January 2016

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We wrote an article where we explain how the eurozone has baked in a competitive advantage for German exporters (twice actually). However, that doesn't mean German exporters don't face issues, here is one:

September's emissions scandal rocked Volkswagen - but it's not the only issue the German car giant has. Alongside other German manufacturers, it faces a major challenge from the digital revolution sweeping through the world of manufacturing, writes Sean Williams.

Can Germany's manufacturers do digital? - BBC News

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This is Olivier Blanchard, one of the world's top economists and until recently chief economist of the IMF. He's mystified by the market collapse:

Take the China explanation.  A collapse of growth in China would indeed be a world changing event.   But there is just no evidence of such a collapse.  At most there is suggestive evidence of a mild slowdown, and even that is far from certain.  The mechanical effects of such a mild decrease on the US economy should, by all accounts, and all the models we have, be limited.   Trade channels are limited (US exports to China represent less than 2 percent of GDP), and so are financial linkages.  The main effect of a slowdown in China would be through lower commodity prices, which should help rather than hurt the United States. Take the oil price explanation.  It is even more puzzling.  Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States.  Consumers, with more money to spend, would increase consumption, and increase output.   Energy using firms, with lower cost of production, would increase investment.  We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion.  Yet the headlines are now about low oil prices leading to low stock prices.   I can think of two potential explanations, neither of them convincing.

RealTime Economic Issues Watch | The Price of Oil, China, and Stock market Herding

But then again..

So how much should we worry?  This is where economics stops giving an answer.  Or, more specifically, where it gives the dreaded two-handed answer.  If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover, just as they did last summer, and this will be seen as a hiccup.  If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling.  Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession.  The ability of the Fed, fresh out of the zero lower bound, to counteract a slowdown in demand remains limited.   One has to hope for the first scenario, but worry about the second.

RealTime Economic Issues Watch | The Price of Oil, China, and Stock market Herding

[admin]

One reason for the recent poor market performance is that corporate buybacks are precluded during the month before earnings are released. Any destabilizing macro news that occurs during the blackout window amplifies volatility because the largest source of demand for shares is absent. Share buybacks in the US are on pace for their biggest year since 2007, he adds, estimating $561bn for full-year 2015 (net of share issuance) and a decline to $400bn in full-year 2016. Aside from shares repurchases already scheduled under 10b5-1 plans, the markets will have to wait until February for the buyback taps to start flowing again properly.

Share buybacks, the markets miss you | FT Alphaville

One might need a reminder of this..

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If not a lack of buybacks, it's the Fed that dunnit..

An increasingly messy divorce between market participants and monetary policymakers might be responsible for the market turmoil in 2016, according to Richard Koo. The "January correction was driven by realization that rate hikes could come faster than expected," he claims... He says the Federal Reserve's desire to calm markets prior to liftoff quickly gave way to rounds of commentary beating market participants over the head with the idea that the pace of tightening would be less gradual than they anticipate.

Koo: The Fed's Communication Shift is Behind January's Selloff - Bloomberg Business

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Somehow we think that these faster rate hikes are not going to materialize after market mayham of this magnitude. We argued all the way back in September 2015 against rate hikes exactly for the probable international fallout....

But then we have another worry:

The prospect of four straight quarters of earnings declines is staring investors in the face on top of the worst multiweek selloff for stocks in years, and the worst start of the year ever.

Woeful earnings threaten to intensify stock-market bloodbath - MarketWatch

Although not exactly earnings, but the circus resumes tomorrow:

75 million subscribers. That's the number Netflix probably needs to report on Tuesday to keep investors happy. Netflix will release its fourth quarter results after the closing bell on Tuesday. But let's cut all the pretense. Nobody is really going to care about Netflix's revenues or profits. This is a stock that lives and dies by its global streaming subscriber count.

Will Netflix top 75 million subscribers? It better - Jan. 18, 2016

[admin]

Some sensible stuff from Marctomarket:

China's data in the coming week is unlikely to have much market impact.  The Bloomberg consensus is for steady growth in industrial output at 6.1% year-over-year pace.  The risk is on the downside, but even a high 5% reading would be the envy of most countries.  The consensus expects retail sales to accelerate to 11.3% year-over-year from 11.2%.   Note that in the three months before the August plunge of Chinese shares, retail sales rose at an average pace of 10.4%.  In the three months since the pace has quickened to 11%. The other data highlight is China's Q4 GDP.  The consensus is that the economy expanded at a 6.9% year-over-year.  It is expected to be the third quarter that China recorded a 1.8% quarterly expansion.

Many disparage the accuracy of Chinese data, which often seems quickly tallied, without the volatility that other countries show, and sometimes seemingly self-serving.  However, critics often do this is by innuendo and accusations, not a robust examination.   In this context, we note the San Francisco Fed report in 2013 that found that: "These alternative domestic and foreign sources provide no evidence that China’s economic growth was slower than official data indicate."  Of course, this is not a comprehensive study and it covers only a short period.  Still, it is suggestive.  We also note that China has agreed to adopt the more robust data regime offered by the IMF.  Lastly, in comparison, reporting data and then revising it ad nauseum for years, which is what many countries including the US, do, might not, at any one point, be providing more accurate data, which ought not be confused with the latest revision.

Week Ahead: What Will It Take to Stabilize the Capital Markets? | Marc to Market

And then some more about the US and Europe:

Nevertheless, the talk of a recession is an exercise in hyperbole.  In December, the US reported its strongest job growth of the year.   Simply, if crudely stated, the US does have a recession with such a pace of jobs growth and with a 5.0% unemployment rate.  Something has to give, and we suspect Q4 will prove to be an anomaly.  Remember the argument that one of the benefits of flexible capital markets is that the price of money can act as a shock absorber so the real economy doesn't.   Perhaps QE compromised the ability of the capital markets to function accordingly, and as a result, the economy has become more volatile. On the other hand, the eurozone flash PMIs are expected to show that growth has remains remarkably steady.  The composite has been between 53.3 and 54.3 since last February.

Week Ahead: What Will It Take to Stabilize the Capital Markets? | Marc to Market

[admin]

And of course here is yet another reason for the selloff:

While the world contends with the consequences of shrinking petrodollar flows, Emad Mostaque at consultancy Ecstrat provides an interesting take on the potential benefits of such reversals for petro sovereign Saudi Arabia. It’s a blessing in disguise because it forces the kingdom to restructure its economy and reduce its dependency on foreign labour and hydrocarbon receipts.

Calling home the petrodollars! | FT Alphaville

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Ok, missing expectations by a fraction, but China is hardly crashing to earth. Retail sales, investment and industrial output are all still growing at what can only be described as a healthy pace.

On a quarter-on-quarter basis, economic growth eased to 1.6 percent in the fourth-quarter, versus expectations of 1.7 percent and down from 1.8 percent in the third quarter. Industrial output rose 5.9 percent in December from a year earlier, missing forecasts of 6.0 percent, and slowing from November's 6.2 percent. Retail sales climbed 11.1 percent in December from a year earlier, but less than an 11.3 percent rise expected by the market and November's 11.2 percent. Fixed-asset investment growth, a crucial driver of the economy, grew 10.0 percent in 2015 from the previous year, also missing market expectations.

China fourth-quarter growth slows to 6.8 percent, weakest since 2009 - Yahoo Finance

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And he's got a point. China isn't about to fall off a cliff as we argued in the previous entry

Global financial markets seem to be overreacting to falling oil prices and the risk of a sharp downturn in China's economy, the chief economist of the International Monetary Fund said on Tuesday. Speaking after the IMF cut its global growth forecasts for the third time in less than a year, Maurice Obstfeld also said it was critical that China is clear about its overall economic strategy, including its currency.

IMF chief economist sees overreaction in markets to oil, China - Yahoo Finance

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the internals of the report suggest that China’s new growth engine – services and consumption – continued to perform strongly, managing to offset a slowdown in heavy industry, investment and trade, the areas that once powered China’s economy. According to the NBS, the nation’s tertiary industry – largely encompassing services – accounted for 50.5% of GDP in 2015, an acceleration of 2.4 percentage points on a year earlier and some 10.0 percentage points above secondary industries, the sector that up until recently was the largest component of China’s economy.

The growth of China's service sector - Business Insider

There is one caveat though, services are growing so strongly because prices are declining at a rate of 5% a year in much of industry. If one takes real measures (corrected for inflation), the adjustment from industry to services is much less pronounced.