Month: July 2013

Fed expectations: Will they stay or will they slow?

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

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Investors searching for clarity this week from Fed officials on the timeline of the winding down of US monetary stimulus shouldn`t hold their breath, said Bank of America Merrill Lynch (BofAML).

According to a report from the bank, the Federal Open Market Committee (FOMC), which meets later on Tuesday on monetary policy and will announce a decision on Wednesday, is yet to make up its mind on when to pull back the USD 85 billion a month bond-buying program.

“We believe the FOMC is still making up its mind on tapering, and thus, will not strongly signal a September start at the July 30-31 meeting. The FOMC will likely need to lower its growth and inflation forecasts in September, which complicates the decision to taper, in our view,” economist Michael S. Hanson and rates strategist Priya Misra at the bank wrote in a note published late Monday.

The central bank`s growth forecast for 2013 stands at 2.3-2.6 percent, and its outlook for inflation at 0.8-1.2 percent.

“With the Fed likely providing an ambiguous message this month, markets may rethink whether September tapering really is a done deal,” Hanson and Misra, who expect tapering to start in December, said.

Last week, Wall Street Journal Fed watcher Jon Hilsenrath wrote that the Fed would likely keep its bond buying program in place, but noted that officials could revise its forward guidance or adjust the economic thresholds required before raising the policy rate.

In December 2012, the Fed pledged to keep interest rates low until unemployment falls below 6.5 percent and inflation tops 2.5 percent. If the unemployment rate threshold was lowered, for example, this would indicate that rates would remain near zero for a longer time period.

Bank of America Merrill Lynch says the Fed will reassess the case for tapering on a meeting-by-meeting basis, consistent with a data dependent approach.

“This could mean not only a later start to tapering, but a bit of a surprise when they finally move,” they said.

“There is no press conference or forecast update at this meeting. If, as we expect, the FOMC makes relatively few changes to its statement – the language already clearly indicates the conditional nature of policy – then there is a risk that markets will see that as dovish,” they added.

Taper, when?

The bank expects the Fed to begin scaling back its monetary stimulus in December, given recent weakness in some economic indicators, including June retail sales data and slowing momentum in the housing sector.

But if the central bank were to begin tapering as soon as September, it would likely communicate this through updated language in the third or fourth paragraph of the statement, BofAML said.

“They could note, for example, that in light of the cumulative improvement in the labor market outlook since September, the Committee stands ready to gradually reduce the pace of purchases,” Hanson and Misra said.

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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

Could Japan fall back into recession next year?

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

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Even before Japan can stage a convincing growth rebound, fears are already building over a sharp slowdown in the world’s third largest economy, with one analyst warning of a possible recession next year.

Economic indicators published on Tuesday including weaker-than-expected industrial production and household spending for June, highlighted the fragility of the recovery.

Also read: Japan faces crucial earnings season

Industrial output fell 3.3 percent in June from May, against expectations for a decline of 1.8 percent. Household spending for the month fell 2 percent month-on-month, lower than forecasts for a rise of 0.7 percent. Employment data, however, was a bright spot, with the country’s jobless rate falling to 3.9 percent, the lowest since October 2008.

“The economy is improving. However, the big question is if Japan can continue to keep growing beyond April 2014 when consumption tax rate is hiked,” said Takuji Okubo, chief economist at Japan Macro.

“The risk is that the Japanese economy could deflate when the tax rate is raised, possibly prompting the economy to enter into a recession in the second half of 2014. I fear that this downside risk is growing,” Okubo said.

The consumption tax on goods and services is due to rise to 8 percent next April from the current 5 percent, and to 10 percent in 2015, under the current law. It is seen as key to helping reduce Japan’s high debt burden, but there are worries that a hike too soon could derail a nascent economic recovery.

According to a report from the local Nikkei newspaper on Tuesday, the government plans to forecast growth of 1 percent in real gross domestic product for the fiscal year 2014 ended March 2015, from 2.8 percent in the current fiscal year, due to fiscal tightening and fading effects of economic stimulus.

Okubo says while the government is likely to unveil a stimulus package in the form of public works spending, it will be insufficient to counter the effects of fiscal tightening.

“If the Japanese economy is to keep growing in 2014, other demands will have to make up for the loss of fiscal easing. Unfortunately, I do not see a source of such compensating demand,” he said.

“The private investment is starting to firm up, but I do not see it being strong enough to save the economy. The export demand offers some hope, but with the dismal outlook on Chinese economy and Europe still on the fiscal austerity, I do not think it is realistic to count on an export boom,” he added.

Bank of Japan governor Haruhiko Kuroda has backed the sales tax increase, saying on Monday that it would not harm the economy and is needed to repair public finances.

“His comment sounds like a mere wishful thinking. In our view, the BoJ can and should do more to help stimulate the demand through lowering interest rates and driving yen lower,” Okubo said.

Uncertainty over a rise in the consumption tax has weighed on the sentiment of equity investors – with the benchmark Nikkei 225 coming under pressure in the recent days. The index has declined 6.5 percent over the past week.

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

Fed intrigue, not policy, has market attention for now

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

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As the Fed’s two-day meeting kicks off Tuesday, markets are more intrigued about who will take Ben Bernanke’s seat than the Fed’s policy statement.

The Fed is widely expected to begin reducing its USD 85 billion bond purchases in September, if the economy shows consistent improvement. The markets have been expecting a quiet meeting this Tuesday and Wednesday because the Fed needs to see more economic data before deciding to start winding down QE, or its quantitative easing program.

But what was not expected was the outbreak of widespread public speculation about who will run the Fed in January, when Fed Chairman Ben Bernanke’s term is up. Wall Street had been convinced he would be replaced by Fed Vice chair Janet Yellen, viewed as a strong inside candidate and possibly even more dovish than Bernanke.

 That changed when former Treasury Secretary Larry Summers’ name came up in repeated news stories.

“It’s a pivotal time for Fed policy, and it would be advantageous to have someone at the helm who had already gone through the analytical process of getting comfortable with the last five years of policy rather than coming in with a completely clean slate and trying to potentially reinvent it,” said Ian Lyngen, senior Treasury strategist at CRT Capital.

 Lyngen said rates have moved slightly higher since the speculation about Summers began to swirl, and the may have added 10 to 15 basis points to the 10-year yield, at 2.59 percent late Monday.

“At its essence, anyone who is not Yellen is seen as less dovish,” he said. “The outcome would be higher rates, whether it’s Summers, (former Treasury Secretary Tim) Geithner or (former Fed Governor) Larry Meyer.”

Summers’ name appears to have been leaked as a trial balloon, but some Fed watchers think he would have a rockier Senate Banking Committee confirmation hearing than Yellen. Some Senate Democrats, meanwhile, circulated a letter urging the president to appoint Yellen to the position.

 “I was convinced it was Yellen, and now I’m less convinced it’s her. Summers has been mentioned, but let’s not forget Geithner or (former Fed vice chairman) Roger Fergusson. The issue is when President Obama needs to make the decision. The longer he waits, maybe it makes it less likely Vice Chair Yellen is the person,” said Deutsche Bank Chief U.S. Economist Joseph LaVorgna.

Ward McCarthy, chief financial economist at Jefferies, said the situation has already become disruptive. “From a market standpoint, I think that the transition from Bernanke to Yellen would be a whole lot easier and create a lot less, at least initially, confusion and uncertainty,” he said. “Everybody has a good handle on Janet Yellen’s commitment to QE. Larry Summers, on the other hand, doesn’t really have a broad and deep track record on QE, but the isolated comments he has made would suggest he is less enamored of that type of policy.”

The Fed is about to embark on slowing down part of the most extraordinary policies its ever undertaken, and the uncertainty has already sent interest rates to a new higher range. Bernanke, however, has managed to build in expectations that the Fed could begin tapering this year, will not move quickly to end the program, and that it will be driven by the economic data, not a timetable. He has also reassured markets the Fed does not intend to tweak short term rates any time soon.

“I don’t think this is a great time to be tacking,” said McCarthy. “It’s added to uncertainty and anxiety and that usually means higher rates. This type of uncertainty and campaigning is not helpful. It’s not something that happens on a routine basis, so you can’t really say there’s a routine way of approaching this. However, this isn’t good for anybody. It makes them look like they can’t make a decision.”

 President Obama, in an interview in the New York Times this weekend, said he had not made a final decision, but that he’s narrowed it down to “some extraordinarily qualified candidates.” He said the next chairman has to understand the Fed has a dual mandate and would work to “keep inflation in check, to keep our dollar sound, and to ensure stability in the markets.”

He also said when unemployment is still too high, “I want a Fed chairman that can step back and look at that objectively and say, let’s make sure that we’re growing the economy, but let’s also keep an eye on inflation, and if it stars heating up, the markets start frothing up, let’s make sure that we’re not creating new bubbles.” Some Fed watchers said that particular comment would suggest Obama may be more intent on an outside candidate, since he pinpointed the concerns that critics have had about the Fed’s QE programs.

As for the Fed, it will most certainly discuss policy this week, and also when it might taper, even how it might start tapering. But there is little chance it announces any moves when it releases its statement Wednesday.

 “On the Fed meeting, I wouldn’t expect major change,” said Goldman Sachs Chief U.S. Economist Jan Hatzius. “I think you’ll probably get some downgrade of the description of the economy, possibly housing. They might want to downgrade slightly. Last time they said it strengthened further. That might go.”

“I think it’s quite possible they don’t do anything on the policy language,” he said. Hatzius said if the Fed does want to comment on tapering, it would probably do so in a way that supports Wall Street’s default expectation that tapering will start in September. It would also reinforce that the committee will decide to slow down bond purchases, based on the economic data.

“The (post-meeting) minutes will be interesting, but I don’t think that statement will be. That’s the bottom line. I don’t think there’s enough information for the Fed to even think of tapering,” said LaVorgna.

Besides waiting for the Fed Tuesday, traders will be watching a gusher of earnings reports, including Merck, Pfizer, BP, Chrysler/Fiat, Deutsche Bank, UBS, Barclays, Sprint Nextel, JetBlue, Thomson Reuters, Occidental Petroleum, NYSE Euronext, Coach and Corning, before the bell. After the closing bell, Buffalo Wild Wings, Boston Properties, Amgen, Aflac, Symantec, and Genworth report.

In the morning, S&P Case-Shiller home price data is released at 9 a.m. ET, and consumer confidence is released at 10 a.m.

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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

Violence rocks the streets of Egypt, but markets shrug

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

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Investors on Egypt`s Stock Exchange appeared unfazed by the renewed spike in violence across the country over the weekend, with the benchmark EGX 30 index easing only 0.7 percent in Sunday trade.

The number of fatalities in clashes between Egyptian security forces and supporters of ousted President Mohamed Morsi has now risen to at least 74, according to the Health Ministry. Representatives of the Muslim Brotherhood claim the toll has already exceeded 100. Either way, it is one of the worst incidents of bloodshed since the uprising began on June 30.

Troubling scenes emerged over Saturday night from the Rabaah Al-Adawiyah Mosque, the epicenter of pro-Morsi demonstrators. Many were shot in the head and the chest, according to a detailed account by Human Rights Watch .

Sunday trade was out of the ordinary given the noted return of confidence among equity investors in the Arab World`s most populous country. Orascom Construction Industries (OCI), the stock with the heaviest weighting, masked a more positive current, led by the likes of private equity giant Citadel Capital , which jumped five percent.

Notwithstanding the pervasive political uncertainty, the EGX30 has in fact gained 13.5 percent over the past month. Volumes are on the rise, and on Sunday, foreign investors were net buyers. The Market Vectors Egypt ETF, one of the most popular ways for US investors to gain exposure to Egypt, will get a chance to react to the latest developments on Monday.

There are encouraging signs. A new cabinet has assumed its tenure, packed for the most part with prominent civilian technocrats to steer the state`s transition to new elections, and vitally for most Egyptians, revive a crippled economy.

Aid pledges from the oil-rich Gulf amount to USD 12 billion so far, a last-minute lifeline to avert a looming balance-of-payment crisis. The new Finance Minister, Ahmed Galal, said late last week that the money would be used to boost reserves and push stimulus, rather than austerity policies. Depleting foreign currency reserves of the Central Bank also get a lift, reflected early on by a marginal strengthening of the local currency in recent days.

The long-touted IMF loan talks, continually pushed back, appear to have been put on hold indefinitely. From the IMF`s perspective, the interim government does not have the requisite legitimacy and recognition , and for Egyptian policymakers there is no longer a sense of urgency with external financing emanating from the Gulf.

But the political impasse between the two camps appears, for the moment, irreconcilable. Pro-Morsi supporters say that despite the casualties, they intend to stand their ground until their demands are met.

Egypt`s Minister of Interior denied that riot police had fired on protesters. Yet he also made it clear they would press on with plans to break up the sit-ins, raising the prospect of another round of battles. It all comes on the back of millions taking to the streets on Friday in a public display of support to give the military a mandate to fight “terrorism.”

“To restore stability, I`d expect to see a carrot and stick approach-the heavy-handed treatment of pro-Morsi demonstrators represents the stick, the carrot will come in the form of pro-poor policies and handouts in the coming weeks,” Farouk Soussa, chief economist for the Middle East at Citi, told CNBC.

U.S. Secretary of State John Kerry described the situation as a “pivotal moment,” underscoring the dangers of an intensified crackdown on protesters.

“Violence not only further sets back the process of reconciliation and democratization in Egypt, but it will negatively impact regional stability,” Kerry said in a statement .

Upbeat market sentiment is not likely to last long, experts tell CNBC, if national reconciliation is not achieved. That may be exactly the scenario investors have yet to truly price in.

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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

Japan faces crucial earnings season

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

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Japan is gearing up for its most important reporting season in over a decade, with investors closely watching for signs of whether Prime Minister Shinzo Abe`s radical policies to kickstart the economy, also known as `Abenomics,` is filtering through the nation`s corporate sector that has been marred by sluggish domestic demand in the recent years.

Key industry bellwethers including Toyota, Honda, Sony and Panasonic, are due to report their earnings for the April to June quarter this week. And what will be key, say analysts, is whether rising profits are being driven by more than just a favorable exchange rate.

“If people see most of the earnings are coming down to a weaker yen and overseas demand, it may suggest domestic consumption isn`t as strong,” said Evan Lucas, market strategist at IG Markets.

“On the other hand, if we see macro policies boosting demand on the domestic front, we can finally believe that Abenomics is filtering through to where it needs to go,” he said.

Electronics manufacturers, Sony and Panasonic, will provide a clearer picture of consumer demand, said Lucas.

“One of the hardest hit by Japan`s lost decade of deflation domestically, Sony, has also had to battle the likes of Apple and Samsung for market share internationally in portable music, smartphones, computing – it has finished last almost every time. Will this Thursday`s results see it finally breaking out of this spiral? Estimates suggest they will,” he said.

Sony is forecast to report an operating profit of 65 billion yen (USD 665 million) for the April-June quarter, according to Citi estimates, compared with 6.28 billion yen in the same period a year earlier.

The earnings season will be important for determining the direction of the benchmark Nikkei 225 – which is up 33 percent year to date, said strategists.

With expectations already running high, Ben Colette, head, Asian Equities at Sunrise Brokers, says earnings will need to exceed estimates in order to inject fresh momentum into the market.

He cited the performance of Fast Retailing shares, which dropped around 6 percent a day after the company`s quarterly earnings report released on July 11, which was largely in line with expectations. For example, the operator of the Uniqlo brand estimated its full year operating profit would be 147.5 billion yen, in line with an average of 149.7 billion yen expected by 19 analysts surveyed by Reuters.

Sean Darby, chief global equity strategist, however, said with many Japanese corporates basing their own earnings projections on dollar-yen exchange rate of around 91, there is room for upward surprises.

For example, in May, Toyota Motor said it expected to post net profit of around 1.37 trillion yen for the year ended March 2014 from 962 billion in the previous year. This forecast was based on an exchange rate of 90 yen to the dollar, much stronger than where the currency is currently trading at 97.75.

Toyota is expected to post an 80 percent year-on-year rise in operating profit to 635.6 billion yen over the April-June period, according to Nomura estimates.

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

Publicis, Omnicom deal ‘extremely brave’: WPP CEO

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

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Despite facing the prospect of a mega rival in the multi-billion dollar merger between advertising giants Publicis and Omnicom, Martin Sorrell, the chief executive of WPP, told CNBC that he was not quaking in his boots yet.

“In terms of size, at the end of the day, if you look at the geographies, it doesn`t really create great scale except in the US and obviously the regulators are going to take a good hard look at that.”

The global advertising market began its week with news of the creation of the world`s biggest firm in the sector, after France`s Publicis (Euronext Paris: PUB-FR) and US-based Omnicom (NYSE: OMC) announced at the weekend they were joining forces to form a group worth USD 35.1 billion, overtaking global leader WPP (London Stock Exchange: WPP-GB).

Even as markets digest the boldness of the deal, analysts are questioning the complications the merger could face.

Potential issues include how the firm will cope with its bases split between continents, whether the two cultures can be combined effectively and potential conflicts of interest in terms of representing competing clients.

Sorrell told CNBC that the deal faced significant challenges.

“We`ve always said further consolidation in the industry was inevitable,” he said. It remained to be seen how shareholders would react to what he described as a “so-called merger of equals.”

“Clients really have not been taken through the pros and cons of this in any great detail and it`s going to be very interesting to see what happens…If I were an Omnicom shareholder I would be extremely concerned about a merger of equals when the company I invest in has USD 14 billion dollars of revenue, while Publicis has only USD 8 billion,” Sorrell warned.

“Time will tell if the cultures will click and whether clients and talent benefit – and how USD 500 million of synergies will be generated without job cuts. Co-CEOs is not an easy structure.”

“Having said all that I think it`s a tremendous deal for Omnicom,” he added. “It`s an extremely bold, brave and surprising move…but we`ll have to see how this all plays out.”

The merger will create a new global advertising powerhouse that analysts have said will reshape the dynamics of the advertising industry.

Publicis`s 71-year old CEO Maurice Levy and Omnicom`s 60-year old CEO John Wren will run the merged group together for the first two-and-a-half years, after which Wren will take the reins.

The firms will now collectively represent competing brands, including Coca-Cola and Pepsi, MacDonald`s and Taco Bell, raising some concerns over whether clients will be happy with the firm also looking after their competition.

But Mike Amour, CEO of Asia Pacific at advertising network Project Worldwide, said the merged firm could tackle this concern by being open and transparent with its clients.

“As long as the agencies are transparent and are upfront with their clients about potential conflict [the issue can be avoided]. This is not the first time this has happened in regards to clients from similar categories sitting under the same agency,” he said.

Changing with the times

The global advertising industry has been undergoing a rapid transformation in recent times with the rise of digital marketing. Major ad agencies have been snapping up digital marketing companies in emerging markets in recent years in a bid to compete.

Amour said the newly merged firm Publicis Omnicom Group will now be better able to compete with global giant WPP, especially in terms of pursuing business in India and China.

“It`s a very bold move in regards to the very fast developing economies such as India and China. WPP has made strong inroads there over the past 20 years, Omnicom and Publicis have been slower in that regard, so this will accelerate their ambitions in these geographies,” he said.

Publicis Omnicom Group is set to spend around USD 100 billion a year, equivalent to 20 percent of the global media business, Reuters reported, which means it could be subject to scrutiny from antitrust regulators.

The deal is expected to be closed in the final quarter of this year, or the first quarter of 2014.

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

Credit squeeze in Asia now worst since financial crisis

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

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Bank lending conditions in emerging Asian nations have tightened the most since the global financial crisis, according to the latest survey from the Institute of International Finance (IIF).

The report shows the region`s headline index falling to a reading of 45.7, below the key 50-level that divides easing and tightening territory and its lowest level since the beginning of the survey in 2009.

Asia also showed the tightest lending conditions of global emerging regions.

The survey questioned 133 banks across Latin America, Europe, Asia and the Middle East- Africa region and Asia`s headline figure of 45.7 was the lowest. Latin America was second-worst at 47.6 while Africa and the Middle East had the best result at 52.9.

The report cites three principal factors for Asia`s strained credit conditions: deteriorating domestic funding conditions, high non-performing loans as well as declining loan demand.

The region`s local funding conditions index dropped to 45.2, its lowest level since 2011 and the worst out of its surveyed peers. The report highlights that around 38 percent of Asia`s surveyed banks reported a tightening in funding conditions compared to just 15 percent in the first-quarter of this year.

Asia also logged the highest pace of non-performing loans (NPLs) of the entire survey. The index reading for NPLs fell to 44, compared to the global average of 48.1. A figure below 50 implies a rising amount of NPLs.

Meanwhile, loan demand decreased for the second straight quarter with commercial real estate and consumer loan demand dropping for the first time since 2011.

India and China to blame

Frederic Neumann, co-head of Asian economic research and managing director at HSBC attributes the tight funding conditions to the on-going credit crunch in regional heavyweights China and India.

Chinese interest rates in the inter-bank market spiked to record highs in June, leading to a liquidity squeeze among local lenders, as the People`s Bank of China deliberately refrained from cash injections in a bid to curb excessive credit growth.

But recent spikes in interbank rates suggest that volatility has not yet eased. China`s seven-day benchmark repurchase rate rose to 5 percent on Monday, following a 4 percent jump on Friday – well above average levels of around 3 percent.

In the past week, India`s central bank has also engineered liquidity tightening in a move to stabilize the plummeting rupee. The measures include forcing banks to maintain 99 percent of their daily cash reserve ratio requirement.

“One reason why the recent spike in short-term rates in both China and India may have a more damaging effect than earlier jitters in financial markets is that it comes at a time when economic activity is already slowing rapidly. This in itself amplifies risk aversion and tightens financial conditions well beyond what can be inferred simply by looking at benchmark interest rates,” said Neumann in a report.

Financial markets may have calmed down since the start of July but analysts widely agree that more evidence of liquidity in the greater economy is needed in order for growth to rebound in the coming quarters.

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

Oil may crack further if China data confirm slowdown

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

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Benchmark oil prices may soften further this week if official data confirm factory activity in China slowed to its slowest pace in 11 months, implying lower demand for primary inputs from the world`s second-largest economy.

Despite correcting lower last week, both Brent and US crude futures remain over USD 100 a barrel and many believe current prices are too high and don`t reflect weaker global fundamentals of ample supply, tepid demand and slowing emerging market growth.

“I still feel we have a USD 5-8 premium in the market which is too expensive,” said Jonathan Barratt, chief executive of Barratt`s Bulletin, a commodity-markets newsletter in Sydney, who has a `bearish` recommendation on the oil market this week. “I`m looking for August 1 China PMI for confirmation of the slowdown,” Barratt said, adding he is `short` the market or betting prices will fall. “The market is trading with economics.”

Exactly three-quarters of those polled in CNBC’s weekly sentiment survey (21 out of 28) believe prices will decline, 14 percent of respondents (four out of 28) say prices will gain while three are `neutral`.

Oil markets face multiple event risks this week. Three major central banks (the Federal Reserve, the European Central Bank and the bank of England) hold policy meetings while scheduled US data releases – including second-quarter GDP and July non-farm payrolls – will take on heightened prominence as investors scrutinize those numbers to determine when the Fed will scale back the pace of asset purchases.

Economists expect the US economy created 185,000 jobs last month, short of the 200,000 nine-month average. Meanwhile, average forecasts suggest the economy grew at an annual rate of 1 percent in the second-quarter. However, a number of economists have cut their quarterly estimates prompted by disappointing US data last week and some even warn of a negative surprise. Even so, markets may be inclined to discount the GDP number, looking ahead instead to what forward indicators suggest about the second half of the year.

“The GDP report will likely be awful this week but it`s a stale number and will be more useful as a headline than as a major influence on oil prices,” said Tom Essaye, President of Kinsale Trading. “If growth doesn`t accelerate in the third quarter, then that will weigh on crude but for now the Q2 GDP report shouldn`t cause much more than a temporary blip, if at all.”

How the US dollar reacts to the data will be a key determinant for commodities and oil, analysts say.

Softer data may vindicate the Fed`s dovish stance and push out the timeframe to scale back asset purchases from the September consensus currently. If the Fed does reaffirm interest rates remain low, and if policymakers lower the threshold for inflation, that may weaken the U.S. dollar, proving supportive for cyclical markets like oil. A weaker dollar makes dollar-denominated commodities cheaper for importers paying in currencies such as euros.

“I think that the FOMC will be slightly dovish,” sending the dollar lower and benefitting oil, said Mark Waggoner, President of Excel Futures. “However, GDP and employment will come out quite positive,” possibly sending bond prices lower, driving yields higher. “This should rally the dollar and pressure energy,” Waggoner said.

Ultimately, price action in the oil market is most likely to be guided by the China data releases. Beijing releases its closely-watched Purchasing Managers` Index (PMI) for July this Thursday and private forecaster HSBC publishes its final PMI factory activity gauge on the same day.

Brent crude fell as low as USD 106.63 a barrel on Friday and recorded its second weekly decline after touching a three-and-a-half-month high. US oil traded as low as USD 104 on Friday before rebounding to close at USD 104.70, the lowest in two weeks.

The catalyst for last week`s decline came from China`s manufacturing activity which sank to an 11-month low in July, according to preliminary data from HSBC. On the supply front, US crude output last week hit its highest since 1990, while crude inventories showed a much smaller fall in the week to July 19 than earlier in the month, data from the US Energy Information Administration showed.

IG Market`s strategist Kelly Teoh expects WTI to consolidate around current levels but may revisit USD 104. “Medium term we are bullish with a target price of USD 108,” Teoh said, adding that the expectation of a slowdown in China is “priced in” while Fed Chairman Ben Bernanke will stay on message with the stimulus program.

Nonetheless, the bears appear to have the upper hand this week. “We were stopped out of long positions on Tuesday, so we`re happy with the trade,” said Tom Weber, Senior Commodity Advisor at Portfolio Managers, Inc. Commodity Futures and Options in Los Angeles. “It seems like there is an awakening to the fact of a China slowdown. Geopolitical risk seems to have burnt itself out for the moment. I wouldn`t be surprised to see oil test the USD 100 level.”

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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 slowdown digs a hole for US industrials

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

Listen to the Article (6 Minutes)

Industrial companies from Caterpillar to Norfolk Southern have felt the effects of the China economic slowdown and the knock-on effects it is having on commodities.

The days of double digit Chinese economic growth are clearly over. And as policymakers look to shift from an economy based on rapid credit expansion and heavy investment in infrastructure to one based on consumer demand, miners, their industrial suppliers and some transportation firms have had to adjust.

“The steadily sliding rate of GDP growth since 2009 highlights just how tired the model for economic growth founded on capital spending has become,” wrote Pictet Asia strategist Laurent Godin in a report. The Swiss asset manager predicts a more modest 6 percent to 7 percent growth from here and that weaker growth is sending reverberations through the commodities space.

Caterpillar, for one, slashed its full-year guidance as demand for its mining equipment drops off as falling China demand has forced miners to scale back new mining projects.

“Mining has come down,” Caterpillar CEO Douglas Oberhelman, told CNBC after its quarterly earnings miss. “All of our big mining customers certainly are spending less on capital.”

Indeed, mining companies like copper miner Freeport McMoran and coal producer Peabody Energy have announced plans in recent days to scale back capital spending.

And commodities prices, as measured by the Jefferies CRB global commodity index, have fallen nearly 6 percent this year and are down nearly 20 percent since mid-2011.

Gordon Johnson, managing director at Axiom Capital, said the issue is China.

“You’re seeing a significant slowing of growth in China due to a reduction in credit,” Johnson said. “That’s affecting the commodities sectors and that’s not reflected in stock prices or valuations.”

Caterpillar hasn’t been the only mining equipment supplier to feel the sting of slowing activity. Swedish rivals Atlas Copco and Sandvik highlighted falling demand from mining customers in their quarterly updates. Together both companies supply more than half the world market of underground mining equipment.

“The low investment levels from miners continues to be noticeable for this part of our business,” as the industry focuses on cost control and capital efficiency, Sandvik CEO Olaf Faxander said in a statement.

The slowdown has even hit the US rails. Norfolk Southern CEO Wick Moorman told CNBC, “Our export coal franchise, which is aimed at the metallurgical markets, has probably suffered a little more than some of the other franchises.”

He attributed it to slack demand from China, Australia’s improved competitive position as the Australian dollar weakens and a struggling European economy.

“Global conditions are really what influence the price of metallurgical coal worldwide,” the Norfolk Southern CEO said. “It’s something that will take a while to work through, and it’s something that we’ll work through, as well.”

Some analysts are optimistic that a bottom in the mining cycle is coming.
JPMorgan industrials analyst Ann Duignan anticipates the global macro data to stabilize, particularly as Europe starts to turn the corner. That should improve sentiment toward Caterpillar in particular, she notes.

“Going forward we think that as (the global economy) gets better, sentiment on Caterpillar’s stock is better, and so we are a buyer,” she said.
Caterpillar’s CEO also sees an eventual recovery in mining. “Seven billion people on the planet, going to nine, [and] rising living standards around the world require minerals and energy—and that’s mining,” Oberhelman said.

Others caution that the mining downturn may prove nastier than the optimists anticipate, particularly as China tries to rebalance its economy.
At CNBC’s Delivering Alpha conference earlier this month, Jim Chanos, the founder and managing partner of Kynikos Associates, laid out his short-thesis on Caterpillar predicated on a China slowdown.

“The bulls expect a capex decline in mining. But here’s the problem: they expect it to decline slowly,” Chanos told attendees.

Chanos pointed out that mining equipment spending was far higher than the historical average, driven in large part by the Chinese real estate bubble. The Chinese slowdown and the end of the global commodities supercycle will drive spending back down toward historical levels.

With the global economy still slowing, “the demand for metals will be low and falling, and the prices will be high and falling for some considerable time,” Roger Nightingale, strategist at RDN Associates, told CNBC.
And that could mean more pain for miners and their industrial suppliers.

—By CNBC’s Justin Menza. Follow him on Twitter @JustinMenza.

More CNBC stories
Why China’s economy may be heading for a crash
China July flash HSBC PMI plunges to 11-month low
Caterpillar’s ‘ugly’ quarter a buying opportunity: Pros

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

A nod to Abenomics: Japan inflation speeds up

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

Listen to the Article (6 Minutes)

Japanese consumer prices rose in June at their highest annual pace since November 2008, a sign perhaps that the Bank of Japan (BOJ) is slowly winning its fight to end two decades of deflation and boost prices in the world`s third largest economy.

Japan`s core consumer price index, which excludes volatile food prices, rose 0.4 percent year-on-year, turning positive after a flat reading in May.

It was the first time in 14 months that consumer prices have risen. The figure came in just above the expectations of analysts polled by Reuters for a 0.3 percent increase.

(Read more: Weak yen not enough for Japan exporters as China slows)

“The inflation numbers are going in the right direction, so the BOJ is probably going to be pleased,” said Bank of Singapore`s Chief Economist Richard Jerram.

The BOJ unveiled an aggressive monetary stimulus program in April to meet a 2 percent inflation target over a two-year horizon.

(Read more: Weak yen? Think again)

Its plan to pump $1.4 trillion into the economy by the end of 2014 has helped weaken the yen , which is in turn helping push up inflation. Japan`s currency has weakened about 15 percent against the dollar so far this year.

The Tokyo core CPI, seen as a good indicator of what will happen to prices across the country, rose 0.3 percent in July after a 0.2 percent increase in June, in line with market expectations.

Not so Fast

Still, analysts said investors should exercise a degree of caution and broader signs of an increase in prices in the Japanese economy are still needed for the BOJ to successfully meet its 2 percent inflation target in two years.

(Read more: Japan consumers haven’t been this confident in 7 years)

They pointed out that when food and energy prices are stripped out, Japan`s CPI fell 0.2 percent in June from a year earlier.

“We can safely say that the CPI numbers were better-than-expected, so that`s the modest good news,” said Vishnu Varathan, market economist at Mizuho Corporate Bank. “But if you exclude oil and food prices, the CPI was still negative – so the takeaway here is that underlying inflation is still not picking up on a broad basis.”

Most economists expect prices to inch higher in Japan as an economic recovery picks up steam and the yen weakens, although there is some skepticism about whether inflation can hit BOJ`s 2 percent goal.

“It [inflation] is trending up, but whether that`s enough to get to 2 percent is debatable,” said Bank of Singapore`s Jerram.

“The currency needs to go down another 8-10 percent to help boost inflation,” he added.

(Read more: Japan PM Abe’s mandate is much smaller than it looks)

The yen was trading at about 99.23 per dollar on Friday, below the key 100-level. Most currency strategists expect the yen to weaken towards the 105-110 area against the dollar by the end of the year.

“By and large what is good news for the economy should be negative for the currency and I would be surprised if it [recent yen strength] was a consistent trend,” Michael Woolfolk, senior currency strategist at BNY Mellon, told CNBC Asia`s “ Squawk Box .”

-By CNBC`s Dhara Ranasinghe; Follow her on Twitter @DharaCNBC .

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