Let’s Pretend That This Episode Is Over – Shutdown to Slowdown
Tired of being buffeted around in the markets because of this debt ceiling deadlock, why not pretend it is over ?
What’s next ?
Shutdown to slowdown ?
US economic data has been disappointing but largely masked by the debt ceiling debate, leaving the market trading with short term gains in mind. The market is surrounding itself in the smokescreen of uncertainty, choosing to ignore weakening export and production numbers out of Asia, in particular SE Asia.
Industrial Production Aug 2.3% YoY vs expected 7.5%.
Exports Sep -1.5% YoY vs expected +2.5%
Exports Sep 11.2% vs previous 13%
Industrial Production Aug +0..6% YoY vs expected +2.0%
IndonesiaExport Aug -6.3% vs expected +5.3%
The IMF economic outlook released last week emphasised slowing export growth and risks associated with the Fed tapering which they have not discounted.
IMF 2013 BRICS Growth Projections
Brazil 2.5% unch
Russia 1.5% prev 2.5%
India 3.8% prev 5.6%
China 7.6% prev 7.8%
The World Bank also stressed last week that EM economies should take the window of opportunity now to make necessary reforms to deal with fiscal reforms and capital flows. http://www.reuters.com/article/2013/10/10/us-worldbank-kim-idUSBRE9990JC20131010?feedType=RSS&feedName=businessNews
Meanwhile the APEC conference held in Bali concluded the same on slowing global growth and trade weakening. http://www.reuters.com/article/2013/10/08/us-asia-trade-economy-idUSBRE99704H20131008?feedType=RSS&feedName=topNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=992637
All in, the picture is rather bleak if we throw in the slowdown in the US that is just starting to take root with US third quarter earnings warning ratio is 2nd worst since 2001.
China will hold its 3rd plenum of the 18th CCP Congress—named the party’s leadership for the 2012-17 period, sometime next month. The 1st was in Nov last year followed by the 2nd in Feb this year.
Expectations are high for massive economic reforms on the agenda, a view supported by the many hints President Xi has dropped in the past months.
Reforms = slowdown.
What can we conclude ?
1. USD strength to resume once the default fears abate.
2. AUD to lag lower on a slower China.
3. EUR to weaken in correlation with a slower Asia. Citi’s view is that “weaker data out of SE Asia is negative risk, and we expect this will be a trigger for selling EUR/USD and AUD/JPY in Q4.”
4. Stocks – buy on rumour and sell on fact when the deadlock is over. Dow seeing a triple top in place.
5. Central banks to continue with over easy monetary policy which may not translate to easy credit this time round. This bodes badly for asset prices especially those which has run up the most i.e. real estate.
6. Commodities to continue to flounder in line with slowing growth.
7. Inflation to be thrown out of the window which is good for bonds in general but not particularly conducive to high yielders that are sensitive to economic growth and stock market movements.
Have I missed out anything ?