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Tue, 17th January 2017

Anirudh Sethi Report

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Archives of “international trade” Tag

These Are Barclays’ 13 Commodity “Black Swan Threats” For 2017

In a special report by Barclays’ Michael Cohen, the analyst lays out what he believes are the 13 commodity “black swan threats” for the current year, divided into two “shock” categories: supply and demand, split evenly between bearish and bullish.

Investors, Barclays warns, will have to balance the risks of unforeseen macroeconomic shocks and their effect on demand (bearish price) with potential geopolitical shocks disrupting the supply side of the market (bullish price). A tightening commodity inventory picture, especially in oil, will likely exacerbate how the market prices supply risks even if no physical supply disruption occurs.

The potential threats, which range from a trade war with China, to a default in Venezuela, to riots in Chile, all have a common denominator: politics: “we assess several black swan threats to the supply, demand, and transit of commodities that could potentially move markets in 2017. Our analysis illustrates an important point: politics are likely to matter just as much as economics” and not just any politics: “in particular, the new politics of populism and protectionist trade policies have the potential to disrupt global supply and demand assumptions for various commodities.”

Those who have been following Trump’s twitter feed are all too aware of this.

While we realize the futility of “identifying” black swans in advance, something which is by definition impossible, nonetheless here is what Cohen warns:

In 2016, few people predicted a Trump election or Brexit, not to mention that the Chicago Cubs would win the World Series or that Leicester City would take the Premier League title. And commodities markets were not without their own set of surprises as well. OPEC cut production with non-OPEC countries for the first time in 10 years. Weather whipsawed natural gas, and Trump’s election inspired a late metals complex rally on the basis of hopes for new infrastructure spending. In fact, when all was said and done, 2016 was a pretty good year for commodities, with the asset class posting its first annual advance since 2010.

Commodity market black swan events come in many forms, and the market may take years or an instant to price them in. Technological innovation caused the US shale gas revolution, the Great Recession caused structural demand destruction, while geopolitical strife has disrupted commodity supplies overnight. We all know that markets will surprise in some fashion in 2017, so we attempt this review to shine  a spotlight on the specific commodity market risks that clients should watch.

Where could the surprises come from: “Watch these spaces: China, Russia, the Middle East and Turkey are likely to surprise the commodity complex in 2017.”

Below is the summary list of the proposed “black swans”

Breaking down the list, Barclays says that generally “it sees risks skewed to the upside in 2017, based on several supply-side risks.”

Given the scenarios laid out below we view supply driven disruptions in 2017 as being more likely than demand side Black Swan events. Although commodity price disruptions may mean higher prices in the short-term there is a risk they result in lower medium-long-term prices. A supply disruption that results in a higher futures curve could result in the sanctioning of new projects or increased producer hedging activity, eventually putting downward pressure on prices in the long-dated contracts. There are, of course, supply-side risks that would be bearish for the market as well, such as higher production from Libya or the Neutral Zone.”

Demand events less likely but more structurally impactful. Given the relative liquidity in global commodity markets we see supply related outages being shorter in duration compared to potential demand side risks. We see demand side events, such as those driven by economic weakness, as less likely but events that would have a longer term structural impact on commodity prices to the downside.

As noted above, the two big categories laid out by Barclays are as follows:

Peso Plunges To Record Low After Trump Tweet

The Mexican Peso is plunging once again this morning – very close to all-time record lows – as fears spread that Ford’s decision yesterday may become the norm following president-elect Trump’s tweet that “this is just the beginning.”

Bloomberg notes that Ford’s move, which follows a similar decision by United Technologies Corp.’s Carrier in November, makes it all the more important for Mexican President Enrique Pena Nieto to dissuade other foreign companies from following suit in the face of Trump’s wrath. Mexico’s northern neighbor buys 80 percent of the Latin American nation’s exports, and luring U.S. companies is a cornerstone of the government’s plans to modernize industries from construction to oil.

“A lot’s at stake, considering that since 1999 close to 46 percent of foreign direct-investment flows into Mexico originated in the U.S.,” said Alonso Cervera, chief Latin America economist for Credit Suisse Group AG. “Investors will likely be anxious to see which other companies may do the same.”

 The damage caused by companies buckling under political pressure offers a preview of the ripples that could jolt Mexico’s economy should Trump also follow through with threats to tear up free-trade agreements and to build a border wall. Economists in Bloomberg surveys have already cut their median forecasts for GDP growth in 2017 to 1.7 percent from an estimate of 2.3 percent before Trump was elected.

 

USFDA warning to Wockhardt’s Ankleshwar plant over data integrity issues

US Food and Drug Administration (USFDA) has issued a warning letter to Wockhardt’s Ankleshwar plant for data integrity issues, destruction of records and other violation of good manufacturing practices.

Three of the company’s plants, including the one at Ankleshwar, are under an import alert.

In its warning letter FDA said the company failed to take measures to prevent microbiological contamination. Further it said the company failed to record complete data of medical tests and failed to exercise control over computers to ensure only authorised personnel make changes in production and control records

“Your (Wockhardt) quality system does not adequately ensure the accuracy and integrity of data to support the safety, effectiveness, and quality of the drugs you manufacture,” FDA said in its last month letter recommending appointment of a consultant for remediation measures.

The move is a setback to the company’s plans to revive its US business. The share of the firm’s US business in the total sales dropped to 22 per cent in FY16 from 24 per cent a year ago because of import restrictions. The Ankleshwar plant contributes 10-15 percent of the US sales (Rs 964 crore in FY16).

Trade zones out, tough bargains in for 2017

A reversal in U.S. trade policy could make 2017 the year that efforts to build multinational trade zones crumble, returning the focus to tough, bilateral dealmaking.

In October 2015, officials from 12 nations including the U.S. and Japan gathered in the American city of Atlanta to ink the historic Trans-Pacific Partnership, confident of the dawning of a new age of trade governed by such high-level, multilateral agreements. Yet that dream lies all but dead just over a year later, not least due to Donald Trump’s presidential victory and his pledge to pull the U.S. from the agreement upon taking office Jan. 20.

 Many bilateral free trade agreements, which reduce or abolish tariffs and set rules for trade in goods and services between two nations, have been struck over the years. Multilateral agreements extend this notion to the regional level and improve security in the areas they cover, further greasing the wheels of commerce.

Yet Trump prefers his trade pacts one on one — the better to drive hard bargains, leveraging U.S. economic and diplomatic might to secure the most advantageous terms. Multilateral pacts involve far more careful compromise and require each nation to give and take small concessions rather than pushing for an unambiguous win.

Us first

Global Equities Encountering Resistance At Year-End

The Global Dow Index is running into its long-term Down trendline stemming from the 2007 all-time peak.

Here in the U.S., equity investors have been a bit spoiled as they’ve watched index after index break into all-time high ground this year. Around the globe, investors have not been so lucky. Yes, most international indices have rallied solidly this year. However, with few exceptions, the rallies have still left these international markets shy of their all-time highs. One illustration of this situation can be seen in a chart of the Global Dow Index (GDOW).

We’ve posted many times on the GDOW due to its reliable conformity to technical charting tools, despite the fact that very little money is traded off of it. Additionally, we have found it to be an accurate barometer of the state of the global equity market. Specifically, the GDOW is an equally-weighted index of 150 of the world’s largest stocks. While this includes U.S.-based companies, its heavy dose of international exposure has led to its aforementioned position below its all-time high.

Furthermore, it is currently running into potential resistance in the form of its post-2007 Down trendline connecting the 2007, 2014 and 2015 tops.

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China “Shocked” By Navarro Appointment, As Trump Team Proposes 10% Import Tariff

As the FT first reported yesetrday, in a dramatic development for Sino-US relations, Trump picked Peter Navarro, a Harvard-trained economist and one-time daytrader, to head the National Trade Council, an organization within the White House to oversee industrial policy and promote manufacturing. Navarro, a hardcore China hawk, is the author of books such as “Death by China” and “Crouching Tiger: What China’s Militarism Means for the World” has for years warned that the US is engaged in an economic war with China and should adopt a more aggressive stance, a message that the president-elect sold to voters across the US during his campaign.

 

In the aftermath of Navarro’s appointment, many were curious to see what China’s reaction would be, and according to the FT, Beijin’s response has been nothing short of “shocked.” To wit:

 The appointment of Peter Navarro, a campaign adviser, to a formal White House post shocked Chinese officials and scholars who had hoped that Mr Trump would tone down his anti-Beijing rhetoric after assuming office.

“Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”

Japan – Trade Balance (November): Y 152.5bn (expected Y 227.4bn)

There is some encouraging news for the Bank of Japan to take into this week’s policy meeting as trade data showed the pace of deterioration in imports and exports during November eased and came in better than forecast.

The pace of import growth improved to minus 0.4 per cent year-on-year in November from a 10.3 per cent contraction in the previous month. This was a better result than the average 2.3 per cent decline expected by economists.

Similarly, there was also an improvement in export growth last month, which showed a contraction of 8.8 per cent year-on-year contraction, almost half the 16.5 per cent decline in October. Economists expected a 12.1 per cent drop.

Japan’s trade surplus narrowed to ¥‎152.5bn($1.29bn) last month from a revised ¥‎496bn (previously ¥‎496.2bn) in October. On an unadjusted basis the trade surplus rose to ¥‎536.1bn last month from a revised ¥‎466.8bn (previously ¥‎474.3bn). Both versions of the trade surplus came in below expectations, though.

China Launches Case Against US & EU With WTO Tribunal Over ‘Market Economy’ Row

This picture taken on March 7, 2014 shows a man working beside a cargo ship in Qingdao port in Qingdao, east China's Shandong provinceOn Monday China followed through a warning to “take further measures” against WTO members which continue to impose tariffs on its goods 15 years after Beijing’s accession to the organization.

On Monday the Commerce Ministry said that China has launched a dispute resolution case at the WTO, demanding that all WTO members, particularly the US and EU, stop using the “surrogate country approach” to impose higher tariffs against Chinese goods, which they claim to be exported at artificially low prices. “Regretfully, the US and EU have yet to fulfil this obligation,” the ministry wrote on its website. Sunday December 11 marked the 15th anniversary of China’s WTO accession, and China expects governments which have not already done so, to lift anti-dumping tariffs against its exports and treat Beijing like a fully-fledged member of the organization. The WTO and China agreed an accession protocol when Beijing joined the organization in 2001. Article 15 of this protocol dictates the terms which importing WTO members can use to compare their prices with those of Chinese producers, to determine if that producer is competing fairly with the domestic producers in the importing country. Some WTO members including the US and EU want to reserve the right to restrict Chinese imports with higher tariffs, in order to protect their manufacturers against “dumping,” the process by which a manufacturer exports a product to another country at a price below that charged in its home market, or at a price lower than the cost of production.

In order to investigate whether China is dumping goods, for the first 15 years of WTO membership Beijing was subject to the “surrogate country approach,” as laid out in Article 15. 

Mexico seen contributing to non-OPEC oil output cuts- Sources

Sources cited.

Mexico could contribute as much as 150,000 barrels per day to non-OPEC oil cuts – OPEC source. 
Russia has already said they would cut output by 300,000.
The non-OPEC  members meet with OPEC members in Vienna  tomorrow.
in other Mexican news Fitch  downgrades outlook for Mexico to negative.
As per Fitch:
The revision in Mexico’s Outlook reflects increased downside risks to the country’s growth outlook and the challenges this could pose for stabilization of the public debt burden. Growth has been under-performing rating peers and the general government debt burden has been increasing steadily in recent years. The victory of Donald Trump in the U.S. presidential election has increased economic uncertainty and asset price volatility in Mexico as the President-elect has alluded to renegotiating or terminating the North American Free Trade Agreement (NAFTA) with Mexico and tightening immigration controls. 
For the full report, CLICK HERE

China says they will further advance supply-side structural reforms in 2017

Reuters reporting statement published on Xinhua 9 Dec

  • will further open its economy in 2017
  • will work proactively to attract foreign investment
  • certain that China will complete its key economic targets for 2016

PBOC also announces that China will start direct trading between yuan and 7 currencies from 12 Dec inc

  • PLN
  • SEK
  • TRY
  • MXN
  • NOK
  • DKR
  • HUF

CFETS the part of the PBOC that runs the interbank FX market says the aim is to facilitate bilateral trade and investment with these countries and lower exchange rate costs.

Previously the US $ has been used to determines the cross rate for the yuan against these ccys.