Month: July 2012

Why further easing may not save commodities

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Commodities bulls betting on further easing from major central banks to revive sagging prices may be setting themselves up for disappointment.

According to commodities analyst Dominic Schnider, loosening monetary policy may release more liquidity into financial markets but that’s not going to be the main driver of prices. Global demand continues to be the key driver of the natural resources sector, and as long as appetite from China – the world’s biggest consumer – remains weak, prices will remain soft.

“At the end of the day, what needs to happen with cheap monetary policy, or loose monetary policy, is that demand gets really activated,” Schnider, Head Commodity Research, UBS Wealth Management told CNBC Asia’s “Squawk Box” on Tuesday.

“And if we don’t see demand getting activated at the end, you are not going to see the kind of inflation that you want.”

Some of the liquidity that was added by central banks in recent easing moves has been kept in banks and “not unleashed into the market and into credit activity,” he said, adding that there is no reason to believe that the next measure will be any different.

In fact, Schnider is not expecting any quantitative easing at all from central banks. The most that will happen is monetary policy from China, which still has the room to cut reserve requirement ratios or interest rates for its banks, after two surprise rate cuts in June and earlier this month.

Interest rates set by the European Central Bank, Federal Reserve and Bank of England are already at all-time lows and the Bank of Japan has been hesitant to boost its asset-buying program after setting aside about 40 trillion yen (USD 505 billion) as Governor Masaaki Shirakawa has repeatedly insisted that that the policy is not sustainable.

US Federal Reserve will hold its next meetings on July 31 and August 1, with bond firms polled by Reuters seeing a 50% chance that Chairman Ben Bernanke will announce another bond buying program. The Fed had held off on another round of asset purchasing in June.

In the meantime, a lack of any real demand will curb prices for commodities from base and precious metals and grains until at least the fourth quarter, Schnider said. Gold, for example, is “heavily oversupplied” and will trend lower.

Schnider’s views counter those of commodity bulls like Jim Rogers, who believes that quantitative easing will drive up the value of hard assets. The renowned commodities investor is long real assets, such as gold, silver and agricultural commodities.

Commodities Spooked by Europe, Global Growth Concerns

A combination of Europe’s debt crisis and concerns over global economic growth have triggered a selloff in risk assets like commodities.

Spot gold has fallen about 17.8% since touching an all-time high of USD 1,918 in September last year. It traded unchanged at USD 1,577 an ounce in early Asian trade on Tuesday. Copper has declined about 16% this year and is now trading at USD 3.37, while iron ore, the main material in steel, is trading at an eight-month low of USD 123.60 a metric ton.

It’s equally bearish in the oil markets. Fresh worries over Spain saw crude prices tumbling for a second straight session on Monday. Brent September crude fell more than 3% to USD 103.26 a barrel and US crude fell 4% to USD 88.14. Year to date, Brent is down about 9%, while Nymex crude has fallen 15%.

Yudee Chang, Principal and Chief Advisor of ACE Investment Strategists, a trading and fund management firm based in Virginia, US, says beyond weak demand, a flood of supply will keep oil prices soft. He expects oil to fall “below or around USD 50 per barrel” over the next two years.

“I really believe that over a longer-term basis, let’s say the next two years, there’s going to be so much supply coming on line,” Chang told CNBC Asia’s “Squawk Box”. “However, over the short term, there are a lot of headline news events, a lot of geopolitical events that will make energy prices oscillate and chop its way down.”

In the short term, oil supply may be disrupted by turmoil in Syria and tensions between Iran and the West over Tehran’s nuclear program. Investors could use the volatility to buy high and sell low, Chang said.

– By CNBC’s Jean Chua.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Malaysia IPO market to keep edge over regional rivals

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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While several IPOs (initial public offerings) have been shelved in recent months in Asia’s financial hubs Hong Kong and Singapore, analysts say Malaysia, which has seen some successful listings this year, will maintain its edge given a strong pool of domestic investors and reasonably priced deals.

Malaysia was home to the world’s second biggest IPO in 2012 with homegrown palm oil firm Felda Global Ventures’ USD 3.3 billion listing last month. Asia’s largest hospital operator, which is backed by the Malaysian government, IHH Healthcare is planning to list its shares in Malaysia and Singapore on July 25 after successfully pricing a USD 2.1 billion IPO.

This will take the number of public listings in Malaysia to around 11 so far this year and means that Kuala Lumpur is running neck-and-neck with China’s Shenzhen as Asia’s top destination for IPOs.

“What we have (in Malaysia) is transactions for companies that are in many cases either the regional or world leaders in their own industries. These transactions are also fairly priced, which is more than could be said for some of the transactions that have been pulled in Hong Kong for example,” Philippe Espinasse, Author of IPO: A Global Guide, told CNBC Asia’s “Squawk Box” on Monday.

This year several companies have pulled IPOs in Hong Kong due to poor investor demand, with high-end Jeweler Graff Diamonds deciding to postpone its USD 1 billion listing in May, just days before the IPO was due to be priced.

“What we’ve tended to see in Hong Kong in particular are transactions that either the issuer or the banks were trying to push the envelope in terms of valuations,” Espinasse said.

In Singapore too there have been no-shows. The most recent example is India’s Reliance Communications which said Friday it has shelved plans to raise up to USD 1 billion for its undersea cable unit in Singapore. This follows motor racing company Formula One postponing its IPO, worth up to USD 3 billion, on the Singapore stock exchange because of volatile markets.

While demand for share offerings has been tepid in the above markets, Espinasse says Malaysia still has a strong appetite for IPOs. “What you have in Malaysia is a deep pool of domestic money including from ethnic Malaysian funds and this supports these transactions.” He adds that demand from international institutions is also strong for Malaysian IPOs.

“There is a good diversity in terms of the domestic Bumiputra funds (investing in IPOs), the other pension and investment funds in Malaysia and also international institutions,” he said.

IHH’s IPO attracted a range of investors including sovereign wealth fund Kuwait Investment Authority and International Finance Corp, the private investment arm of the World Bank.

Southeast Asia IPO Market Still Hot?

Analysts tell CNBC that the outlook for the IPO market in Southeast Asia is still positive, despite recent setbacks in markets such as Singapore.

“We are in an uptrend for IPOs in Southeast Asia. We had a kick-in-the-teeth with Formula One but that was delayed because of volatility in global markets,” said Justin Harper, Markets Strategist at IG Markets in Singapore.

“The fundamentals in Southeast Asia are still good, Asian markets are not suffering as much as Europe and the US It is definitely a buoyant market and I’m optimistic about foreign listings here,” he said.

Singapore’s stock exchange last week tightened its listing rules, hoping that stronger corporate governance will encourage more large companies to list on its bourse.

“I think it’s interesting in the past few days that Singapore has announced it is going to increase the threshold for companies to list there. They are conscious that there is a liquidity issue and they are doing the right thing to bring bigger companies to list in Southeast Asia,” said Espinasse.

Harper says the IPO market in Southeast Asia is likely to stay subdued for the rest of the year given concerns about the global economy, but will pick up heading into 2013.

By CNBC’s Dhara Ranasinghe

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Spain debt woes may limit further oil mkt rallies: Survey

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Lingering concern over the sustainability of high Spanish borrowing costs may limit further gains in the oil market despite heightened tensions in the Middle East, according to CNBC’s weekly survey of oil market sentiment.

Brent and US crude futures posted weekly gains of more than 4%, both contracts having touched eight-week peaks on Thursday, as fighting raged in the Syrian capital Damascus and just over half of Iran’s parliament backed a draft law to block the Strait of Hormuz shipping lane.

“Europe will be back front and center this week with Spanish 10 year (yields) above 7%,” said Kirk Howell, Chief Operating Officer of SunGard’s Kiodex, who has a ‘neutral’ view this week. “There is definitely real risk of a conflict with Iran and that risk needs to be covered in a portfolio, but I believe both sides will try every avenue to not be seen as the aggressor. We could see a similar situation that we saw in March where no news out of Iran is good news and oil slides without an event.”

Six out of 13 respondents, or 46%, expect oil prices to rise this week; four (about 31%) expect prices to fall while the remaining three believe prices will remain around current levels, CNBC’s weekly survey of oil market sentiment shows. Last week’s survey correctly predicted prices would rise.

Mike Wittner, Managing Director and Head of Commodities Research, Americas at Societe Generale said the recent gains in the oil market “won’t last with the macro environment” and expects “tactical selling” in what is going to be a range bound market.

Aiden Bradley, Managing Director and Head of Asian Oil and Gas at CIMB Research in Singapore, said underlying structural issues – a lack of OPEC spare capacity, rising cost and complexity of projects – will act “like a magnet” pulling prices higher.

“But on a shorter time frame poor economic (and) demand news can naturally see prices fall,” Bradley added, saying he has a ‘neutral’ call this week. “Another neutral to positive week for economic news will see prices at least consolidate last week’s gains. However, all it will take is a couple of bad updates on the US and China and we could easily be back to where we started last week.”

From a technical perspective, most strategists believe prices will extend gains this week and several are reversing short-positions, or bets that prices will fall.

Dhiren Sarin, Chief Technical Strategist for Asia-Pacific at Barclays Capital said last week’s “strength in Brent exceeded our expectations” and is pricing in further upside risk.

“For WTI crude, our focus is on a test of USD 94.30 and for Brent crude towards USD 109.25 before looking for a pause. A close above USD 109.25 in Brent, however, would mean that the market can even get back to USD 116.05.”

Mike Baghdady at Training Traders said he has reversed short positions and is now long above USD 89.32 and with “break-even stops if one of our exit rules are triggered.”

Kevin Kerr, President and CEO of Kerr Trading International has done the same: “We were net short and now have added calls and also bought some futures.”

-By CNBC’s Sri Jegarajah

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

US economy going from bad to worse: Roubini

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A robust and self-sustaining US recovery is not on the cards, and we should now expect below trend growth for many years to come, according to Nouriel Roubini, the economist famed for his bearish views.

Roubini, best-known for calling the 2008 economic crisis, outlined five reasons the bulls have been wrong and argued that an American economic cold will lead the rest of the world to catch pneumonia in a post on the Project Syndicate website.

“Even this year, the consensus got it wrong, expecting a recovery to annual GDP growth of better than 3%,” the founder of Roubini Global Economics wrote.

“And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.”

Roubini believes the US economy will slow further this year and next as expectations of the “fiscal cliff” keep spending and growth lower – and uncertainty about the outcome of the presidential election dogs markets.

The fiscal cliff could knock 4.5% off 2013 growth if all tax cuts and transfer payments were allowed to expire and spending cuts where triggered, according to Roubini.

“Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder. But, even if the fiscal cliff turns out to be a mild growth bump – a mere 0.5% of GDP – and annual growth at the end of the year is just 1.5%, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1%,” he wrote.

The US consumer, which drives plenty of the global economy as well as the US, will not be able to keep spending when USD 1.4 billion worth of tax cuts and extended transfer payments come to an end according to Roubini.

“In 2013, as transfer payments are phased out, however gradually, and as some tax cuts are allowed to expire, disposable income growth and consumption growth will slow. The US will then face not only the direct effects of a fiscal drag, but also its indirect effect on private spending,” he wrote.

The problems in the euro zone, a slowdown in China and emerging markets, added to the chance that oil prices could be driven higher by tensions over Iran’s nuclear program, will also add to America’s economic woes, Roubini argued.

He warned the Fed will not be able to ride to the rescue this time.

“The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending,” he wrote.

“Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves. Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing.”

Roubini also argued that earnings growth is now beginning to run out of steam, after buoying markets earlier in the economic cycle. The second-quarter earnings season has so far presented a mixed picture.

“A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia,” he warned.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

US earnings show recession may be ‘fast approaching’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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While this quarter’s earnings reports have crossed a substantially lowered profit bar, future expectations through the year indicate a recession could be on the way.

Estimates for the third and fourth quarters have been dropped to levels not seen since the days of the 2008 financial crisis, below even the muted 2% expected level of inflation.

That’s an ominous recession sign for an economy that has barely managed to attain positive growth this year even with the strong level of earnings beats, according to an analysis by Nicholas Colas, chief market strategist at ConvergEx in New York.

“Revenue estimates for the back half of 2012 have been slowly working their way lower this year,” Colas said. “This trend, however, has accelerated to the downside over the past 30 days and we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later into 2012 and 2013.”

For the current quarter, about 69% of companies in the Standard & Poor’s 500 have beaten analyst profit estimates. Only 42%, though, have beaten on top-line revenue estimates, indicating that growth is weakening.

That’s evidenced by a rash of downward forward revisions from analysts.

In the broader S&P 1500, analysts have cut outlooks for 792 companies and raised for just 323, with the decreases especially prevalent in technology, which saw half its components down, the highest level since February 2009, according to Bespoke Investment Group.

In Colas’ analysis, though, he limited his look to the companies in the Dow Jones Industrial Average.

Analysts now expect revenue to grow at just 1% to 1.5% pace in the third quarter. The forecast for the fourth quarter is 3.9%, though Colas says “I doubt any analyst could defend this point of view unless they expect a rapidly weakening dollar…or a truly epic round of liquidity-pumping operations from the world’s central banks.”

Colas is not alone in his expectations for recession.

Laksman Achuthan, at the Economic Cycle Research Institute, made headlines late last year when he said he expected recession to hit the U.S. in the first quarter, which, according to the most current data, didn’t happen.

But he recently said in media appearances that he is sticking to the call, saying the country already could be in recession or is progressing toward one later this year.

“There have been a lot of economists and analysts who have had their blinders on for quite some time,” said Brian LaRose, an analyst at United-ICAP in Jersey City, N.J. “We’re not bullish on the recovery here in the U.S. We think that there are far greater problems ahead that have yet to be addressed.”

Colas also is not alone in his surprise that stock prices have continued to trend higher despite the bleak economic prospects.

The only reason he, and other strategists, have devised for the climb in equities has been hope for more Federal Reserve intervention. The Fed has carried out two asset buying programs called quantitative easing, as well as a third program that entailed buying and selling debt in equal amounts known as Operation Twist, which it voted to extend last month.

“When corporations feel the pinch from a slower economy, they lay off workers,” Colas said. “When they law off workers the Fed executes on its dual mandate and increases liquidity. And when the Fed increases liquidity, stocks go up.”

LaRose, though, thinks investors “want a QE3 so badly, they refuse to accept the fact that there will be no QE3.”

The rise in stock prices that has accompanied those easing hopes in fact, may be what actually thwarts another round. Fed Chairman Ben Bernanke favors the stock market as a gauge of economic health and the vehicle for a wealth effect that boosts sentiment.

“If the economy was plummeting into a recession then it would be obvious that monetary policy needed to be eased,” said Paul Dales, chief U.S. economist at Capital Economics. “But, even allowing for the deterioration in the incoming data, the economy is still growing modestly, stock markets have not tanked and the euro-zone crisis is still rumbling along without ever really developing into a full-scale meltdown.”

Should the economic data continue to deteriorate and earnings through the rest of 2012 come in as low as Colas expects, the case will become clearer for a a recession and, perhaps, more Fed intervention.

Bank of America Merrill Lynch has been below consensus economic forecasts, looking for just 1.1% growth this quarter, and said Friday that if anything it could be too optimistic.

“The European crisis shows no sign of fading and, in the usual lagged fashion, should have increasing rather than decreasing collateral impacts on growth outside Europe,” Ethan S. Harris, BofA’s North American economist, said in a note.

“Last but not least, the risks of the fiscal cliff have just started to work their way into corporate psychology,” he added. “We are frankly a bit puzzled by the persistent optimism in consensus and official forecasts.”

© 2012 CNBC.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Lying libor is nothing compared to China’s fake GDP: Report

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A fake Libor rate, the scandal involving global benchmark interest rates that has raised the level of distrust in major banks and markets, is nothing compared to the damage that could be done if China’s true economic growth figures were revealed, according to Larry McDonald’s newsletter.

“Is Chinese GDP the new Libor?” asked McDonald, author of “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers,” in a much talked about note to clients last week. “More and more investors are starting to question the Chinese math on GDP.”

Annual gross domestic product came in at 7.6% in the second quarter, according to China’s government on July 13th. The report was better than investors expected, easing concern of a dramatic slowdown for the world’s second-biggest economy and sparking a bid in risk assets like stocks that has lasted for two weeks.

But slowing imports and industrial production, as well as harder-to-fudge electricity usage data, points to much slower growth, according to McDonald and other investors. Barclays believes the number should have been more like 7.15%.

What worries McDonald, a former vice president at Lehman, is that lying by governments and banks — be it Libor rates or GDP statistics — raises the systemic risk to the markets, which is much worse than just economic risk.

RELATED LINKS

Chinese Data Mask Depth of Slowdown, Executives Say
Ignore Economic Data, Here’s What Matters About China: Jim Rogers
China Braces for ‘Hard Landing’ in Corporate Profits

“As difficult as economically driven market sell offs are, they do not compare to 2011, 2008, 1929 and 1907,” wrote McDonald. “A look through history shows traditional economically driven sell offs range from 5-15%, or one standard deviation. Systemic risk sell offs, 2008 and 2011 are 25-50%, or two standard deviations.”

Governments not being forthright is happening right now in Europe, with the Bank of Spain the latest to update its number of actual bad loans.

“One of the primary reasons for Japan’s lost decade was their government’s cover up of bank losses,” said McDonald. “The faster pain is taken, the faster the return to healthy markets.”

For the best market insight, catch ‘Fast Money’ each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Could oil really spike to $200/bbl by August?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Heard the talk that oil could spike up to $200 as soon as August? Us too.

As far as we can tell, it was largely triggered by commentary made by Beau Taylor of Taylor Woods Capital at CNBC’s Delivering Alpha conference.

He told us that if there were a “material military escalation (in the Mideast) with no endgame,” he thought oil prices could double. “(In this kind of situation) commodities have a strange ability to go much higher and I suspect that they would,” he said.

Largely Taylor as well as other oil bulls point to rapid developments in the Mideast region which include: 1) the killing of top Syrian security chiefs on Wednesday, and 2) the attack on Israeli tourists in Bulgaria, which Israel accused Iran of carrying out.

Considering the Middle East is the source of more than a quarter of the world’s oil, should tensions escalate to the point where Iran blocks the Strait of Hormuz and prevents oil from getting to market – they say oil could hit $200

That’s what they say, anyway.

Esteemed commodities investor Dennis Gartman says something altogether different.

“Nonsense! The argument is illogical, it’s ill-founded and wrong.”

Gartman tells us despite the region’s woes, there’s no way prices could double. “There’s just too great a supply of oil in the world. Also there are so many new ways to get oil and the prospects of nat gas are so dynamic,” a spike of that magnitude is almost out of the question.

“Sure Brent could go to $115,” he admits. “But it wouldn’t last.”

Unless current events devolve into a massive geo-political circumstance (like a war) Gartman says, “oil trades about where it is or lower – not higher.

Now that’s not to say oil’s current rally will stop dead in its tracks – that’s not the point. “Oh sure, oil could have another $2-$3 dollars to go,” Gartman admits, but that’s it.

Also read:

Trader disclosure: On July 19, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s “Fast Money” were owned by the “Fast Money” traders; Stephanie Link is long AAPL; Stephanie Link is long EBAY; Stephanie Link is long CVS; Stephanie Link is long JPM; Stephanie Link is long STI; Stephanie Link is long MCD; Stephanie Link is long WY; Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long AGU; Guy Adami is long MSFT; Guy Adami is long NUE; Guy Adami is long BTU; Josh Brown is long AAPL; Josh Brown is long JPM; Josh Brown is long GDX; Josh Brown is long GLD; Josh Brown is long XLU; Josh Brown is long XLF; Josh Brown is long WMT; Josh Brown is long TGT; Josh Brown is long MCD; Josh Brown is long QCOM; Mike Murphy is long FB; Mike Murphy is long EBAY; Mike Murphy is long TOL; Mike Murphy is long LEN; Mike Murphy is long SWK PUTS; Mike Murphy is long EMC; Mike Murphy is long URI

For Dennis Gartman
Dennis Gartman is long GOLD
Dennis Gartman is long CAD
Dennis Gartman is long AUD/EUR
Dennis Gartman is long HEATING OIL
Dennis Gartman is long S&P 500 INDEX
Dennis Gartman is long WHEAT
Dennis Gartman is long NAT GAS
Dennis Gartman is short EURO
Dennis Gartman is short YEN
Dennis Gartman is short CORN

© 2012 CNBC.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Will Asia see a repeat of the 2008 food scare?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Record high prices of corn and soybean brought on by the worst US drought in 56 years may be triggering a sense of de ja vu for Asia concerned about a repeat of the food scare in 2008, but most economists are downplaying those fears, for now.

The US may account for a third of global corn production, and soybeans are hugely important because, along with corn, it goes into the feed for Asian farm animals such as cattle and pigs, but the two grains do not make up a huge component of headline inflation numbers in the region, economists say.

“How worried should we be? Not overly,” Frederic Neumann, Co-Head of Asian Economics Research at HSBC said in a report on Friday. “Sure, Asia has structural inflation problems. But soy isn’t one of them. And neither is corn nor US wheat. Oil and rice matter much more for food inflation in Asia.”

Rice carries a large weight in Asian CPI baskets, especially in Southeast Asia, but prices appear to be under control and nowhere close to levels seen in 2008, when the benchmark Thai rice hit USD 1,000 a metric ton, 40% higher than current levels, Neumann said. And oil – which determines the cost of transportation and production – has dropped “sharply” in recent months, he noted, adding that prices are unlikely to return to previous highs.

Neumann still expects inflation in the region, including China and Japan, to head lower this year to 2.5%, compared to 2.7% in 2011.

Arjuna Mahendran, Head of Investment Strategy at HSBC Private Bank, agrees that as long as prices of energy, “a key commodity component”, are kept in check, inflation should be under control.

“Energy demand in general seems much more subdued because India’s only growing 5.5% and China’s only growing 7-8%, a lot less than they were growing even last year,” he said on CNBC Asia’s “Squawk Box”. “And that I think means that energy prices should remain subdued and that could be the factor that keeps a lid on inflation taking off on a generalized basis.”

Asia was hit hard in 2007 and 2008 when shortages of foodstuffs, especially rice, led to hoarding and riots. Food inflation hits Asia harder than other regions food make up a greater portion of consumer spending than in other parts of the world. In developing Asia, for example, it makes up 35% of consumer prices, compared with about 20% in the US and Europe, according to the International Monetary Fund .

The wild card in the outlook for inflation remains in monetary policy, specifically quantitative easing by central banks which could in turn drive new money into commodity markets, Mahendran said.

“The speculative overhang on these commodities prices tends to push them up much faster than they would under normal circumstances,” he said.

Other economists are less sanguine about inflation. Jonathan Barratt, Founder of investment newsletter Barratt’s Bulletin, expects more stimulus from central banks to drive already lofty prices higher. Already, rice is pushing six-month highs and oil, after declining over the past few months, have rallied about 10-12% in the last two weeks, Barratt said.

“Stimulus which is going to be injected so it’s going to be quite interesting as to how this will play out, because I don’t see there’s too many offsetting forces at the moment other than seeing inflation pick up off the lows we are seeing at the moment,” he told CNBC Asia’s “Squawk Box”.

– By CNBC’s Jean Chua.

Copyright 2011 cnbc.com

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

China food firms brace for margins hit from US drought

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The worst drought in more than 50 years in the US is hurting food companies in China and margins are likely to suffer in the second half of the year, even as firms battle rising wages, analysts tell CNBC.

Tingyi, one of the world’s largest producers of instant noodles, and United President, the biggest food-production company in Asia, should see margins decline over the next few months as prices of raw ingredients such as corn to soybeans rise, analysts say.

“The drought that we are having in the US is raising corn and soybean prices dramatically, that hasn’t yet hit the food chain but when that hits the food chain, they (food companies) are going to see food costs go through the roof,” Donald Krueger, Senior Analyst for Equity Research at Motley Fool Asset Management, told CNBC Asia’s “The Call”.

There are some signs that China may already be seeing its first casualty of higher food prices.

On Wednesday, Yum Brands, the biggest US food company operating in China, reported second-quarter profit that missed Wall Street’s view as inflation in China, where it earns 40 percent of its revenue, cut into margins there.

The US is the world’s biggest producer of corn, growing about a third of the total crop, and any supply shortage there will drive global prices sharply higher. The commodity, which has already risen 30% since the beginning of June, is approaching record highs. December corn futures, representing the crop currently in the field, rose marginally on Wednesday to USD 7.73 a bushel, just 3.4% lower than the record USD 7.99 per bushel reached last June.

More than 61% of the US is now considered drought-stricken, the highest percentage in the 12-year history of the US Drought Monitor.

Soybeans hit an all-time high on Wednesday, with the contract for August delivery rising 44.5 cents, or 2.7%, to finish at USD 16.835 per bushel. Wheat prices also ended at the highest level since the spring of 2008.

All this points to higher food prices in China in the second half of the year, analysts say. Jessie Guo, Head of Consumer Research at Jefferies in Hong Kong, said the high prices of soybean, which is an ingredient of many food products in China, will also lead to higher prices for other products like beef and pork.

“Soybean is very important for people who raise cattle as it goes into the feed, and that will add some pricing pressure on food prices in general in the second half of the year,” Guo told CNBC.

Labor Costs Rising

At the same time, labor costs in China are rising across the board, with wages increasing more than 10% a year for workers in the agricultural, retail and food industries, Guo said.

“I would see an accelerated increase across the board and this will impact margins,” she added.

Yum blamed rising food and wage costs as well as expenses related to extending operating hours and building new restaurants in the country for cutting into margins.

Some observers, however, are not as pessimistic on food inflation. Donna Kwok, China Economist at HSBC in Hong Kong, expects prices to decline in the second half of the year and corporate margins to improve.

“While food prices were a key driver of China’s inflation last year, the bulk of it related to supply issues at home, not overseas,” Kwok said. “China’s imported food as a percentage of domestic consumption is only around 3%. This means that while a drought in the US would for sure put marginal upward pressure on prices in China, the impact would be significantly less than if there was a drought in China.”

China’s annual consumer inflation cooled to 2.2% in June, from May’s 3.0%, official data showed earlier this month.

– By CNBC’s Jean Chua.

Copyright 2011 cnbc.com

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‘Massive demographic change’ gives India edge over China

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Even as the proverbial battle of supremacy between emerging economic giants China and India continues to polarize views, it seems the South Asian nation may have an edge when it comes to demography.

According to economist John Maudlin, China will be losing in the next 30 years 85 million workers, or the equivalent of the working population of Britain and all of Germany, and India is going to add the same number.

This gives India a better long-term future than China, he argues, as the “massive demographic change” will see the latter lose a significant portion of its productive population.

“That is a massive demographic change. That means they (Indians) are going to become more productive,” Maudlin, President of advisory and asset management Millennium Wave Investments, told CNBC Asia’s “Squawk Box” on Thursday.

“I’m more bullish long term; short-term – who knows what will happen – ask your local politicians. But long-term …if somebody held a gun and say you got to put money somewhere in Asia and come back in 30 years, I’d put it in India.”

While Maudlin concedes that India does have deep-rooted problems such as governance and infrastructure bottlenecks, he believes that “they’ll figure it out.” China, on the other hand, does not seem to be sustainable the economy is based on central planning policies by the government rather than market forces.

“I have never really gotten China. I don’t understand how the business model works and their demographics over the next 20, 30 years are not very good,” Maudlin said.

He also said that no country has even been able to sustain an investment portion of GDP at 50% for as many years as China has. “This cannot continue without serious consequences,” he added.

China’s one-child policy, introduced in 1979, has significantly impacted the country’s demography. Over the last 30 years, China’s total fertility rate-the number of children a woman can expect to have during her lifetime-has fallen from 2.6, well above the 2.1 rate needed to hold a population steady, to 1.56 last year, well below that rate, according to the United Nations.

As a result, China now faces a long period of ultra-low fertility, compounding another demographic challenge, which is the country’s fast-growing ageing population, the United Nations said. In contrast, by 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan, the U.N. said.

Vishnu Varathan, Market Economist at Mizuho Corporate Bank in Singapore, said a large and young population will indeed be coming on board in India, and the country could potentially benefit from it.

“Yes, already the early signs of wage pressures due to some pockets of labor market tightness are showing up in China, giving India an edge, all else being equal,” Varathan said. “But it needs to be complemented with sound and progressive policies. As much as a large jump in young workers could be a boost for the economy, equally it means that jobs need to be created.”

This means that India will have to reform its economy urgently, increase manufacturing’s share of the economy from about 16% now to 25% over the next 5 to 10 years to absorb the new workers and invest in infrastructure to accommodate urbanization, Varathan said.

A.S. Thiyaga Rajan, Managing Director, Aquarius Investment Advisors, an asset management firm based in Bangalore, India, agrees that India’s growth could be more attractive than China’s over the longer term but it is hardly a “given”.

“If you compare China and India, China has been growing for the last 20 years at 9-10%,” Rajan said. “Can we say over the next 10 years, they can still grow at 10-12%? Impossible. It could be 5, 6, 7%. But India, it could grow 7-8% over the next 10 years, which growth could come only if they spend more on infrastructure.”

– By CNBC’s Jean Chua.

Copyright 2011 cnbc.com

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow