Tags: hans | parisis | Rising | Commodities | Stir | Global | Uncertainty

Rising Commodities to Stir Global Uncertainty

By    |   Monday, 14 February 2011 12:20 PM

This morning we have some interesting headlines.

In Egypt, the Supreme Military Council issued its "Communiqué Number 5" saying that “the Supreme Council will run the affairs of the country on a temporary basis for six months or until the end of parliamentary and presidential elections."

Speaking about contagion, over the weekend we also saw protests elsewhere in the region, including Bahrain that has new protests today. Bahrain may worry markets, as protests there may take on a sectarian tone, and that could resonate among oil producers in the Gulf if unchecked.

China had its “smallest” surplus in nine months. Imports in January rose 51 percent y/y (forecast of plus 28 percent) while exports gained 37.7 percent (forecast plus 22.4 percent), leaving a trade surplus of US$6.5 billion for the month. This compares to $13.1 billion in December and a forecasts of $10.7 billion.

PBOC (People’s Bank of China) vice governor and also head of SAFE (State Administration of Foreign Exchange) Yi Gang said that the exchange rate of the yuan (CNY) is at an “appropriate” level at present.

He is also quoted as saying that the authorities will gradually allow the market to set the value of the yuan (CNY,) but notes that “there is no timetable to make the Chinese currency fully convertible.”

In India, the wholesale price index rose 8.23 percent y/y in January, which was above the consensus forecast of 8.05 percent, but down from 8.43 percent previously. However, wholesale food prices rose 15.7 percent y/y compared with 13.6 percent in December.

South Korea: The Korea Development Institute said in a monthly report that the “Korean economy is facing growing inflationary pressure amid continued economic growth and improvement in the employment sector.”

Central Bank of Chile’s President Jose De Gregorio said: “On the one hand, there is administering capital inflows into some emerging economies … This has not occurred in Chile and although there is the possibility of applying capital controls, its long term efficacy must be carefully evaluated … on the other hand, in a world where emerging economies have gained importance, the appreciation of their currencies is here to stay … Although their effects on the economy can be mitigated for some time, long-term measures must be adopted to foster competitiveness.”

With the G-20 meeting taking place in Paris at the end of this week and when we take a worldwide approach, we note that if there has been a “common” theme so far to 2011 it has been a rising tide of protests, both at street as well as at governmental levels, in a number of markedly different nations globally, and as well as in emerging as in developed economies.

The daily headlines illustrate this point unmistakably with reports of clashes over the weekend in Yemen, Algeria, the latest communiqué from the Egyptian Supreme Military Council and talk in Ireland that Fine Gael that is the second largest political party in Ireland and is generally seen as more to the political right may have already threatened to restructure the debt of the Irish banks should they fail to get better terms on the bailout if they are elected to power next week on Friday, Feb 25.

Although a lot of reasons can be identified for this rising tide of unrest, caused by the droughts in China to the mind-blowing “structural inefficiencies” in the eurozone, it seems to me that if we were to identify one of the underlying forces to all this then it would be the policy intensifying disputes over currencies and monetary policy settings or “currency wars” if you want that, in fact, have dominated the market landscape for the past decade.

To me, nothing has changed and it still seems to me that the causal chain of the bubble that had emerged in a wide range of markets through 2007-2008 was the dispute that arose at the start of 2002 between the U.S., China and Japan over precisely these issues. These forces were directly responsible for the wave of money that flowed into peripheral Europe, known as the PIIG countries, through and at least until the summer of 2007, hereby forcing sovereign yields down to unjustifiable low levels and stimulating their already hot housing markets in nations such as Ireland, Spain, etc. creating, in turn, the perfect conditions for the ultimate bust.

All that said, today the blind can see that the current boom in commodity prices that’s really raging since June of last year as being just the next phase in a boom/bust cycle that in recent times first emerged at the end of 2001 and that now has been in its current boom phase since March 2009 when the Federal Open Market Committee (FOMC) introduced its first Quantitative Easing (QE) program.

I’m convinced it’s fair to say that without this boom in commodity prices then it really becomes debatable whether Tunisia, Egypt, etc. would have experienced such a wave of popular protest in recent weeks.

My reason for highlighting this extraordinarily complex point is certainly not to blame any institution or entity. After all, notwithstanding the U.S. dollar remains the main reserve currency in the world, we must accept that the U.S. can hardly be blamed for running monetary policy that suits its own national purpose and interests as U.S. headline CPI still remains stubbornly below 2 percent.

Rather, I want here to highlight that the latest guidance from U.S. and Chinese officials indicates that broad monetary policy trends in the world’s two biggest nations, when measured in world GDP numbers, are unlikely change radically over the next six months.

As a result it seems reasonable to me supposing that further pressures will be brought to bear upon a wide range of markets, while in particular, a wide range of commodity prices could, for the time being at least, continue to push higher. I have no doubt about that.

Now, given that sharp rises in the cost of living were one of the main catalysts for political change in Egypt and Tunisia, etc. it shouldn’t come as a surprise that we could see investors becoming increasingly worried about other potential flashpoints that could appear in a wide range of emerging markets should prices continue to rise as all this is, after all, a global rather than a purely regional issue. Little wonder then that emerging equity markets that includes, of course, the BRICs, have started definitively to perform poorly.

In my opinion and if I’m right, of course, then this retreat from Emerging Markets (EM) risk only looks set to intensify further and could easily have long legs. Yes, massive flight to safe havens could start at any moment, once gain.

As I’ve already said last week on markets in general and commodities in particular we are continuing to witness a very mature rally for which positive investor sentiment remains at extreme optimistic levels while the market players so far clearly don’t seem to be inclined “yet” to lose their belief. As long as the trends and channels remain pointing upward, there is still a chance we could continue to go up for another 10 percent to 15 percent.

As long as “inflation” in the U.S. but more importantly globally and specifically in the emerging economies (EM) doesn’t become to be considered as a “threat,” which would imply further rising interest rates everywhere, and inflation continues to be regarded more as a “positive” by the vast majority of the market players but also, yes, by a few central bankers, psychology and vested interests both could continue to support the actual very mature uptrend.

Until these upward trends in the markets break; until U.S. Treasurys get a “bid” once again; until the forex players will massively seek protection, once again, in the dubious “safe haven” of the U.S. dollar, that will be most probably the way to play it, however uneasy and worried one may feel about the final outcome.

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This morning we have some interesting headlines. In Egypt, the Supreme Military Council issued its Communiqué Number 5 saying that the Supreme Council will run the affairs of the country on a temporary basis for six months or until the end of parliamentary and...
Monday, 14 February 2011 12:20 PM
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