'Green Shoots' Sprouting in Global Markets (Part 2)

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“Green Shoots” Sprouting in Indian Economy

In the emerging world, India’s factories are humming again for the first time in five-months as new orders are building-up in the pipeline, pointing to a tentative “Green-Shoots” recovery. India’s purchasing managers’ index (PMI), based on a survey of 500-companies, rose to 53.3 in April from 49.5 in March, climbing above the key threshold of 50 that separates expansion from contraction. India’s PMI has jumped to its highest in seven months after hitting a trough of 44.3 in December. The new orders index rose to 54.9 from 49.5 in March.

Like other emerging markets, India was hurt by huge outflows of “hot money,” from last year, hammering its stock market into a rout and knocking the rupee 20% lower against the dollar.Foreign investors sold $13-billion worth of Indian shares in 2008, compared to a record influx of $17.4-billion in 2007. But since March 6th, the pendulum has swung again, back in India’s favor. Foreigners bought $1.8-billion of Indian stocks in April and the rupee gained 2.3% against the dollar.

The Bombay Sensex Index rebounded above the psychological 12,000-level for the first time since early October, with all its components advancing. Bombay has soared +51% since hitting a low of 8,047 on March 6^th, and is up +26% this year after slumping -52% in 2008. The benchmark jumped +17.5% in April, its best monthly gain in 10-years, and the top performing Asian index last month.

India’s $1.2-trillion economy expanded at an average 9% for four straight-years, but it’s vulnerable to outside influences in the global economy. Over the past two-decades, successive governments have transformed the country into a cheap labor platform, particularly for hi-tech information technology and related business services. Major corporations from around the globe have exploited its large supply of highly-trained, English-speaking graduates to cut business service costs. Yet fully 70% of India’s population of 1.1billion survives on less than $2 per day.

While many Indian analysts have said the Sensex recovery since early March is a “bear-market” rally, some have switched their opinions, and now believe this could be the start of a new bull-run. Shares in Indian banks were hit by the global downturn, but are now attracting foreign investors on signs of an economic recovery, with bad debts not as large as their American or European peers.

India’s inflation slowed to an all-time low of 0.27% in April, giving the Bank of India room to cut interest rates further to support a faltering economy. The RBI’s key repo rate, at which it lends to commercial banks, is pegged at a record low of 4.75% from a peak of 9.0% last year. Accompanying the rate cuts, are three fiscal stimulus plans involving tax and duty cuts, infrastructure spending, and other steps, totaling $4-billion. Sectors such as steel, automobiles, and cement are already showing renewed strength in the domestic market. Still, India’s export-related industries must wait for genuine recovery in the G-7 nations and other developed markets.

Shanghai Red-chips are back in favor,

In Beijing, the ruling Politburo is ordering the People’s Bank of China (PBoC) to massively inflate the M2 money supply, and removing lending restrictions to revive the world’s third-biggest economy. State-owned Chinese banks extended 4.58-trillion yuan ($670-billion) of new loans in Q1, including loans to speculators in Shanghai red-chips,andfueling the initial stages of a stock market recovery. Shanghai red-chips have climbed above 2,500, from a low of 1,700 in November, under a rising tide of liquidity injected by the PBoC.

Coupled with Beijing’s 4-trillion yuan spending plan, the stimulus is the equivalent of 32% of China’s entire economic output per year. Most interesting, the Shanghai rally began to gain momentum in the first-quarter, when Chinese industrial firms earned a combined 219-billion yuan ($32-billion) in profits in the first two-months of 2009, down -37% from a year earlier. The figure marked a sharp slide from annual growth of +5% in the first 11-months of last year.

Thus, the Shanghai red-chip rally is inflating P/E ratio to risky levels, due to a rising tide of liquidity. China’s M2 money supply is exploding at an annualized 25.5% clip, distorting market values. Chinese banks are funneling yuan into the coffers of big trading firms, who in turn, are bidding-up red-chips. Beijing’s double-cylinder fiscal and monetary stimuli have been aggressive and are already starting to pay dividends in the real economy, and base metals markets.

Chinese factories gained further momentum April, adding to tentative evidence that “green-shoots,” are blossoming into a full fledged recovery. China’s factory PMI rose to 53.5 in April from 52.4 in March, reflecting strength in output and new orders. It was the fifth-month in a row that China’s PMI has improved and the second straight month it’s been above the 50-mark.

Brazil’s currency Tracking Green Shoots

After dumping $43.7-billion worth of Brazilian bonds and stocks in the second half of last year, “hot-money” is returning to Sao Paulo, home of Brazil’s Bovespa Index. Amid signs of sprouting “Green-Shoots” in the Chinese, Indian, and US-economies, the Brazilian stock market is up +26% so far this year, after tumbling a record 41% in 2008. Foreigners were net buyers of $1.5-billion of Brazilian stocks last month, and Brazil’s trade surplus doubled from a year ago to $3.7-billion.

China has become the biggest customer of Brazilian exports in recent months, surpassing the United States as the country’s main trading partner for the first time ever. Brazil is among the world’s top commodity exporters and sales abroad rose +4.3% in April to $12.3-billion. While exports were rising, Brazil’s imports fell 14% in April to $8.6-billion widening its overall trade surplus.

Asian steelmakers may lose their battle for a 40% cut in annual iron ore prices, as firm spot prices and rebounding steel output in China, the world’s top steelmaker, puts iron-ore miners in a better position for contract talks. The world’s top-three miners of iron-ore, BHP Billiton (BHP), Rio Tinto (RTP), and Brazil’s Vale (RIO), control two-third’s of global seaborne trade, and are already preparing for a recovery in China with higher output targets. Iron-ore is Brazil’s top export, shipping 23.5-tons in April, followed by 5.7-million tons of soy, and 2-million tons of crude oil.

Foreigners, including carry traders who leverage their bets in low-yielding currencies, such as the Japanese yen and US-dollar, now accounting for 36% of daily volume in Sao Paulo’s capital markets. “Money has no motherland; financiers are without patriotism and without decency; their sole object is gain,” – Napoleon Bonaparte. Brazil’s central bank has cut its Selic rate to a record low of 10.25% to reinvigorate its economy, but yields are still much higher than in G-7 nations.

Brazil’s broadest measure of inflation, the IGP-M price index, fell to 0.15% in April, which could allow the central bank to cut the Selic rate at its June meeting, and ultimately to 9.25% by year-end. That won’t deter “carry traders” who are focusing on Brazil’s crude oil, iron-ore, soy, and steel exports. Brazil’s currency, the real, has rebounded +14% to 47.2-US-cents since early March, its highest level in six-months, on hopes for a rebound in commodity markets.

But on May 5^th, the Brazilian central bank surprised the currency markets, by soaking-up $3.4-billion of excess US-dollars, through a reverse currency swap, aimed at slowing the real’s advance. It was the first time the Bank of Brazil arranged a reverse swap since late September, which could help bolster its FX stash.

Gold whipsawed by Deflation risk in the Euro zone

There is a battle brewing within the European Central Bank, between two opposing camps, with different views of the risk of a deflation-trap, which could spell longer-term danger for the Euro-zone economy. Producer prices fell -0.7% in March to stand -3.1% lower than a year ago, reinforcing expectations the ECB would cut its repo rate by 25-basis points to 1% at its meeting on May 7th. The main driver behind the annual fall in producer prices was a 7.3% drop in energy costs.

“In the forseeable future, the risk potential is to be seen on the side of deflation rather than inflation,” warned Bank of Austria’s chief Ewald Nowotny on May 5^th. “The vicious cycle of deflation is not easy to overcome without drastic conventional and non-conventional measures, which several governments and central banks have adopted and continue to adopt,” added Bank of Cyprus’ Athanasios Orphanides.

While central banks in England, Japan, and the US, have already started buying-up bonds with newly-printed money to supplement near zero-percent interest rates, ECB chief Jean-Claude Trichet has resisted “quantitative easing” (QE), and will lay out his thoughts at the May 7^th news conference. Resisting the hallucinogenic drug of QE, are the Bundesbank’s Juergen Stark and Axel Weber, who point to historical evidence that pumping vast quantities of money into an economy leads to hyper-inflation, from Germany in the 1920’s to Argentina in the late 1980’s.

A damaging downward price-cycle is still seen as unlikely, but there is danger for the ECB in waiting too long to pull-out all the stops, if deflation takes root. In Spain, the Euro zone’s fourth largest economy, consumer prices fell for the first-time since records began in 1962, and the jobless rate jumped to a record 17.4-percent. Once the jobless rate spreads into the double-digits throughout the Euro-zone, consumers could recoil, and the risk of a vicious deflationary spiral jumps.

In the Euro-zone, gold prices have tumbled from a record high of 793-euros /oz set in February, to around 675-euros today, in reaction to a strong rebound in European banking shares. Austria’s Nowotny said the “bulk of the banking and financial crisis is over.” The ECB’s six rate cuts since October, totaling 300-basis points, coupled with liquidity injections in the interbank market, have subdued financial market turmoil.

Still, gold traders want to see if the ECB decides to start printing money, and expand its balance sheet through purchases of bonds or other assets. Although the risk of deflation in the Euro-zone is weighing on the yellow metal, - the prescription for fighting the disease – slashing interest rates to near zero-percent, and printing money to buy long-term bonds, is buoying gold.

How long can the global “Green-shoots” rally last? Are P/E’s artificially inflated due to the hallucinogenic side-effects of QE? What’s the long-term implication for interest rates, foreign currencies, gold, and the US Treasury bond market? The answers to these questions are included in the latest edition of Global Money Trends.

Comments

[Ricard:]

Yet another comprehensive article from Mr. Dorsch.

The PPIP, combined with the mark-to-make-believe gimmickry, point to a criminal conspiracy at the highest level. That is sad...

Without the latter, there would be some sort of sense of justice in the system we have in place, but the latter makes it a circus, courtesy of Tim Geithner.

Based on your evidence of a Chinese recovery, I remain unconvinced. I'm not sure if that was the point you were making, but it seems there are some fundamental factors (such as the economy) that are not factored in yet.

Thanks for a good read.

May 07 04:37 AM

[cayman:]

even after the titanic started going down there was a little up feeling after the initial dip. Where are those good from China going to go ???

May 08 01:15 AM

[mathhero:]

it's more accurate to say usa is no longer brazil's biggest trading partner, china is now.


On May 08 08:02 AM Freya wrote:

> cayman: do you know who China's biggest trading partner is? No longer
> USA.
>
> Its Brazil.
>

May 08 03:26 PM