“According to analysts at Credit Suisse, the consensus has "severely" underestimated the amount of housing supply set to hit the market in coming years. Chinese developers own enough land to build almost 100,000,000 new housing units. Together with the sale of some empty apartments, this would be enough to satisfy China's housing demand for up to 20 years, the analysts have warned."
- Financial Times, 22 March 2012
I woke up this morning and checked my charts, as always. I have been expecting a downturn in risk appetite to manifest in crumbling asset prices, at least until correction happened.
I’ve been getting a bit discouraged with this call, as most everything has stayed relatively buoyant. But today after looking at the commodities I think we could be getting very close to a substantial and playable drop, technically speaking.
CRB Commodities Index, daily: a convincing break below critical support at its 50-day moving average today? It seems so ...
And the newswire this morning suggests global growth expectations could add pressure and break the camel’s back. Let’s go to Reuters:
The euro zone's economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity that even the most pessimistic economists failed to predict, business surveys showed on Thursday.
The purchasing managers indexes (PMIs), which capture how thousands of companies have fared over the month, effectively quashed any lingering hopes the euro zone might avoid falling into a new recession.
Most worryingly, the surveys suggested business activity in economic heavyweights France and Germany is starting to flag, with job losses mounting across the bloc at the fastest pace since March 2010.
Markit's Eurozone Composite PMI fell to 48.7 in March from 49.3 in February, slipping further below the 50 mark that separates growth from contraction and capping the first quarter of the year in disappointing style.
The “resolution” that secured Greece’s second bailout brought more calm to the market than I expected ... up to, during and after the process. Thus, it seemed it would take a noticeable downturn in growth numbers to change the sentiment ... since all the PR measures will certainly fall short of actually stopping recession.
Back to Reuters:
The HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell back to 48.1 from February's four-month high of 49.6. New orders sank to a four-month low, an expected rebound in export orders failed to emerge and new hiring slumped to a two-year low.
Clearly, China has been on a steady and gradual downward growth trajectory. But thanks to eurozone commotion and a gravity-defying US stock market, the slower growth in China has not been met with much scrutiny.
These PMI numbers, however, are a favorite among analysts considering China’s lasting dependence on manufacturing. PMI reports do not go unnoticed, especially when they are south of 50. Granted, this is the HSBC number and not the “official” number reported by China which usually comes in a smidge higher. Nevertheless, here is a chart that encapsulates it all:
This theme of the eurozone falling into recession followed by lower-than-expected Chinese growth has been part of our fundamental story for some time now. And for those who follow me more closely, and those who subscribe to my Commodities Essential newsletter, know, I expect this dynamic will ultimately hit commodities hard.
Another take away is the improving US growth differential. With investors of an increasingly international mindset, investing has become very much a relative game at times (note: it’s always a relative game in the FX market.) That said, we could continue to see a relative outperformance in US assets relative to those in Europe and Asia.
US jobless claims fell to their lowest level in four years, as reported this morning, for what it’s worth.
This means US stocks could continue to outpace foreign stocks on the upside. I am just waiting to find out if US stocks will ever succumb to any downside. We could be close.