Global Stocks Jump on Stimulus Hopes Global stocks rise, led by a 7.7% rise in Japan’s Nikkei, following signs that China would do more to stimulate its slowing economy.
(…) But investor sentiment improved Wednesday following an announcement from China’s finance ministry on Tuesday evening that the country would roll out a “more forceful” fiscal policy to boost its economy. (…)
China’s Ministry of Finance said in a statement Tuesday evening that it would allocate more funds to support some infrastructure projects and implement tax cuts for small businesses. It also said it would accelerate the approval process for duty-free stores to boost construction.
In a message read out at a Bank of America Merrill Lynch event in Tokyo, Abe said that he would lower the effective corporate tax rate by at least 3.3 percentage points “next year” and will “aim to go beyond that if possible.”
Abe spokesman Kenko Sone said that Abe’s comments signaled no change in policy, and the message may not have been clearly expressed. Some of the reduction that Abe referred to has already been implemented, and the rate will fall to 31.33 percent in the fiscal year starting April 2016 from 34.62 percent in fiscal 2014, according to the Ministry of Finance website.
Citigroup Sees 55% Risk of a Global Recession Made in China Citigroup Inc. is sounding the alarm bells for the world economy.
In an analysis published late on Tuesday, the New York-based bank’s chief economist,Willem Buiter, said there is a 55 percent chance of some form of global recession in the next couple of years, most likely one of moderate depth and length. (…)
“The world appears to be at material and rising risk of entering a recession, led by EMs and in particular by China,” wrote Buiter, a former U.K. policy maker.
Among reasons for worry is his view that in reality China is already growing closer to 4 percent than the government’s goal of about 7 percent targeted for this year. A shallow recession would likely occur if expansion slowed to 2.5 percent in the middle of next year and stayed there, he said.
Other emerging markets such as Brazil, South Africa and Russia are already in trouble while developed economies are still lackluster. Commodity prices, trade and inflation remain sluggish and corporate earnings are slowing. (…)
As for the advanced economies, Buiter said China’s woes could infect them via declines in trade given it accounted for 14.3 percent of global commerce in 2013. China unloading some of its $6 trillion of foreign assets such as U.S. Treasuries could also roil international financial markets, while the dollar could surge as investors seek a safe haven. (…)
Buiter is a frequent outlier. Counterparts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. are playing down the risk posed by China to rich economies, while those at Societe Generale SA said this week that they envisage just a 10 percent chance of a new global recession with cheap oil providing a buffer against the emerging market weakness. In July 2012, Citigroup was warning of a 90 percent chance Greece would leave the euro only to be proved wrong. (…)
Having it all ways:
China Slowdown Could End Up Being Good for U.S. Economists say it would keep a lid on consumer prices and possibly give a boost to U.S. service industry exporters
On the economic side, a China slowdown would keep a lid on consumer prices as weak demand in China would depress the price of commodities such as copper, oil and steel used in cars, electronics and other consumer favorites, economists say.
And if China presses hard to remake its economy to focus on its service industry, as Chinese reformers have long urged, that would give a boost to U.S. companies, like software and entertainment firms if China gives them space to operate, and would cut overproduction in China’s industrial sectors.
Another plus: big Chinese firms, say economists, would be likely to invest more in the U.S. as returns on investment shrink in China and expand in the U.S. Similarly, some of China’s brightest talent, who are already educated in the U.S., might choose to stay abroad rather than return home if economic prospects in China fade. (…)
- China electricity consumption was reported up 2.5% YoY in August following –2.0% in July. This was the fastest pace so far this year!
- New home sales in the 30 largest cities are up 35% YoY.
- Alibaba Braces for Sales Slowdown as China’s Growth Falters
Alibaba Group Holding Ltd. expects the value of its e-commerce transactions to be lower than previously thought in the quarter ending in September due to slower consumer spending. (…) At a conference Tuesday in New York, the e-commerce giant’s head of investor relations,Jane Penner, said Alibaba is “observing some negative impact to the magnitude of the spending” by Chinese consumers on their online platforms.
The company believes its total transaction value, a closely watched measurement called gross merchandise value, will be “mid-single-digits lower than our initial expectations,” she said. “We do think this will have an impact on the September quarter.” (…)
Ms. Penner said the company doesn’t see the economic slowdown directly hitting Chinese pocketbooks so far, citing wage growth and other indicators.
“We think this is more due to psychology than an ability to spend,” Ms. Penner said. “We’re still actually seeing high engagement by buyers on our platforms.” (…)
Chinese Internet portal SinaCorp.’s executives said during the quarterly earnings announcement last month that an 8% decline in advertising revenue from the previous year was due to macroeconomic factors, as brands tightened spending on advertising, particularly in autos amid flat and declining passenger car sales. (…)
From CEBM China surveys:
Roughly half of CEBM’s steel sector survey respondents saw sales fall below expectations in August. Most respondents attributed weak sales to insufficient real
demand, although some respondents did report that temporary factors (i.e., production shutdowns tied to the Sept. 3rd Military Parade in Beijing and the Tianjin Warehouse Explosion) had an influence on the sales environment. In July, cement sales saw a meaningful rebound boosted by infrastructure projects. August survey feedback, however, indicates that cement sales lost momentum.
On the external demand front, survey feedback indicated a continued deterioration in export activity. Container freight shipping was weak, registering a decline in M/M and Y/Y growth.
CEBM’s property developer and agent surveys show that real estate sales fell below expectations in August. The correction in sales was larger-than-anticipated.
CEBM’s banking survey indicates the scale of loan issuance likely contracted on an M/M basis.
China is being unfairly criticized for its management of the currency and doesn’t want to use yuan depreciation to boost exports, Li said Wednesday at the World Economic Forum’s “Summer Davos” meeting in Dalian, China. He said the currency, also known as the renminbi, will be kept at a reasonable, equilibrium level, and that competitive devaluations wouldn’t benefit the country.
Growth is stabilizing and employment data show that the world’s second-largest economy is operating in a reasonable range, Li said. As long as there’s sufficient employment, incomes growing in tandem with economic output, and an improving environment, China can accept such growth as it had in the first half of the year, he said. (…)
Li said the creation of over 7 million new urban jobs and keeping unemployment rate at 5.1 percent in the first half of this year showed China’s economy was on “reasonable track”. (…)
Li said the structure of the economy is trending in a positive direction as the government promotes new drivers of growth and continues with reform and restructuring efforts. He said China can maintain mid- to high-speed growth. (…)
The premier said China has successfully prevented the emergence of systemic risks, and that measures taken in July amid the stock market plunge prevented such risks from spreading.
Government debt risks are controllable and the total amount is at a relatively low level, with borrowing by the central government equivalent to about 20 percent of gross domestic product, Li said.
Outstanding consumer credit, a reflection of nonmortgage debt, rose $19.1 billion or at a 6.7% annual rate in July, the Federal Reserve said Tuesday.
Revolving credit, mostly credit cards, rose at a 5.7% annual rate. In June it climbed at an annual rate of 10%.
Nonrevolving credit, made up largely of auto and student loans, increased at a 7% annual rate, compared with 9.4% in June. (Charts from Haver Analytics.
The former president of the Federal Reserve Bank of Dallas readies markets for lift-off in this FT op-ed.
The Fed has declared that it wants prices, as measured by the personal consumption expenditure deflator, to rise by 2 per cent a year. The headline inflation rate is running well below that. Should the Fed, then, keep interest rates close to zero? No. Headline inflation is being held down by the big fall in energy and crop prices that began in the second half of 2014. Once these prices stabilise, overall headline inflation is likely to rise again.
Policymakers should focus on the direction of price changes over the medium term. (…)
Moving towards lift off from the zero bound in a timely, anticipatory way would also buttress faith that the Fed will not risk setting back economic growth. Every time the Fed has waited for full employment to be achieved before starting to tighten policy, it has ended up having to tighten so much that it has driven the economy into recession. (…)
If the Fed waits for full employment and then has to throttle back sharply, there will be a nasty shock. The upcoming Fed meetings present a timely opportunity to start slowing down the engines, however slightly, so as to maintain the confidence of markets, businesses and consumers alike.
Mexico to slash spending by $5.8bn ‘Considerable challenge’ says finance chief as he presents budget
A 2016 budget package, which he submitted to Congress, reduces spending by 1.15 per cent of gross domestic product compared with the 2015 package — a total of 221bn pesos ($13bn). Mr Videgaray said that more than half of the budgetary belt-tightening had already happened — amid falling oil prices, Mexico’s main budgetary problem, the government announced a pre-emptive 124bn peso austerity drive in January.
However, Mexico still needs to find 97bn pesos of cuts, which Mr Videgaray told reporters represented a “considerable challenge”.
He acknowledged that despite a growing and stable economy, in which inflation is at an all-time low, jobs are being created and unemployment is down, Mexicans cannot shake off a sense of crisis.
“It is clear that Mexicans are very worried by falling oil prices, a rise in the dollar compared with the peso, uncertainty in financial markets. This is a reality,” he said. That was why the budget’s main goal was “to preserve stability and protect Mexican pocketbooks”.
Mr Videgaray said the budget estimated 2016 growth at 2.6 per cent to 3.6 per cent, although that could change depending on how the international economy performs.
Mexico is also aiming for a 2016 average exchange rate of 15.9 pesos per dollar, a recovery compared with the current level of around 16.8.
It expects oil production of 2.247m barrels per day, significantly lower than the 2015 budgeted production of 2.4m, and is basing its calculations on an expected price for Mexico’s crude oil mix of $50 per barrel. (…)
The budget expects to cut the primary deficit to 0.5 per cent of GDP in 2016 compared with the 1.3 per cent estimated for 2015.
Andrew Lo has spent a lot of time peering into Wall Street’s various black boxes and “modeling the endogenous risk among hedge fund strategies.” The finance professor at Massachusetts Institute of Technology’s Sloan School of Management and chairman ofAlphaSimplex Group LLC shared his thoughts on Friday about the recent spate of volatility in the stock market and what role strategies such as risk parity, trend-following commodity trading advisers and volatility targeting may have played.
Question: What does this volatility look like to you? Is this another quant meltdown?
Lo: I’m not sure I’d characterize it as just a quant meltdown. I think that makes it a little bit too cut and dried. Probably there are a number of different factors, including algorithmic trading, that plays into it. We have a number of different forces that are all coming to a head. And because of the automation of markets and the electronification of trading, we’re seeing much choppier markets than we otherwise would have five or 10 years ago. But it’s many forces operating at different time scales, all coming to a head.
Question: Is systematic trading exaggerating the moves?
Lo: I think it’s doing two things. One it can be exaggerating the moves if it lines up with what the market wants to do. So if the market is looking to sell because of an impending recession, then I think we’re going to see a lot of the algorithmic trading going in the same direction. And if the time horizon matches, you will see that kind of cascade effect. At the same time, I think algorithmic trading can play the opposite role. They can dampen some of the market swings if they’re going opposite to the general trend… The one thing that is true, though, is that algorithmic trading is speeding up the reaction times of these participants, so that’s the choppiness of the market. Everybody can move to the left side of the boat and the right side of the boat now within minutes as opposed to hours or days.
Question: When you talk about exaggerating the effect, is that mostly CTAs and momentum players or is it not that simple?
Lo: I think that over the course of the last few weeks, that’s actually a pretty decent bet: That there are trend followers that are unwinding because of some underperformance and concerns about the change in direction of the market. But, for example, what happened in August 2007 was equity market neutral strategies that unwound. So I think it really varies depending on the nature of the strategies that are getting hit and the money going into and out of those strategies, and how that’s affecting market dynamics.
Question: A lot of focus has fallen on risk parity strategies. The notion that, as volatility picked up, there was a lot of deleveraging going on, especially with futures and ETFs. Does that make sense to you from what we’ve seen?
Lo: Well, it certainly looks that way. Part of the challenge of risk parity is that it ignores anything about expected returns. The idea behind risk parity is not a bad one, which is to focus on risk and to manage your portfolio so as to try to stabilize that risk. But the problem with equalizing it across all asset classes or investments is that not all investments are created equal at all points in time. So there are certain strategies that end up doing worse than others during periods of times. And if you end up equalizing your volatility across those strategies, you might end up getting hit pretty hard as some of the equity risk parity strategies got hit over the course of the last few weeks.
Question: Is risk parity looking like a crowded trade?
Lo: I think there’s definitely a case in point of the idea of alpha becoming beta. The idea that once you start popularizing a particular investment approach, and it becomes so popular, that in and of itself creates these kinds of shock waves. So for example if the strategy itself underperforms, now we have a larger number of investors that are going to be unwinding that strategy and that will create a kind of cascade effect where the strategy will underperform even more as people start to take money out of the strategy. There are a number of examples. Risk parity, of course, is the most recent. But before that trend following, before that value investing, growth investing, earnings surprise, earnings momentum, any kind of a strategy can become a crowded trade. And when it does you have to just make sure that the risk premium associated with that trade is commensurate with the potential risks of getting hit with these unwinds.
Question: Are volatility targeting strategies part of the story? Have they become so popular that they’re exaggerating the moves?
Lo: Not only are they exaggerating the moves, but I think they are creating volatility of volatility. So it’s making the market quite a bit more complicated and the dynamics now are much more different and much more difficult to manage if you’re not aware of how these dynamics play out.
Question: What about when you get a big rebound? What do you suppose that is? Is that actually value-type of investors seeing the drops and coming in, or is it just another systematic trading function?
Lo: These rebounds are a confluence of a number of phenomena. One, you’re seeing that once selling pressure declines, investors will naturally become more optimistic and will come back into the market. That’s a common phenomenon. But I think that a rather newer phenomenon is the fact that these algorithms, because they operate at such high frequencies, when the price moves beyond a certain threshold, the algorithms will kick around and flip and go the other way. It’s happening at a rate that’s faster than it’s been anytime in the past because we haven’t had the technology to be able to do that.
And finally what we’re seeing is expectations shifting more rapidly because unlike five or 10 years ago we now have very big players in the financial markets, actively trying to move markets. In particular, I’m thinking about central banks and governments that are trying to manage economies by engaging in quantitative easing or other kinds of financial market transactions. When you have a small number of very big players that are going to be trying to move markets for political or long-term economic reasons, it becomes much, much harder to understand what’s happening. So people are all sort of trigger happy when small pieces of information hit the market, they tend to start moving money very quickly and in large size.
Question: Is that type government intervention something that algos can’t anticipate? Is that sort of an Achilles heel of algo strategies?
Lo: Absolutely. That event risk is something most algorithmic trading strategies really can’t manage yet. I say “yet” because in five or 10 years maybe natural language processing and artificial intelligence will have allowed them to read the news, interpret it and make judgments the way George Soros or Warren Buffett can. But I think we’re still a few years away from that
Question: Are a lot of momentum strategies able to turn on a dime that quickly? We’ll see this intraday drop of several hundred points, then it turns on a dime…
Lo: I think that it’s hard for momentum strategies to be able to move that quickly. In fact, some of the strategies that do move that quickly end up getting whipsawed. The real challenge in operating in these markets is that risk management would have you cut risk in the face of losses. The problem is that if you cut risk too quickly and by too much, you may end up missing out on the rebound, in which case you’ve locked in your losses and you might be getting back in the market exactly at the worst time. So you’re getting hit on both ends. What this atmosphere creates is a much more complicated challenge to risk managers to figure out what is the right frequency with which they need to cut risk and put it back. And I think everybody is trying to figure out what that optimal frequency is. But until we get a sense of who’s involved in the markets and driving these frequencies, it’s going to be anybody’s guess. And as a result a lot of people are going to be surprised over the next few weeks and months.
- More on that: Blame the algos for the sell-off!