economics

December 14, 2009

news Dec 14th 2009

Oil retreats for 9th day -CNN

The market pared losses after Abu Dhabi bailed out Dubai with $10 billion in surprise aid for Dubai World, which boosted stock markets as risk appetite improved and eased fears of a potential debt default.

If the U.S. crude contract settles down on Monday, that would match the nine-day losing streak in July 2001. Crude is up from below $33 in December 2008, but is still less than half its July 2008 record high of more than $147.

Concern about a sluggish recovery in global fuel demand, along with high stockpiles in the United States, has pressured crude prices.

Ministers from the Organization of the Petroleum Exporting Countries say the group is likely to hold its output targets steady at a Dec. 22 meeting. OPEC has unofficially been putting more oil on the market since April as prices rallied.

Dollar rally stalls as risk appetite returns– FT

The dollar gave back strong early gains against the euro on Monday as news that Abu Dhabi had agreed to bail-out Dubai and allow it to pay its creditors boosted risk appetite.

The news weighed on haven demand for the US currency and helped stem a rally that saw the currency hit a two-month high against the euro in the wake of strong US retail sales and consumer confidence data at the end of last week.

However, he said the increase in risk aversion that the issue raised, combined with added scrutiny on the fiscal position of governments’ finances around the world, was unlikely to reverse completely.

“It has served to remind investors that the liquidity injection from central banks, which has been so important to the equity market rally, is unable – and was never intended – to solve the structural issues facing the global economy,” said Mr Robinson.

The dollar, which rose to a high of $1.4596 against the euro ahead of the announcement, reversed course to stand down 0.1 per cent at $1.4630 against the single currency

Dollar dips on Dubai’s bailout

Fed in focus

The dollar fell 0.6% to ¥88.50, unable to sustain a jump to around ¥89 after Dubai’s announcement. Traders cited Japanese exporters selling the greenback after its rise.

The retreat in dollar/yen helped to prompt a broad buyback in the yen, which recovered from initial selling against higher-risk currencies, including sterling and the Australian and New Zealand dollars.

Traders looked ahead to a two-day Federal Reserve policy meeting, which begins on Tuesday.

The U.S. central bank is likely to keep rates unchanged near zero, but the focus will be on the accompanying statement and whether the Fed reiterates a dovish bias and does not fully acknowledge the recent run of strong data.

The surprisingly strong reading of U.S. consumer data on Friday, coming on the heels of a lower-than-expected fall in non-farm payrolls earlier this month, had boosted the dollar.

Such signs of a recovery in the U.S. economy have raised some speculation in the market that the Fed may wind down loose monetary policy sooner than markets had been expecting.

“We had a one-two punch of the payrolls and the retail sales data, so maybe the market is getting optimistic about a U.S. recovery,” said Rumpeltin at Nomura.

“But we don’t think the market should get ahead of itself and start to anticipate an early Fed rate rise.”

White sugar reaches record high– FT

White sugar prices hit an all-time high in London on Monday, supported by signs that Asian countries are buying refined sugar to cover domestic shortfalls.

Sugar brokers said the gains come as physical supplies tightened and there was a perception that some importers, notably India, had a “little more urgency” to buy.

Cadbury launches defense against Kraft offer– YahooFinance

LONDON (AP) — Cadbury PLC revealed Monday it has received approaches from The Hershey Co. and Italy’s Ferrero International SA as it launched a robust defense against a hostile 9.8 billion pound ($16.3 billion) from Kraft Foods Inc.

Cadbury Chairman Roger Carr said the statements of intent from Hershey and Ferrero were too preliminary to start proper talks as he warned shareholders not to let Kraft “steal your company with its derisory offer.”

The British chocolate and gum maker also raised its long-term performance targets to play up its position as a strong independent company.

The prospect of the 195-year-old company falling into foreign ownership has caused some consternation in Britain were it is a much-loved brand — a member of Cadbury’s founding family has been publicly critical and the country’s leading labor union fears large-scale job losses.

Shares in Cadbury have shot up in recent weeks on the prospect of a bidding war following Kraft’s unsolicited approach. Analysts have also suggested that Nestle SA may be interested, although the Swiss company has made no comment.

Eurozone industrial output falls– FT

Doubts were raised over the strength of the economic recovery in the eurozone on Monday, after figures showed industrial output fell for the first time in six months in October amid continued weakness in household spending.

Industrial production dropped 0.6 per cent from September and is now down more than 11 per cent year-on-year, according to the European Union’s statistical arm

The drop is mostly down to flagging demand for consumer goods across the 16-member currency bloc, with significant variations once again appearing between member states.

The bulk of the fall was borne by Germany, where production eased 1.8 per cent, although production in France, Ireland and Portugal also fell. The Netherlands and Italy bucked the trend with modest improvements.

Economists blamed weak household demand for consumer goods for the lacklustre figures, pointing to a 0.5 per cent drop in eurozone employment during the third quarter, according to EU figures also released on Monday

Obama-pushing-banking-execs– YH

WASHINGTON (AP) — President Barack Obama is asking bank executives to support his efforts to tighten the financial industry, while bankers are prepared to tell the president he should stop oversimplifying their concerns if he wants good-faith collaboration.

Administration officials described the meeting as a continuation of discussions the president initiated early in his tenure and the latest push for lenders to take greater responsibility as the nation combats an economic crisis that began on Wall Street.

Republican Party Chairman Michael Steele said Monday that Obama “should recognize that banks aren’t going to lend money to people who won’t pay them back. Banks can open the floodgates of cash, but you have inability of small business owners to pay back the loans.”

One industry official said Obama is viewed as trying to paint the debate as either “You’re with us or you’re against us.” The industry official said bankers did not view it that simply.

“We want him to know we have the same goals, but disagree about how to get there,” the official said.

Bankers were planning to outline alternatives to the new consumer agency. Most lenders support strengthened consumer protections but believe the administration proposal would increase costs and create more gaps between regulators.

Administration officials said Obama would use a populist appeal when discussing pay for top executives at bailed-out institutions. Distaste for Wall Street remains high and Obama took a public shot at the banks in his interview.

Many firms have taken steps toward the administration’s goals of tying pay to long-term performance and making sure companies do not encourage risky bets. Bowing to public outrage, Goldman Sachs Group Inc. announced Thursday that 30 top executives will receive long-term stock instead of cash for bonuses this year.

China: The heat is on– FT

But a key risk facing the economy is a surge in inflation following the massive monetary and fiscal stimulus measures introduced this year. Consumer prices rose 0.6 per cent in November from a year ago, after falling 0.5 per cent in October, while prices at the factory gate fell 2.1 per cent in November compared with October’s 5.8 per cent.

The return of even modest inflation, in the FT’s view, will feed into the intense discussions in Beijing about how quickly to ease stimulus measures and whether to abandon a de facto peg against the US dollar and to allow the renminbi to appreciate.

All the numbers make it clear that the China’s recovery is in full cry, with property investment taking over the lead from government infrastructure spending. The price indices, while still low in absolute terms, have been racing upward on a month-on-month basis… CPI is now positive, and jumped more than a full percentage point between October and November… Producer prices are also accelerating, and M1 growth soared to nearly 35%.

Many economists believe Beijing will not shift currency policy until there are clear signs that Chinese exports are recovering, notes the FT. November export data were among the few figures that were worse than expected. Exports fell 1.2 per cent compared with the year before, compared with a 13.7 per cent drop announced in October.

Some economists say that the most likely trigger for an appreciation of China’s currency, however,  would be rising commodity prices. After all, adds the FT, Beijing’s officials have admitted in recent weeks that even if inflation were to pick up, it could be risky to increase interest rates well in advance of any similar action by the US, because that could attract a fresh wave of capital inflows to China.

In a separate, daily client note, Gavekal foresees growing political pressure on Beijing to do something about its currency. It explains:

The US has recently been happy to sit tight, let the dollar go down, and let the Chinese increasingly take the heat for it… The next stage could see increased political pressure on China, and possible punitive tariffs. Yet hardball tactics to force Beijing’s hand could actually delay the process as Chinese policymakers are loath to be seen as kowtowing to international pressure.

Nevertheless, with rising food and energy prices, and domestic consumption still lagging targets, China has a lot of good internal reasons to seek a revaluation. One way or another, we think 2010 will be a big year for the renminbi.

Meanwhile, Andrew Smithers, of Smithers & Co, strays from his usual focus on Japan, US and Europe to examine the dynamics of the renminbi.

In brief (our emphasis):

1. Even if it were correctly priced today, the Chinese currency needs to strengthen either in nominal terms or by Chinese inflation being higher than that of the US.

2. High Chinese inflation is likely in the medium-term with an unchanged exchange rate as expansion of Chinese foreign exchange reserves leads to a rapid increase in domestic liquidity, against which it is difficult to immunise. It is also likely in the shorter term unless money growth slows.

3. Immunisation can occur through bond issues or by increasing the level of reserves that commercial banks hold with the central bank. The Chinese bond market does not seem sufficiently mature for this purpose and changes in reserve requirements have been the preferred policy weapon in the past.

4. Their use, however, produces a wedge between the returns on bank deposits and the returns available in the economy. This leads to bank disintermediation with funds flowing into other investments with the usual result of driving up asset prices… The process now seems to be starting again.

5. A rapid rise in Chinese inflation is undesirable. Experience suggests that once inflation rises to even 4% or 5%, expectations of further rises mean that inflation will rise even if there is no output gap. To prevent this, central banks have to depress demand. The result is a needless loss of output and employment and a highly volatile economy.

6. Creating a sufficient gap between Chinese and US inflation, without such disturbance, requires US inflation to be very low and probably negative. Even moderate US inflation will add to problems with China.

7. While it is generally agreed that marked deflation is as disturbing as inflation, there appears to be an exaggerated concern over mild deflation, despite historic evidence that it has often been associated with periods of strong growth in output and productivity.

8. Zero inflation or mildly falling prices in the US is desirable as a way to achieve a smooth adjustment of real exchange rates without political drama or protectionism. This illustrates that the US can no longer ignore the rest of the world in setting its economic policies. We doubt, however, whether this is yet fully appreciated in Washington.

African states end climate talks boycott– FT

Much of the tension is focused on whether to keep alive the Kyoto protocol – the existing international climate agreement struck in 1997 – as part of a new deal or replace it with an entirely new treaty.

Developing countries, including China, India and Brazil, want to keep the Kyoto process because it commits developed countries to legally binding emissions cuts without making the same requirements of poorer nations.

But developed countries, led by the US, want a new framework that binds China and other emerging economies to targets.

African leaders on Monday accused Denmark, which is chairing the conference, of trying to sideline the Kyoto protocol from negotiations and said they would not take part in the morning’s talks as a result. Other developing countries backed their stance, leading to the suspension.

“The Kyoto protocol is of paramount importance to us,” said Mama Konate, chief delegate for the African nation of Mali. “We can never accept the killing of the Kyoto protocol.”

Talks have so far proceeded along a “two-track” process, including both the Kyoto protocol and the so-called Long-term Co-operative Action working group. The US is involved in only the latter of the two because it never ratified the Kyoto treaty and has made clear that it is not willing to join.

China Casts Its Shadow on Mongolia- By PETER STEIN

ULAANBAATAR, Mongolia—China’s unstoppable economic growth and its implications for the world inspire both optimism and fear. In the U.S. and Europe, many businesses see a vast and growing market, even as their workers face China’s low production costs and increasingly sophisticated technical capabilities.

But in the remote, windswept streets of Ulaanbaatar, the capital of a country with a strategic importance to China, the promise and the threat loom especially large these days.

In Mongolia, China’s role as the catalyst for interest in this desert land’s untapped mineral and energy resources has fueled optimism. Chinese demand for coal, copper and other Mongolian resources means anyone investing in the businesses that excavate them has a guaranteed market right next door.

But some in this traditional land of conquerors fear the China it once ruled may now swallow the tiny Mongolian economy.

“In my opinion, it’s not a question of whether Mongolia will get money or not, but of the very existence of Mongolia as an independent country,” says Gombosuren Arslan, who leads a Mongolian political group called the Just Society Front. He wonders: “will Mongolia become a colony of China?”

China is already Mongolia’s biggest foreign investor, and new funds are pouring in. In recent months, China’s sovereign-wealth fund, China Investment Corp., has agreed to invest $1.2 billion in mining companies with Mongolian assets. That sum is about a quarter of Mongolia’s gross domestic product, but less than half a percent of CIC’s total assets of $300 billion.

In an interview for the Wall Street Journal, Mongolian Prime Minister Batbold Sukhbaatar spoke with Hong Kong Bureau Chief Peter Stein about the country’s relations with China and the U.S.

China’s financial clout unnerves politicians who grew up in an era when Russia was Mongolia’s uncontested international ally. “In my generation, more than 50% of engineers were educated in Russia,” says a member of Mongolia’s parliament involved in foreign relations. “We know Russian technology. It’s easier to understand their culture.”

Mongolia’s leadership is, by necessity, adept at maintaining an equilibrium between the two powers that surround this country of 2.6 million people.

In an interview last week, Mongolia’s new prime minister, Batbold Sukhbaatar, said he welcomed Chinese investment, but he was also careful to promote “balanced interest and balanced investment” from a number of countries. The translation: we’d like some other investors in here too, thank you.

One person close to the prime minister said that is one reason Mongolia is eager to see Peabody Energy Corp. of St. Louis play a role in the development of Mongolia’s next big resource project, the Tavan Tolgoi coal mine. Peabody is one of a number of parties interested in the project; China’s Shenhua Group in another interested party, a person close to the talks has said.

[HKVIEW]

Despite its enormous financial influence, China has kept its profile in Mongolia relatively low-key. It has built up a presence in the mining sector not by acquiring mining assets directly, but through investments in companies with those assets, such as Canadian-listed coal miner SouthGobi Energy Resources Ltd. and Western Prospector Group Ltd., a Canadian uranium exploration company.

Arshad Sayed, World Bank country manager in Ulaanbaatar, sees an admirable restraint in China’s behavior toward Mongolia. “It’s very different than Africa, where China is very brazen,” he says—that is, much more willing to throw its weight around and not afraid to be seen doing it.

Perhaps China is motivated by concern over its international reputation, Mr. Sayed suggests. Or maybe it is an understanding that economics and geography are already in the country’s favor. Pushing too hard could prompt an anti-China backlash that might lead Mongolia to seek closer ties with Russia.

There does seem to be a certain inevitability to China’s rising influence over Mongolia, especially as the older Russian-educated elite are replaced by a generation with a different perspective. My 20-year-old translator says she studied Russian in school when she was young but lost interest when she got older. Now, she says as she plays a favorite Mandarin pop song on her cellphone, she’d rather learn Chinese.

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