5 Things Investors Should Know About China this New Year
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Today marks the first day of the Chinese Lunar New Year, also known as the Spring Festival, China’s most important holiday. The fire rooster struts off-stage, clearing the way for the loyal earth dog. According to CLSA’s tongue-in-cheek Feng Shui Index, health care, consumer and paper products are favored to outperform early this year, followed by internet, utilities and tech leading into the summer.
Around this time I always pay close attention to transportation and industrials. “Chunyun,” which translates to “Spring Festival Transportation,” is a 40-day travel season that’s known as the world’s largest human migration. This year, as many as 390 million Chinese travelers—more people than live in the U.S. and Canada combined—are forecast to put roads, highways, passenger trains and airlines through their paces as they visit families, go on vacation and travel abroad. Airlines alone are expected to serve 65 million passengers, a 10 percent increase from last year.
As the size of China’s middle class continues to surge and incomes rise, this upward trend in flight demand and overall consumer spending appears sustainable, creating some very attractive investment opportunities.
Below are five additional things I think investors should know about China and the surrounding region in the New Year.
1. China is a veritable wealth factory.
Speaking of disposable income: Last year, the China region added more new billionaires than the U.S. for the first time ever. UBS and PricewaterhouseCoopers’ (PwC) annual report on billionaires found that the total number of Asian billionaires rose to 637, followed by the U.S. (563) and Europe (342). China alone minted 67 new billionaires in 2017 and is now home to nearly 320.
Combine this with a surging middle class—already the largest in the world—and the consequences on consumption could be huge.
As I’ve shared with you before, China is still in the early stages transitioning from a manufacturing to a consumption and services-based economy. According to the World Economic Forum (WEF), Chinese household income is projected to grow around 5 percent annually between now and 2027, elevating approximately 180 million people into the middle-income bracket. This will contribute to greater demand for everything from appliances to smartphones to automobiles to luxury goods.
Gold jewelry demand, for instance, grew 10.35 percent year-over-year in 2017. And it wasn’t just the super wealthy making purchases, the China Gold Association reported. Less affluent consumers also had an appetite, helping China maintain its ranking as the world’s largest buyer of gold for the fifth straight year.
Heavier spending is also showing up in Macau casinos, which saw revenues jump an incredible 36.4 percent year-over-year in January. This was the gaming territory’s 18th straight positive month and its largest such increase in nearly four years, suggesting Macau is well on its road to recovery after Chinese president Xi Jinping’s anticorruption crackdown.
This month, Macau welcomed its newest casino resort, the $3.4 billion MGM Cotai, increasing MGM’s gaming table count in the territory nearly 30 percent to 552, according to Reuters.
2. But don’t count Chinese manufacturing out just yet.
Despite China’s de-emphasis on manufacturing as its main growth engine, a lot of value still remains. Chinese manufacturing began the year strong, expanding at a healthy clip with a purchasing manager’s index (PMI) reading of 51.3. This was down slightly from December but in-line with the previous January.
Expectations are especially high for electric vehicle (EV) production and sales, as the Chinese government sweetened the incentive for families to trade in their gas-powered automobile for one that runs on a battery-powered electric motor. Those with a range greater than 400 kilometers (249 miles) on a single charge now come with a 50,000 yuan ($7,881) cashback incentive, up from 44,000 yuan ($6,937) last year, according to Bloomberg. The government also increased the number of kilometers a car must be able to travel on a single charge to qualify for the incentive, from 100 last year to 150.
“Sales volumes for new-energy vehicles exceeded 700,000 last year, and this number is further expected to increase to more than 2 million in 2020, and to more than 5 million in 2025,” Kevin Li, a senior analyst with Strategy Analytics, told CNBC early this week.
Several Hong Kong-listed carmakers and their suppliers had a fabulous 2017. Guangzhou ended the year up 97 percent while Geely gained more than 265 percent. The government’s policy change appears to be another tailwind.
Robotics and artificial intelligence (AI) is another space that China is expected to dominate. According to UBS, China overtook the U.S. and Japan in 2016 in installed robotics systems, and by 2020 it’s set to manufacture up to 40 percent of all robots globally. By 2030, its AI industry could be worth as much as $150 billion.
3. China has an insatiable appetite for energy, both clean and traditional.
As its generous incentive for EVs suggests, the Chinese government is serious about combating air pollution, especially in highly populated metro areas. As such, the country imported a record amount of natural gas, which burns more cleanly than coal. According to customs data, China consumed 68.57 million metric tons of the fossil fuel in 2017, up 27 percent from the previous year.
That doesn’t mean the Asian giant is done entirely with other fossil fuels, though. The U.S. Energy Information Administration (EIA) reported last week that China imported more crude oil than the U.S. for the first time in 2017. It brought in an average 8.4 million barrels per day last year, compared to 7.9 million barrels per day for the U.S.
As I shared with you earlier this week, China is now the largest consumer of U.S. crude oil other than Canada, according to Reuters.
4. Nearly 40 percent of the world’s unicorns call China home.
As you probably know, a “unicorn” is a company valued at more than $1 billion that hasn’t been listed yet. Think Uber, Dropbox, Airbnb and more.
A September report by Deloitte and China Venture found that China is home to 98 of the world’s 252 unicorns, accounting for 38.9 percent of the total number. Only the U.S. has more at 106 unicorns, or 42.1 percent.
Like U.S. unicorns, the ones in China come mostly from information technology, including online payment services and e-commerce.
Among the largest is smartphone-maker Xiaomi, which is valued at a whopping $100 billion. It, and several others, are highly anticipated to go public this year, with a showdown brewing between Hong Kong and New York.
According to CNBC, close to 140 Chinese companies raised $32.2 billion in initial public offerings (IPOs) in 2017, a figure that could be exceeded this year if Xiaomi, Uber-competitor Didi Chuxing, content platform ByteDance and more decide to list.
5. China hosts the most and biggest bitcoin mining facilities. But for how long?
Another Chinese unicorn that could be eyeing a possible IPO soon is Bitmain, the world’s largest manufacturer of bitcoin mining rigs. It also operates Antpool, a cryptocurrency “mining pool” that generates digital coins using the pooled resources of a number of different miners. The Beijing-based Bitmain, whose valuation is reportedly “in the billions,” claims to have built around 70 percent of all mining rigs in operation around the world today.
It’s little wonder, then, that three-quarters of bitcoins globally are mined in China, according to a 2017 University of Cambridge study. Mining concentration is especially high in the southwestern province of Sichuan, where miners have managed to strike deals with hydroelectric power companies.
“China is the country that hosts most mining facilities and uses the highest power consumption of all countries for cryptocurrency mining,” the study’s authors write.
That could soon change, however. The Chinese government has already clamped down on bitcoin exchanges and banned initial coin offerings (ICOs), and now it seeks to shutter the mines themselves. Last month, a governmental taskforce on internet finance asked local authorities to assist in shutting down operations that produce cryptocurrencies.
At the moment, there doesn’t seem to be a deadline, but miners are already scouting the world for new mining locations. Bitmain, which also has a presence in Switzerland, is looking at potential sites in energy-rich Quebec, according to Reuters, and other miners could be following suit.
I want to wish all readers a happy Lunar New Year! May the year of the earth dog bring you joy, health and prosperity!
- The major market indices finished up this week. The Dow Jones Industrial Average gained 4.25 percent. The S&P 500 Stock Index rose 4.30 percent, while the Nasdaq Composite climbed 5.31 percent. The Russell 2000 small capitalization index gained4.45 percent this week.
- The Hang Seng Composite gained 5.75 percent this week; while Taiwan was up 0.48 percent and the KOSPI rose 2.46 percent.
- The 10-year Treasury bond yield rose 2 basis points to 2.87 percent.
Domestic Equity Market
- Information technology was the best performing sector of the week, increasing 5.83 percent compared to an overall increase of 4.61 percent for the S&P 500 Index.
- CSRA was the best performing stock for the week, increasing 31.60 percent.
- Shares for Twilio were up 19 percent Wednesday morning following strong quarterly earnings on Tuesday.
- Real estate was the worst performing sector for the week, increasing only 1.75 percent versus an overall increase of 4.61 percent for the S&P 500.
- Biogen was the worst performing stock for the week, falling 7.86 percent.
- Xerox stock slid on Tuesday following news that the company is being sued by one of its largest shareholders. Billionaire investor Darwin Deason has sued Xerox to block its proposed merger with Fujifilm.
- Warren Buffett's Berkshire Hathaway loaded up on more Apple. Berkshire upped its Apple stake by 23 percent to 31.2 million shares, a 13F released Wednesday showed. Its stake is now worth $165.3 million.
- Cisco's revenue is finally growing again. The computer-networking company said revenue rose 3 percent year-over-year to $11.9 billion in its fiscal second quarter, reversing a two-year decline.
- Monetary policy is likely to remain a drag on stock-multiple expansion this year, but recent claims that equities are likely to suffer from higher rates across the curve seem overblown, write Gina Martin Adams and Peter Chung of Bloomberg Intelligence. An analysis of the historical relationship between equities and 10-year yields suggests that the equity-risk premium will merely return to its long-term average when the 10-year yield reaches 4 percent.
- President Donald Trump "feels strongly" that the U.S. should impose a sales tax on purchases made over the internet, Treasury Secretary Steven Mnuchin said. The prospect of an online sales tax has been a longstanding point of contention between internet-based retailers and their brick-and-mortar rivals. Trump has previously gone after internet giant Amazon, saying last year that it does "great damage to taxpaying retailers."
- Wedbush Securities analyst Michael Pachter, one of the biggest Netflix bears on Wall Street, told Business Insider that the company's $300 million deal with high-profile producer Ryan Murphy was expensive and that he's concerned about Netflix's cash-burning tendencies.
- Shake Shack beat on earnings but gave disappointing guidance. The burger chain earned an adjusted $0.10 a share on revenue of $96.1 million but gave disappointing full-year 2018 revenue guidance of $444 million to $448 million.
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The Economy and Bond Market
- U.S. consumer sentiment jumped to the highest level since February 2001, according to the Bloomberg Consumer Comfort Index. The index rose to 57 from 54.4, with the 2.6-point gain matching the biggest since 2009. A gauge of the buying climate climbed by 3.1 points to 48.6, the highest since December 2000. A measure tracking current views of the economy jumped to 61, the highest since February 2001, from 57.8.
- The Philadelphia Fed's business outlook rose to 25.8 from 22.2. The survey anticipates a strengthening of economic conditions later this year, including stronger capital spending and continued hiring gains.
- Confidence among American homebuilders held steady in February near the highest level since 1999, suggesting that housing demand is expected to remain strong, according to NAHB data. The Housing Market Index was unchanged at 72 from the prior month, while a measure of the six-month sales outlook climbed 2 points to 80, the highest since 2005.
- Treasuries fell on Wednesday after U.S. consumer price data rose more than forecast last month, fueling speculation the Federal Reserve will accelerate its pace of monetary tightening. The yield on the 10-year Treasury note pushed toward a four-year high.
- The New York Fed's Empire State Manufacturing Index for February slowed to 13.1 from January's reading of 17.7
- Inflation took the biggest bite out of Americans’ paychecks in almost five years in January. Real average hourly earnings of production and non-supervisory workers, who make up more than 80 percent of employees at companies, fell 0.5 percent in January, according to BLS data. It marked the fifth decline in the last six months and could be the explanation of why fourth quarter 2017 credit card debt registered the second largest percentage increase since 2007.
- An estimated pickup in business investment could provide an important tailwind to economic growth in 2018. Tax cuts for households and businesses should further support acceleration beyond the 2 percent GDP growth rate that has prevailed for most of the current cycle. While consumer spending will remain the key driver, business investment should strongly support economic growth in the coming quarters.
- Industrial-production growth slowed in January as inclement weather in parts of the country at the beginning of the month impaired manufacturing. Looking beyond the weather impact, industrial output will likely pick up this year, supported by tax reform and a more optimistic economic outlook, which should further increase capacity constraints and bolster business-investment growth.
- Housing starts are expected to rebound in January after a sharp decline, according to economists. A sharp decline in December in overall starts (8.2%) was mainly driven by a correction in the South from post-hurricane rebuilding efforts. Activity in the region is expected to normalize in January.
- A growing number of economists expect the Fed to step up the pace of its interest-rate increases this year to four hikes, form the current projections of three, according to a Bloomberg survey of 29 respondents conducted February 12-14. That brought the survey’s median estimate for the upper bound of the central bank’s federal funds rate target to 2.5 percent by year-end versus the current 1.5 percent. A faster pace of rate hikes would put increased pressure on bonds and could deter economic activity.
- Recent selloffs in the Treasury market have been driving both nominal and real 10-year yields close to notable resistance levels, writes Ira Jersey and Aleksandr Nozhnitskiy of Bloomberg Intelligence. Real yields are climbing, and any increase in inflation expectations could easily drive nominal rates to reach or exceed the 3 percent mark.
- Next week brings a slew of data from purchasing managers' surveys in the major countries, which will shed light on the strength of the mini global capital spending boom. There have been a few disappointing capital spending and industrial production reports recently.
This week spot gold closed at $1,347.10, up $30.95 per ounce, or 2.35 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 5.87 percent. Junior-tiered stocks underperformed seniors for the week, as the S&P/TSX Venture Index came in up just 2.06 percent. The U.S. Trade-Weighted Dollar continued its, slide down this week by 1.49 percent.
|Feb-14||Germany CPI YoY||1.6%||1.6%||1.6%|
|Feb-15||Initial Jobless Claims||228k||230k||223k|
|Feb-15||PPI Final Demand YoY||2.4%||2.7%||2.6%|
|Feb-14||Germany ZEW Survey Current Situation||94.0||--||95.2|
|Feb-14||Germany ZEW Survey Expectations||16.4||--||20.4|
|Feb-15||Initial Jobless Claims||230k||--||230k|
|Feb-16||Eurozone CPI Core YoY||1.0%||--||1.0%|
- The best performing metal this week was palladium, up an impressive 7.17 percent after having been trending down since the middle of January. The weekly Bloomberg survey showed gold traders are overwhelmingly bullish after being bearish last week as the yellow metal is set for its best week since April 2016. A falling U.S. dollar has boosted demand for bullion as an alternative asset. Gold futures also had a big week, surging the most in 11 months, reports Bloomberg.
- On Wednesday figures were released showing the U.S. consumer price index rose 0.5 percent in January, higher than the estimated increase of 0.3 percent. This spurred gold to fall intra-day; however, it recovered to continue a rally. According to Bloomberg, gold futures rose 0.3 percent to $1,334.20 an ounce after falling 0.8 percent.
- The U.S. dollar continues to fall, leading to gold nearing a 3-week high and hitting $1,357.20, the best since January 26. Billionaire hedge fund manager John Paulson kept his holdings last quarter in the SPDR Gold ETF while Bridgewater Associates increased its position, signaling a bullish time for gold. Gold was further supported due to Indian jewelers purchasing metal to keep up with wedding season demand.
- The worst performing metal this week was silver, still up 1.77 percent. Money managers flipped to bearish from bullish as shorts outnumbered longs. The world’s largest ETF tracking gold mining companies, VanEck Vectors Gold Miners ETF, saw $556 million in assets pulled by investors in December with a total of $3 billion pulled out last year. Greenlight Capital sold its stake of 7.9 million shares due to Barrick Gold, the ETF’s second biggest holding, underperforming. The ETF recovered much of that this week with six straight days of inflows totaling $669.1 and total assets held at $7.82 billion. All this money is chasing gold beta and not focusing on what the valuation metrics are for the index members. Investors are buying ETFs without regard to the fundamentals of the companies they own.
- This week several gold companies reported poor performance, fourth quarter losses or production woes according to Bloomberg. Kinross Gold reported fourth quarter revenue of only $810.3 million while the lowest estimates were $822.0 million. Yamana Gold reported unexpected fourth quarter losses of 20 cents per share while estimates predicted only a 3 cent loss per share. Acacia Mining canceled its dividend and announced that its gold production will fall around 38 percent this year due to an ongoing dispute with the Tanzanian government. Barrick Gold is heading for its eighth straight year of declining production with expectations of 4.5 to 5 million ounces of gold drawn from mines in 2018. This is partly due to Acacia Mining’s losses, as Barrick Gold is their majority shareholder.
- This week the results of the New York Fed’s Survey of Consumer Expectations showed that consumers expected to see the fastest wage growth in years. According to Bloomberg, last month was only the third month in the survey’s 56-month history where expected wage growth of 2.73 percent exceeded consumer price inflation at 2.71 percent. The Labor report released earlier this month of hourly earnings rising 2.9 percent on average triggered the most severe stock market volatility in many years.
- The core consumer price index rose 0.3 percent in January, higher than the predicted 0.2 percent rise. Bloomberg writes that faster-than-projected inflation and unexpected declines in retails sales aren’t as bad for the economy as it may seem. American businesses are facing higher production costs as the Empire State Manufacturing prices-paid index increased 12.4 points to 48.6 this month.
- The dollar continues to take hits after a vote to increase spending by $300 billion over the next two years came shortly after $1.5 trillion in tax cuts. Bloomberg reports that the dollar’s outlook looks bleak as the U.S. deficit is approaching 6 percent of gross domestic product. High inflation has historically been positive for gold and the currently plunging dollar could set the stage for a new gold bull market. Fawad Razaqzada, technical analyst at City Index, said that gold prices have managed to hold onto crucial retracement levels and that “buyers are in control of this market and prices are going higher.”
- Pure Gold Mining released strong drilling results this week that exceeded expectations. Its Madsen Gold Project saw increased widths and grades of 26.4 grams per ton over 12.7 meters, and underground drill holes have expanded the known mineralization outside of the current mineral resource.
- Global bond funds experienced the fifth-largest week of redemptions ever last week with $14.1 billion pulled out of debt funds with $10.9 billion taken from high-yield bonds alone on fears of higher interest rates, reports Bloomberg. The world’s third-largest fixed income ETF also saw massive outflows with $921 million leaving in a single day this week from the iShares iBoxx $ Investment Grade Corporate Bond ETF. Inflation and rate hike fears are creeping into the broader market but bond holders have read the tea leaves.
- South Africa’s Chamber of Mines is arguing for the 2017 Charter to be reviewed on multiple grounds that deal with its legality and constitutionality. The new 2017 Charter sought to create more fees and royalties on the miners and reintroduce Black Economic Empowerment initiatives that had previously been fulfilled.
- Companies are citing rising inflationary trends that didn’t exist a few years ago that hike the price of fuel, power, labor and more. Kinross Gold Corp fell as much as 10 percent this week.
Blockchain and Digital Currencies
- Of the cryptocurrencies tracked by CoinMarketCap, the best performing for the week ended February 16 was Hexx, which gained 451 percent.
- On Monday, Bitcoin started to pull out of its slump as regulatory concerns plaguing digital currencies this year showed signs of subsiding, reports Bloomberg. The popular coin rose back above the $10,000 mark on Thursday after falling below $6,000 in intraday trading on February 6. Investors are keeping their eye on the currency to see if it will stay near the $10,000 mark.
- Gold trader Regal RA DMCC, based in Dubai, is the first company in the Middle Easter to receive a license to trade cryptocurrencies, reports Bloomberg. Cryptocurrencies will be stored in the company’s vault unconnected to a network and fully insured from theft. Company executive Tyler Gallagher said “We have developed what we believe is the number one most secure way of investing in Bitcoin, Ethereum and other crypto-commodities.” Many crypto investors are hesitant to store large amounts of coins in digital wallets for fear of theft or hacking.
- Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week ended February 16 was PACcoin, which lost 35 percent.
- In an environment of unsustainably growing supply, Bloomberg strategist Mike McGlone says that Bitcoin could plunge 90 percent further, after already being slashed by more than half since hitting a record near $20,000. Using Amazon and the Nasdaq Composite as a guide, primarily their rise and retreat at the turn of the millennium as a proxy, Bloomberg reports, McGlone believes the currency could plunge to $900.
- Bill Clerico, CEO of WePay, the payments company owned by JPMorgan Chase, said that his firm has not seen huge demand from customers to offer cryptocurrency transactions in its system. Clerico said that “crypto is very interesting” but that “no one has figured out a killer use-case.”
- According to Bloomberg, there are numerous reasons why governments might consider joining the “cryptocurrency craze.” One reason is that, theoretically, a government could have greater control of a virtual currency than a paper one because it could keep track of transactions recorded on the blockchain, the article reads. Another benefit would be regulating money supply through changes in interest rates, or monetary policy, as it would be “much more direct, which could mean it’s more effective and cost-efficient.”
- In a new quarterly report on cryptocurrencies, JP Morgan will feature in-depth analysis of the technology, applications and challenges of this emerging space. In its February 9 report, the team explains that cryptocurrencies are both a new technology (blockchain) and a new currency (numerous new ones). “The new shape and form of this market in the future will likely depend on what economic value they are perceived to add,” the report notes. “We would expect the marketplace and regulators to ultimately weed out what are perceived as negative, less useful characteristics of cryptocurrencies and retain the positive elements that add economic value.”
- A similar technology to blockchain, Hashgraph, is emerging as a distributed ledger with a decentralized online record of transactions. Although Hashgraph could be a cheaper and faster alternative to blockchain, according to Bloomberg Technology, adoption has been slow, with many sticking to blockchain technology. With blockchain, only one transaction exists for each block while with Hashgraph no transactions are discarded and multiple users can view the record.
- On Wednesday, South Korea announced that it will take firm action against illegal and unfair acts in cryptocurrency trading, reports Reuters, after a 280,000 signature petition was sent to the presidential Blue House.
- Last month around $500 million in cryptocurrencies were stolen from Coincheck users in Japan, after which the company prevented users from withdrawing funds from their accounts. On Monday, Coincheck opened back up account activity leading to users withdrawing $373 million from the exchange. Coincheck promised to reimburse users from the hack, however no details have been released on how it plans to do so and it is still unclear if the hackers behind the theft were identified.
- Cryptojacking, where a hacker takes over your device to use its power to mine a cryptocurrency, is on the rise in smartphones. Criminals have released malicious software that unlocks the power of a smartphone or other small device to mine the coin Monero. Bloomberg reports that Monero mining is on the rise, in particular because it requires less computing power, can be produced on typical devices people already own, and is a privacy coin harder for authorities to track.
Energy and Natural Resources Market
- Copper was the best performing major commodity this week rising 5.1 percent. This week, commodities rebounded from the slump that was triggered by the recent global equity rout as a weak dollar, rising inflation and global growth stroke demand. Goldman Sachs said the rebound reassured that the strong “fundamentals of the metals market remain intact.”
- The best performing sector this week was the S&P 1500 Steel Index. The index rose 14.3 percent as Commerce Secretary Wilbur Ross recommended tariffs on all steel and aluminum imports, with higher tariffs on imports from specific countries. President Trump has to decide by early April on whether or not to follow his Commerce Secretary’s recommendations.
- SolarEdge Technologies Inc. was the best performing stock in the broader resource market this week. The Israel-based company, which provides monitoring and optimization solutions for solar power, rallied 42.9 percent for the week to fresh 52-week high. The stock rose after it reported its fourth-quarter financial results, showing its net income more than doubled from a year earlier.
- Natural gas prices dropped 0.8 percent this week; the most among major commodities. The commodity dropped as warmer weather on the east coast is expected to last at least through the end of February.
- The worst performing sector this week was the S&P 1500 Integrated Oil & Gas Index. The sector returned 0.1 percent as investors focused their attention on higher beta sectors with greater exposure to a market rebound.
- The worst performing stock for the week was South32 Ltd. The Australian diversified miner dropped 9.3 percent after reporting its half year earnings and warning that it expects “inflationary pressures” from rising salaries and raw material costs to impact its financial statements in 2018.
- The Organization of the Petroleum Exporting Countries (OPEC) may extend its crude oil supply cuts despite already having brought global inventories to average levels. Choosing to extend supply curbs for the whole of 2018 would likely favor Saudi Arabia, which is keen to ensure a healthy global crude market as it prepares the historic initial public offering of its state oil company.
- The Trump administration unveiled its much-anticipated $200 billion infrastructure plan. The plan was not as well received due to its lower fiscal contributions from the federal government. However, it still calls for a proposed $100 billion to be made available to states and municipalities in the form of matching funds for infrastructure projects. This type of fiscal stimulus has direct impact for commodity demand, which should see a sizeable boost as municipalities take advantage of these funds to repair and expand their infrastructure.
- New-home construction in the U.S. rose in January to the highest level since October 2016, government figures showed Friday. This was helped by a surge in apartment building, as momentum in the housing market continues into 2018. The data is supportive of raw commodity demand used in construction.
- U.S. Commerce Secretary Wilbur Ross has unveiled recommendations to slap import tariffs on steel and aluminum imports. These duties would be higher for specific nations, including Russia and China. Despite a welcome reception by U.S. producers of these raw materials, U.S. consumers such as the auto industry have voiced concerns over the possibility of an escalating trade war with major trading partners such as China.
- Unyielding U.S. shale production is expected to overwhelm global oil demand and weigh on prices this year, the International Energy Agency warned Tuesday. The agency called the current climate “reminiscent of the first wave of U.S. shale growth” at the start of this decade, which ultimately flooded the market and caused oil prices to plummet in late 2014.
- OPEC revised higher its 2018 production growth estimate from outside of the oil cartel for a second consecutive month as higher crude prices spur output from the US and other global producers. OPEC said it forecast non-OPEC supply growth of 1.4m barrels a day this year — an upward revision of 250,000 b/d from last month — led by bullish expectations of production from US shale oilfields, FT reports.
- In a bounce-back week for nearly all regional indices, Hong Kong’s Hang Seng Composite Index (HSCI) soared 5.75 percent, leading among the region. Vietnam’s Ho Chi Minh Stock Index also performed well, climbing 5.56 percent. Both of these leaders had a short week as the Lunar New Year holidays kicked off across several countries around the region.
- Materials, up 10.15 percent this week, constituted the top-performing sector in the HSCI.
- New Yuan Loans came in higher than expected for the month of January. Analysts anticipated some 2.05 trillion, according to Bloomberg data, while actual numbers clocked in at 2.90 trillion yuan. Presumably, curbs on shadow banking continue to drive borrowers to more well “lit” sources of funding.
- India’s NIFTY and SENSEX indices were among the worst relative performers, down 1 basis point and up 4 basis points, respectively.
- The HSCI’s Telecom sector dipped 0.51 percent this week, worst among the HSCI’s sectors and notably the only one to finish the week in the red.
- India’s year-over-year exports declined to a 9.1 percent gain for the January period, down from December’s 12.4 percent pace.
- The People’s Bank of China (PBOC) named major U.S. bank J.P.Morgan Chase as the first non-Chinese yuan clearing bank, as China seeks to continue the process of internationalizing the renminbi.
- More than 390 million people in China are expected to travel by train over the Lunar New Year holidays—more than the entire U.S. population!
- Year-over-year domestic vehicle sales in Vietnam came at a gain of 29.4 percent, up handily from the prior month’s drop to -14.9 percent.
- While North Korea appears to be “playing” nicely (or is it competing?) at the Olympic Games in PyeongChang, South Korea, the reclusive East Asian nation, remains a potential headline risk.
- An intriguing article recently in the Wall Street Journal (“China Rolls Out Mobile Facial Recognition”) noted China’s leadership in marrying artificial intelligence with “cutting-edge surveillance technologies.” One might do well to observe that mobile facial scanning technology deployed in the form of computerized glasses is indeed cutting-edge, and probably useful for catching “criminals,” although, as the Journal article rightly points out, “it could also make it easier for authorities” to do things like “track political dissidents and profile ethnic minorities.”
- Finally, it’s Lunar New Year. The year of … Hogzilla? Nope. We enter the year of the Earth Dog, but some Hong Kongers did get a fright after spotting a large wild boar raiding dumpsters recently. Be careful out there, global investors, and Happy Lunar New Year!
- Romania was the best performing country this week, gaining 4.1 percent. Strong economic data supported equites trading on the Bucharest exchange. Romania is growing at the fastest pace among emerging European countries; gross domestic product was reported at 6.9 percent for 2017, however, below expectation of 7.3 percent. Inflation spiked to 4.3 percent from 3.3 percent. Industrial output increased to 12.2 percent from the prior reading of 9.5 percent.
- The Russian ruble was the best relative performing currency this week, gaining 3.5 percent against the U.S. dollar. The Russian currency rebounded sharply from the prior weeks’ selloff, as Brent crude oil stopped its two-week slide.
- The materials sector was the best performing sector among eastern European markets this week.
- The Czech Republic was the worst relative performing country this week, gaining 57 basis points. Gross domestic product was reported at 5.1 percent, below expectations of 5.3 percent. Inflation declined to 2.2 percent, in line with expectations, but below the prior reading of 2.4 percent.
- The euro was the worst relative performing currency this week, gaining 1.2 percent against the U.S. dollar. The currency tested a new multi-year high above 1.255 to a dollar. Crossing this technical level may suggest further strengthening in the EU bloc currency.
- The health care sector was the worst performing sector among eastern European markets this week.
- This week Central Emerging European countries published fourth quarter 2017 growth data. Hungary is growing at 4.4 percent, Poland 5.1 percent (the fastest in six years), and the Czech Republic at 5.1 percent. Eastern European nations continue to outpace the euro region, where gross domestic product rose 2.7 percent during the same period.
- S&P Rating Agency is due to review Russia’s sovereign rating on February 23, which now puts the country one level before investment grade. Fitch still rates Russia at investment grade. An upgraded rating to investment grade by S&P would make Russian sovereign debt eligible for inclusion in the global benchmarks that international funds follow, such as Bloomberg Barclays and JPMorgan Chase & Co. indices. According to Bloomberg, such an upgrade could bring $2 billion of inflows to state euro-bonds.
- European car makers posted 6.8 percent sales upswing in January, as the region’s economy keeps expending. Registrations for the month advanced to 1.29 million vehicles, the European Automobile Manufacturers Association said. Almost all companies posted gains, led by largest Germany’s Volkswagen.
- Political parties in the Czech Republic have begun debate on a new referendum law, and it may have the potential to trigger a vote on “Czexit.” The Czech Republic sell 84 percent of its goods to the EU bloc, and is the most euro-skeptic EU nation after Greece. The United Kingdom is struggling to negotiate with new EU trade agreements, which is a much bigger and more diversified economy. Czexit would be more problematic for the Czech Republic than Brexit is for Great Britain.
- Rising U.S. interest rates could hurt emerging Europe equities, according to a report published by BCA Research. Odds are that 10-year U.S. Treasury yields will move north of 3 percent. A rise in U.S. yields may prompt carry trade investors to switch from riskier emerging market assets to less risky U.S. assets. The fund flows into emerging markets may decline.
- The European Commission recently published its first quarter business survey showing that 20 percent of the companies in the EU are not suffering from a labor shortage, up from 10 percent three years ago. Central Europe’s wages boom has more upside given its wages are still well below the EU’s. A tight labor market might bring wages higher, and it will put pressure on companies’ margins. A wage boom may also cause central banks to start tightening policies sooner rather than later.
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