As many will know, part of the most recent Chinese stock meltdown has been weak economic data. Now with the government reportedly buying to prop up stocks, new inflation data has come in. Consumer prices rose just 1.6% year on year in December, while producer prices fell 5.9%, more than expected. The article says that deflationary pressures have eased in China, but they are still a concern. The worst of the slowdown is falling on the manufacturing sector, which can be seen in how much producer prices are falling. The chief economist for HSBC, Qu Hongbin, says “The weaknesses in both domestic investment and external demand have exacerbated the deflationary pressures in the economy. All measures of prices now underscore the rising deflationary risks”.
FINSUM: This is bad news, and while it is not worse than recent inflation data, it will do nothing to help stem the tide of panicked selling in China.
Source: Financial Times
Bank of America Merrill Lynch has made a bold and unsettling prediction for 2016: Chinese stocks (Shanghai Composite) will fall nearly 30% this year. The forecast comes despite, or perhaps because of, the fact that Chinese equities saw a huge decline during summer 2015. The bank thinks the unwinding of the huge build-up in leverage the country has seen will hurt the economy and markets there. The bank’s head of China strategy, David Cui, who is known to be a bear on the nation, said “Historically, any country that grew debt this fast inevitably ran into financial-system problems, including currency devaluation, banking recap, and high inflation, and we do not expect China to be an exception”.
FINSUM: We are not specialists on the Chinese market, but we certainly agree on the overall direction of the economy and markets there. The way the markets have started the year only supports this thesis.
China suffered a severe market rout yesterday, with trading halted on major exchanges as prices fell near or more than 7% across the country. In response, China’s government stepped in to stem the falls today, which helped to stabilize the country’s indices. Some traders and analysts said that the “national team” of state-backed financial institutions resumed buying shares the way they did over the summer in order to stabilize the country’s exchanges. Commenting on the volatility more generally, one analyst had this to say, “The moves seen in Chinese stock markets are quite concerning. Many market internals point to a likely renewed sell-off and a revisit of the late-August lows”. The PBoC also injected more cash into the banking system today as a measure to further help stem fears.
FINSUM: China stepped in and dealt with this round of panic much faster than it did in the summer. However, propping up markets may not solve the underlying problem of a slowing economy.
Source: Financial Times
The world’s biggest oil market has much better options than US crude. Asia, which is the biggest center of oil demand on the globe, seems unlikely to be buying much US crude oil as the export market loosens in America. This piece says that US oil is too expensive, too high quality, and simply too far for Asian buyers. The US’ light oil is not feasible for many refiners in Asia, which are used to much heavier, high sulphur content crude. Add on the fact that US oil has to go a third farther than oil from the Middle East, and suddenly US oil looks expensive and somewhat irrelevant in Asia. One head of a refinery in India commented this way, saying “U.S. light oil economically is not viable for most of Asian refiners … The majority of the refiners in this region are not configured to use light oil, plus there is a long charter time and high freight costs involved”.
FINSUM: This article shows that while US crude exports are opening up, it is not as if the world is chomping at the bit to get US oil.
Emerging markets are continuing to see their financial assets deteriorate. According to the Institute for International Finance, emerging markets once again saw portfolio outflows in November. After rising in October, last month saw total EM stock and bond outflows by non-resident investors of $3.5 bn. The IIF cited increasing confidence over a US interest rate hike this month as a reason for the resumed outflows, after a brief recovery in October following the Fed’s decision to delay rate rises. All regions except Latin America were likely to have seen outflows the IIF said. Interestingly though, despite its brutal recession, Brazil is still seeing inflows.
FINSUM: Emerging markets seemed to have hit a period where they will suffer for a number of years as they deleverage. Investors and analysts have clearly picked up on this, which explains the deterioration of EM assets.
Source: Financial Times
Brazil’s economy is headed nowhere fast, as new GDP data shows the size of the country’s economy dropped a staggering 4.5% from this time last year. Latin America’s largest economy shrank 1.7% in the third quarter, with a 2.1% drop the previous quarter. The shockingly bad numbers have led Goldman to say the country is facing an all out depression. Brazil is facing a huge budget deficit, a partial government shutdown, sky high rates, and double digit inflation. The chief Latin American economist at Goldman Sachs summarized the situation this way, saying “What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand”.
FINSUM: And one wonders why the BRIC concept has lost its traction! Emerging markets are in the midst of a broad downturn, and Brazil is at the very leading edge of that.