Daily Shot: Japan Doubles Down
Saxo Bank | Nov 05, 2014 05:58AM ET
The Saudis continued to apply pressure on US energy producers today by cutting prices on oil exports to the US (while raising them for exports to Asia and Europe). We are about $4-$5 per barrel above what some analysts are calling the “drop-dead” price for US producers. I have heard suggestions that the US government should use these depressed prices to increase the strategic oil reserve.
The currencies of both Mexico and Canada came under pressure due to weakness in oil prices.
Here is the Mexican peso (chart shows USD appreciating against MXN):
USDJPY broke through 114 as the BoJ’s Haruhiko Kuroda defended the 2% sustained inflation target. Once again, a central bank is asked to solve a nation’s structural problems with a rather blunt tool. This is going to be hard on people living on fixed incomes, as Japan’s import prices will rise sharply.
In spite of lower allocation to government bonds by Japan’s national pension fund (GPIF), the Bank of Japan’s accelerated quantitative easing is expected to overwhelm the demand for government paper.
From Morgan Stanley:
Get The News You Want
Speaking of the GPIF, the increased allocation to foreign equities by Japan’s state pension should benefit a number of stock markets. In dollar terms, the US market is the winner, but on a relative basis the impact will be modest (about $30 billion if my math is right).
Here are a few trends in the European Union that I am following closely:
1. The UK has been the driver of economic growth in the EU, providing the bulk of growth last year and the largest contribution this year.
2. Most “eurosceptic” political parties have made significant gains in the latest EU parliamentary elections (with the National Front being the most widely publicised outside of the EU).
3. The unemployment problem, particularly in the Eurozone, is taking its toll.
Brazil's industrial production was down 2.2% year-over-year (2.9% year-to-date) — more than expected. Durable goods seem to be the main problem.
The US is keeping China’s economy humming; the trade deficit with China represents 80% of the US' total trade deficit (an historic high). Of course, at the same time US (and EU) businesses operating in China are finding it increasingly difficult to conduct business.
Rising rental costs in the US have been particularly hard on younger people. As a percentage of spending, housing is now materially more expensive than before the Great Recession for those under 25.
One trend in the US economy (outside of housing) that is starting to concern me is the slowdown in retail sales (as indicated by the Goldman-ICSC chain store sales index). This could spill over into the holiday season.
Not sure what to make of this, but according to the Wall Street Journal, “Alibaba's shares are up 50% from their IPO price. The company is now worth more than Wal-Mart.”.
Here is a scary chart from SocGen (from a few years back), showing “US whole economy non-financial profit growth” leading the stock market index. US whole economy non-financial profit growth has recently fallen to minus 5%.
The Economist ran a story recently (called “eliminate the negative”) on target volatility strategies for institutional investors. I can understand an options-based collar strategy/overlay where an investor buys downside protection and finances it in part by giving up some upside. But here is how the Economist described this process:
An investor following this approach would have ramped up equity positions in late June/ early July, when the volume was at lows. Then in October, the investor would have sold at the bottom when volume spiked, maximising losses and then missing the equity market rally back to the highs.
Madness.
On the commodities front, the broad index (Continuous Commodity Index) resumes its slide.
Source: Barchart.com
Gold in particular is under pressure in part as a result of the BoJ’s actions. A more aggressive QE in Japan provides support to the US dollar and weakens gold, which is now at levels not seen since early 2010.
Now some food for thought. The Russian propaganda machine is ramping up internationally, as the state-owned media outfit called RT takes on the US as well as the Western media. Sadly, it’s hard to argue with this particular message.
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