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Avoid Trouble Spots Instead of Searching for Safety in Global Storm

Avoid Trouble Spots Instead of Searching for Safety in Global Storm

By    |   Monday, 15 February 2016 11:21 AM

New York Fed President William Dudley recently made some interesting comments, saying that talk of using negative interest rates is “extraordinarily premature,” which in my opinion he is absolutely right.

He also stressed the important thing is to assess how much of the downturn in markets is based on economic fundamentals and how much is simply on short-term swings in sentiment. “The U.S. economy has quite a bit of momentum,” he said.

In this context, the Atlanta Fed released its updated GDPNow forecast for real GDP seasonally adjusted annual growth rate, rising to 2.7 percent from 2.5 percent for Q1 of 2016 while the U.S. Census Bureau forecast for Q1 real consumption growth rose to 3.2 percent from 3.0 percent.

Now, looking at the Asia markets, one could say people over there seem to have enjoyed themselves over the Lunar New Year as equity markets have reopened with lots of optimism.

As an investor, I would prefer to keep my distance from that euphoria as I can’t see anything that has fundamentally changed over the last eight days.

On the Tokyo stock exchange, the Nikkei 225 spiked 7.16 percent and the Topix spiked 8.02 percent on an avalanche of bad Japanese news: Japan’s GDP contracted by 0.4 percent on a quarterly basis and by 1.4 percent on a yearly basis while private consumption fell be 3.3 percent year-on-year and exports fell by 3.4 percent on a yearly basis.

In simple words, we could describe this as “Abenomics in tatters,” which didn’t mean equity markets saw the bad news as good news… but nothing new about that as we have now gotten used to this kind of behavior.

In China, the equity markets fell slightly on thin volume, but what many seem to pay more attention is what the Governor of the PBoC Zhou Xiaochuan said in an interview to the Chinese daily Caixin: “… As long as there's no problem in the economic fundamentals, rises and falls of reserves are perfectly normal … cross-border flows under Qualified Domestic Institutional Investors and Qualified Foreign Institutional Investors schemes are limited in volume, and the size and pace of such flows are subject to management … it is necessary to distinguish capital outflows from capital flight…”

When I look at the capital flow charts, it doesn’t look specifically “normal” to me when about $1 trillion has left the country over about a year and a half, and this taking into account the outflows have been partly offset by money coming in from the trade surpluses, which is of course normal.

Anyway, markets don’t seem to look deeper into economic realities and so far seem to believe China will not depreciate its currency to promote exports and growth, which by the way it must also be said that depreciation rarely promotes exports and growth.

The big unanswered question remains: How will the Chines authorities stop the outflows?

Anyway, the strengthening renminbi/yuan brings it back within recent ranges, so far nothing extraordinary about that.
Interestingly, HSBC, which by the way just decided to keep its headquarters in London, has raised its USD/CNY exchange rate forecast from 6.70 CNY per dollar to 6.90 CNY per dollar by year-end while it expects a further widening (weakening) of the range.

For investors, there is no doubt confusing times will continue for much longer than many think as possible at this moment.

Over recent months, the broad deterioration in financial markets can be traced back to August 2015 when we got the devaluation of the Chinese currency while we got as an extra number of central banks that either established negative deposit rates or took them further into negative territory. And for now, nothing seriously hints of an improvement in this situation anytime soon.

So, as an investor, I  wouldn’t dream of “upside” moves in the markets, but on the contrary, I would try not being part of the “downsides.” Yes, "downsides" — in plural!

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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So, as an investor I wouldn’t dream of “upside” moves in the markets, but on the contrary, I would try not being part of the “downsides,” yes, in plural!”
china, economy, invest, stocks
Monday, 15 February 2016 11:21 AM
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