MORNING BID-All the metal in China

February 26, 2014

Without a lot of fanfare, the U.S. equity market has worked its way back to a few points of all-time highs, as concerns over emerging markets (largely related to Ukraine) have magnified, as have worries over China’s struggling growth.

That’s once again produced the “best house in a bad neighborhood” effect for the U.S. stock market; bond yields remain range-bound in the 2.70 to 2.75 percent area, the 10-year still reflects a value that doesn’t suggest economic acceleration or worries over massive slowing either.

One of the better indicators of the effect of China’s slowdown comes out of Brazil, where Vale SA, the world’s largest iron ore producer and exporter, will issue its fourth-quarter results.

The company was expected to exceed expectations due to cost cutting and higher iron ore prices, but sluggish demand in China is a long-run effect that cannot be shunted aside. Starmine sees the stock as heavily undervalued, as it has been in a persistent downward trend since early 2011, when it peaked at about $35 a share (US); it now marks time around $13 to $14. The company did surprise the last time, so it’s got that going for it.

It comes at a confusing time for those following China. Authorities there have been allowing or guiding the yuan lower, weakening it at a time when exporters have been less competitive due to China’s real effective exchange rate (measured by the IMF and BIS) hitting all-time highs, according to a Brown Brothers Harriman note on Tuesday. “We believe that officials would like to contain further appreciation by moving the nominal exchange rate weaker,” they wrote.

Part of Chinese officials’ motivation seems to be to inject a bit of two-way volatility into the currency market, lest it become a constant one-way bet, but making the environment more competitive for their exporters is also a necessity.

As Bank of America/Merrill Lynch pointed out this week, the U.S. only exports about 0.6 percent of GDP to China (one reason the slowing there isn’t as big a deal for the USA) but China’s exports to the US and Europe are about 7 percent of its GDP – and that’s an issue.

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