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Words from the (Investment) Wise for the Week That Was (Aug 4 - 10, 2008): Part II

David Fuller (Fullermoney): Lengthy correction in commodities
"I am looking for a lengthy medium-term correction, in most commodities ... This can be anything from a few months to a couple of years and occasionally more. That assessment is based on historic precedent and any attempt to be more precise would be pure guesswork, since the eventual outcome will depend on a series of events, known and unknown, yet to unfold.

"I think the reactions will often be biggest in tracker fund favourites, since many people have piled into these in recent years. In comparison, it may have little effect on commodities such as iron ore and phosphate, where there are no futures.

"Targets are also guesswork, as you know, and 'marginal cost of production' is inevitably a ballpark figure that will vary considerably from one region to another. The markets will show us in their own due time. Meanwhile, we can monitor the trends."

Source: David Fuller, Fullermoney, August 5, 2008.

Business Spectator: China's squeeze on copper
"An important article from Bloomberg reporter Xiao Yu unveils some of the Chinese strategic thinking behind the latest fall in copper and other metal prices. Oil may be affected by similar forces. And the Australian dollar is suffering the twin blows of lower commodity prices and likely lower interests rates. If the dollar keeps falling it will underpin our inflation level, thereby making the September Reserve Bank decision more complex.

"... what we are seeing is a four way squeeze on copper - lower global demand, an interruption in China's power demand, the absorbing of China stockpiles while the price is high and selling by the hedge funds who are being mauled by this process.

"My view is that by using their stockpiles at a time of lower demand, the Chinese appear to be using a fortuitous set of events to put the squeeze on the hedge funds. Last night copper fell again in a trading pattern that indicated hedge fund selling. What Xiao is telling us is that the second half of the year China will be back in the market, by which time they will be hoping that the current squeeze will have lead to lower prices."

Source: Business Spectator, August 6, 2008.

John Authers (Financial Times): European economy heading for recession
"Europe has moved further along the road towards a recession than the US. The economic data of the past two weeks make that conclusion hard to avoid and Jean-Claude Trichet made no great attempt to deny it in his press conference on Thursday.

"The governor of the European Central Bank admitted that the data 'point to a weakening of real GDP growth in mid-2008' and said directly that the bank no longer has a bias towards raising rates. He made obligatory commitments to fight inflation but the market drew the necessary conclusions; last month's rate rise from the ECB was a 'one-off' warning shot and there will be no more.

"This was ample reason to sell the euro, which already looked as though it had peaked after briefly topping $1.60. By the end of European trading, the euro was down 4.4% from its peak against the dollar, back to levels it first set in March.

"Business activity surveys suggest a European contraction in the third quarter. Similar surveys in the US suggest that the American economy, while extremely unhealthy, has not dipped into technical recession.

"Unlike the eurozone, the US has an election this year, and so it has resorted to moves such as the 'stimulus' tax rebates. This may be why it kept GDP growth positive in the second quarter.

"Ironically, Thursday's US data suggest the worst of the economic hit from housing may be over, but the 'second-round' effects of the housing and credit busts on the economy are now being felt."

Source: John Authers, Financial Times, August 7, 2008.

GaveKal: Fears of contraction in German economy
"When Germany announced in May that its GDP had grown an annualized +6% in the first quarter, we were sceptical. We argued that the numbers were deceptively boosted by warm weather - thus boosting construction growth - and the fact that German statisticians have a strong propensity to take numbers at face value. Moreover, we feared that this apparent surge in growth would later be likened to the surge in US growth we witnessed in 3Q07 - which of course preceded a sharp drop in the following quarters ...

"While Germany's official 2Q GDP data will not be released until August 14th, our fears seem to have been well grounded. Indeed, a major German newspaper has recently been circulating a 'leaked" estimate of a -1% contraction for the second quarter, far worse than the expected official release ...

"... it increasingly looks like the highly valued euro, the hawkish ECB, the credit crunch, and weaker growth around the rest of the EU and the world ... is finally starting to weigh on the German economy. And with EMU retail sales dropping fast, negative industrial production and GDP figures from Germany would remove the primary support left for EU growth outlooks."

Source: GaveKal - Checking the Boxes, August 7, 2008.

Victoria Marklew: Italian GDP contracted in Q2
"The first of the Eurozone's big economies reported preliminary Q2 GDP data today - and the picture was not a pretty one. Italy's GDP contracted 0.3% q-o-q in Q2, and posted zero growth on the year.

"That Italy's economy is stalling out is no surprise - already one of the weaker economies in the 15-nation Euro-zone, data in recent weeks have pointed to a marked deceleration in the 'zone's third-largest economy. Consumer morale has plunged to near-15-year lows and business sentiment is the weakest it's been in seven years."

Source: Victoria Marklew, Northern Trust - Daily Global Commentary, August 8, 2008.

Bloomberg: European producer-price inflation quickens to record 8%
"European producer prices rose the most in at least 18 years in June on soaring energy costs, sharpening the European Central Bank's dilemma over how to balance faster inflation and slowing economic growth.

"The 8% increase from a year ago in factory prices in the 15 nations that use the euro was the biggest since the series began in 1990 and followed a 7.1% gain in May, the European Union statistics office in Luxembourg said today. Economists expected a 7.9% increase, according to the median of 27 forecasts in a Bloomberg News survey.

"The ECB lifted the benchmark interest rate to a seven-year high last month on concerns that consumer-price inflation at twice the 2% limit will become embedded in the economy even as growth slows. ECB President Jean- Claude Trichet said that the central bank 'will do in the future what is appropriate to deliver price stability'.

"'Manufacturers throughout the euro zone have been able to pass on higher food and energy costs,' said Philip Shaw, an economist at Investec Securities in London. 'That's being reflected in consumer prices. While there's no case for a rate cut right now, we're similarly cautious about calls for higher rates because of the damage it would do to the economy.'

"Consumer-price inflation accelerated to 4.1% last month, the fastest pace in more than 16 years, the statistics office reported last week."

Source: Brian Swint, Bloomberg, August 4, 2008.

BCA Research: BoE - delaying the inevitable
"The Bank of England (BoE) opted to leave the official Bank Rate unchanged at 5%, as expected. However, monetary easing will resume before yearend.

"Policymakers have been hesitant to cut interest rates, given that headline inflation remains well above the central bank's 3% mandated ceiling. However, the meltdown in the UK real estate market is resulting in significant knock-on effects for the domestic economy: consumer sentiment has plunged and spending is beginning to weaken markedly. Indeed, the UK appears to be heading rapidly into recession.

"The BoE's decision to delay monetary relief will only amplify the downturn and inevitably result in the need for more monetary stimulus. Fortunately, the recent setback in crude oil prices should soon feed through into headline inflation, helping alleviate policymaker concerns and providing justification to lower policy rates.

"Bottom line: The BoE will cut aggressively before yearend. Stay short the pound and overweight gilts within a global hedged fixed income portfolio."

Source: BCA Research, August 8, 2008.

Financial Times: UK house prices tumble
"House prices fell by almost 11% in the year to July, figures showed on Thursday - one of the biggest year-on-year falls recorded in the UK.

"The decline, which means all house price gains since June 2006 have now been wiped out, underscores the speed at which the nation's housing market is deteriorating. The Halifax House Price Index showed prices in July were 10.9% lower compared with the same month last year, and 1.7% below those of the previous month.

"The index's July data are matched by another widely watched index compiled by Nationwide, but the Halifax data mark the first time that homes have posted a single-month double-digit drop, year-on-year, in the history of either index.

"Nationwide's housing index recorded a drop of 10.7% for the three months through December 1990 from the same period in 1989.

"'This is significant for several reasons,' said Michael Hume, economist at Lehman Brothers. 'It tells you how out of balance the housing market must have been to generate this level of decline.' The credit crunch has made what should have been a long-term orderly decline in house prices turn into a sudden rout, he said."

Source: Norma Cohen, Financial Times, August 7, 2008.

David Fuller (Fullermoney): Chinese slowdown mild compared to Western economies
"Inevitably China's GDP growth is slowing following measures introduced early last year to curb economic overheating, and to deflate bubbles in the housing and stock markets. Additionally, most of China's exporters can only experience a downturn because of weak demand from the West.

"I suspect that China's growth will slow more than most analysts are currently forecasting, due more to the factors just mentioned than a post-Olympics drop in Beijing's construction projects. However economic activity anywhere near the Olympic village is already on hold and I assume that there will be a pan-China pause during the games, given their importance to the regime.

"A question for investors: Are these factors behind the slowdown reasons for concern or part of China's success story?

"We have seen China warnings before, and they have been largely wrong. That record will not prevent another wave of bearish articles and reports, now that China's GDP really is slowing, and they will also partly represent a projection of our own economic problems in OECD countries.

"However there is a vital difference between China's slowdown and what we are experiencing in the West. China's economic growth is moderating, largely by government choice, but it is still likely to be a world leader. China has a sound banking system, a massive current account surplus and high personal savings rate.

"Contrast that with the USA, UK and some Continental European economies. Banks are reeling due to reckless speculation and pitiful regulation. Economic growth hovers near recession, both personal and government debt levels are high.

"Taking a long-term view, I know where I would rather invest. China's superior economic prospects will not prevent the stock market from remaining high beta, but it has already fallen a long way. Moreover the Chinese government is now switching its emphasis from curbing economic overheating, and deflating stock market and property bubbles, to boosting economic growth once again. I think they will succeed."

Source: David Fuller, Fullermoney, August 6, 2008.

Financial Times: Tokyo concedes end to long spell of growth
"The Japanese government conceded on Wednesday that the country's longest postwar period of economic expansion might be over as it reported a drop in its key measure of underlying economic conditions for June.

"The June coincident indicators index fell a preliminary 1.6% and the government downgraded its assessment of the economy to 'deteriorating'. That marked an admission that the economy had probably entered a recession, with an official declaration possibly to come on Thursday on the publication of the government's June economic report.

"In its assessments in April and May, the government had said only that 'a change in the phase of the economy may have taken place'.

"Ministers in the new cabinet formed last week by Yasuo Fukuda, the prime minister, have indicated their intention to focus on supporting the economy. They have suggested that the government may drop its goals of achieving a primary budget surplus in the year ending March 2012 and keeping government bond issuance to under Y30,000bn ($274 billion).

"Most economists expect the downturn to be relatively mild."

Source: Michiyo Nakamoto, Financial Times, August 6, 2008.

Fin 24: India inflation passes record 12%
"Annual inflation in India passed 12%, reaching a thirteen-year high, despite months of increasingly restrictive monetary policy, the nation's Ministry of Finance reported Thursday.

"The wholesale price index - the most-watched inflation benchmark - inched up to 12.01% for the week ending July 26, marginally higher than the 11.98% reported for the previous week.

"This time last year, when global commodities prices were far lower, annual inflation in India stood at just 4.7%, according to the ministry of commerce.

"While the ministry of finance characterised the weekly change as 'stable' some in India have begun to question whether traditional monetary measures, like raising interest rates and requiring banks to keep more cash on hand, will work for India.

"The Reserve Bank of India has been deploying those measures: Since April, it has hiked its key interest rate - the repo rate, at which it makes short-term loans to commercial banks - by 125 basis points and raised the cash reserve ratio - the amount of cash commercial banks must keep on hand - by 150 basis points."

Source: Fin 24, August 7, 2008.

Victoria Marklew: Czech central bank eases as growth slackens
"... the Czech central bank switched to easing mode yesterday, lowering its key repo rate by 25bps to 3.50% - the first actual cut in over four years. Governor Tuma noted that the Czech economy is in a 'declining phase' and that a 'bigger dampening' is now expected. The bank also lowered its GDP growth forecasts to 4.1% this year (prev. 4.7%) and 3.6% in 2009 (prev. 4.0%). Tuma also warned that he could not exclude another rate cut this year."

Source: Victoria Marklew, Northern Trust - Daily Global Commentary, August 8, 2008.

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