Category: Stock Markets

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

From Abheek Bhattacharya:

Partly, steel mills and ports in China, the center of global demand, are stocking up on iron ore. But that is seasonal. Every year, China’s construction season begins in earnest around March. Traders likely bought ore in anticipation. But demand for the year may be weaker than expected. Steel mills as of February reported flat order books compared with January, according to Credit Suisse.

…..In the long term, however, China’s demand for iron ore depends not on its capacity to make steel, but on its demand to consume it. That demand is held hostage by the industrial slowdown. Chinese steel consumption actually fell last year, forcing the country’s steelmakers to export excess capacity…..

Steel consumption is largely driven by real estate development and infrastructure investment, both of which are likely to shrink in the next few years.

Source: China Will Make Sure Iron Ore’s Rebound Won’t Last – WSJ

From Chris Pash:

BHP posted a massive half year loss of $US5.669 billion, the big miner’s first in 15 years, cuts its dividend by more than half and reorganised its management to create a leaner and more agile business.

Revenue was down 37% to $US15.71 as falling commodity prices continue to cut into the business.

BHP declared a fully franked dividend of just 16 US cents, a sharp fall from the 62 cents of the previous year, breaking its progressive policy of keeping payouts the same or higher…..

CEO Andrew Mackenzie says the new dividend policy is part of a broader strategy to help BHP manage volatility.“Slower growth in China and the disruption of OPEC have resulted in lower prices than expected,” he says.

…..Mackenzie expects crude oil prices to remain weak in the short term as high inventory levels weigh on an oversupplied market and rising OPEC exports offset production declines in the US.

“The long-term outlook remains healthy,” he says.

BHP’s outlook for Chinese steel production is unchanged, peaking between 935 million tonnes and 985 million tonnes in the middle of the next decade, as China continues to urbanise and mature its manufacturing capability. “The iron ore price will likely remain low, constrained by weak demand and abundant seaborne iron ore supply. Over time, additional low-cost seaborne supply will continue to displace higher-cost supply, and we expect productivity gains will continue to be an industry feature.”

Source: BHP posts a $US6 billion loss, slashes dividend | Business Insider