More On China

Thursday, January 21, 2010

Well, yesterday it looked as if equities were preparing to dump after all before a late session recovery mitigated the day's losses and left bears of Macro Man's acquaintance gnashing their teeth. Plus ca change....

Macro Man was intrigued this morning to see the first singificant downgrade of equity fundamentals that he's observed in what feels like forever. CS has reportedly trimmed its forecast for 2010 FTSE dividends from from 219 to 198; based on last night's close of 189, that suggests that upside of current year dividend swaps was cut from nearly 16% to less than 5%. It's a small drop when compared to the torrent of optimism emanating from the donuts on CNBC, but nevertheless is interesting coming from a heretofore unmitigatedly bullish shop.

Another reason for caution remains, of course, China, where the data dump this morning came out more or less bang in line with yesterday's leaks. The activity data is now pretty clearly a "V" (Q4 GDP rose 10.7% y/y); unfortunately for the authorities, inflation is threatening the same. While input price inflation is always more volatile than output pirces or CPI, the recent surge will concern the PBOC over potential pipeline pressures. And if there's anything the CCP likes less than unemployed urban factory workers, it's rioting peasants who cannot afford to eat. Food price inflation in China is now 5.3% y/y; while that's pretty modest in comparison with the mid-2008 highs, it's also moving swiftly in the wrong direction.

More meaningful rate rises in China are looking likely; real yields on 1 year government paper have swung back into negative territory, which ain't exactly what a 10.7% growth economy needs. While we will soon enter the silly season for Chinese data (with y/y comparisons distorted by the changing dates of the lunar new year), it is starting to look like locals are starting to pull in their horns.

Macro Man suggested an H share futures short the other day (he is restricted from trading ETFs or non-sovereign credits), which ahs thus far worked well. He's also been intrigued to see the recent weakening of the HKD off of the 7.75 base, which is certainly illustrative that something has changed, though it's hard to say exactly what.
And taking a swift look onshore provides an intersting counterpoint to the bullish growth consensus for China. Note that despite uber-abundant liqidity conditions, the property sector subindex in Shanghai is looking very limp indeed. Given that construction investment has been one of the primary beneficiaries of the Chinese stimulus program of the past year or so, it's not exactly a resounding vote of confidence, is it?

And so, with the dollar looking stronger than Hercules, potential tightening/slowdown in China, Greece imploiding before our eyes, and even an RBA board member suggesting that rates are close to neutral, Macro Man is left to wonder why copper is near its post-Lehman highs and Ozzie's still got a 90-handle, among other things. To be sure, markets like Korea are still performing well....but it's been a cold winter in China, and it might be time to start wondering what happens if the country sneezes.

Posted by Macro Man at 9:04 AM  


Greece is NOT imploding before our eyes. Punters are paying CDS and risk managers are panicking and forcing further selling and paying. We've nothing to fear but fear itself...

Anonymous said...
9:54 AM  

Well, someone is selling Greek bond and they've gotta scrounge up €25 bio in the next few months. Given the market is 70% owned by foreigners, what's the likelihood of that? If a 170 bp rise in 14 month yields isn't an implosion, it's something that's not far off. And unless you're a bank that decides not to mark to market, you're wearing every penny of that move.

Macro Man said...
9:58 AM  

Indeed their options narrow with every 20bp lurch higher in spread.

However the next few months are a long enough window that the market will get bored of Greece and move onto something else. Otherwise, there's the "popular bond", further stuffing of greek banks with paper, and of course the IMF.

Anonymous said...
10:06 AM  

Thx MM - thinking my language. If the Chinese have in fact been the marginal buyer of copper all along, then maybe my HG short will come good over their New Year.

Rossco said...
10:21 AM  

We need Greece to lower the Euro and boost our exports. It seems the German and the French have found the perfect opportunity to lower the Euro without changing interest rates in Europe (as they are already too low)
Nobody will help Greece as it is against the EURO. Too get some weak currencies, you need to have countries with a strong currencies. EU wants a weak Euro.

Anonymous said...
11:00 AM  

Why is the AUD and copper still strong?

The belief in Chinese growth, commodity demand and Australian interest rate divergence is extremely strong - like "the force" in Luke Skywalker.

As MM suggested the other day, there is even a school of thought that China is not tightening at all.

It is possible that if the banks lend the 7.5trn limit, plus lend the excess deposits from 2009 and the 'off-balance-sheet' lending (estimated at more than 1trn RMB and designed to avoid the quotas) loan growth could even increase in 2010 relative to 2009.

The Chinese banks will need to lend around 7-8trn simply to maintain the current infrastructure pipeline - otherwise they would end up as NPLs.

It is possible that there is an even larger growth/inflation bubble this year, before the eventual pop.

However, it does seem clear that policy makers have been triggered into action and more aggressive tightening is not too far away. Particularly if the CPI does accelerate above 4%.

The price action in the AUD and copper does seem to be somewhat inconsistent with the relative weakness in Chinese property and banking stocks.

Skippy said...
12:09 PM  

Is it time for a folder "Dollar Positives":

Greece; other European basket cases, Spain and UK; Japan's pending debt debacle (only timing the issue); China's unsustainable flight path; Baltic currency worries; and now, the Massachusettes rebellion which likely is going to crimp Mr Helicopter and any more debt creation, bailouts and stimulus bills, very possibly kill the Health Care bill - and Messrs Geithner & Paulson.

Donlast said...
12:24 PM  

i dont get copper either... there is a marked dichotomy between supplies and prices, you would think eventually fundamentals would rule.. also copper is entering a seasonal period of strength until march/april.

abee crombie said...
12:37 PM  

abee c,
-Cu is a 'small' market with only about 17MM mtons of phys mining output per annum;
-global stocks are in single digit nbr of weeks of global demand;
- total LME stocks now at 534kt = 11 days of global demand;
-the LME markt makers can easily rodger the Cu mrkt;
-lot of LME stocks are 'financial', ie underlying for big position(s) so not really free stocks;
- a single or a few funds can have oversized positions in Cu and thus be much more the driver than so-called fundamentals;
- don't be guided too much by global supply/demand's disconnected most of the time with where Cu is pricing

Anonymous said...
1:04 PM  

The Greek situation reminds me of the Good ol' times of LTCM convergence play on what was ECU at the time. The ones that had inside information about the outcome of the "political" understanding of Maastricht criteria made a lot of money.
Will we see the same story again ?

Charles said...
1:16 PM  

Anon@1:04: Aren't the recent demand figures skewed by the purported purchasing of the physical commodity by speculators (primarily from China)? I.e. how much of recent demand is actually consumed vs. being stockpiled. If stockpiling is significant, then the wiff of a price reversal might lead to some significant liquidation. I don't have the numbers to know.

PPM said...
1:37 PM  

A propos:

PPM said...
1:56 PM  

i totally agree that the 'China' factor is huge in Cu futures market and the FT article explains.
Access to easy credit (ie motivates speculation in China) and stockpiling by China's import agency.
But, similar to crude, during '09 Cu stocks massively built , true demand down and still we had a doubling of price: 3500 to 7000. Point being: don't be too fixated with supply/demand picture. But is Cu at 7400 exposed to downside? Yes, it is. But many said that as well when Cu in '09 was at 5000, and then at 6000. Copper is a tough call of all the commods.

Anonymous said...
2:13 PM  

Copper: As an equity-orientated guy, I'm most confused by the rising inventory levels and rising price of copper! Seems somewhat contrary to all the historical data...(i.e. to my simple mind reeks of speculation).

Though at least FCX is rolling over, after trying to get me fired earlier in the month!

Our Man in NYC said...
2:16 PM  

Charles at 1.16 - I too well remember Greece's "political" entry into EMU and the free 250bp of convergence on offer. Sadly I learned this only thru the 600bp I lost on the same Italy trade 2 years previously.
I haven't seen too much political will this time around. The old cliche of markets and uncertainty may make the contrarian trade of short € vs $ and £ 2010's gangbuster....

Anonymous said...
2:39 PM  

"risk managers are panicking and forcing further selling and paying."

That's usually how the deleveraging gets started isn't it? Whether the trigger is Greece, Dubai or Credit Anstalt doesn't really matter.

LB is inclined to think that a lot of stars are aligning for the dollar - look for it to gain strength. The commodity currency/equity trade is long in the tooth and looking highly vulnerable here.

Supermodels still want to be paid in €...always nice to have Gisele on the other side of your trade.

leftback said...
3:22 PM  

when they realise they can't eat copper people who have no business being in the market will be ready sellers.

Anonymous said...
4:06 PM  

when they realise they can't eat copper people who have no business being in the market will be ready sellers.

Anonymous said...
4:06 PM  

Some of the US bank prop desks may throw all their toys out of the pram today, if Obama proposes new restrictions on trading by the money centre banks. The IBs will just go back to their old business model of advising on M&A and trading, and LB wouldn't be shocked to see some of them taken private again.

MM, the market has been going down for nearly 2 hours. Is that allowed?

leftback said...
4:12 PM  

Not only that, but the S&P was just flirting with -200 bps from the close. I did not believe that was allowed any more, even intraday. I assume there will be some frenzied buying as soon as people remember that.

wcw said...
4:48 PM  

Oooh dear, there are going to be some VERY unhappy campers downtown today.... can't say we didn't warn you, punters. The dollar and other hated and despised "risk-off" assets are having a good day. Haven't heard any taunting from certain parties for a day or two....

leftback said...
4:53 PM  

large US macro sold a lot of mini-spoos. GS buys 34k of Feb Vix 32 calls.

Anonymous said...
5:03 PM  

Hope that GS buy was for their franchise biz......

And LB, the moronicity (is that a word?) of trying to ban prop trading is so profound that it makes me really, really, really hate the USD. Barry is looking like Gordon Brown Jr......and no, that ain;t a good thing.

Macro Man said...
5:18 PM  

What is up with EUD?

Anonymous said...
5:26 PM  

Moronicness? Moronity? Moronishness?

LB is shocked at an overall ban on prop trading, but had expected language about position size limits. Decreased market liquidity is not exactly a good thing, right? Also, have they really thought this through, I mean what about bond trading, for heaven's sake? Not quite clear where the B-D operations fit into this.

Clarification next week - after a little mini-panic...?

leftback said...
5:27 PM  

The banks have poisoned the political debate with their flagrant insouciance, and by so doing, shot themselves in the foot. Since moral suasion clearly isn't getting the job done, governments are increasingly going to turn to the 2x4...hence banker tax, prop bans and other ASBO-type measures...I'm surprised anyone is surprised.

VandalsStoleMyHandle said...
5:40 PM  

“Clarification next week - after a little mini-panic...?”


Yeah, that’s what I’m thinking. The political guys in the White House are running this thing right now.

DL said...
5:46 PM  


Anonymous said...
6:05 PM  

It will be a bit bizarre if the RBS/CS/DB guys can trade US equities over here but the US banks can't. As for tradable credit instruments, commodities, derivatives, interest-rate swaps, WTF? There better be some clarity on this, or we will see The Unwind to End All Unwinds.

Maybe it rains bankers tomorrow, and then we have a clarification. On Sunday night. Just for fun.

leftback said...
6:16 PM  

“It will be a bit bizarre if the RBS/CS/DB guys can trade US equities over here but the US banks can't”.

. . . . . .

Perhaps the U.S. banks could route the trading through foreign subsidiaries.

I’m sure a loophole will crop up before long.

DL said...
6:26 PM  

MM - I have been ranting about political risk now for months (at least two on this blog that I remember)

The surprising thing about Obama's "no prop trading" proposal is that bankers are actually surprised

How hopelessly out of touch was Obama that he thought trillion dollar deficits for political spending wasn't going to bite him in the rear?

And how hopelessly out of touch are Congress's puppeteers on Wall Street that they profess to doing God's work?

And their business plan is just the definition of wishful thinking: borrow from taxpayers at 0% and lend taxpayer money back to them at 6-7%. If somehow the banks still manage to lose money, the taxpayers will be expected to bail the banks out at no cost to the banks.

How out of touch with reality is Wall Street? About as much as their off-the-book employees in Congress, at the Treasury and at the Fed.

Of course there will be limits on bank prop trading. Its absurd to think otherwise.

Only a couple decades ago, prop trading was done by partnerships. The partners watched risk like hawks because their own wealth was on the line.

Someone else takes all the risk, but traders get all the upside? A bunch of cowards. If you take the risk, you deserve the reward. If someone else takes the risk, they get the reward. That's called capitalism

Today's big banks are going to go away -- they have no business model (robbing the taxpayer doesn't count) and they forgot why they exist. None of the big banks have a competitive advantage (a reason for being) -- every product you can get from Citi / Goldman / BofA/ RBS / Deutche you can get from at least ten other places. Market liquidity is being provided by the Fed, not the insolvent banks.

This happened back in the early 1970s, when Jack White & Co, EF Hutton, and others ruled the street. And this time won't be different.

Smaller firms that actually add value will emerge as yesterday's Goliaths collapse-- its just going to take a few years

Gary said...
6:26 PM  

I believe the technical term is "moronification."

Obama knows not what he does. I wonder how the seizure of liquidity will work out for everyone.

I agree on the dollar MM but it assumes that no one will follow suit, and that the dollar can go down with stocks and commodities. I'm waiting for some weakness to reload.

Steve said...
6:33 PM  

The seizure of liquidity won't have any effect on FNMA / FHLMC / GNMA (aka the Treasury, aka the taxpayers). They are the only ones actually lending mortgage money now.

The seizure also won't effect small businesses and most non-financial S&P companies -- they aren't allowed to borrow at imaginary Fed rates anyway.

The seizure will effect the big banks that, in reality, all failed last year (or before). These things have been on taxpayer life support since.

GM is not an on going entity on its own, and neither are the big banks.

Instead of allowing Ernst Stravo Blofeld (or whatever super villian you think Paulson was) to bail out his friends at taxpayer expense -- the government should have seized the failed banks and allowed them to fail "gracefully" ... the same thing that was done in the 1980s with S&Ls using REFCO. Protect the depositors, and allow failed banks to fail. Let capitalism work -- reallocate money away from bad management to good management.

That's what should have happened, and if we are ever going to have a real economic recovery, that's what still needs to happen.

There will be some pain -- no one ever promised life would be or should be painless. The best things in life always involve some sacrifice. After the pain, the economy will grow again.

All Paulson / Geithner did was postpone the pain AND postpone the recovery.

Gary said...
6:57 PM  

Hi MM.

Kraehe was very, very hawkish IMO. It was more like "we are almost at neutral, but here's a bunch of reasons why we need to be in restrictive territory..."


Anonymous said...
10:11 PM  

I'd like to know who owns the base metals stockpiles. Since commodity investment is a such a major theme lately, are the LME stockpiles actually held by various investment funds? How large are the stockpiles/investments that LME doesn't record? Who held the stockpiles in the old days, when nobody "invested" in commodities?

Anonymous said...
10:26 PM  

"I'd like to know who owns the base metals stockpiles"

We do. Want to buy some copper?

Chinese pig farmers said...
10:33 PM  

Seems its not just Obama who wants to put limits on banks prop trading and "risky" activities -

Nic said...
10:52 PM  

Viz the possibility of all the prop trading being done out of foreign subs, how realistic is this? I don't understand the finer points of tax avoidance to know whether this is feasible. Because if so, I'm going to get even longer Singapore real estate.

Nemo Incognito said...
10:52 PM

Nic said...
10:53 PM  

Game over kids. You're all moving to asia soon enough.

Nemo Incognito said...
10:58 PM  

I am not really an Obama fan, but restoring capitalism to banking (assuming he does it, and this isn't just more talk to protect the status quo) is the first good idea I have heard out of him.

Zombie banks, bailing out the stupid, and rewarding people based on their government contacts is hardly the stuff that made finance -- and it is obviously a big part of what brought it down.

Restoring a system where people who take "smart" risk get rewarded is something those of us in Europe and the US should be encouraging.

If we continue down this path of government by Goldman Sachs, for Goldman Sachs and of Goldman Sachs -- then Nemo will be right.

Gary said...
11:54 PM  

There is a book about the Rothschild banking dynasty -- don't remember the name at the moment.

The Rothschild family (various generations) had tremendous connections / friendships with high government officials throughout Europe.

In each instance, the Rothschild family made money, most other people lost money, and the government in question collapsed

Goldman Sachs might is doing to the US and UK what the Rothschild's did to Europe's monarchies

Willy said...
12:20 AM  

Nemo, the whole issue is not about banning prop trading, it is banning prop trading backed by financing from the Central Bank. I like Singapore (It has been 10 years I am living there), and it has certainly a future as a pure private banking center (the way the Swiss were doing before being caught up by investment banking hubris), but if you think that MAS will guarantee 20 bln of Goldman Sachs issuance like the FDIC is doing, you are dreaming. The Icelanders, Swiss and maybe even the Brits are realizing that having a banking sector balance sheet many times the size of GDP is a risky proposition. If finance ever moves out from the US/UK sphere, the only place with significant financial strength is China, but I am not sure it will be that receptive to investment bankers's sweet talk, at least for the foreseeable future.

Charles said...
3:08 AM  

Gee how simple is that?
No need to ban prop trading - just make them do it with their own money instead of the taxpayers :)
Maybe I'm having a blonde moment.

Nic said...
3:16 AM  

Moronstrocity: A montrous atrocity committed by a moron?

Cortex said...
8:50 AM  

Love it!

Macro Man said...
8:55 AM  

" I like Singapore (It has been 10 years I am living there), "

Certainly has had an effect on your English LOL

Anonymous said...
9:37 AM  

agree, RBA K was very hawkish. he was asked if there was any concern about overtightening, and he replied that they were more worried about inflation.

Matt Johnson said...
10:54 AM  

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