Tags: growth | investors | US | dollar

Global Growth Probably Will Suffer Once Again

By    |   Tuesday, 03 September 2013 01:36 PM

As it has been the case most of times, the period immediately after the Labor Day holiday sets the tone for the last quarter. We'll have to wait and see if this year will be any different due to the geopolitical risks associated with the U.S./Syria situation.

It's an undeniable fact that there are various upcoming events that could seriously impact the markets during September and October, two months that historically have proven usually not being positive for the markets.

In the United States, we'll have the vote by Congress for backing President Obama's already-announced "punitive" strike against Syria for its allegedly use of chemical weapons. Please don't underestimate this, as it is a very serious issue where the credibility of the United States is at stake especially after the president precisely articulated his "red line" that should not be crossed and whereby the "forbidden" use of chemical weapons would not be tolerated.

In this context, Reuters on Monday cited an unnamed administration official who said the White House is prepared to rework the language in a draft resolution authorizing military force in Syria "within the parameters that the president has previously explained."

Interestingly, also on Monday, the German daily Der Spiegel reported German intelligence agency (the Bundesnachrichtendienst) Chief Gerhard Schindler voiced his "duly documented" support for U.S. allegations Syrian President Bashar al-Assad's government ordered the attack on the eastern Damascus suburb of Ghouta on Aug. 21.

It's evident that Israel, as well as South Korea, have a lot at stake with whether Obama will stick with his clear drawn "red line" being respected or not.

Anyway, in the context of any long-term investing strategy, this time around is certainly one of those best of times to engage in long-term investments. Investors shouldn't fool themselves and take the probable military action against Syria lightly. That said, it can't be positive for investors, the Syrian people and the world as a whole.

And then, on Sept. 17 and 18, we'll have the Federal Open Market Committee (FOMC) meeting that will be associated with the Fed's own economic projections and hopefully an enlightening press conference by Fed Chairman Ben Bernanke.

In my opinion, it's not such a big deal if stimulus tapering will be announced now or later this year. More important is the fact that tapering finally will cause higher yields for longer-term bonds.

It wouldn't come as a surprise to me to see a 3 percent yield on the 10-year Treasury by the end of this year and even a 4 percent yield by the end of 2014 , which of course, is not for sure as this depends fully on the recovery to continue in the United States.

In this context, on the Chicago Mercantile Exchange, the 10-year Treasury futures contract for December delivery was 123.210 Tuesday morning, which implies a yield of 3.215 percent (higher prices mean lower yields).

I have no doubt whatsoever the Fed will attempt to have the impact of its coming policy shift (tapering) on the longer-term Treasury yields be as muted as possible.

Nevertheless, the consequences of rising U.S. rates have already had severe negative impacts on various emerging economies' foreign exchange (FX) rates and have obliged them to intervene in the markets since the month of May when it all started with Bernanke's speech in Chicago.

Yes, several emerging economies have been obliged to use part of their FX reserves, which include logically U.S. Treasurys and dollars, and then in turn have exercised upward pressures on the longer-term bond yields.

Taking India as an example, and also because it publishes weekly its FX reserves, we have seen a remarkable inverse correlation between the rising yields of longer-term U.S. Treasurys and the noticeable declines in India's FX reserves and the importantly weakening Indian rupee.

This development of events was, in fact, also confirmed by the latest monthly Treasury International Capital data, which represents cross-U.S. border financial flows, where we saw that China, Brazil, Taiwan and the oil exporters all reduced their holdings since May. In June, net foreign official outflows came in at $14.3 billion.

In many emerging economies we are seeing rising uncertainties dominating their widespread perceptions about the coming Fed tapering and the consequential rise in global bond yields that could ignite, and probably will have, destabilizing effects in various markets, increase emerging economies' financing costs, provoke further capital outflows from these emerging economies and put further downward pressure on their respective currency exchange rates.

Already on Friday, the Indian Finance Ministry's Principal Economic Adviser Dipak Dasgupta told Reuters his government was seeking support for coordinated intervention in the FX markets. Believe me, this will not be the last time an emerging economy will try to organize such an intervention and FX markets could, as a result of such actions, become very hectic and unpredictable.

In my opinion, there is no doubt that geopolitical risk/uncertainty should dominate the landscape in the foreseeable future, which would not help stimulate growth overall and certainly not in most of the emerging economies.

As a long-term investor, I would take notice, but certainly not get excited, of the "better" purchasing manufacturers' indexes for various countries, particularly the eurozone, but I wouldn't overlook the fact that no country in the eurozone, except Ireland, saw an improvement in its unemployment situation and new hiring.

If you ask me, I think global growth probably will suffer once again. Morgan Stanley just revised its global growth forecast down to 2.9 percent for this year and 3.5 percent in 2014, which is down from 3.1 percent and 3.9 percent, respectively, previously, mainly because of widespread weaknesses in various emerging economies.

Interestingly, according to a draft that has already been prepared for this week's G20's concluding communique of the G20 meeting in St. Petersburg, Russia, the economic recovery is weaker than expected and downward risks remain. So, not much to build on!

Finally, I still expect a correction in the stock markets to occur and once underway, it could easily provide a downward move that could stretch over several years in multiple waves. No, not in a straight line down, but under which circumstances I have no doubt "cash would be king."

I'm continuously asking myself where sound growth will finally come from now that easy money is on its way out.

I'd like to add I remain bullish on the dollar, but in case the United States would have to start a new war, then I'd have to change my position, as historically war has practically always meant a weaker dollar. I think long-term investors would do well to put also the dollar in function of the United States getting involved in a new war on their radar screens.

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I'd like to add I remain bullish on the dollar, but in case the United States would have to start a new war, then I'd have to change my position, as historically war has practically always meant a weaker dollar.
Tuesday, 03 September 2013 01:36 PM
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