Asian shares rise || Hedge fund reaps $500m on Greek bet || Geithner told of Libor fears in 2008 || Japan’s exports fell in November || Knight agrees to Getco offer || Cerberus to sell gun company stake || Basel may tighten ABS risk weight models || Watching for unintended consequences in 2013
It seems odd — and it may well be short-lived — but the US is beginning to shape up as a rare bright spot in the world economy.* Or indeed almost the only bright spot in the world’s economy, except for the Gulf petro-states. That is, if you were to base such an assessment solely on Japan’s September export data, released on Monday. Japan’s preliminary September trade data tell a story not dissimilar to China’s — exports to Europe are slowing (unsurprisingly) by a lot, down 26 per cent for the month, year-on-year.
Cheap labour isn’t forever. The act of taking advantage of it enriches the work force over time. At least, that’s what should happen. As America proved, a work force can, in effect, end up aiding its own overall decline due to a lack of competitiveness on wages and pensions. That sort of rigidity, whether good or bad, isn’t the only thing that can lead to a decline in manufacturing employment. Automation can too.
A few weeks ago FT Alphaville drew attention to a Standard Chartered report that quantified what we had been hearing via anecdotal reports for a while, namely that Chinese corporates had somehow ended up with a large dollar short position — estimate about $800bn — due to previous expectations that the Chinese renminbi would only ever strengthen against the US currency. This, of course, is very reminiscent to the situation that non-eurozone emerging Europe found itself in after 2008. Many corporates there had shorted the euro and the Swiss franc on similar expectations that their own currencies would only keep strengthening — though this time related to euro adoption convergence effects.
The US manufacturing PMI released by the Institute of Supply Management (ISM) on Monday beat expectations, coming in at 53.4. But that’s not what we really want to talk about here. Instead, we want to ask the question that the team at Bank of America Merrill Lynch asked themselves in an impressive 73-chart, 43-page report last week. Namely: is US manufacturing in the early stages of a renaissance? There is a popular image of the sector as being in perpetual decline due to offshoring. However, at least some of the alleged decline had more to do with other sectors growing and thus decreasing manufacturing’s share of GDP as a percentage.
The US has launched a case against India at the World Trade Organisation, charging that the Asian nation’s ban on poultry imports – imposed to prevent avian flu – violated global trade rules, the FT reports. The move comes as the Obama administration has become more aggressive on trade enforcement, recently establishing a new taskforce across government agencies to co-ordinate litigation efforts. The move marks the fifth time the US has brought a WTO case against India, and the first under the Obama administration.
US crude imports have fallen to their lowest level for a decade as a result of weak demand and growth in domestic production, making the economy more resilient to oil price rises, the FT reports. The US imported 8.91m barrels a day of crude oil last year, according to the US Energy Information Administration, the lowest amount since 1999.
Japan is “in the final stages” of talks with the US on a deal to make deeper cuts to its Iranian oil imports, its foreign minister has said, according to the FT. A deal to reduce reliance on Iran’s crude would be made in return for Japanese banks avoiding tough US sanctions on dealings with Iranian financial institutions. Amid the clampdown on Iranian exports, more and more questions are being asked about the true extent of Saudi Arabia’s “spare capacity” to replace lost supply, the FT adds. A Western release of strategic crude reserves, also to meet demand, would meet the logistical problem of the oil market being tightest in Asia, Reuters says.
The Australian dollar rose to its highest level against the US dollar in five months on Thursday, as figures showed that the country’s trade surplus rose to a record high last year, buoyed by strong commodity exports. The FT reports that Australia’s currency advanced to a fresh five-month high of $1.0756 against the US dollar in early Asian trading. It later pared some of its gains and was flat against the dollar by the close of trading in London. The Japanese yen continued to strengthen against the US dollar after a week of gaining ground. The dollar declined 0.2 per cent to hit a low of Y76.02.
Orange juice prices hit an all-time high as worries over a possible US ban on Brazilian imports after the discovery of fungicide traces at the end of last year fuelled more speculative buying, the FT reports. Supply concerns were exacerbated last week after a destructive disease called citrus “greening” was found in Texas, the third-largest US orange producer after Florida and California. Frozen orange juice futures on the ICE Futures US exchange hit a record $2.2695 a pound, up by almost 8 per cent from last Friday. The contract was trading at $2.2210, up 5.4 per cent in late morning in New York on Monday. While uncertainty about a halt in Brazilian imports by the US Food and Drug Administration triggered the buying by speculative investors, there was no conclusive news from the authorities.
US natural gas prices have sunk to the lowest point in a decade as the shale drilling boom threatens to fill the nation’s underground storage network, reports the FT. Nymex February gas was $2.402 per m British thermal units early Thursday, down almost 50 per cent from a year ago to return to levels last reached in early 2002. The decline marks a stunning turnround for a market that was building sea terminals to handle an anticipated flotilla of imports just a few years ago. Drillers’ use of horizontal drilling and hydraulic fracturing techniques has instead added decades to estimated reserves, allowing the US to ponder significant liquefied gas exports. Analysts say that with production at records and mild winter temperatures leaving inventories swollen, prices could approach $1 per m Btu later this year. US gas now costs just a third of prices in European markets and a sixth of gas sold in Japan, where it’s $15 per mBtu. An analysis unit of the US Department of Energy is on Thursday expected to release a study on the impacts of exporting liquefied natural gas to higher-priced markets.
Japan wants to keep importing crude oil from Iran despite rising pressure from the US to cooperate in strengthening sanctions against the Islamic Republic, reports the WSJ, citing an unnamed official at Japan’s Ministry of Foreign Affairs. The official reportedly said the country was concerned about the impact on energy prices and the possibility of a fuel shortage affecting rebuilding after the disastrous earthquake and tsunami that hit in March. The comments came a day before the planned meeting between US Treasury Secretary Tim Geithner and Japan’s Finance Minister Jun Azumi. The two ministers plan to meet Thursday morning, with a possible ban on Iranian crude oil and Japan’s currency intervention likely to be on the agenda, which a spokesman at the Ministry of Finance declined to discuss.
China’s overall trade surplus last year fell to $155bn, its lowest level since 2005, underscoring how slowing global growth and rising Chinese demand are reshaping the country’s economy, the FT reports. The falling trade surplus could ease pressure on China to accelerate the appreciation of the renminbi, in a year when US election politics have turned up the rhetoric over Chinese trade policies. US Treasury secretary Tim Geithner arrives in Beijing on Tuesday for a two-day visit to discuss trade and economic issues, and he is also expected to press for Chinese co-operation on recent US sanctions on Iranian oil transactions. China’s trade surplus shrank last year as imports grew faster than exports, partly due to Beijing’s growing purchases of commodities such as iron ore and crude oil.
China will impose retaliatory duties on US car imports in the latest sign of trade friction between the world’s two largest economies, the FT reports. In a statement, China’s commerce ministry said on Wednesday that it was taking action in response to damage to its car industry from US “dumping and subsidies”. The move will affect several larger vehicles popular in China, including sport utility vehicles made by Germany’s BMW and Mercedes-Benz brands at their US plants. Shares of BMW and Daimler, which owns Mercedes, fell 5 per cent and 3 per cent respectively on Wednesday. China overtook the US in 2009 as the world’s largest vehicle market, and sales there account for a substantial chunk of profits for BMW and Mercedes, who build the SUVs they sell globally in North America. In addition to the two German premium brands, the ministry is also targeting models manufactured by General Motors, Ford Motor, Chrysler and Honda’s US unit. The individual duties will range from 2 per cent to 21.5 per cent and be imposed for two years on imported cars and SUVs with engines larger than 2.5 litres.
China will impose retaliatory duties on US car imports in the latest sign of trade friction between the world’s two largest economies, the FT reports. In a statement, China’s commerce ministry said on Wednesday that it was taking action in response to damage to its car industry from US “dumping and subsidies”. The move will affect several larger vehicles popular in China, including sport utility vehicles made by Germany’s BMW and Mercedes-Benz brands at their US plants. Shares of BMW and Daimler, which owns Mercedes, fell 5 per cent and 3 per cent respectively on Wednesday.
South Korea’s ruling conservatives have approved a landmark trade agreement with the US in a boisterous parliamentary session in which one opposition lawmaker let off a gas canister, reports the FT. Although Washington and Seoul signed the tariff-reducing agreement in 2007, legislatures in both countries have struggled to finalise it, needing to overcome objections from vocal lobbies who feared job losses, such as US auto unions and Korean farmers. Lee Myung-bak, South Korea’s president, called on parliamentarians to ratify the agreement, calling it “a survival strategy for our country”.
The Chinese renminbi could pose a threat to the international dominance of the US dollar within a decade, according to an independent commission set up by the US Congress, the FT reports. The annual report of the US-China Economic and Security Review Commission, published on Wednesday, said China’s efforts to spread international use of its currency were succeeding in broadening its reach. “[It] no longer seems inconceivable that the RMB could mount a challenge to the dollar, perhaps within the next five to 10 years,” said the commission, chaired by William Reinsch, president of the National Foreign Trade Council, a business group. “Chinese financial authorities are laying the groundwork for these ambitions via a series of bilateral arrangements with foreign companies and financial centres.” The report also said China was continuing to intervene heavily in its domestic economy through a combination of subsidies and protections to state-owned enterprises, rules on forced transfer of technology from foreign investors and limiting government procurement to Chinese companies – the so-called indigenous innovation policy.
Protracted US budget negotiations will cast a shadow over President Barack Obama’s trip to the Asia-Pacific next week where he will tout growing US-Asian economic and security co-operation, Reuters reported. Obama is set to visit Hawaii, Australia and Indonesia from Friday, coinciding with the Asia-Pacific Economic Cooperation summit that he will host in Honolulu on November 12-13. However, Obama’s bid to market his export strategy to Asia – hot on the heels of the recent free-trade agreement with South Korea – coincides with domestic calls to cut the nine-day trip short amid US budget talks and the 2012 presidential election, the wire reported. An editorial in the New York Times on Friday urged the President to tout his free market credentials and “make a case for expanding and liberalizing trade with other Pacific Rim countries”.
China has warned that the US could plunge the global economy into a 1930s-like depression if it passes a bill that aims to punish Beijing for holding down the value of its currency, reports the FT. With the Senate set to vote on Tuesday on legislation that would impose tariffs on imports from countries that manipulate their exchange rates, China has said that the consequences of such a move could be dire, leading to a trade war. In a commentary just hours ahead of the vote, the official Xinhua news agency took the warnings a step further, saying the proposed legislation in the US was reminiscent of the Smoot-Hawley tariffs in 1930 that worsened the Great Depression.
Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday, the FT reports. The Boston Consulting Group analysis says the new jobs will be generated by a “re-shoring” of manufacturing activity lost to China over the past decade. “Re-shoring is part of a broad trend that will emerge as … production gradually swings back to the US,” Hal Sirkin, a senior partner at the consultancy, told the Financial Times. The Boston Consulting Group estimates that the trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade. The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies.
Chinese premier Wen Jaibao threw some shade on the eurozone on Wednesday, and the US too — insisting they get their own fiscal and monetary houses in order and recognise China as a market economy if they really want to see some investment. His own house didn’t look so great, either, when the Asian Development Bank challenged the likelihood of a much hoped-for Chinese soft landing with its updated outlook. It raised the inflation forecast for China, while cutting growth forecasts (hmm… stagflation, anyone?).
An exasperated Michael Pettis always makes for an enlightening Michael Pettis column. This time he trains his eye on the possible implications of the recent announcements by China that this time it means what it says about diversifying its reserve holdings out of USD assets. Sure.
The news on Tuesday that the US trade gap in May widened to its largest point in more than two years won’t alleviate concerns about an expected disappointment in Q2 GDP, but the news isn’t quite as bad as the headline number would suggest. Here’s a graph from Calculated Risk:
The World Trade Organisation on Tuesday ruled against China’s practice of limiting its exports of raw materials, handing a victory to the US and the European Union in a closely watched trade dispute, the FT writes. The edict from a WTO judicial panel, responding to a complaint from the EU, US and Mexico, said China’s imposition of export duties and quotas on a variety of metal ores and other materials were illegal under WTO rules. By setting a precedent, the decision also strengthens the hand of the EU and US in their related campaign to prevent Beijing restricting the exports of rare earth materials, which are vital components in a number of high-tech products and are produced almost exclusively in China. Karel de Gucht, Europe’s trade commissioner, said the verdict would help to create a more level playing field for raw materials. “I expect that China will now bring its export regime in line with international rules. Furthermore, in the light of this result China should ensure free and fair access to rare earth supplies,” Mr De Gucht said.