Overseas Headlines- November 26, 2018

Date: November 28, 2018

United States:

Goldman Predicts Commodities Will Soar in 2019

Commodity bull Goldman Sachs Group Inc. is undaunted by the sell-off in raw materials and is forecasting returns of about 17 percent in the coming months, describing the current situation as unsustainable and touting this week’s G-20 meeting in Buenos Aires as a potential turning point. “Given the size of dislocations in commodity pricing relative to fundamentals — with oil now having joined metals in pricing below cost support — we believe commodities offer an extremely attractive entry point for longs in oil, gold and base,” analysts including Jeffrey Currie said in a report. The note listed its top 10 trade ideas for 2019, including a rebound in Brent as OPEC cuts supply. Raw materials have been battered in November on a toxic cocktail of drivers, with crude sinking amid speculation there’s too much supply, metals getting hit on concern growth is slowing, and investors fretting about the outlook for the trade war between the U.S. and China. This week, leaders from the G-20 gather in Argentina, offering presidents Donald Trump and Xi Jinping a chance to address their trade spat, while Russia’s Vladimir Putin has an opportunity to address crude policy with Saudi Crown Prince Mohammed bin Salman.



Euro-Area Economy Puts Another Dent in ECB Hopes for Rebound

The euro-area economy stumbled again this month, with a key indicator falling to the lowest in four years, denting expectations for an economic pickup after a summer slowdown. Adding to worries, the composite PMI from IHS Markit also showed that employment and orders growth slowed and companies’ expectations dropped. The euro, which plunged earlier after a weak reading in Germany, was down 0.3 percent against the dollar. The figures will be another disappointment for European Central Bank policy makers, who are counting on a rebound this quarter as they prepare to start unwinding stimulus. They’ve acknowledged “fragilities’’ in the economy, but are holding to the line that the broad-based expansion remains intact. Chief Economist Peter Praet said Thursday that downside risks have increased, but the overall outlook remains “broadly balanced.” Changing that view would be a big step for the ECB, which will have to confirm at its meeting in less than three weeks whether it will stop bond purchases at the end of the year as planned. The PMI continues a run of bad news for the euro area. Just this week, the OECD cut its forecast for economic growth and consumer confidence fell more than forecast. Separate data on Friday confirmed Germany’s economy shrank for the first time in more than three years, with exports proving a major drag. The contraction was largely due to a temporary slump in the auto industry, but the weak PMI raises questions about the expected rebound.



Asia’s Liquidity Squeeze Is the Worst Since 2008

Leave aside Japan, where the printing presses are still pumping out yen. In rest of the region, central banks’ supply of currency plus bank reserves has shrunk 7 percent in real terms since the dollar began surging in April. This is the steepest contraction in base money since the 11 percent fall between January and October of 2008. Bank of America Merrill Lynch equity strategists recently looked at a similar measure of money supply for the world and asked if the squeeze was a harbinger of something ugly. The inflation-adjusted global monetary base has shrunk just five times since 1980, the analysts noted: in 1982, 1990, 1998, 2001 and 2006. All five episodes either preceded or coincided with global slowdowns. The Asian tightness is easily explained as the unwinding of the capital flows that came rushing in after Western central banks cut interest rates to zero and expanded their balance sheets – first to deal with the 2008 credit contagion and then to try to put nominal GDP on its pre-crisis path. Now a stronger dollar and higher U.S. interest rates are pulling funds back. The only major Asian equity markets that have seen year-to-date net inflows of foreign funds are China and Vietnam. Next year could be worse if Goldman Sachs Group Inc. is right in its forecast of only 5 percent earnings growth for companies in the MSCI Asia Pacific-ex-Japan index. That’s half of the current consensus. Exports, which could mitigate the outflows by bringing dollar revenue into Asia from surging U.S. demand, are also at risk. Container rates of $2,652 per 40-foot box on the Hong Kong-Los Angeles route are the highest since 2012, according to Drewry Shipping Consultants Ltd. But that’s only because everyone’s trying to rush Chinese goods into America before President Donald Trump ratchets up the tariff on $200 billion of imports from China to 25 percent at the start of 2019. Should there be no trade deal by then, Nomura Research expects Chinese export growth to crash by 5.6 percentage points in the first quarter of 2019, after a 1.8 percentage point acceleration in the current quarter. Meanwhile, global smartphone demand looks fatigued. Foxconn Technology Group, the biggest iPhone assembler, is planning deep spending cuts next year as demand wanes.