of markets has been particularly impressive given they had ample opportunity to take flight. But equity markets have shrugged off uncertainty over the crisis in Ukraine and weak U.S. growth.
It was striking how resilient equity markets proved to be and how contained volatility stayed during this period.
Equity market volatility is being anchored at low levels by confidence in the positive structural outlook for the U.S. economy. When implied volatility (VIX) falls below 20, we have a favourable environment that allows valuations to expand.
Lower volatility was a pre-requisite for the re-rating in markets we saw in 2013, and it is currently well below 20. While many investors got used to elevated volatility through 2008-2012, it can stay low for a sustained period, much like it did in the 1990s, so investors should be wary of only looking at the recent past.
In terms of what might trigger volatility, the interest rate cycle has become the key focus. U.S. Fed chair Janet Yellen recently let slip at a press conference the phrase “six months” in response to how soon the interest rate cycle could start after tapering is completed.
While there was a small spike in volatility and equities fell on the news, there was no reaction from U.S. 10-year treasuries, indicating the lack of concern among bond investors about inflation risk.
Resurgent U.S. will continue to lead global stock markets
In the US, the news is only going to get brighter. I think we are at an inflection point in the U.S. economy, and I am not convinced the market is fully recognising how rapidly the economy is strengthening.
The data is improving across the board, whether it is loans data, manufacturing PMIs, services PMIs, or consumer confidence data.
The speed of the improvement in the budget deficit is remarkable. Since 2009, the fiscal deficit has shrunk to around $600bn from $1.5trn. It is not implausible President Obama will finish his term with a fiscal surplus.
In this case, I think we are looking at a U.S. equity market that is similar to the late 1990s, one in which equities should be well supported by liquidity.
Valuations and earnings can go higher
Equity markets are no longer cheap, but nor are they expensive. In the U.S. market, we have a slightly unusual situation in earnings expectations at present.
Usually, we start the year with high and unrealistic earnings forecasts which have to be revised down. The opposite is the case this year, and we are likely to have a strong earnings season versus subdued expectations.
Beyond that, it is prudent to consider the standard counterargument to the buy case for the U.S., which has lately become commonplace. This argument points out the U.S. is on a P/E of 16 times, yet corporate profitability is at record highs.
If we cyclically adjust for peak profits, then the P/E is 22 times. Given we are approaching an interest rate tightening cycle, the bears say this makes the U.S. market a sell.
This is naïve in my view. Profit margins may well be at record highs, but I think they can move higher. The distribution of profits between capital and labour in the U.S. is going through a fundamental shift.
There are a number of reasons why profit margins can stay high, such as the globalisation of labour forces, less organisation of labour, technological change, and the ability of markets to press companies to focus on profit margins in a way that just did not happen 30 years ago.
Overall, the outlook for corporate earnings remains favourable.
Buy on the dips
The U.S. market is going to break out strongly on the upside from its current period of consolidation. With compressed yields on U.S. and euro credit, equities will look attractive versus credit as earnings come through.
The danger is U.S. equities have a too-strong rather than a too-weak year, given the positive outlook for both liquidity and earnings.
It is evident some investors have been left a little traumatised by the bear market in equities and are still relatively fearful.
However, I believe we are in the middle of a bull market and, in a bull market, you buy the dips.
In this light, if we get a mid-cycle correction based on the expected onset of the interest rate tightening cycle in 2015, this would be a buying opportunity, and, the S&P 500 could move to 2,000-2,300 from its current level of 1,800.