Monday, September 16, 2013

Emerging Markets Driven By Commodity Prices (excerpt)

During the summer, the currencies of many emerging market economies (EMEs) took a dive. In addition, their bond yields spiked because capital inflows dried up as a result of all the tapering talk by Fed officials, which drove yields higher in the advanced market economies (AMEs) as well. Yet the Emerging Markets MSCI stock price index rebounded from a decline of 11.1% ytd on June 25 to a decline of only 1.2% on Friday.

This 11.2% rebound was mostly attributable to mounting signs that Chinese economic growth was picking up after slowing down earlier this year. The latest confirmation of that appeared in the 9/11 WSJ in an article titled, “China's Steel Industry Gains Steam.” The increase in economic activity has boosted demand for steel and concrete. A sudden surge in China's demand for iron ore has helped push the Baltic Dry Index, a measure of global shipping freight rates, to the highest level in more than 18 months.

However, there are mounting concerns, as I noted last week, that the government is resorting to the same old tricks of financing too many unnecessary infrastructure projects with too much debt. Total social financing, a broad measure of new credit in the economy, measured 1.6 trillion yuan ($261 billion) in August, nearly double July's 808 billion yuan.

It may be that Chinese government spending is having less bang per yuan on the economy. However, for now, it’s clear that like many other policymakers around the world, the ones in China will do whatever it takes to stimulate growth and avoid a recession.

If China can grow fast enough again to lift commodity prices, then the rally in the EME MSCI stock price index will continue. There is a very strong correlation between this index (and its forward earnings) and the CRB raw industrials spot price index. So far, the commodity index continues to flat-line, as it has been doing since the spring.

Today's Morning Briefing: Cover Curse. (1) Which team are you on? (2) Cover bull. (3) Ideal scenario for stocks. (4) Fall in the fall? (5) Q3 earnings season could be challenging for financial and global companies. (6) Another soft patch ahead. (7) Another fiscal fistfight ahead. (8) Taper Lite and more Yellen ahead. (9) German court to rule on OMT soon. (10) Euro zone’s weak production doesn’t jibe with region’s strong M-PMI. (11) Commodity prices yet to confirm rally in EME stocks. (12) Syria deal could be a big deal if it is serious. (13) It all adds up to neither boom nor bust, which is good for stocks. (14) Focus on market-weight-rated Consumer Discretionary Retailers. (More for subscribers.)

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