Beijing leadership’s quandary is that the struggle to refashion the Chinese economy with further liberal economics comes up against the determined effort of the CCP to maintain its power monopoly
A dispassionate discussion of the major forces impacting the investment climate in the week ahead.
With Malaysian authorities frustrated (and seemingly confused), and US and Chinese government offering "help" to solve this increasingly mysterious disappearance of the Boeing 777-200ER over a week ago, we thought a quick summation of all that we know would be useful. The possibilities remain numerous but it appears the latest line of investigation is the pane vanished through "deliberate action" with the airline pilots coming under increasing scrutiny.
It has been over a week since Malaysia Airlines Flight MH370 disappeared without a trace, and the world is nowhere closer to finding either where the airplane and its 239 passengers and crew are to be found, nor what actually happened. Instead, what initially was speculation about a midair disintegration, and subsequently suggested a potential case of airplane terrorism gone wrong, has now transformed into a theory that the pilot and/or crew may have been engaged in "foul play", especially since it appears that based on tracking data, that the plane flew for nearly seven hours after someone "skilled" purposefully shut down its communications and tracking beacon: possibly indicative of a stealthy midair hijacking. However, the same satellite data gave no precise location, and the plane's altered course could have taken it anywhere from central Asia to the southern Indian Ocean.
In the aftermath in the recent surge in China's renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China's "fight with speculators" (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn't done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan's trading band against the dollar from 1% to 2%.
"The best way to define the mood in the market right now is panic," warns one commodity broker, adding that "everyone understands why we are going down, but nobody can tell where the bottom is." As the WSJ notes, the economic slowdown in China is hammering prices of some raw materials, driving down industrial commodities from copper to iron ore and coal - exacerbated by the vicious cycle of credit-collateral-contraction. So what is the cheapest way to play continued stress (with potentially limited downside)? The diversified natural resources company Glencore has a huge $55 billion of debt, is drastically sensitive to copper (and other commodity) prices, and its CDS remains just off record tights...
China is the reason so many companies tell you how great their prospects are.
It was another day of ugly overnight macro data, all of it ouf of China, with industrial production (8.6%, Exp. 9.5%, Last 9.7%), retail sales (11.8%, Exp. 13.5%, Last 13.1%) and fixed asset investment (17.9% YTD vs 19.4% expected) all missing badly and confirming that in a world of deleveraging, the Chinese economy will continue to sputter. Which is precisely what the "bad news is good news" algos needs and why futures levitated overnight: only this time instead of latching on to the USDJPY correlation pair, it was the AUDJPY which surged after Australia - that Chinese economic derivative - posted its third best monthly full-time jobs surge in history! One can be certain that won't last. But for now it has served its purpose and futures are once again green. How much longer will the disconnect between deteriorating global macro conditions and rising global markets continue, nobody knows, but sooner rather than later the central planner punch bowl will be pulled and the moment of price discovery truth will come. It will be a doozy.
"I don’t think they’ve solved anything. I think they’ve compounded the underlying problems that caused the last crisis, and so now the next crisis will be that much worse because of what the central banks did, in particular the Federal Reserve...The Fed is building an economy that is completely dependent on that cheap money. And so if you take it away, the economy implodes, but if you don’t take it away, then it’s worse." The idea is to preempt capital controls - "get out the window before it slams shut!"
Australia just added the 3rd most full-time jobs ever in a month according to the Aussie Bureau of Statistics. That is 16-times the average monthly gain since 1978. Of course, rather than shrug it off as some idiotic aberration as the nation suffers under the crushing blow of a collapsing commodit market and shrinking China, "traders" bid AUDJPY to the moon (which sparked a mini-rally in US equity futures).
At the onset of the derivatives collapse in 2007/2008 it would have been easy to assume that most of America was receiving a valuable education in normalcy bias. As much as we are for people waking up to the nature of the crisis, there comes a point when those who are going to figure it out will figure it out, and the rest are essentially hopeless. The cultism surrounding the U.S. economy and the U.S. dollar is truly mind boggling, and by “cultism” we mean a blind faith in the fiat currency mechanism that goes beyond all logic, reason and evidence.
While progress on the search-and-recovery efforts of the missing Malaysian Airlines jet continues to disappoint, the stolen-passport plot thickens considerably. While earlier we discovered that it was a mysterious "Mr. Ali" that purchased the tickets for the two passengers traveling on stolen passports (with cash), The Telegraph reports that BBC Persia confirms they were Iranian nationals. According to another Iranian friend (who had hosted them while in Kuala Lumpur) the two were "looking for a place to settle" in Europe (intending to complete their journey in Frankfurt and Denmark).
Iron Ore prices have dropped 25% since the end of last year, sending the key steel-making component into a bear market after slumping by over 9% overnight - its biggest daily drop on record. We warned last week this was likely to happen on the heels of Copper prices fell on monetary financing fears as we explained here how Iron Ore replaced copper as the collateral pool for new loans (following China's clampdown on cash-for-copper deals last year) and stockpiles hit record highs. What is further hurting the Iron ore prices are concerns over China's new anti-pollution reforms which are set to close thousands of furnaces.
This week brings a slew of central bank meetings: At the forefront will be the BOJ meeting on Tuesday where no changes to monetary policy are expected. However, we will be watching the commentary closely for hints to further monetary easing in the coming months. Goldman, and others, still expect the BOJ to provide additional stimulus in the second quarter of this year as the impact of the consumption tax hike on the economy becomes visible - it is that expectation that sent the USDJPY above 100 in late 2013 and any disappointment by the BOJ will certainly have an adverse impact on the all important Yen carry pair. In terms of the key data to watch this week, the themes of recent weeks remain the same: US activity data, with retail sales and the U. Michigan Consumer sentiment survey the main releases, European inflation trends (French and German HCPI data on Thursday and Friday, respectively), and finally external balances in EM. Within that group, the latest data points for trade and current account balances in India, Turkey and South Africa will receive the most attention.
Will London's current property bubble play out to be one of the most costly ever and end up costing UK and foreign investors billions?