Author: ColinTwiggs

From Bob Doll at Nuveen Investments:

It May Take Better News for the Rally to Continue

Financial markets appear to be normalizing in recent weeks after the risk asset rout that started the year. We would caution, however, that market improvements have come about because the news has become less bad, not because it has turned good. Investor sentiment is fragile and will likely remain so for some time. One of the key variables remains oil prices. Oil markets have stabilized in recent weeks, but volatility and a renewed downturn could occur anytime. We also believe we need a sustained improvement in U.S. and Chinese economic data before investors grow more confident. Finally, the global political system remains a wildcard. The current focus is on the possibility of the United Kingdom leaving the European Union. The odds favor the status quo, but a potential “brexit” would be destabilizing for the U.K., and the uncertainty is fueling downward pressure on risk assets.

I agree with Bob’s view that a broad US recession is unlikely. Energy and Materials sectors are contracting but the rest of the market has so far held up well. But I am concerned that profit margins are falling and sales growth is slowing — which could lead to weaker stock prices.

Shrinking bank net interest margins and a flattening yield curve both warn of a future credit contraction, however, that would make recession highly likely. Based on past (reactive rather than proactive) performance by the Fed we cannot expect swift action to avoid this threat.

Source: Weekly Investment Commentary from Bob Doll | Nuveen Investments

From Ben Bernanke:

China faces the classic policy trilemma of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows. Accordingly, China’s ability to manage its exchange rate may depend, among other factors, on its willingness and ability to adjust on other policy margins.

…..An economy that is growing more slowly, and in which monetary easing is the principal macroeconomic response, is not an economy that offers high returns to domestic savers. Consequently, Chinese households and firms who are able to do so are spurning yuan-denominated investments and looking abroad for higher returns. However, increased private capital outflows also constitute a flight from the yuan toward the dollar and other currencies; that, in turn, puts downward pressure on China’s exchange rate.

In the short run, the PBOC can offset this pressure by selling some of its enormous stocks of dollar-denominated securities and buying yuan; indeed, Chinese reserves have fallen over $700 billion over the past year and a half. With more than $3 trillion in reserves yet remaining, China should be able to defend its exchange rate for some time. If nothing else changes, however, eventually China will run low on reserves and will no longer be willing or able to buy up yuan in the foreign-exchange market. At that point the currency would fall, probably sharply….

The former Fed Chairman’s analysis of possible solutions provides insight into the extent of the problem:

1. Sharp devaluation would cause global deflation and spark currency wars;
2. Controls on capital outflows are unlikely to be effective and would discourage investment; and
3. Fiscal policies aimed at re-balancing the economy and increased welfare payments would need massive scale to have an impact.

It is clear there is a giant panda (rather than an elephant) loose in the lifeboat which is likely to destabilize the global economy over the next decade.

Source: China’s trilemma—and a possible solution | Brookings Institution

From FT.com:

In dollar terms China’s exports fell 25.4 per cent in February from a year earlier, the worst one-month decline since early 2009 and down from an 11.2 per cent drop in January. Imports fell 13.8 per cent, trimming losses after an 18.8 per cent fall in January.

The IMF is growing increasingly concerned about the state of the global economy because of what it sees as signs of a further slowdown. It has already said it is likely to lower its 3.4 per cent growth forecast for this year when it issues its next round of predictions in April.

Not a good time to bet on rising oil and commodity prices.

Source: IMF issues warning on global growth as China exports plunge – FT.com

From Huileng Tan at CNBC:

Hard data however is not supportive of the [recent iron ore] price moves.

“We are yet to find evidence of higher-than-expected steel demand – whether in the order books of individual steel producers or in the official data for new orders. Based on the information currently available, the seasonal increase in demand appears only marginally stronger than last year,” Goldman Sachs said.

Source: Iron ore rally short-lived, prices to come off: Goldman Sachs

From Stephen Cauchi at SMH:

HSBC is the latest to join a chorus of voices warning that the rally in iron ore prices may be soon be curtailed, with global oversupply and waning demand from China about to kick in.

…..”Iron ore supply has ramped up rapidly in recent years as major projects in Australia and Brazil come on line,” said HSBC.

“The problem, now, is that production is still likely to expand over the rest of the decade as capacity already in Australia and Brazil continues to come on line.”

Source: Iron ore rally won’t last: HSBC tips $US39 by 2017

From David Llewellyn-Smith:

…..real GDP remains a misleading measure of how Australia is faring. The key to the mining boom was not GDP strength – real GDP growth was weaker than in the 1990s – but the income uplift from rising terms of trade. The issue now is the income drag from the terms of trade falling. Real per capita net income fell 2¼% through 2016. Australia is now the midst of the longest period of declining per capita income since quarterly data started in 1959 (Exhibit 1).

Source: Minack exclusive: Australian recession risk still live – MacroBusiness

Some interesting charts from David Llewellyn-Smith at Macrobusiness:

Real estate construction is shrinking and likely to affect long-term demand for steel, iron ore and coking (metallurgical) coal.

Source: Charts that make you go ‘hmmm’ about the iron ore rally – MacroBusiness