Archive for the ‘Asia/China’ Category

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March 24th, 2011 Michael McDonough Comments off

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November 11th, 2010 Michael McDonough Comments off


The QE Trade Road Map From the Bloomberg Brief: Economics

November 3rd, 2010 Michael McDonough Comments off

When the Federal Reserve launched its unprecedented program of quantitative easing in early 2009, it was difficult to predict how various asset classes would react. Now, as the Fed considers a second round of asset purchases, the first program has left a blueprint of sorts behind that could be useful in predicting how markets might respond. The table here shows, as measured by R^2, how strongly the fluctuations in a variety of assets are correlated with the level of securities held by the Fed during the first six months of 2009. The table also displays the performance of these assets during the first half of 2009, as well as in the period since Fed Chairman Benjamin Bernanke’s Jackson Hole speech, where he laid out the case for additional quantitative easing.

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**This is an excerpt from the Brief published on 10/29/10**


Car Sales in China a Victim of Tightening

July 9th, 2010 Michael McDonough Comments off

In a sign of China’s slowing economy passenger car sales in the country grew at the slowest pace in 15 months, moving off historic highs stoked by the country’s unprecedented fiscal stimulus. As the attached chart highlights, the spike in car sales was highly correlated to strong consumer lending growth catalyzed by the government’s stimulus package—bad news for the sector, and expectations of Chinese economic growth exceeding 10%. The Chinese government has already started, and is expected to accelerate, implementing tighter fiscal and monetary policies, which will have an adverse impact on new lending, auto sales, and general economic growth.

Chinese Car Sales vs. New Consumer Lending

Source: Bloomberg


The IMF’s Delusions of Grandeur for China

July 8th, 2010 Michael McDonough Comments off

As everyone is aware—excluding possibly the IMF— the Chinese government has begun tapping the brakes on the country’s economic engine to prevent overheating and curtail inflationary fears.  With this in mind, the IMF surprised quite a few people yesterday increasing their 2010 growth forecast for China to 10.5% y/y from 10.0% in April; well above the current Bloomberg consensus forecast of 10.1%, which I believe holds more downside than upside risk.  Even more surprising was a downward revision to its 2011 forecast to 9.6% from 9.9%, which is likely also too optimistic, especially compared to the 9.25% Bloomberg consensus forecast.  The IMF seems to be underestimating the impact of government restrictions in the country’s real estate sector, the effect of European austerity on the country’s exports, and various other domestic lending restrictions.  Highlighting the downside risk facing the Chinese economy both this year and next, the government’s chief statistician was recently quoted as saying, “In a complex and changing world economic environment, domestic economic conditions are getting more uncertain and complex.”  The lesson here is don’t be surprised to see some disappointing numbers from China over the months ahead.  Keep your eye on the country’s weakening Purchasing Manager Indices, for clues toward future growth.

Categories: Asia/China Tags: ,

China’s Real Estate Free Fall May Not Bode Well For Commodities

June 21st, 2010 Michael McDonough Comments off

China’s plummeting real estate transactions could spell trouble for domestic steel and cement industries.  The average number of real estate transaction in China’s 15 largest cities fell 75% on an annual basis according to the most weekly June release according to Goldman Sachs.  On a ytd basis transactions have declined -29%.  The Chinese government has been attempting to cool the overheating sector, in the face of mounting inflation and a more hawkish tone on monetary policy.  According to the China Daily, quoted by Bloomberg, “Apart from one villa development, no residential project obtained a sales license last week and no new residential buildings were put on the market over the weekend.”  One of the primary reasons for the decline is more stringent government policy making it more difficult to receive a second mortgage, coupled with concerns over future policies that have buyers taking a wait and see approach.  The government relied on the domestic economy, including the real estate sector to strengthen growth during the global financial crisis. 

One potentially significant international implication of a slowdown in the Chinese real estate sector is that the country’s construction industry consumes half of the nation’s steel and 36% of its aluminum.  China’s insatiable demand for natural resources has been a major crutch for the commodities industry as demand from the remainder of the world remains tepid at best.  For example in 2009 China consumed 65% of the world’s iron ore exports.  Therefore, any slowdown in Chinese demand for natural resources could have an adverse impact on the commodities sector, and continue to depress shipping companies still at the mercy of China’s whim.  To get a visual on just how significant Chinese demand for natural resources has been please see this piece from Bloomberg’s Interactive Insight team:

Categories: Asia/China Tags: , ,

Chinese Government Officials May Have Leaked Key Economic Data

June 9th, 2010 Michael McDonough Comments off

“Dear all: One Chinese official apparently leaks May macro data According to Reuters, a senior Chinese government official leaked some key macro data during an internal investor conference. If confirmed, it will be one of the largest leakages in China in two years. Official numbers are yet to be released. Relevant numbers are for CPI, PPI, Industrial production, FAI, Exports, new loans, and M2. The most surprising number is the 52% export growth, though people are deeply (in our view, not so necessarily) concerned about the 3.1% CPI inflation which for the first time this year surpassed the targeted annual target at 3%.”  -Ting Lu (陆挺), Ph.D., CFA (Bank of America – Merrill Lynch)


Risk Aversion the New Norm

May 21st, 2010 Michael McDonough Comments off

Global markets may be converging on a new ‘volatile’ norm as investors revalue risk, as governments begin the painful process of deleveraging to more sustainable debt levels.  Thus far fears of sovereign defaults have remained contained to the usual suspects—fundamentally weak nations—leading investors to flock to the safe-havens of the U.S., Japan, and Germany.  Risk aversion has pushed 10Y German Bund yields down to a multi-decade low of 2.632%; while 10Y U.S. Treasuries are yielding 3.113% from nearly 4% in April.  Yet, safe-haven debt levels are in most cases worse than their weak counterparts, especially in the case of Japan, meaning deleveraging is a unilateral prescription.  I won’t beat a dead horse on who could be the next Greece, but I do want to emphasize that deleveraging is a painful process, which can adversely impact growth.  Eventually, in the U.S. tough austerity measures coupled with substantial tax increments will be necessary, transforming the fuel of the nascent economic recovery, fiscal stimulus, into fiscal drag.  Japan’s likely the most at risk of the safe-havens with a vast amount of its debt financed domestically, by what is now a shrinking and ageing population; meaning external financing will ultimately be necessary.  This could cause investors to reassess Japan’s stability.  The good news is while tough measures in the US are necessary— creating significant economic headwinds— it should allow the nation to avoid the fate of Greece.  Meanwhile, I recommend monitoring investor sentiment toward Japan as the canary in the coal mine for the U.S.

Categories: Asia/China, Europe, US Tags: , , ,

US Equities Outperforming The World

May 17th, 2010 Michael McDonough Comments off

As of this morning, not only have US equities (as measured by the MSCI)outpaced their global counterparts, but on a year-to-date basis it’s the only index still showing gains, albeit somewhat modest.  Interestingly, as of this week the spread between the MSCI US and MSCI World index reached its highest spread of the year, mostly due to losses in Latin America and emerging Europe. 

MSCI Indices:

Source: Bloomberg



Risk Aversion Not Just an Equities Story: Look for the Yen to Weaken

May 12th, 2010 Michael McDonough Comments off

The AUD/JPY exchange rate, commonly used as a carry trade to take advantage of stark interest rate differentials between the two countries, is also a measure of investor risk.  For that reason it may surprise some of you to learn the cost of the Australian Dollar in terms of the Japanese Yen is tightly correlated with the S&P500’s performance.  Both trades invovle risk, and as investors appetite for risk diminishes so to does demand for equities, while demand investors rush into the Yen to quickly unwind their potentially highly levered carry trades.

Risk aversion has also kept the USD/JPY trading relatively range bound, but improving U.S. fundamentals coupled with Japan’s fiscal weakness could be setting the cross-rate up for a bounce.  I expect that recovering investor sentiment, which will eventually lead to a decline in U.S. government bond purchases, will also coincide with a sharp depreication for the Yen in terms of U.S. Dollars.  The chart below highlights how the relationship between the AUDJPY cross-rate against the USD/JPY rate has broken down since the start of 2009.  I expect that USD/JPY rate will gradually increase to 100 from the current level of 93.25 as confidence returns to the market, and investors begin to digest the extent of Japan’s fiscal weakness.  In fact, with the preface that Japan is no Greece, the country’s finance minister recently announced they wanted to extend the average maturity of Japan’s government debt to reduce its refunding risk.  Japan’s debt to GDP ratio is expcted to hit 227% of GDP this year; Greece 110%… 

AUD/JPY, USD/JPY, & the S&P 500

Source: Bloomberg
Categories: Asia/China, US Tags: , , , , ,