Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

mohsinqureshii

The Global Economic Restructuring: 2014 Global Macro Outlook

Recommended Posts

It’s been 5 years and roughly 3 months since the financial crisis, yet the three main engines of the global economy: the U.S., China, and the Eurozone, remain stuck in low gear. Like weary kids on a long road trip, investors have been itching to arrive to their final destination of sustainable and steady global growth. China is working towards reconstructing its economy towards one based more on domestic consumption, instead of exports and fixed asset investment, fueled by dizzying credit growth. Meanwhile, the U.S. is focused on improving its current account by way of increasing exports, while working through its credit-induced “hangover”. In Europe, complementing efforts to improve the current accounts of the periphery are massive fiscal adjustments. Taken together, government officials are aiming to reverse the global imbalances built up over the past decade. Market participants are again asking, this time confidently, if the lengthy trip is almost over; that China will undergo a soft landing, eventually providing the rest of the world with aggregate demand; that Europe, having finally stabilized, can begin its long awaited recovery after years of austerity and reform; and that the U.S. has healed enough to hold its own and expand its business abroad. 2014 will likely answer this question:

 

“Yes children, we’ve arrived.” “No kids, we’ve taken a wrong turn.”

 

May 22nd will be an important day for Europe. The parliamentary elections will pit the seemingly unstoppable force of increasing anti-euro sentiment, due to years of austerity and dreadful economic and social conditions, against the immoveable object of institutional liberalism, represented by the complex web of organizations that comprise the European Union and its currency zone. The result of the elections will significantly depend on whether the recent bout of stabilization can shift into first year, reenergizing a fatigued citizenry and political class with optimism that Europe has reached the end of its historically difficult voyage. Given Germany’s notable dependence on exports and the dreary repair of current accounts of many periphery nations, the global recovery must gain momentum in order for it to serve as the elixir of political will for continued economic and eventual political integration.

The Asian region contains a number of potential negative surprises. First, military tensions continue to increase between China and Japan, South Korea, the Philippines, and a host of other countries. China’s increasing economic and military potential is changing the status quo and gradually shifting the balance of power in the region. Establishment of an Air Defense Identification Zone (ADIZ) over the East China Sea overlaps with Japan’s own and is a sign that Xi Jinping is striving to establish regional hegemony. Rumors of a second ADIZ in the South China Sea would dangerously raise the stakes. This territory is home to almost one third of global crude oil trade flows and over half of liquid natural gas, according to the Energy Information Administration. Inherent distrust of U.S. and Japanese intentions means that China will continue to increase military expenditure, as Japan has, to counteract Nippon’s ally and its “Asian Pivot.” Realism is alive and well. John Mearsheimer’s article “The Rise of China Will Not Be Peaceful at All,” written in 2005, is evermore prescient.

 

Second, Abenomics, the term used for Shinzo Abe’s 3-pronged policy of monetary easing, a hefty dose of fiscal stimulus, and structural reform depends highly on increasing wages in time for April’s sales-tax hike. If the strategy fails to pull Japan out of its deflationary slump, the country’s “world-class” debt pile, aging population and resulting reduction in national savings, increasingly structural current account deficit (due to rising energy imports), and worrying politicalization of monetary policy may attract investor angst, especially if external conditions do not improve and provide a crutch for the island nation’s economy. Last but certainly not least, China’s ongoing economic remodeling from exports and fixed-asset investment, all the while taming a suspected credit and property bubble, calls for a resumption of global growth as well. The communist country’s 3rd Plenum of the 18th Central Committee has generated optimism that leaders have finally gotten serious about tackling the state’s unsustainable business model. However, reforms may lead to unintended consequences, the most pressing being increasing stress on the nation’s progressively fragile financial system.

 

Meanwhile, the U.S. sports a couple of budding secular bullish tailwinds in re-shoring and hydraulic fracturing or “fracking.” George Mitchell, considered by most to be the father of fracking and horizontal drilling, laid the foundation for a revitalized energy industry in America. The technology has been instrumental in producing economic conditions in North Dakota, which flaunts an unemployment rate of 2.6%, envied by the rest of the nation. The evolution of the industry will close to double the segment’s workforce according to energy consultants. Moreover, industries ranging from trucking, to rail construction, to restaurants and hotels will benefit, providing jobs for the foreseeable future. America will likely become the world’s largest natural gas producer and will compete for the zenith in oil production, currently owned by Russia. From a macroeconomic perspective, increasing energy independence will likely help in shrinking America’s chronic current account deficit and in boosting FDI, itself a symptom of a second principal bullish trend to keep an eye on this year: Re-shoring. Lower energy costs are making the United States an increasingly attractive option for foreign businesses in Europe to set up shop. Meanwhile, the renminbi has appreciated by roughly 25% in just 6 years. Even better for re-shoring, Chinese labor costs have more than quadrupled since 2001. This sino-trend will continue due to a shrinking workforce throughout this decade.

 

After a lackluster 1st half of the year, U.S. economic growth has accelerated; surging 4.1% on an annualized basis in Q3. Furthermore, the unemployment rate hit a 5-year low of 7.0%. The aforementioned bullish tailwinds are playing a role in America’s resurgent economic growth, in addition to rising home prices and improved consumer psyche.

 

However, not all the news is rosy. These dynamics will bring about a wave of uncertainty over financial markets with regards to Federal Reserve policy. Janet Yellen is scheduled to take over as chairwoman of the Fed come February 1st. She won’t be the only new face.

 

Potentially 75% of the FOMC voting committee may change. The addition of Charles Plosser and Richard Fisher as voting members, replacing Charles Evans and Eric Rosengren, means a stronger hawkish contingent for Dr. Yellen to tame. Furthermore, in exchange for a slight closure of the monetary spigot (tapering), the Fed provided investors with another gadget, “Forward Guidance.” This concept serves as an indication to investors, business, and consumers of how the Fed intends to conduct monetary policy in the future. By stating that rates would remain low “well past the time that the unemployment rate, now 7%, declines below 6.5%,” long-term rates would be expected to decrease and lower borrowing costs to help the recovery. However, the risk of reputational damage increases using this strategy.

 

What if the FOMC suddenly had to backtrack on a stated promise due to unexpected inflation? The tapering of QE and introduction of forward guidance is likely to ferment uncertainty over the coming months.

 

Since the 2008 financial crisis feeble global growth has brought about an increasingly vocal cohort forewarning of “secular stagnation,” a prolonged period of insufficient worldwide aggregate demand whereby improved economic conditions come at the expense of financial stability (ie overextended asset prices). Returning to our analogy, it’s been a very long and exhausting journey for the kids. On the bright side, like all situations, “this too shall come to pass.” Long-term reforms in China will eventually strengthen the foundations for a protracted period of global expansion. Re-shoring and the rise of fracking worldwide will provide for long-term growth as well. The question that 2014 will likely answer is whether officials took a wrong turn at some point throughout the trip. Most of the time investors figure this out much later, as was the case with the repeal of portions of Glass-Steagall during the Clinton years (1999) and years of suboptimal interest rate policy by Alan Greenspan. As I stated in my prior outlook roughly 1.5 years ago: “…If world leaders can successfully navigate the treacherous waters of global restructuring over the coming years, eventually today’s seemingly endless period of weak economic performance will lay the foundation for a powerful secular bull market that may last for decades. Until then, investing today will require flexibility, risk management, and a willingness to embrace the fact that buy-and-hold investing has taken a back seat for the time being.” Always fasten your seatbelt!

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • $BAC Bank of America stock finally got the breakout , see https://stockconsultant.com/?BAC
    • $AYI Acuity Brands stock good day with a breakout above 104.85 , see https://stockconsultant.com/?AYI
    • $AXP American Express stock with a solid breakout above 97.46 , see https://stockconsultant.com/?AXP
    • $ACGL Arch Capital Group stock with a nice narrow range breakout above 31.43, from Stocks To Watch , see https://stockconsultant.com/?ACGL
    • Date : 7th August 2020.FX Update – Ahead of NFP, USD finds a bid.The narrow trade-weighted USDIndex (DXY) posted a two-day high at 93.16, extending the rebound from the 27-month low seen yesterday at 92.53. EURUSD concurrently retreated to a 1.1819 low, which is a pip shy of yesterday’s low and 2 pips shy of making it a big figure correction from yesterday’s 27-month peak. Cable posted a two-day low at 1.3098, drawing back from the 1.3187 five-month peak seen Thursday following the warily upbeat BoE outlook. USDJPY continued to ply a narrow range (less than 15 pips) around the 105.50 mark. Both the Aussie and Kiwi Dollars corrected moderately as the US currency firmed. AUDUSD, after first edging out a high at 0.7243, which matches Wednesday’s 18-month peak, ebbed to a low at 0.7196. USDCAD lifted to a three-day high at 1.3372.Front-month USOil futures were soft for a second day, maintaining sub-$42.00 levels after posting a five-month high earlier in the week at $42.52. Gold prices corrected below $2,050.00 after printing a fresh nominal record high at $2,077.85. The ascent of gold has been a reflection of investor concerns over the risk of there being an eventual pop in inflation as a consequence of massive global fiscal stimulus efforts and massive global monetary uber-accommodation, although there has been scant sign of this happening thus far, with disinflation remaining in force and with much of the US yield curve and other sovereign benchmark yields either at or near record lows. In the mix is speculation that the Fed, and possibly other major central banks, may be amid a strategic shift to allow higher inflation.The US Department of Labor’s weekly initial jobless claims will be THE key data release from the US later today, while labor market reports from Canada and the United States will be closely watched by market participants. The median forecast of economists polled by Reuters is for the Non-Farm Payroll to rise by 1,600,000, following the big miss in ADP number of 167,000 on Wednesday and the better than expected Weekly Claims yesterday of 1,186,000 compared to expectations of 1,400,000. The range in the Reuters poll estimates varies from -280,000 to 3,500,000. On the other hand, Canada is expected to add 400,000 jobs with the Unemployment Rate slumping lower to 11% from 12.3%.Always trade with strict risk management. Your capital is the single most important aspect of your trading business.Please note that times displayed based on local time zone and are from time of writing this report.Click HERE to access the full HotForex Economic calendar.Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE!Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.