Quotes: MENA   Enter Symbol: NewsLetter: Search: advanced

Implications of China's currency move poorly understood  Join our daily free Newsletter

MENAFN - Muscat Daily - 26/02/2014
No. of Ratings : 0
Add to Mixx!



(MENAFN - Muscat Daily) The market seems to be very sluggish in picking up on the implications of China's recent move to weaken its currency, with the Yuan now suddenly trading at its lowest level in months versus the US dollar.


My conclusion is this:

  • China will slow down to five per cent growth over the next two to three years;
  • China will start devaluing its currency in response to Abenomics and China's weaker terms of trade;
  • China will no longer be the world's biggest investor and importer of investment goods.

    This will have huge implications outside of China and in 2014, these developments will likely mean the following:

  • Germany growth will turn negative (quarter-on-quarter) in the fourth quarter relative to the third quarter;
  • World growth will come down from its recent 3.7 per cent to less than 3 per cent;
  • The recovery projections will once again be postponed and the out-of-synch monetary policies of the major central banks will be questioned, leading to all-time new lows in interest rates;
  • Deflation will take hold in Europe and become a major risk in the US;
  • Equity markets need to be sold off. This comes after commodities sold off after the US banking and housing crisis, followed by fixed income during the late stage European debt crisis. Now I see a 30 percent correction in the second half of 2014 after a high is registered between current levels of 1,850 and 1,890 in the S&P 500. 

    China leads the world economy. It took the burden of supporting world growth in its hands during the peak of the crisis in 2008/09, with the largest fiscal expansion ever seen (nearly US600bn). China also increased its investment-to-GDP ratios, which brought export orders for major European and US exporters until late 2013. But since the Third Plenary Session of the 18th CPC Central Committee in November 2013, the main objectives for the political elite in China have changed from growth for its own sake to rebalancing, fighting graft, reducing pollution and hoping that they can engineer a transition of their economic growth model with a smaller crisis now rather than a bigger one later.


    I have already spent some effort explaining why China is proactively seeking a small crisis rather than a big one and how China can no longer afford to keep its investment-to-GDP levels at excessive levels. Now, China seems to have embarked on a fundamental change to its currency policy with its move to weaken the renminbi. It's worth noting that China has been a strong critic of Abenomics and the resulting JPY devaluation as Japan and Korea remains its key export competitor. But until last week, China allowed its currency to continue higher in recent months ”a side effect of a relatively tight monetary policy that was aimed at reining in bubbly credit markets. But now the focus has shifted back to the risks from a strong yuan and China's shift to weaken the currency is a pivotal new development:
    Saxo-Bank

    With the present tensions between China and Japan, this chart is cause for concern for all of us: it now appears that China will no longer "play nice" and we have to wonder what this will mean for the US-China relationship. US President Barack Obama's provocative decision to receive, once again, the Dalai Lama in the White House is not helping the situation. That the rally in USDCNY kicked off almost to the day Obama hosted the Dalai Lama is, of course, a pure coincidence (they met on Friday, February 20)!


    China is not happy these days: the domestic economy needs rebalancing, with the risk that doing so upsets the population and those in the public sector who have benefited so handsomely from the status quo of the past several years. Overseas, Japan's Abe is insisting on a stronger Japan, the US is "misbehaving" by talking to the Dalai Lama and the recent G20 meeting had the developed world blaming the recent slowdown on emerging markets.


    It's certainly not been a good month for monetary policy coordination or friendly summits. The growing potential for a political crisis comes ironically at a time when stock markets across the world are reaching 7-, 14- or even all-time highs, as was the recent case of the US S&P 500 Index.


    My old economic theory: The Bermuda Triangle of Economics remains in place. We've still got slow growth, high unemployment and high stock market valuations ” all driven by a policy that only benefits the 20 percent of the economy that comprises large, listed companies and banks, who get 95 percent of all credit and access to policy subsidies. Meanwhile, the 80 percent of the economy that is the SMEs, who historically create 100 percent of all jobs, get less than 5 percent of credit and less than 1 percent of the political capital.


    Markets and monetary policy


    It's the weather! The reason for the disappointing start to 2014 in the US is now all about the weather ”well partly. I think most investors/pundits forget that the data for December and January was actually ''born'' three, six and nine months before due to impulses in interest rates and the overall cycle. As I have covered in the past, the slowdown in housing was ''expected'' in our models owing to the spike in mortgage rates between May and August 2013.


    Elsewhere, the US consumer must have known the weather would be bad as far back as last summer judging by this retail sales (Mom) chart:
    FRED

    US consumers remain two thirds of the economy, but they are still conservative: spending rose two per cent in 2013 after 2.2 per cent in 2012 and 3.4 per cent in 2011. This is mainly due to low wage growth. Since 2010, the average after-tax income growth, adjusted for inflation, has only been 1.6 percent ”to reach the magic three per cent growth level, we will need wages to grow at least 3 percent on their own! This is not likely to happen in world of excess capacity, but nevertheless the pundits started the year with a 2.9 per cent average expected growth for 2014. Now, one month into the year, the revisions are pouring in: the first quarter has already been reduced from 2.3 per cent to two per cent and the blockbuster Q4 growth of 3.2 per cent is now expected to be revised lower to only 2.4 per cent! Again, one has to laugh at how imprecise these measures are ” we watch them, take decisions on them but ultimately their reliability is really only valid six months past the first announcement. Talk about looking in the rear-view mirror!


    Strategy


    Fixed income: still see new low yields in 2014 ”mainly in Q4 ” and into Q1 2015. ETF flows into fixed income are at USD 16bn year-to-date, which could be the largest inflow since 2002! Mainly prefer US and core Europe, although Italy's BTPs have done well with the political transition from Enrico Letta to Matteo Renzi as prime minister. My view on falling yields goes back all the way to last year.


    Dividend yield is at 1.89 per cent versus 2.72 percent and still attracts my money.


    Equity: We have had a call for a peak in Q1 ” admittedly I did not expect 1,850 to be broken, but my partner in Economo-physics still sees the chance of 1,870/90 before a top is in place. I submit our updated November 2013 forecast, which, slightly corrected, still stands. The risk reward looks compelling: the upside is perhaps 50 S&P 500 points versus 500 points of down-side potential. Remember that a 20 percent to 30 percent correction happens every four to five years ” and a 10 percent correction occurs twice a year, on average.
    Equity

    OVerall, the USD should soon find support. The best long-term gauge of the USD is world growth minus US growth. Why? Because the USD is the reserve currency and often the currency of choice in trade. When world growth is slowing (now ) then the US and the USD need to pull ahead to fill the gap. We need to monitor the US Dollar Index over the next week or two as it's sitting on a major trend support line.
    US-Dollar

    Conclusion:


    China has now joined the currency devaluation game as it jostles with others for some wind for its sails. But there is only so much wind to go around. 


     


    By Steen Jakobsen


    Steen Jakobsen was appointed to the position of Saxo Bank's chief economist in March 2011.J Jakobsen has more than 20 years of experience within the fields of proprietary trading and alternative in

  •  


    Muscat Daily




      MENA News Headlines
     Nov 27 2014 - Lebanon mourns 'songbird' SabahArab News
    (MENAFN - Arab News) BEIRUT: Iconic Lebanese singer and actress Sabah died Wednesday at the age of 87 after a seven-decade career and a colorful love life that kept her in the headlines until the ...

     Nov 27 2014 - Egypt drops ban on 'adults only' filmArab News
    (MENAFN - Arab News) CAIRO: An Egyptian court has revoked a government ban on a film by Lebanese star Haifa Wehbe that had been deemed sexually provocative judicial sources said on Wednesday.In April ...

     Nov 27 2014 - Saudi- Prince vanishes from social mediaArab News
    (MENAFN - Arab News) NEW YORK: Prince whose distaste for the music industry's conventions is well known has abruptly disappeared from social media after tentative efforts to promote his two new ...

     Nov 27 2014 - Saudi- Cumberbatch quits smokingArab News
    (MENAFN - Arab News) LONDON: 'Sherlock' star Benedict Cumberbatch has revealed he left smoking one month back.The 38-year-old actor said staying away from cigarette is helping him stay healthy ...

     Nov 27 2014 - Saudi- Dilip Kumar perfectly fine: Big BArab News
    (MENAFN - Arab News) MUMBAI: Thespian Dilip Kumar is 'perfectly fine' says actor Amitabh Bachchan quashing rumors of the former's health scare.Social networking platforms were abuzz with rumors ...

     Nov 27 2014 - Saudi- Turki Khan: Changing society one step at a timeArab News
    (MENAFN - Arab News) Dreams ambitions and determination have no limits dedication to those three traits can take that dreamer ambition-seeker and determined young man or woman to places he or she ...

     Nov 27 2014 - Saudi- Exploring fine art through pencilArab News
    (MENAFN - Arab News) Eman Al-Qahtani is a successful talented and ambitious young Saudi artist. She combines thoughts and colors in her paintings. She has her own art method; a painting is to deliver ...

     Nov 27 2014 - Saudi- Qatar lifts 22nd Arabian Gulf CupArab News
    (MENAFN - Arab News) Qatar rallied to get the better of Saudi Arabia 2-1 to win the 22nd Arabia Gulf Cup football tournament at the King Fahd International stadium in Riyadh Wednesday night.Playing ...

     Nov 27 2014 - Saudi- Al Kabeer climbs to No. 2 after honors sweep in Globe CupArab News
    (MENAFN - Arab News) One mighty performance that saw Al Kabeer Frozen Foods sweep honors had the defending champion moving up the leaderboard after the eighth week in the Thursday League 12th ...

     Nov 27 2014 - Al-Taib wins Fastest Car Race 2014 in RiyadhArab News
    (MENAFN - Arab News) Ahmed Al-Taib a Saudi topped the Fastest Car Race 2014 which was organized at Dirab Park racetrack in Riyadh. Al-Taib won the race in a Porsche 911 Turbo which is characterized ...

    more...


     






    Google

     
     

    Middle East North Africa - Financial Network

    MENAFN News Market Data Countries Tools Section  
     

    Middle East North Africa - Financial Network
    Arabic MENAFN

    Main News
    News By Industry
    News By Country

    Islamic Finance News
    Private Equity News

    How-To Guides
    Technology Section

    Travel Section

    Search News

    Market Indices
    Quotes & Charts

    Global Indices
    Arab Indices

    Commodoties

    Oil & Energy

    Currencies Cross Rates
    Currencies Updates
    Currency Converter

    USA Stocks
    Arab Stocks
     

    Algeria 
    Bahrain 
    Egypt 
    Iraq
    Jordan 
    Kuwait 
    Lebanon
    Morocco 
    Oman 
    Palestine
    Qatar 
    Saudi Arabia 
    Syria
    Tunisia 
    UAE 
    Yemen

    Weather
    Economic Calendar
    Financial Glossary


    Financial Calculators

    RSS Feeds [XML]

    Corporate Monitor

    Events

    Real Estate
    Submit Your Property

    Arab Research
    Buy a Research

    Press Releases
    Submit your PR

    Join Newsletters


     
    © 2014 menafn.com All Rights Reserved.  Terms of Service | Privacy Policy | Contact Us | Advertise | About MENAFN | Career Opportunities | Feedback | Help