The United States has been quite vocal about its “pivot to Asia,” but as Washington seeks to further its influence in the Asia-Pacific, China has been quietly upping its own importance to Central and Latin America. Now China is making a push to further its engagement with countries in the Western Hemisphere, as evidenced by the announcement of a new dialogue mechanism with CELAC.
It's that time again, when a largely random, statistically-sampled, weather-impacted, seasonally-adjusted, and finally goalseeked number, sets the mood in the market for the next month: we are talking of course about the "most important ever" once again non-farm payroll print, and to a lesser extent the unemployment rate which even the Fed has admitted is meaningless in a time when the participation rate is crashing (for the "philosophy" of why it is all the context that matters in reading the jobs report, see here). Adding to the confusion, or hilarity, or both, is that while everyone knows it snowed in December and January, Goldman now warns that... it may have been too hot! To wit: "We expect a weather-related boost to January payroll job growth because weather during the survey week itself - which we find is most relevant to a given month's payroll number - was unusually mild." In other words, if the number is abnormally good - don't assume more tapering, just blame it on the warm weather!
Inflation is hot property today, hyperinflation is even hotter!
- Draghi as ECB Master of Suspense Keeps Investors on Edge (BBG)
- Abe lays out detailed plan for expanding defense powers (Nikkei)
- Inflation Fuels Crises in Two Latin Nations (WSJ)
- Obama walks into crossfire of Asian tensions (FT)
- Harvard Makes Professor Disclose More After Blinkx Slides (BBG)
- Hedge Funds Rework Currency Positions in Market Drop (BBG)
- Canada, U.S. Strike Tax-Information Sharing Deal (WSJ)
- Indonesia calls for greater clarity from Fed on tapering (FT)
- Sony to cut 5,000 jobs, split off PC, TV operations (Reuters)
Today the lingering problems of the "emerging" world and concerns about the Fed's tapering take a back seat to what the European Central Bank may do, which ranges from nothing, to a rate cut (which sends deposit rates negative), to outright, unsterilized QE - we will find out shortly: with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today it virtually assures a surprise . However, despite - or perhaps in spite of - various disappointing news overnight, most notably German factory orders which missed -0.5% on expectations of a +0.2% print, down from 2.4%, the USDJPY has been supported which as everyone knows by now, is all that matters, even if it was unable to push the Nikkei 225 higher for the second day in a row and the Japanese correction persists.
In the years since the Financial Crisis, major Central Banks have been engaged in incredible easing programs that included the injection of massive amounts of liquidity into the financial system. That liquidity, Citi notes, had to go somewhere, and in a search for yield, much of it went indiscriminately into Local Markets. So far, the exodus of money from Local Markets has been “tame” compared to previous EM crises and it has also been selective since countries with weaker economies and foreign reserves have been the ones taking the largest hits. However, as Citi warns, our bias is that this is just the beginning.
The key events this week are have non-farm payrolls (consensus 181K) and unemployment rate (consensus 6.7%). There is also going to be a number of speeches given by Fed policymakers. Production surveys from the US (ISM) and other parts of the world are due Monday. We also get trade balance updates from the English-speaking economies - US, UK, Australia and Canada. Finally, keep track on inflation data from Italy and Turkey: the latter is important to track given current high correlation among 'fragile' EM currencies.
The United States’ rapport with the Russian Federation is one of the world’s most important bilateral relationships. Russia maintains a large nuclear arsenal and is a resurgent player in world affairs. Russia has considered Ukraine to be a vassal for the last five hundred years. Russian President Putin has routinely referred to Ukraine as a Russian state rather than a free and independent country. How would the United States react if Moscow was able to exert influence over Mexico and install a pro-Russian government? America needs to take off her rose colored glasses and look at the world with a Machiavellian view. We should decide to intervene in centuries old conflicts only when there are clear American security interests involved. Unfortunately for the idealistic leaders of American foreign policy, Ukraine does not meet this test. The Ukrainian people have shown an ability over the two decades to have a natural ability to take matters into their own hands and are quite capable of deciding this issue among themselves.
Big Oil Is Gaming the System to RAISE Domestic U.S. Prices
Over the past week we took our fair share of jabs at SocGen EM FX analyst Benoit Anne (the one who said "Governor Basci, You Have Avoided A Domino Crisis In EM"... er, oops?) . They were all in good humor - after all when it comes to sheer contrarian cluelessness nobody, and we mean nobody in the known world, can even reach Tom Stolper's toe nail, whose fades have resulted in over +12,000 pips on these pages alone over the past 5 years. Which is why we follow up the comedy with something more serious: now that the honeymoon is over, Anne has put together a solid compendium on how to trade the EM meltdown, with an emphasis on defensive strategies. Considering the tapering will continue for a long time, and as GaveKal explained yesterday, someone will have to lose (big) before EM normalcy returns, we urge anyone with EM exposure to read this.
- Even Obama's fans has turning on him: "The Decline and Fall of 'Hope and Change'"
- European Stocks Drop, Head for Worst January Since 2009 (BBG)
- Euro-Area Inflation at 0.7% Builds Rate Pressure on ECB (BBG)
- Japan’s Inflation Accelerates as Abe Seeks Wage Gains (BBG)
- Unpossible - this is the USSA: Detroit Debt Proposal Favors Pension Funds (WSJ)
- Keystone Report Said Likely to Disappoint Pipeline Foes (BBG)
- YHOO still pretending someone cares about it: Yahoo says detected hacking attempt on email accounts (Reuters)
- How Google's Costly Motorola Maneuver May Pay Off (WSJ)
- Mexico Surpassing Japan as No. 2 Auto Exporter to U.S. (BBG)
The problem is twofold. First, current accounts are a zero sum game, so future improvements in emerging market trade balances have to come at someone else’s expense. Second, we have had, over the past year, only modest growth in global trade; so if EM balances are to improve markedly, somebody’s will have to deteriorate. When the 1994-95 “tequila crisis” struck, the US current account deficit widened to allow for Mexico to adjust. The same thing happened in 1997 with the Asian crisis, in 2001 when Argentina blew, and in 2003 when SARS crippled Asia. In 1998, oil prices took the brunt of the adjustment as Russia hit the skids. In 2009-10, it was China’s turn to step up to the plate, with a stimulus-spurred import binge that meaningfully reduced its current account surplus. Which brings us to today and the question of who will adjust their growth lower (through a deterioration in their trade balances) to make some room for Argentina, Brazil, Turkey, South Africa, Indonesia...? There are really five candidates...
Beginning by disavowing Mario Gabelli of any belief that rising stock prices help 'most' people, Marc Faber discusses his increasingly imminent fears of the markets in this recent Barron's interview. Quoting Hussman as a caveat, "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There's no calling the top," Faber warns there are a lot of questions about the quality of earnings but "statistics show that company insiders are selling their shares like crazy." His first recommendation - short the Russell 2000, buy 10-year US Treasuries ("there will be no magnificent US recovery"), and miners and adds "own physical gold because the old system will implode. Those who own paper assets are doomed."
Below is a chart which flags the highest external risk among the 10 most prominent EMs broken down by liquidity (reserves over near-term maturities) on the X-axis and capital flows (current account as % of GDP) on the Y-axis. It should come as no surprise, that Turkey is worst, followed by South Africa, India and Indonesia. China, Korea and Russia have current account surpluses and strong coverage of short-term debt by reserves. Brazil also has high reserve coverage of short-term debt. Mexico and Poland have small current account deficits and healthy reserve coverage, in addition to their IMF Flexible Credit Lines. As for Argentina, forgetabout it.
The depressed tone overnight following AAPL's disappointing earnings mysteriously evaporated just ahead of the European open, when around 2 am Eastern the all important USDJPY began an dramatic ramp, (with ES following just behind) which saw it rise from the Monday closing level of 102.600 all the way to 103.250, in what appears to have been a new frame-setting stop hunt ahead of a variety of news including the start of the January - Bernanke's last - FOMC meeting. One of the potential triggers for the move may have been the RBI's unexpected hike in the repurchase rate to 8.00% with an unchanged 7.75% consensus, which was its second consecutive INR-boosting "surprise." Among the amusing comments by RBI's Rajan, justifying the ongoing (loising) fight with inflation, was that India's consumer numbers are weak because of inflation. But... isn't that the Keynesian cargo cult's wet dream?