On economy:
September European flash PMIs were released today. Markit's Eurozone Flash Services Purchasing Manager's Index is made up of surveys of around 2,000 businesses, and basically asks them how their businesses are faring. The reading fell to 53.6 in September from 55.9 in August. This was the survey's lowest reading since February and clearly shows the declining trend. Europeans stock markets were clearly lower today.
The most worrisome was notable drop in German reading which is significantly below the high reached in summer. Germany had been more or less the lone brightspot in global manufacturing over the summer in maintaining accelerating growth. It seems like that has clearly come to an end. It is possible significant strengthening in Euro since early June is finally having its impact on German exports.
I expect US stocks to outperform Europeans stocks and USD to strengthen versus EUR in Q4 as sentiment catches up to Europe’s reality.
In US, weekly initial jobless claims came in on a disappointing side while existing home sales registered a mild positive surprise in growth from the dismal number the month before.
Tomorrow we will see German IFO survey (business sentiment). If we see a large slip here then I can feel more confidence that European slowdown is going to unfold in full force come October. US August durable goods orders would give us a good indication of how true the upbeat August ISM number was. If this doesn’t come in good I think we have a reason to believe that we were fooled in September on inaccurate data.
On stocks and corporate credit:
The lone bright spot in the US economy has been the strength in the corporate sector (banks excluded) where we have seen a strong rebound in profits and extremely cash-loaded balance sheets.
Corporate cash hoarding so far has benefitted corporate bond investors who as a group have no other want other than the companies to not default. Bond holders tend to object to business spending, dividends or stock buybacks. Obviously it’s hard to default on debt if you have a ton of cash on hand. Corporate bonds have rallied hard lately on both risk aversion and falling treasury yields.
We are starting to see the sign that some of the excess cash might be getting deployed. M&A is picking up in a big way and dividends are starting to rise. Both are tailwinds for stock investors. One could argue that for the broad economy the cash would be better spent on hiring, but companies refuse to do so based on uncertain economic picture. Hence recovery in employment is kept muted which feeds into weak consumer confidence. It has been a bad cycle. We will see if we can break out of it in the next couple quarters.
Outlook and sentiment vary greatly among companies based on their size. Larger companies with significant international presence are relatively upbeat while smaller businesses with limited geographic footprint and limited access to credit are suffering. This is why we are more heavily weighted in megacap stocks in our equity holdings. We see this as a continuing theme in US.
On precious metals:
Gold is knocking on the $1,300 mark again today and I expect this to be breached before October. We have seen a remarkable run in gold and silver since early August. While I do not see an up 5% month to be a norm going forward, I believe the economic and financial environment remains very bullish for precious metals. Emerging market central bank purchases, private sector investment, opening up of Chinese gold market, and additional quantitative easing around the world all provide favorable backdrop to continue the rally.
On industrial metals:
Copper continues to creep higher as LME inventory continues to fall (in a stark contrast versus crude oil). Copper is up 21% since July while SP500 is up 9%. Copper is benefitting from robust emerging market demand especially from China – more on that tomorrow. I continue to believe that industrial metals are better place to be than energy in next 3 months.
On the agricultural front:
Russia is expected to increase imports throughout 2011 amidst the shortfall following this summer's drought and wildfires. Russia, typically a net exporter, will have to import nearly 6 million tons of grains, according to SovEcon. The Moscow based research firm also believes that the government's official supply estimate of 90 million tons is grossly overstated and is expected to only be between 77 and 81 million tons. This should keep pressure on grain prices in the upcoming year as more countries will rely on the US, Canada and Australia to provide the world's grain.
Prices of Robusta coffee have risen to their highest prices in a month on concerns that there will be issues with the harvest in Vietnam. Vietnam often has issues in getting coffee to port due to poor infrastructure and poor husbandry. Demand for Robusta coffee, used in instant coffees, is expected to rise due to an increase in the price of higher quality Arabica coffee. As prices for the high quality coffee rise, consumers naturally switch to the cheaper priced coffee. Continued issues with the weather in Brazil have increased prices to historical levels. Many roasters who are not fully hedged will now turn to the Robusta coffee as a way to cut costs.
Australia sugar areas set for wet December qtr
• SYDNEY, Sept 23 (Reuters) - Above-average rain is forecast for much of eastern Australia through the end of the year, threatening to disrupt the sugar harvest and new crop planting but boding well for summer crops such as cotton.
• Australia's northern sugar and cotton growing regions and eastern grain growing regions are all expected to record above-average rain in the last three months of the year as the La Nina weather event intensifies, Australia's weather bureau said on Thursday.
Mexico opens sugar quota to cover demand
• MEXICO CITY, Sept 22 (Reuters) - Mexico's economy ministry approved on Wednesday a quota to import 100,000 tonnes of sugar to help stabilize prices amid a shortage caused by bad weather hurting cane fields.
• The import quota would be the second opened this year in Mexico, which generally produces enough sugar to cover domestic needs and some exports. But now the country is reeling from two straight years of lower-than-expected harvests from aging cane fields with lower yields and bad weather.
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