Today stocks are higher almost everywhere, with British, and European companies being the best performers of the day. Among currencies, we find the USD depreciating against most except the JPY, while gold has appreciated significantly from the recent lows of $1360 recorded a few days ago. Oil continues to hold on to the $91 per barrel handle.
Some news about Chinese platinum purchases, and silver stocks dwindling in Europe according to the blog "Zerohedge" are making the news. We believe that these factors have only a small role in determining general price trends, but it is true that, with respect to individual commodities, significant shortages may turn out to be the main drivers of price trends. At the same time, it is not wise to have too much faith in the rumor mill, as refutations of the same shortage can be found in the news media too. Over the long term, in any case, the trend in the commodities market will remain pointed to the upside for as long as the USD weakness continues.
Today`s most important event is the visit of Chinese President Hu Jintao to Washington, where he will meet U.S. business leaders, tour Chinese factories, and have a private dinner with President Obama and his main aides at the White House. The main theme of the visit is economic relations, with both sides willing to deemphasize some of the salient points of disagreement. Americans would like to export more goods to China, which is only possible if a modest amount of goodwill and cooperation is maintained between the two sides during such events. Any unexpected disagreement will not only be bad for bilateral relations, but it will also dynamite the U.S. administration`s stated plan to transform the U.S. to a more balanced growth model. We believe that the Chinese are in the U.S. in order to hug and kiss like pandas showing their softer and enchanting sides to their American partners, with the hope that the status quo can be maintained forever. We doubt that they have any intention of addressing the root causes of the recent difficulties in the relationship, but we would expect to see at least some kind of announcement to satisfy the Congress and opinion-makers in the U.S. so that serious, longer term commitments may be avoided. This is China`s, and in fact, Asia`s main strategy. Delay the inevitable for as long as possible. Keep hoarding cash, promise improvements, and do as little as possible convincing yourself that everything is fine. But even a very elementary analysis of the situation would show in the clearest terms that in fact this approach is creating enormous dangers for the region and for the world in as much as it is based on bubbles, and contradictions that will inevitably collapse at one point regardless of the convictions of Asian leaders.
Bilateral trade between the two countries has reached a volume of more than $400 billion recently, unhindered by the President`s, Treasury`s, and the Fed`s insistence that the Chinese must do something to reduce their surplus. The surplus has been rising, and will probably come down this year, if at all, only because of the measures that the Chinese will have to adopt in order to manage their inflation problem.
Trade agreements are beign signed, and smiles on both sides outshine the gloomy aspects of the bilateral relationship for now. We`ll return to this subject tomorrow as the Chinese President`s visit, the first since Jiang Zemin`s visit in 1997, continues.
Apart from meeting the Chinese leader, the U.S. president is also busy working on reforming business regulations in the country in order to make businesses more competitive, and the labor market more flexible. In an article in the Wall Street Journal, he voices his commitment to balancing the needs of business with the needs of the consumer. Still, we think that the trend in the next few years will be towards tightening or maintaining of regulatory standards, since the laissez-faire approach of the past decades seems to be almost complete out of vogue with politicians and voters in the world at large. That doesn`t mean that some cosmetic adjustments can`t be made here and there, and perhaps certain sectors, like technology will indeed benefit from the changes, but on the whole, we believe that regulators will have a tighter control over economic life in the coming years.
We conclude by taking note of the fact that there continues to be some concern about the recent rise in the spreads of longer to shorter term maturities in the Treasury market, with some warning about a possible beginning of the end for the U.S. government as its obligations challenge its refinancing capability in the of face rising interest rates. Is this likely? Probably not in the short term, since, as Ben Bernanke recently explained, the recent movements are probably being caused by expectations of better economic performace over the year as much as they are caused by worries about the government`s ability to make repayments. The U.S. is unlikely to face the kind of challenge that some would expect to see unless a kind of severe domestic political issue or geopolitical crisis overtakes the headlines sometime in the near future. The European problems are enough to justify an elevated level for the USD price at least against the Euro, which means, in our opinion, that the U.S. unit will see stable, but not great demand for this year and probably the next,depreciating gradually in line with the government`s expectations.
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