Thoughts On Trade

Wednesday, March 10, 2010

It was all looking like an orthodox drift higher in equity markets last night until the SPX rolled over in a late-session swoon, perhaps on rumours that the government would flog out its considerable holding in Citigroup? Regardless, Macro Man's Bloomberg inbox lit up with comments on the heavy futures selling driving the 7 point reversal.....perhaps this is a sign of the top?

Uh....OK. We'll disregard the fact that in the context of the past couple of years, a 70 bp move in the index within half an hour constitutes more of a "baby's hiccup" than a reversal. No, what made Macro Man laugh was the commentary on the "heavy futures selling." Perhaps there was a large order or two that went through....but even so, aggregate end-of-session volume was utterly unremarkable by the standards of the past couple of weeks- which themselves haven't exactly been a hotbed of activity. If you've found yourself musing that equity markets haven't been particularly interesting recently, perhaps this is an example of why.
China, on the other hand, has become very interesting indeed, and this morning saw the release of February's trade data. While the Feb balance was a bit better than expected, the margin ($7.61 bio versus the expected $7.15 bio) was as thin as a gnat's whisker. What is sure to grab (Chinese) policymaker attention is the fact that a) the surplus is a mere fraction of its 2008 highs, and b) that trend import growth now appears to be very comfortably outstripping trend export growth. It's not exactly a picture that screams out "Reval now!" to Voldemort and chums, is it?

Of course, the Chinese have been saying that "the FX rate won't affect the trade balance" for so long now that Europe and the US could justifiably throw the argument back in their faces at the current juncture. Certainly one region where abject currency weakness a competitive exchange rate has yet to pay many noticeable trade dividends is the UK.

Yesterday saw the release of January trade data...and they were pretty brutal. The goods balance fell to nearly £8 billion, its worst since July of 2008....not exactly what you'd expect with the pound languishing in the gutter, is it? You can't even really argue that it's a J-curve effect, as import growth has been matched almost perfectly by export growth. Maybe it really is as simple as the classic water-cooler lament that "the UK just doesn't make anything that anyone wants to buy."
Now, the overall picture isn't quite as bad, given Britain's tasty services surplus. (Though if Comrade Adair Turner has his way, who knows how long that will persist?)'s not a particularly comforting sign for sterling, as it raises the question of just how far the pound will have to fall before it starts supporting the trade balance. In his current mindset, Merv might just want to find out. All aboard the "sterling lower" train least until, the conductor starts to Swerve.

Posted by Macro Man at 8:18 AM  


Wonder what Chinese imports ex commods looks like..... if you revalue on that and many of the export industries can happily pass through those costs the revaluation might not be insanely expensive at all....

Nemo Incognito said...
9:15 AM  


I think this is a story of shrinking margins and makes the reval look less likely still.

Anyone notice the comedic miss from the street on Aussie owner occupied housing loans ? (+2% vs -8% actual) Gotta say it gives some fuel to the bears on Aussie housing that show up here occasionally.

Rossco said...
9:38 AM  

MM: UK's oil production peaked in 1999 at 2.9mmbd and declined from then on each year with 2008 output at 1.54mmbd (source: BP Annual Energy Stats). Is that possibly part of the story behind UK's declining Goods Balance since early 2000's?

P2 said...
9:40 AM  

Agree on sterling. I wonder if the problem is not so much that the UK does not make anything (I seem to recall the UK is the 7th largest manufacturer in the world - others can confirm / rebut) but that the UK's exports are exchange rate inelastic. Simplistically if all the UK manufactured was pills then if the pills were 30% cheaper, would "foreigners" buy more UK pills - unlikely. The UK has to hope that it can steal market share and that takes time to do. If the UK has to expand its range of exports it has to compete with some very low cost Asian producers. That would require not a 30% fall in sterling but something much larger. If only the Chinese would revalue and help the west out. Benevolent exchange rate policy is needed.

Nic Barnes said...
9:45 AM  

on the aussie homes data. if you think aussie bad take a look at new zealand. its banking industry is owned by australia. it has consumer debt to gdp that looks like the uk (although gvt debt in better shape). it has net external liabilities that would make iceland look less of an outlier.
When the aussie homes markets crashes, it will be nz that is the real loser - it has no commodities to sell to China.
Have to declare an interest - it one of my favourite shorts

Nic Barnes said...
9:53 AM  

So many have tried shorting the Aussie (insert sector here) or the AUD over the past year that it is almost laughable at this point. The think is stuck near the ceiling and poised to break through. Nothing will take it down short of a meltdown in China. Nothing.

Ivanovich71 said...
12:34 PM  

@NIC - interesting you say 'When' not 'If' re impending Aussie housing crash. I spoke to a couple of Aussie mates last time they were in town and the biggest moan was house pricing and how ridiculous it's getting in Sydney especially. They actually looked at London and saw huge value across the board.

What do the stats on personal leverage / buy to let type scenarios etc look like? House prices in and of themselves don't become that big a deal when we're only talking about single primary dwellings imho - it's the excessive bubble type effects that really cause the pain.

Pascoe said...
2:04 PM  

I remember reading a paper on the effect of currency movements on export/import prices and the gist of it was that businesses move prices only in regards to fairly long term trends.

In the short term, currency moves are mainly reflected in profits.

Bob_in_MA said...
2:46 PM  

We did manage to export Becks, Macro Man.... (the footballer, not the beer).

Leftback said...
8:51 PM  

A nice piece from the FT. Germany is caught between its own sound money policy and the economic woes of its neighbors.

Germany and the Eurozone Crisis

Leftback said...
12:37 AM  

For what it's worth, I think (a couple of months ago) the SocGen Asia strategy guy was predicting/talking about the possibility of a Chinese Trade Deficit by Q3-2010.

Our Man in NYC said...
3:38 AM  

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