Inflation has moved from a non-issue to the star of the global macro story, and given what we saw in China on Friday, the inflation trade only gets hotter from here. Here are a few factors to watch.
China. Shanghai’s 5% plunge was one of last week’s top market stories and will continue to fuel gossip as we try to figure out just what happened. Was it a dark sign of a new correction or just a one-off excuse to lock in profits?
Watch weekend policy moves from the People’s Bank of China (PBOC) to see what aspects ofinflation they go after and how aggressively they move. In the meantime, yuan appreciation this week was a welcome sign to the markets and there is a sense that Beijing is serious this time about letting the currency float up to its natural value. Did Tim Geithner and company set them on the path to righteousness at the G20 summit? Dubious. It simply makes sense to decouple the strong yuan from the weak dollar, but they — and nobody else — need to be the ones to express this view. (Kind of like your 2-year-old daughter here.)
Food inflation in emerging markets is a theme we have been early and accurate on. Watch out: The poor October numbers that came out this week included Brazil, Turkey, China, India. What does this mean for policy in these markets? Can they actually increase the interest rates that have already gotten a flood of fixed-income investors to send money? I think the food wars have only begun to simmer.
Earnings last week from Brazil were largely fantastic. Look across the consumer space and you can see demand. Look across valuations and you can also see consumer and retail names in Brazil and throughout emerging markets are not cheap. Are people looking to buy weakness or book profits? I would say the former, but longs who have been hiding out here could get hurt if this week’s pullback intensifies.
Oil is close to $90, which is boom time for big integrated players. The big movers in the lagging large-cap emerging markets oil trade have been the China plays: CEO , PTR and SNP. Are PBR and OGZPY next? Talk about missing the party… These were the most popular stocks in emerging markets from the last rally, but now have been orphaned. If people ever get back to their old weighting in these names, look out for long-hanging fruit.
GM is celebrating its return to the markets next week with the second IPO of its long corporate history. GM now stands for “Global” Motors. That’s our view and the view of the company, which apparently in its road show has been only playing up its foreign assets. They should. GM is far ahead of most of the car field internationally.
I think they can hold their ground in most places and have taken a good approach in China, which is via joint ventures with large local players. You will not get pushed out by the government as fast and will be around longer to play — until they no longer need you, of course. The global auto trade is something we will continue to get lathered about into next year, so stay the course. TTM, TM, VLKAY, DDAIF, HMC — all major players and all reporting strong growth in emerging markets. Get ready for the flood of attention on this IPO.
Finally, we will be going live on Thursday with another Emerging Markets half-hour prime time special of Trading the Globe. Tune in at 7:30 ET to get a look at Goldman’s Jim O’Neill himself — inventor of the BRIC — and I talking about the next wave of BRIC countries, growth targets and what developed investors are missing about emerging markets. Plus we will go deeper into “unchartered waters” of South Korea — “the new Japan” — and explore the next release from the Ambassadors index: a global media play that is focused on Latin America.
Disclosure: no positions