Global Investing

Taiwan’s forecast-beating export data today came as a pleasant surprise amid the general emerging markets economic gloom.  In a raft of developing countries, from South Korea to Brazil, from Malaysia to the Czech Republic, export data has disappointed. HSBC’s monthly PMI index showed this month that recovery remains subdued.

With Europe still in the doldrums, this is not totally unsurprising. But economists are growing increasingly concerned because the lack of export growth coindides with a nascent U.S. recovery. Clearly EM is failing to ride the US coattails.

Does all this confirm the gloomy prediction made last month by Morgan Stanley’s chief emerging markets economist, Manoj Pradhan. Pradhan reckons that a U.S. economy in recovery would be a competitor rather than a client for emerging markets, as  the world’s biggest economy tries to reinvent itself as a manufacturing power and shifts away from consumption-led growth. It is the latter that helped underwrite the export-led emerging market boom of the past decade.

It’s early days yet. Yet the impact of the U.S. rebound this time does appear different from the past.

Typically, a recovery in the United States leads to a rise in demand for all sorts of products – chemicals,  home furnishing, clothing, footwear, light manufacturing,  electrical appliances, machinery and equipment, transport – and this leads to a broad-based rebound in imports, analysts at UBS say. That has not happened in this cycle, and imports from  EM in particular have lagged. The answer, according to UBS, lies in the kind of things the United States has been importing. Look at their chart below  - most in demand are heavy machinery and transport equipment because the rebound is centred on construction, autos and infrastructure. UBS says:

The Czech central bank surprised many this week after its policy meeting. Widely expected to announce the timing and extent of FX market interventions, Governor Miroslav Singer not only failed to do so, he effectively signalled that intervention was no longer on the cards — at least in the short term  In his words, looser monetary conditions were now “less urgent”.

What changed Singer’s mind? After all, data just hours earlier showed Czech industrial production plunging  12 percent year-on-year in December. The economy has not grown since mid-2011 and is likely to have contracted by more than 1 percent last year. Singer in fact predicts a second full year of recession. But some slightly upbeat-looking forward indicators could be cause for cheer. According to William Jackson at Capital Economics:

We think that the need for further policy loosening was tempered by the tentative pick-up in the most recent survey data as well as the fall in the crown (versus the euro) since the start of the year.

Brazil’s central bank meets today and almost certainly will announce another half point cut in interest rates, the eighth consecutive reduction since last August. But so far there is little sign that its rate-cutting spree – the longest and most aggressive  in the developing world – is having much success in resuscitating the economy.

HSBC’s closely watched emerging markets index (EMI), released this week, shows Brazil as one of the weak links in the EM growth picture,  with sharp declines in manufacturing and export orders in the second quarter.

The government is expected to soon revise down its 4.5 percent growth projection for 2012; the central bank has already done so.  Industrial output is down, and automobile production has slumped 9 percent in the first half of 2012. Nor  it seems are record low interest rates encouraging the middle classes to take on more debt — the number of Brazilians seeking new credit fell 7.4 percent in the first half of this year, the biggest fall on record, according to credit research firm Seresa Experian.

Euro zone factories sank further into decline last month but manufacturers in Asia upped their tempo to meet growing demand from the United States and China, exposing a widening gulf between Europe and the rest of the world.

Unemployment in the euro zone rose to a 15-year high of 10.9 percent in March – as this chart shows the level of youth unemployment paints a worrying picture:

U.S. private employers hired a far fewer than expected 119,000 people in April, the smallest gain since September 2011, a report showed on Wednesday, adding to concerns that the economy has lost some of its momentum. This chart shows the relationship between the first release of ADP figures and non-farm payrolls which are released on Friday.

ISM report on U.S. manufacturing shows PMI at 53.4 in March against 52.4 in February:

Euro zone unemployment rose to 10.8% in February, with youth unemployment in Spain reaching 50.5%

China’s official Purchasing Managers’ Index (PMI) hit an 11-month high with a stronger-than-expected reading but a separate private survey by HSBC, which focuses more on smaller factories than the large state-owned enterprises captured in the official data, painted a gloomier picture:

The euro zone’s economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity. The manufacturing purchasing managers indexes for France and Germany were both worse than even the most pessimistic expectations from economists polled by Reuters.

China’s HSBC manufacturing PMI also fell to 48.1, below 50 for a fifth straight month.

“Reflation trade”? Equities have been tracking the 5yr breakeven inflation rate derived from inflation-protected bonds.

Five things to think about this week:

GOOD RUN 
-  Stocks have managed to extend their rally but potential hurdles, such as this week’s U.S. non-farm payrolls, could prove increasingly hard to leap given valuations — European stocks are trading at their highest multiples of earnings since May 2008 while the multiple for the S&P is the highest since mid-September 2008. If investors are to boost equity holdings — which Reuters polls show already back to pre-Lehman levels — it may require more concrete evidence of economic expansion, rather than just economic stabilisation, and signs that profit margins will be supported by revenue growth, rather than cost cutting. 

BOE – HANGING IN THE BALANCE
- The Bank of England will have to decide this week whether to end its asset-buying programme or extend it. Concern about potential longer-term inflation implications will have to be weighed against the signs of economic weakness still manifest in recent Q2 GDP data. With economists split on the outcome, markets look set for volatility, not least as the MPC’s decision is likely to be viewed as a indication of when other central banks could start to halt/unwind their credit easing strategy. 

SQUARING CIRCLES
- The dexterity with which China can manage surging lending and potential price pressures without unsettling markets with any rapid reversal of stimulative policy is increasingly in focus and will have financial market and macroeconomic repercussions well beyond its borders and Asia, as last week showed. Australia, which felt the spillover effect of the China jitters, has its own policy dilemma as the RBA is trying to push back against its currency’s appreciation while giving markets another reason to buy A$ by its more upbeat view on the domestic economic outlook. The RBA policy meeting this week will give the central bank a chance to show how it squares this circle. 

Five things to think about this week: 

RESULTS RUSH 
- The early wave of Q2 earnings last week prevented any major risk shakeout but there are plenty more results this week, including from banking, technology (Apple, Microsoft), and other sectors (Lockheed Martin, Coke, McDonalds). Investors with bullish inclinations will be looking for the VIX to stay subdued after it fell last week to lows last seen in September 2008, especially if more pent up cash is to be released from money market funds. Bears will be thinking that what might be the S&P’s best weekly performance since mid-March could be setting the market up to be more sensitive to bad news.

BANKS – IS THE BEST PAST? 
-  It is hard to see how bank results this week can top the boost which Goldman and JPM gave stocks last week. More of a mixed bag is likely with the U.S. slate including Bank of New York Mellon, Morgan Stanley, Wells Fargo, Capital One, and American Express while Credit Suisse will be the first major European bank to report. Defaults and delinquencies will be in focus for banks more exposed to the retail sector — both for what it means for their outlook and for what it bodes for household solvency and spending. 

DRILLING DOWN 
-  The breakdown of company results this week (ABB, Texas Instruments, Caterpillar, DuPont, Boeing, 3M) will show the extent to which the inventory rebuilding story, which has helped lift world equities almost 40 percent from their March lows, can offer more sustainable support to stocks in the weeks and months ahead. Earnings this week will be closely scanned to see how inventories are stacking up verus orders. How deeply firms are cutting into costs to defend profit margins, as well as their business investment plans, will be key for unemployment and other macroeconomic data.