China's flag is waving strongly these days, the direction of the economic- and political winds have changed but the present multitude of macro changes is yet to be recognized by consensus and the market.
My conclusion is this:
· China will slow-down to 5% growth over next two-three years.
· China will start devaluing their currency in response to Abenomics and weaker terms of trade
· China will no longer be the world's biggest investor and importer of investment goods.
The changes will during 2014 mean that:
ü Germany growth will go negative quarter-over-quarter in Q4 (from Q3)
ü World growth will come down from the recent 3.7% to less than 3.0%
ü The recovery will once again be postponed and the synchronic monetary policy of the major central banks will be questioned, leading to all time new lows in interest rates
ü Deflation will take hold in Europe and become a major risk in the US
ü This final third crisis in this cycle will mean equity needs to be sold off. This comes after commodities sold off in the US banking- and housing crisis, followed by fixed income during the late stage European debt crisis now I see a 30% correction in H2 of 2014 after a high is registered between 1840/1890 in the SPX.
I simply believe that China leads the world. They took the burden of world growth in their hands during the peak of the crisis in 2008/09 through the biggest fiscal expansion ever seen (550 billion US Dollars), then they increased their investment to GDP ratios securing 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 and export to rebalancing, fighting graft, reducing pollution and betting a small crisis now is better than a big one later.
I have already spent considerable amount of ink 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 excessive but now China seems to have engaged in a fundamental change to its FX rates – attempting to weaken the CNY.
China is a long term critic of Abenomics and the ensuing devaluations as Japan and Korea remains its key competitors in the export market, but until last week China held their FX tight and tightening but now things have changed:
Source: Bloomberg LLP & Saxo Bank
With the present geopolitical tension between China and Japan this chart is cause for concern for all of us: China no longer will play 'nice', they are this time ignoring "best practice" of playing paying lips service to the US Sino relationship. Clearly Obama once again receiving the Dalai Lama in the White House is not helping the situation. That the rally in USD-CNY happened almost to the day Obama hosted the Dalai Lama is of course a pure coincidence! (They met Friday February 20th!)……
China is not happy these days: The domestic economy needs rebalancing with the risk for upsetting the population and the bureaucrats. Overseas Japan's Abe is insisting on a stronger Japan, the US is clearly ignoring China advice on the Dala Lamai and overall the G-20 meeting had the developed world blaming the recent slow-down on the EM.
Not a good month for monetary coordination and friendly summits. The political crisis is biting ironically at a time where stock markets across the world is reaching 5, 7, and in the case of the UK 14 year highs! My old economic theory: The Bermuda Triangle of Economics is still in place: Slow growth, high unemployment and high stock market valuations kept in place by a policy where the 20% of the economy which is the listed companies and banks gets 95% of all credit and access to subsidies while the 80%, which creates 100% of all jobs, the SME's get less than 5% of credit and less than 1% of the political capital.
Markets and monetary policy
It's the weather! The reason for the disappointing start to 2014 is all to do with the big cold in the US – well partly, I think most investors/pundits forgets that data coming in for December, January really was "born" 3,6, and 9 month before due to that specific times change in outlook, interest rates and the overall cycle. The slow-down in housing was "expected" in our models as I have constantly conveyed it to you through my economic co-op on econo-physics it has to do with spike in rates in mortgage rates between May and August 2013.
The US Consumer must have known the weather would be bad already last summer looking at this chart of Retails Sales (Mom):
The US consumer remains 2/3 of the economy but he is still conservative: Spending rose 2.0% in 2013 after 2,2% and 3,4% in 2012 and 2011. This is mainly due to low wage growth. Since 2010 the Average after tax income adjusted for inflation have only been 1.6% - to reach the magic 3% growth we will need wages to grow 3% on their own! Not likely to happen in world of excess capacity, but never the less the pundits started the year with a 2.9% average expected growth for 2014, but one month into the year the revisions comes pouring in as Q1 is already reduced from 2.3% to 2.0% and the blockbuster Q4 growth of 3.2% is now expected to come in at 2.4% only! 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 reverse engineering!
Strategy
Fixed income: Still see new lows in 2014 – mainly in Q4- into Q1-2015. ETF flow into fixed income has been +16 billion US Dollars year to date, could be largest inflow since 2002! Mainly like US and Core Europe although Italy and BTP's have done well with the power change from Letta to Renzi. The bet on rates down goes back all the way to last year.
Divend yield is @ 1.89% vs. 2.72% still attracts my money.
Equity: We have had a call for peak in Q1 – admittedly I did not expect 1840 to be broken, but my partner in Economo-physics still see chance of 1870/90 before top is in place. I submit our updated November 2013 forecast which slightly corrected still stands – The risk reward is now wrong: Upside is 50 S&P points vs. 500 points down-side. Remember a 20/30% correction happens every 4-5 years – a 10% correction twice on average in 'normal year'.
My last update called for correction of the equity market this is now from tactical point almost complete:
FX:
Overall the US Dollar should soon find support. The best long term gauge of the US dollar is World Growth minus US Growth. Why? Because US dollar is the reserve currency and often the currency of choice in trade. When the world growth is slowing (now…) then the US and the US Dollar needs to pull ahead to fill the gap. This is one of the catalysts we need to monitor over the next week or two as the US Dollar Index is right on its support line:
Conclusion:
The world economic flags is still almost in vacuum but some countries are now changing the position of the flag pole to get better wind conditions.
Safe travels,
Steen
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
Phone: +45 39 77 40 00 | Direct: +45 39 77 62 23 | Mobile: +45 51 54 50 00
Research: http://www.tradingfloor.com/traders/steen-jakobsen
Please visit our website at www.saxobank.com
This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
material in this email is strictly prohibited.
Email transmission security and error-free status cannot be guaranteed
as information could be intercepted, corrupted, destroyed, delayed,
incomplete, or contain viruses. The sender therefore does not accept
liability for any errors or omissions in the contents of this message
which may arise as a result of email transmission.
Ingen kommentarer:
Send en kommentar