From Maurice Pomery of Strategic Alpha
Whilst we all await the outcome of the EU summit I want to draw your attention elsewhere:
Whilst the US equity markets closed down 2% last night, it is clear that there is little appetite to put on new trades in front of this summit meeting as evidenced by the lack of interest in Asia. Equities and FX markets were extremely quiet except for when the Aussie CPI came in weaker than expected sparking a fall in the AUD and a complete 25bp cut being priced in for next week’s meeting. To me the AUD looks very exposed to a steep fall as global growth is in trouble. The fall on Wall St was, in my opinion, more on the back of further weak data from the housing market in the US and consumer confidence which is collapsing fast, as the Case Schiller disappointed yet again. Is operation twist going to help? If the answer is no then Bernanke will have to try something else and this view is building as the fall in equities was accompanied by a fall in the Dollar and a steep rise in precious metals, all signs that fears of further QE are building.
There are some issues away from the EU crisis that I think need attention and one of them is deleveraging and a drying up of demand. The cash price of iron ore for immediate delivery to China, a benchmark for Asia, dropped the most in more than two years as demand from steelmaker’s wanes. Last week, Chinese steel prices plunged the most since the 2008 global economic crisis, signalling mills may further curb output. China seemingly has enough stockpiled to last some time and the likes of Australia and other exporting nations are likely to feel this as demand globally drops led by steep declines of demand from the developed world.
I have been warning you all of this and the impact on global growth but this steep fall in Iron ore is very concerning. Copper prices had been in a steep decline before speculation on further QE from the Fed put a spark back in demand but physical demand is still low and is the best leading indicator for global growth prospects. Additionally and another point I have tried to highlight is that the consumer in the developed world is starting to deleverage as evidenced by the rise in savings ratios in the UK and less money being spent on credit cards. Across the developed world the consumer is considering the impact of rising unemployment and rising essential costs and the household debt burden is still enormous. Demand side dynamics do matter; third-quarter profits at 3M, one of the US’s biggest industrial conglomerates, missed Wall Street expectations and the company slashed its outlook for full-year earnings, as sales of consumer electronics dropped, reflecting what the company said was “generally slowing economic growth in the developed world”. Cummins, one of the world’s biggest engine-makers, also cut its full-year outlook, citing a sharp drop-off in demand in emerging markets. Expect a lot more of this.
Interestingly or rather strangely, the extremely low levels of consumer confidence has yet to hit retail sales in both the US and UK but looking at the numbers I would suggest they are very likely to soon or the data is being manipulated! Consumers are closer now to getting maxed out on credit and they won’t get or want any more. Yes the very wealthy have been spending on the likes of Louis Vuiton but the majority are beginning to save and shed debt. This MATTERS. Even in Canada growth is being scythed lower as the finance minister cuts growth from 2.8 to 2.1%! Europe is as good as in a recession as I mentioned yesterday and this will impact whether they come up with a deal or not tonight and in my opinion too many analysts are missing what is going on with the economics out there.
US consumer confidence is collapsing and there is no other word for it. The Conference Board's index of consumer confidence posted yet another decline in October, falling to 39.8 (previous: 46.4) - the weakest reading since the end of the recession! Looking at the detail there is a rather worrying issue here as the decrease reflects declines in both the present situation and expectations components, whereas the previous, more recent major moves down in the index were driven primarily by the expectations component. This means the concerns are NOW. Spending will now surely take a hit and some shocks in retail sales are on the way in the US and in the UK as deleveraging is forced upon the masses. I cannot highlight or stress how important this issue is to growth everywhere. As prices increase and wages stagnate, things are going to get tougher into the winter and I note with interest the component in the US data highlighting concerns over future earnings. In the past low confidence has not always hit sales but in my mind things are different as the debt burden is almost unbearable and many have little credit left, adjustments will have to be made.
When these adjustments come through, in my mind very soon, the Fed and other central banks may see a steep move towards deflation as growth stumbles and economies go back into recession, probably led by the EU then the UK and finally the US. The world cannot fill that massive customer void. The timing of this could be dreadful as just at a time when the world needs China and the other Asian exporters to pull us through, the hard landings will hit. Global growth expectations are far too optimistic and policy shifts will be swift where possible. What the world does not need right now is a falling Dollar as that complicates matters worse but it is of little concern to Bernanke and Geithner as they are concerned about America and rightly so.
Again I reiterate that a world where we have deleveraging from Sovereigns (which demands draconian austerity measures), banks (lack of credit supply to small businesses, the essential for growth) and the consumer, is not a world that is going to grow. In fact the speed of the fall could surprise. Data suggests to me that the EU issue is not the main concern, it is deleveraging and this will dominate long after the EU idiots come up with some compromise to delay things further.