International markets are mixed today, as investors and speculators try to find yield in a shifting world economy. Production is slowing and commodities are declining in unison, but the scramble for illusive profits increases.
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World Indexes and Forex Rates
In the Calendar This Week
Sun 9 August
Chine CPI y/y 1.6% (expected: 1.5% previous: 1.4%)
Mon 10 August
Japan Bank Lending y/y 2.6% (previous: 2.5%)
Tue 11 August
Australia NAB Business Confidence
German ZEW Economic Sentiment
Wed 12 August
China Industrial Production y/y (expected: 6.7% previous: 6.8%)
UK Claimant Count Change (expected: 1.4K previous: 7.0K)
Thu 13 August
US Core Retail Sales m/m (expected: 0.5% previous: -0.1%)
US Unemployment Claims (expected: 272K previous: 270K)
New Zealand Retail Sales q/q (expected: 0.5% previous: 2.7%)
Fri 14 August
Germany German Prelim GDP q/q (expected: 0.5% previous: 0.3%)
Canada Manufacturing Sales m/m (expected: 2.1% previous: 0.1%)
US Producers Price Index m/m (expected: 0.1% previous: 0.4%)
US Prelim UoM Consumer Sentiment (expected: 93.5 previous: 93.1)
Making The News
Today’s GEO is admittedly downbeat due to the evident state of the global economy. Global production is slowing, and commodities are in decline. Rather than wait for the symptoms to disappear, they are identified and discussed below.
Slumping Trade and Production
Among the largest economies, with the exception of the UK, trade and production has been slumping during 2015. Last week’s trade balance and producer index data confirms continuation of the trend:
China Caixin Final Manufacturing PMI: 47.8 (expected: 48.3 previous: 48.2)
UK Manufacturing PMI: 51.9 (expected: 51.6 previous: 51.4)
US ISM Manufacturing PMI: 52.7 (expected: 53.6 previous: 53.5)
US ISM Manufacturing Prices: 44.0 (expected: 49.5 previous: 49.5)
Australia trade Balance: -2.93B (expected: -3.06B previous: -2.68B)
US Trade Balance: -43.8B (expected: -42.8B previous: -40.9B)
China Trade Balance: 43.0B (expected: 53.4B previous: 46.5B)
The UK manufacturing purchasing managers index (PMI) improved, but it is a mere 1.9 points above the watershed (50 points) into contraction. Similarly, US PMI is decreasing, and its deteriorating negative trade balance reflects the contraction. China’s giant manufacturing industry is contracting at an increasing rate – faster than expected – and drawing its trade balance lower.
As explored in the xbt.social series Fiat, Credit, Deflation and Bitcoin, slowing production reflects the late stage of credit expansion and heralds the phase of credit deflation. The evidence of contracting production implies that the initial slide into deflation is already underway.
Production, typically, increases and decreases in sympathy with the larger business cycle and the phenomenon is considered normal. However, as Fiat, Credit, Deflation and Bitcoin illustrates from historic examples, the contraction of production in conjunction with a credit bubble (and the current credit expansion is the largest in history) brings about the necessary conditions for the onset of deflation of that bubble.
Most commodities are priced in US dollars, and greenback strength is coinciding with a general decline in commodity markets. WTI crude fell by 20% in July and Brent crude by 18%. Gold has declined below $1,100 and copper declined 10% during July, hitting its lowest level since June 2009.
A look at the MSCI World Commodities Index shows what happened to commodity prices during and after the (contained) “Credit Crunch” of 2008.
MSCI World Commodities Index
The reasons for the broad decline in commodity prices could be various. Some analysts try to pin it on slumping demand, or over-production and other causes. Certainly these factors all have an influence. What we are witnessing seems to be cyclical, because commodities are slumping in unison.
MSCI Gold Producers Index
Gold producer Barrick has announced that it is planning for a $900 gold price. The Gold Producers Index above illustrates how gold mining companies became unprofitable during the 2008 mini credit deflation. The subsequent announcement of QE by the Fed, spurred concerns for inflation and Gold, the inflation hedge, rallied to an all-time high.
The US dollar made gains against all major currencies, except for the Australian dollar and New Zealand dollar last week.
The attraction of the US dollar is a consequence of the end of its active devaluation via QE, and of course, the prospect that the Fed will raise interest rates in September. A higher level of interest rates in the US makes it a more favorable environment for investment and deposits. Additionally, the promised growth of emerging markets like China has not materialized and money is flowing out of the EMs and back into the safer dollar.
The chart on the right illustrates how the US dollar had historically lost value following the announcement of a Fed rates hike. However, notice that in more recent instances (e.g. 1994 and 2004) the initial slump was quickly followed by a rally. If we extrapolate the trend to 2015, there may be no slump due to the money flow dynamic described in the previous paragraph.
The British pound fell out of favor, as the Bank of England signaled a reluctance to raise interest rates this year, regardless of what the Fed may do. Many investing institutions were bullish the pound prior to the announcement and their prospects of a stronger pound, going forward, have been dashed.
The Australian dollar hit a 2015 low near $0.7235 last month. With the Reserve Bank of Australia stepping away from their dollar devaluation stance, there may be a long opportunity in the making for traders of the Australian dollar. Some CCN.LA readers have confirmed this sentiment.
The CFTC Committment of Traders report for last week shows speculative currency positioning as follows:
Also In The News
Asian Stocks Down, European Stocks Up
Weak China production data, released over the weekend, caused a general slump in Asian stocks on Monday as markets price in the industrial powerhouse’s growth slowdown.
Meanwhile, in Europe, stocks are up for the day on news of successful negotiations for Greece’s third bailout. Hooray!
GEO Commodities Indices Early Warning System
As mentioned in last week’s GEO, US and OPEC oil production is running at full-throttle, up by 1.5 million barrels/day since the start of 2015, and US domestic production currently outputs 9.7mil barrels/day, the highest since 1971, according to the U.S. Energy Department. This is what it looks like on the chart:
Brent Crude Oil – 1-Day Chart
This analysis is provided by xbt.social.
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The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
Charts from TradingView, image from Shutterstock.