CLSA Greed & Fear - Loose cannons

CLSA Greed & Fear - Loose cannons 18-07-2013

·         Markets will doubtless continue to trade on every comment coming out of Fed governors and on every US data point. GREED & fearcontinues to believe there will be more of a normalisation scare over the American and European summer.

·         The potential for market nervousness has been further increased by press reports last week that former Treasury Secretary Lawrence Summers is lobbying hard to replace Billyboy Ben when his term expires on 31 January. The lack of certainty over who will replace Bernanke has created added uncertainty to increase the already significant neurosis over “tapering off”.

·         Many are arguing that the neurosis over “tapering off” is overdone even if tapering begins. First, the Fed will only be reducing the amount of securities it buys, not liquidating existing holdings. Second, the whole process will be done extremely incrementally.

·         Still in GREED & fear’s view the market reaction to the first hint of tapering highlights the potential for market dislocation from any attempt to exit though the fallout is likely to be much greater in the emerging market debt space than in, say, US equities. The outstanding amount of emerging market debt issuance has grown considerably in recent years.

·         As for the timing of any theoretical rate hike, Bernanke’s testimony before Congress on Wednesday confirmed that the Fed will net out any effect on the employment data stemming from Americans leaving the workforce.

·         If the prospect of “tapering off” and a resulting stronger US dollar represents one continuing threat to Asia and emerging markets, slowing China growth is obviously another. The latest data from China indicates continuing slowing growth if not a collapse with the slowing trend extending to the all-important credit data.

·         The comment by Chinese Finance Minister Lou Jiwei last week that a real GDP growth rate of 6.5% was now acceptable is a sign that the new China leadership is more focused on real restructuring than its predecessor. Still the pressure to ease up from the various vested interests will be immense so GREED & fear will take nothing for granted in terms of a potential move back to stimulus.

·         Pressure to ease in China will grow, via a cut in the reserve requirement ratio, if capital continues to flow out. China certainly has the room to cut the reserve requirement ratio.

·         There is a growing argument for a depreciation of the renminbi given the substantial appreciation of the real effective exchange rate in recent years. A managed depreciation has certainly become a distinct possibility, even if China has not yet reached the stage where it would be prepared to announce a one-off large depreciation of the currency as happened in early 1994, a move which would certainly put pressure on Asean.

·         There is growing noise about the new China leadership moving faster to liberalise the capital account. If this is really the case, andGREED & fear is highly sceptical because of the control-freak instincts of the PRC leadership, then it would be very risky. This is because it is dangerous to deregulate fully and open a capital account when there is a pre-existing problem in a banking system. GREED & fear’s base case is that further opening moves will be very limited. 

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