The Fed’s plan to reduce monthly bond purchases is exposing the deep-seated fragility of India’s economy, underscoring the risks facing emerging markets at a time of rising global interest rates.
India’s stock market tumbled 1.6% Monday, adding to a 4% decline Friday, and the rupee hit a fresh low against the dollar. Government-bond prices slumped, sending yields sharply higher.
(…) as their export engines have sputtered, because of China’s slowing growth and uneven demand in the U.S. and Europe, these [emerging] economies have started to run large current-account deficits, which occur when imports outweigh exports. As investors begin demanding higher returns for taking on risk, nations with large economic imbalances are getting punished. (…)
The selloff in Indian assets began in May, as Fed officials started discussing plans to pull back from the $85 billion of monthly bond purchases designed to bolster uneven U.S. economic growth. Seeing interest rates rise in rich-country markets such as the U.S., investors who had sought investments in faster-growing emerging markets pulled their funds.
The selloff has since spread to other developing nations, such as Indonesia and Thailand, which like India are exposed to rising global interest rates, thanks to budget and current-account deficits that mean they must borrow to finance daily spending.
The Indonesian rupiah fell to its lowest level in four years Monday. Shares slid 5.6% in Indonesia and 3.3% in Thailand. Asian shares fell further in early trading Tuesday. Indexes in Japan and Australia were both down 0.7%, and Indonesia’s main index dropped 3%. (…)
Let’s not forget that financial markets are communicating vessels.
Sell-off worsens in Indonesia, India and Thailand
Brazil’s currency hit a new low against the dollar amid increasing concerns that the country’s policy makers are failing to reinvigorate the South American economy.
(…) Brazil’s central bank has tried to fight the outflows by raising interest rates three times this year, raising the yields on the country’s debt. It also has stepped up market interventions, pumping $7.6 billion into the currency-futures market in the past week and $45.8 billion since May 31. The real is down more than 10% over that period.
“They’re intervening like crazy, and it’s still not working,” said Sara Zervos, portfolio manager of the $11.7 billion Oppenheimer International Bond fund . “It’s gotten to the point where investors and even domestic citizens have lost confidence in the ability of the government to navigate the country into growth.” (…)
After a 71.35% rally over 4,571 calendar days from 1/18/2000 to 7/24/2012, the US long bond future is quickly approaching bear market territory for the first time in more than 13 years.
Ed Yardini reveals who the big sellers are (US International Capital Flows)
The US Treasury released data last Thursday tracking international capital flows for the US through June. The outflows out of US securities was shocking. Especially troubling was the amount of US Treasuries sold by foreigners. Their outflows exceeded those from US bond funds. Of course, some of the outflows from the bond funds could be attributable to foreign investors. Nevertheless, the data suggest that foreign investors may have been more spooked by the Fed’s tapering talk in May and June than domestic investors.
- Morning MoneyBeat: Stock Selloff Starting to Get Serious (WSJ)
This selloff is proving to be more than just a blip on investors’ radars.
The Dow and S&P 500 are each riding their first four-day losing streaks of the year and have fallen in nine of the past 11 trading days. The Dow is down 4.1% from its record high hit earlier this month, a skid that has brought back memories of the spring swoon that was also driven by worries about future Fed stimulus.
A lackluster earnings season, negative technicals – the S&P 500 fell through its 50-day moving average with authority on Monday – and historically tough months ahead are making some investors nervous that this selloff could be worse than what transpired a few months back.
Stocks are Tapering Themselves (Barron’s)
The Dow Jones Industrial Average is coming off its worst week of the year and now, for the second time in 2013, it is trading below its important 50-day moving average. Even without any fancy indicators, it is not difficult to surmise that something has changed in the stock market. Now is not the time for taking big risks.
Not only has the blue chip index dipped below its 50-day average, but it is the first major index to fall below its rising trendline from the market’s 2012 low (see Chart 1). That is a big deal, but unfortunately for the bears the Dow is the only major index to accomplish this dubious feat.
(…) A longer-term view of this index suggests that it has its sights set on the vitally important 200-day moving average, which should provide some comfort to the bulls. After all, one simple definition of a bull market is consistent trading above this metric. At its current rate of advance, this average will rise roughly 150 points to meet chart support from the Dow’s June low in two or three weeks. This is where the risk/reward equation will once again be favorable for the bulls. (…)
BUT HOW ABOUT THE ECONOMY?
The Philly Fed’s Aruoba-Diebold-Scotti Business Conditions Index (hereafter the ADS index) is a fascinating but relatively little known real-time indicator of business conditions for the U.S. economy, not just the Third Federal Reserve District, which covers eastern Pennsylvania, southern New Jersey, and Delaware. Thus it is comparable to the better-known Chicago Fed’s National Activity Index, the August update for which will be published tomorrow (more about the comparison below).
Named for the three economists who devised it, the index, as described on its home page, “is designed to track real business conditions at high frequency.”
The index is based on six underlying data series:
- Weekly initial jobless claims
- Monthly payroll employment
- Industrial production
- Personal income less transfer payments
- Manufacturing and trade sales
- Quarterly real GDP
This next chart shows that business sales are growing very, very slowly, in both nominal and real terms.
And this one from Bloomberg Briefs shows that the Fed is not helping at all and is not about to begin helping.
Meanwhile, the U.S. consumer seems exhausted:
Decline puts spotlight on plan to raise consumption tax
(…) Figures from the finance ministry on Monday showed that total exports fell 1.8 per cent from June, to Y5.78tn ($59bn), when adjusted for seasonal variations. That marked the first month-on-month decline in the yen value of shipments since November last year, when Shinzo Abe’s Liberal Democratic party began to push for a lower currency to support an ambitious, multifaceted growth programme.
Falls were led by the US, Japan’s top export partner, where the nominal value of shipments dropped almost 3 per cent from June to just over Y1.1tn, on an unadjusted basis. Taking into account fluctuations in exchange rates and prices, overall exports in July were 2.1 per cent weaker than the previous three-month average, according to calculations by Nomura. (…)
CHINA: SLOW AND SLOWER
Big debate whether China has hit bottom. CEBM Research’s mid-August surveys say:
- The general condition of the steel market improved over the last month, with nearly 60% of respondents reporting sales better than expectations.
- In August, the cement market remained stable and in-line with seasonal trends. Most respondents reflected that they had not observed any “stabilizing growth” policies from their local governments. Presently the amount and demand of projects in progress was considerable but some projects were terminated due to funding shortages. Compared with survey results in July, the proportion of producers we surveyed reporting that sales in the first half of August were below expectations declined from 37% to 23%.
- Actual demand for construction machinery is not recovering. Historically, sales in August are generally at the year’s bottom. Most clients do not want to buy equipment before the second half of September unless it’s an urgent necessity. Most dealers did not see project starts or preparations for new construction. Progress of ongoing construction projects also remains slow. Funding constraints took the largest share of the blame.
- During the August Heavy Truck Dealer Survey, 0% of the respondents reported sales in the first half of August exceeded expectations, while 63% believed sales were in-line with expectations and 37% reported sales below expectations. Generally speaking, respondents believe that sales in August will be increasingly weaker than seasonal trends.
- July Copper Imports Driven by Financing Demand Rather Than End Consumption We did not find any obvious signs of demand rebound in the August communication between copper traders and end users, and end demand is believed to be flat in September according to respondents. Although July copper import volume reached a 14-month high, based on our communication with copper importers, a large portion of copper imports were driven by tight liquidity rather than robust end consumption, as most copper import transactions are settled by letters of credit rather than cash. Some copper traders also said that the impact of these copper imports has not reached the Shanghai spot market yet, but this is ultimately inevitable. This revival in copper financing may distort the copper balance in China once again.
(…) The report, by Michael Tanner and Charles Hughes, is a follow-up to Cato’s 1995 study of the subject, which found that packages of welfare benefits for a typical recipient in the 50 states and the District of Columbia not only was well above the poverty level, but also more than a recipient’s annual wages from an entry-level job.
That hasn’t changed in the years since the initial report, said Mr. Tanner, a senior fellow at Cato. Instead, the range has become more pronounced, as states that already offered substantial welfare benefits increased their packages while states with lower benefits decreasing their offerings. (…)
The authors found that in 11 states, “welfare pays more than the average pretax first-year wage for a teacher [in those states]. In 39 states, it pays more than the starting wage for a secretary. And, in the three most generous states a person on welfare can take home more money than an entry-level computer programmer.”
Fed advises US banks to lift capital targets More regulatory capital needed for periods of market stress
The largest US banks should hold regulatory capital beyond their own internal targets to better prepare them for periods of market stress, according to a study published by the Federal Reserve on Monday.
The study, which examined banks’ approaches to the Fed’s recent stress tests, also said that while banks had “considerably improved” their regulatory capital planning in recent years, they had “more work to do to enhance their practices”.
Follow up on The Coming Arctic Boom:
China’s Yong Sheng is an unremarkable ship that is about to make history. It is the first container-transporting vessel to sail to Europe from China through the arctic rather than taking the usual southerly route through the Suez Canal, shaving two weeks off the regular travel time in the process. (…)
The travel time of about 35 days compares with the average of 48 days it would normally take to journey through the Suez Canal and Mediterranean Sea.
Chinese state media have described the approximately 3,400-mile Northern Sea Route, or NSR, as the “most economical solution” for China-Europe shipping. Cosco has said that Asian goods could be transported through the northern passage in significant volumes.
The NSR, at roughly 8,100 nautical miles, is about 2,400 nautical miles shorter than the Suez Canal for ships traveling the benchmark Shanghai-to-Rotterdam journey, according to the NSR Information Office. (…)
The Yong Sheng’s travel comes as shipping volumes on the arctic route are rising fast amid warmer weather, which has kept the passage relatively free of ice for longer than in recent decades.
The Russian-run NSR Administration has so far issued 393 permits this summer to use the waters above Siberia, compared with 46 last year and a mere four in 2010. The travel window usually opens in July and closes in late November when the ice concentration becomes prohibitive for sailing. (…)
Mr. Balmasov said even ships without ice-breaking capabilities received permits as the weather became warmer. “This cuts the cost of operators as the seaway is free of ice and the voyage time significantly lower,” he said.
Arctic ice covered 860,000 square miles last year, off 53% from 1.8 million square miles in 1979, according to the National Snow and Ice Data Center of the U.S. (…)
“It’s warming very quickly in the arctic and I would not be surprised if we see summers with no ice at all over the next 20 years. That’s why shipping companies are so excited over the prospects of the route,” Mr. Serreze said. (…)
The benchmark Asia-to-Europe shipping route accounts for 15% of total trade. (…) Shipowners recognize the potential of the route, but say it will take years to determine whether it will become commercially viable.
“We are looking into it but there are still many unknowns,” said a Greek shipowner whose vessels are chartered by a number of Chinese companies that trade with Europe. “The travel window is short and if ice forms unexpectedly your client will be left waiting and your cost will skyrocket to find an icebreaker. But if climate change continues to raise temperatures, the route will certainly become very busy.” (…)
Lloyd’s List, a shipping-industry data provider, estimates that in 2021 about 15 million metric tons of cargo will be transported using the Arctic route. That will remain a small fraction of the volumes carried on the Suez Canal. More than 17,000 vessels carrying more than 900 million tons of cargo plied the canal route last year.