Reuters blog archive
The ructions in China have had an interesting effect on commodities prices – good for gold, crappy for copper. And more developments in this area should be expected as the market deals with growing weakness and the threat of a deflating credit bubble coming from the massive lending to various sectors in the world's second-largest economy. Copper has been rather weak of late, but the broader CRB commodities index is actually much higher on the year. This is the biggest divergence since the eurozone debt crisis in 2011, points out Ashraf Laidi, the chief global strategist at City Index in London.
Again, the recent selling has had to do with the Chinese companies using the metal (and iron ore, too) as collateral for cheap dollar financing. So we've hit a weird storm here – weak yuan that makes those loans more expensive, and copper falling too, and again, that also messes with those loans. Put that together and you have a few markets moving in directions that are not beneficial to a major counterparty in several of them, for one, and resulting in the kind of activity that tends to turn into a vicious cycle.
More copper weakness, more yuan weakness, wash, rinse, repeat. Add a slowing macro economy and it's a recipe for some more problems down the line. It's also not good for other risk assets, even U.S. stocks, and part of the reason bonds rallied on Thursday. The growing problems there may be a reason why the Fed's custody holdings data on Thursday afternoon showed foreign central banks dumped more Treasuries this past week than at any time - $104 billion, almost triple the previous record - as banks prepare for liquidity problems.
And it's why things look like they're going to be a bit ugly on Friday following more losses in Russia (down 5 percent) and in Asian markets. That's not all, though. More defaults on trust products in China are expected. These started earlier in the year, where these big trusts that were sold to investors guaranteeing big returns backed by loans to coal producers didn't repay investors on time. "The number of defaults are likely to accelerate in coming weeks as more Trust funds are expected to mature starting in April," wrote Robbert van Batenburg, strategist at Newedge. He points out how intertwined these companies are in differing industries, with the common link being that they've all promised big returns for investors that now seem like they're not going to come to fruition. Sound familiar? "If these problems in China escalate, a flight in gold and Treasuries is likely to ensue," van Batenburg wrote. Well, that's what we're seeing again on Friday; the safe havens get the benefit while other markets suffer.
Markets start on the back foot this morning, with weakness overseas - and particularly in emerging markets - feeding through to a bit of strain on U.S. futures and a bit of flight to quality to the U.S. bond market.
The outlook for China once again comes into play, with the most recent fears being more corporate defaults in the world's second-largest economy and the way in which copper imports are used in China as collateral to raise funds. So it's all nicely intertwined here and has had a detrimental effect on both China's stocks, stocks in various exchanges around the world, and of course the price of copper, which was down 5 percent in Shanghai.
from Global Investing:
It's the economy, stupid. Or isn't it?
Brent crude has risen 15 percent since the end of last year, focusing people's minds on the potential this has to choke off the recovery in world growth. But some reckon it is the recovery that's at least partly responsible for the surging oil prices --- economic data from United States and Germany has been strong of late. There are hopes that France and the United Kingdom may escape recession after all. And growth in the developing world has been robust.
Geopolitics of course is playing a role as an increasing number of countries boycott Iranian oil and fret over a possible military strike by Israel on Iran's nuclear installations. But Deutsche Bank analysts point out that world equity markets, an efficient real-time gauge of growth sentiment, have risen along with oil prices.
from Reuters Investigates:
By Rebekah Kebede
You wouldn't think you'd have to make hotel reservations months ahead of time in Karratha, a small, dusty town on the edge of the Outback a 16-hour drive from Perth, the nearest city. But with Australia’s commodities boom, Karratha is bursting at the seams and nowhere is it more apparent than when trying to find a place to stay.
(Above photo: A kangaroo stands atop iron ore rocks outside the remote outback town of Karattha in Western Australia. Reuters/Daniel Munoz)
from Environment Forum:
This month, Vedanta Resources and subsidiary Sterlite Industries (India) Ltd. made headlines for posing a public health risk to the surrounding community in southern India with pollution from a large copper smelter. They share the top spot in this issue of The Green Gauge, a breakdown of companies recently in the news for winning or losing credibility based on environment-related activity.
Selections of companies were made by Christopher Greenwald, director of data content at ASSET4, a Thomson Reuters business that provides investment research on the environmental, social and governance performance of major global corporations. These ratings are not recommendations to buy or sell.
from Afghan Journal:
Afghan authorities have organised a roadshow in London that opens on Friday aimed at drumming up interest in the country's mineral wealth variously estimated at anything from $1 trillion to $3 trillion.
India and China, the regional heavyweights, are the top candidates to fight for a piece of the action in their immediate neighbourhood. If there are such large reserves of copper, iron ore and key industrial metals such as lithium lying untapped in their neighbourhood you would expect them to invest heavily in Afghanistan to feed their supercharged economies.
from Commodity Corner:
With most base metal prices running way ahead of fundamentals, real and apparent demand unclear and leading economies at different stages of recovery or not, its a key time to take the temperature of banks, producers, consumers and funds involved in metals.
Anglo American hasn't yet received a formal bid from Xstrata. But the miner's interim results read very much like a defence document.
The highlights alone give a pretty good idea of what chief executive Cynthia Carroll and new chairman John Parker will focus on if Xstrata does eventually pounce.
Anglo's case hinges on four things.
First, that its plan to cut $2 billion of costs by 2011 is ahead of target. Second, that it is getting on top of its $11 billion net debt, and third, that progress is being made in restructuring its problem child Anglo Platinum <AMSJ.J>. Lastly, Anglo acknowledges that it is an objective to reinstate the dividend.
Added to these elements, lest they appeared to have too defensive a flavour, is the promise of growth, largely through its Minas-Rio iron ore project in Brazil and its Los Bronces copper development.
Of these, cost savings are a crucial point of contention in the Xstrata debate, with the rival miner's chief executive Mick Davis confident he can squeeze a further $1 billion out of a combination with Anglo, taking the total to $3 billion.
Anglo isn't making any promises beyond those already given but the tone of the language -- which includes talk of being ahead on "asset optimisation", procurement and job reductions -- hints that it may be able to find more savings on its own, without handing anything to Xstrata.
So far the market seems largely happy to let Carroll stick to her plan -- highlighting Anglo's leading position in platinum, diamonds and iron ore alongside its cost cutting success. But investors might ask more searching questions in the event that Xstrata did come back offering a premium.
from Financial Regulatory Forum:
By Rodrigo Martinez
SANTIAGO (Reuters) - Finance ministers from the Americas and leaders from multilateral lenders will huddle in Chile on Friday to evaluate their responses thus far to the global economic crisis and figure out the way ahead.
Chilean Finance Minister Andres Velasco told Reuters that turbulence has shown the International Monetary Fund and World Bank need more resources for the slump.
He also said he hopes the elected government of Honduras will be represented at the meeting in Chile after a military coup in the Central American country on Sunday that has been widely condemned by the international community.
"We will discuss counter-cyclical fiscal policies and the impact these have had," Velasco said of the meeting in the Chilean coastal city of Vina del Mar, which is being held as economies in the region suffer their sharpest downturns in years.
"Secondly, we need to think about how we can prepare countries for the post-crisis world. This implies taking steps to improve productivity and, for example, financing for infrastructure and construction."
Chile, the world's No. 1 copper producer, has won praise for building up savings from high metals prices during boom times and using the cash for an economic stimulus package.
Top executives from the World Bank, International Monetary Fund and the Inter-American Development Bank will also be at the meeting.
Some countries in the region have looked for credits from multilateral lenders to help weather the crisis.
"It's important for the IMF, for example, to have the resources in the short-term so that countries don't have liquidity problems -- Chile hasn't had trouble but other countries have," he said.
"The World Bank and IADB should also have more resources so they can loan out money faster for infrastructure and productivity programs."
SUPPORT FOR HONDURAS
Velasco was asked if finance ministers would issue a statement supporting ousted Honduran President Manuel Zelaya.
"There is a widely shared commitment to preserving democratic institutions in Honduras and this means that I hope the democratic government of Honduras can be represented at the meeting," he said.
World Bank President Robert Zoellick said on Tuesday that the lender has "paused" all loan programs to Honduras because of the political turmoil there.
Friday will be the second meeting of finance ministers from the Americas after one held in Mexico in 2008. (Editing by Leslie Adler)