Despite all the market excitement, some things never change. On Monday the Australian Bureau of Agricultural and Resource Economics (ABARE) released its September quarter commodities report.

It further strengthens our reasoning for not caring about what happens in the US. Of course, if the US does go into a steep recession it will have an impact on global markets and economies. But the influence of the US is becoming less important as time goes on.

When we take a step back and look at what is happening in Asia and the rich Arab emirates in the Middle East it becomes even more apparent that Australia does not need to be too concerned about the US Congress taking on USD$700 billion of additional debt.

Why? Because it is all still ticking along nicely in the commodities markets.

For the most part anyway. There is the odd story floating around of capital raisings being postponed due to tighter credit markets, but they appear to be in the minority.

The report from ABARE tells us that although “world economic growth is assumed to decline from 5 per cent in 2007 to around 3.9 per cent in 2008 and 3.8 per cent in 2009″ Australia’s “commodity export earnings are forecast to increase to a record $214 billion in 2008-09.”

Australian Resources Exports to Increase by 48%
That represents an increase of 40% over the previous year. Even better than that is that energy and minerals exports are forecast to increase by 48% to $178 billion.

Putting those figures into perspective, the entire value of all exports for the year until May 2008 was $216 billion.

In other words, based on forecasts (which may or may not be reliable) the resources sector alone will export this amount alone.

And what market share does the United States contribute to our exports? Last year it totaled $10.3 billion, that’s less than half of what was exported to China. And only a third of the exports to Japan.

Look to Asia for Profit Growth
Compare the economic growth rates of the major OECD economies…

… with those in Asia.

We know things can change. And we also know that many of these Asian countries rely on the US as an export market. But increasingly, the new economies in Asia are growing to an extent that is making the ‘Old World’ economies less important.

As the United States, Europe, Japan and China all work to reflate the global financial system, the price of commodities will recover. The global economy will not suffer a hard economic recession. In fact, the emerging markets might escape one altogether.

Meanwhile, interest rates are still in negative territory if you adjust for inflation, and the Fed isn’t likely to raise rates anytime soon. That’s not about to change until both the housing and credit markets heal.

Inflation is not dead and commodities remain in a secular bull market as China and other rapidly growing economies continue to boost domestic consumption and increase trade.

The credit crisis is a Western problem, not an Asian one. Balance sheets across Asia are not restricted by sub-prime losses or other mortgage-related write-downs. So the sooner the U.S. finally tackles the credit crisis, the sooner Asian growth will reaccelerate. That’s when I expect commodities to bottom.

The long-term picture remains bullish for these markets and commodities. Over the next 12 months, I see the greatest reflation trade of the century hitting the markets, courtesy of the United States government and the European Union.

 

 

Asian stockmarkets dropped yesterday, driving the region’s main index to a two-year low, after Japan’s economy contracted and companies reported weaker profit growth. The Japanese slowdown, the Chinese bear market, more write-offs in the US banking industry and poorly received profits in Australia were the main drivers behind a sharper than expected loss across the region yesterday. The slowdown in Japan was driven in the main by contractions in exports and home building. It’s a clear sign that the slumping US economy has had a direct knock on impact on Japan. Japanese exports to the US have been falling now for 10 months, and in the past couple of months, they have also lost their growth drive into Asia and emerging markets. Cars, computers and capital equipment shipments across the Pacific to the US have fallen sharply in recent months as the US recession has rolled on. The yen rose to a 12-week high against the euro after the report on the economy, with the currency hitting a two year high against New Zealand’s dollar and the highest in four months against the Aussie currency. The yen also advanced for a third day against the US dollar after hitting a five and a half month high on Tuesday. Japanese investors are unwinding so-called carry trades as they quit higher yielding positions in assets in currencies like the Australian and NZ dollars. The Yen is one of the few currencies the US dollar hasn’t made headway against in its recent rise, which has seen it make big gains against the euro, the NZ and Aussie dollars and sterling. It picked up yesterday with the news of the contraction in the second quarter, an announcement that saw the Nikkei lose around 2% as other markets across Asia fell. The Australian market also lost around 2%, despite solid profits announced by Telstra and the Commonwealth Bank. The Japanese economy contracted 0.6% in the June quarter compared with the March quarter when it rose a revised 0.8% (down from the 1% previously reported). That put growth at an annual minus 2.4% compared to the revised 3.2% expansion in the first quarter. It joined the US, Canadian, Danish, New Zealand and Italian economies in reporting a quarter of contracting growth: the US contracted in the 4th quarter of 2007 on the basis of revised GDP figures issued last month. New Zealand is heading to the dubious honour of a second quarter of contracting growth in the June quarter. The MSCI Asia Pacific Index fell 1.3% to the lowest level since September 2006. The Index has fallen 20% this year as accelerating inflation and slower growth had undermined regional economic growth. That puts the Asian region in a bear market: Japan, Hong Kong, Australia and China are already there. China’s CSI 300 Index slipped 3.1%% at one stage as the value of stocks traded on the two primary exchanges yesterday fell to the lowest since November 2006.

 

But the markets recovered the losses to close little changed after the afternoon rebound

China’s market has now fallen more than 9% since the Olympic Games started last Friday.

All other indexes in the region fell.

Japanese exports fell the most since the 2001-2002 recession, while record fuel and food prices cut consumer spending and retail sales, while housing contracted.

The Japanese government last week described the economy as “weakening”, language it hadn’t used since 2001.

Rates cuts can’t rise to fight inflation (which is running at a 27 year high for wholesale inflation of 7.1%). Falling oil and petrol prices will bring some relief from this month onwards, which will provide some help to hard-pressed consumers.

Exports slumped 2.3% in the quarter, the first drop in three years imports.

Consumer spending, which accounts for more than half of the economy, decreased 0.5% from the previous quarter.

It is not a recession though, as that is two consecutive quarters of negative growth, a common definition of a recession.

Some analysts reckon the economy could rebound weakly to just above break-even this quarter. Japanese companies though are well-placed to ride out a slowdown: they have plenty of cash, solid cost structures and are better shape than at the start of the 2001 slump.

The second quarter slowdown shouldn’t worsen this year, given the current state of the global economy, especially with the plunge in oil and other commodity prices. 

The impact of the export slowdown was shown with Japan’s current account surplus which fell by a record amount in June as exports fell and higher oil prices pushed up the import bill.

The surplus dropped a huge 67.4% to 493.9 billion yen ($US4.5 billion) from 1.52 trillion yen a year earlier.

The Ministry of Finance said exports fell 1.5% in June from June 2007, the first fall since November 2003. Imports rose 17.8% to a record 6.59 trillion yen. As Japan imports virtually all of its oil, the surge in crude oil prices hurt the country in the month.

The higher import and energy costs were reflected in the 7.1% rise in wholesale price inflation in July, a 27-year high.

The surplus was boosted by returns on investments made overseas.

But some of those are currently being unwound as the carry trade is curtailed.

The difference to China is quite stark: consumer price inflation is easing in China, but wholesale prices are rising: exports are still growing, retail sales surged last month, but imports are growing rapidly.

US

Better than expected results from Citigroup, JP Morgan and Wells Fargo initially saw the US stockmarket off to a good start this week. The White House moved to drop its veto against the housing bill. In the case that things do get worse for Fannie and/or Freddie, the Treasury will need the power to bail them out before Congress goes to recess in September.

Existing home sales fell in June, down 16% compared to a year earlier, to its lowest point in a decade. Resales were down 2.6% and the median home price dropped by 6.1% when compared to last year. These numbers indicate that the US housing market has not yet bottomed out. As long as house prices are continuing to go down, noone can say how much the banks are going to lose and how long the downturn is going to last.

A consequence of the very high oil prices this year, is that automakers have remained under pressure. Ford announced the biggest quarterly loss ever with an $8.7 billion loss recorded for the 2nd quarter.

Asia Pacific

The Reserve Bank of New Zealand unexpectedly lowered interest rates for the first time in 5 years as growth concerns outweighed inflation concerns and signaled that more rate cuts may be on the cards. Official interest rates in New Zealand fell from 8.25% to 8%.

Inflation in Australia accelerated in the 2nd quarter by 1.5% up to 4.5%. Despite the rise in consumer inflation, the Reserve Bank has indicated that rates will likely remain on hold with a slowdown in the domestic economy expected to drive down inflation.

UK

In England, we’ve seen retail sales plunge down to multi decade lows with the sharpest drop in the numbers in 22 months. Retail sales in June were down 3.9% as fears of a recession saw consumers cut back on spending.

The hawkish stance of the European central bank was put to the test this week with very, very weak Eurozone data filtering through. German business confidence plunged below the 100 point mark as measured by the IFO index. This is the weakest reading in 3 years.

The French business confidence index saw the same type of decline. Even the Eurozone current account turned into a deficit in May.

End note

We saw another turbulent week on global markets. These big jumps up and down are typical of a bear market. Most market watchers agree that we were seeing a bear market rally which would return to the downward trend. On a positive note, we saw oil prices ease by around 15% which helped markets earlier on in the week. We have yet to see the US housing market bottom out before the end of the problems for US financials will see a turnaround.

America was closed, Europe and Asia sagged, oil retreated a little, and other commodity prices were leaderless: American holidays continue to emphasise the primacy of US markets in setting global price levels in a wide range of products. European markets fell 2.7% (some individual markets were off more, some less); US markets were off around 1.2% or a bit more (but closed on Friday), Asia was down more than 3% and Australia was off 3%-plus as well, despite Friday’s rise. Our market will be flat to slightly weaker today judging by the futures market Friday night. Friday’s rise here was a bit of a ‘con job’ by punters looking to exploit higher commodity prices, and not worrying that the US markets were closed or the European markets were unsettled. There was this belief that the poor US jobs figures were ‘good news’ because the 62,000 jobs lost meant US interest rates were not rising any time soon. Jobs losses in the US are going to worsen in coming months.  US investors and some local optimists still don’t understand that 2008 earnings in the US, Europe and here are going to worsen, before they get better and that forecasts for a big rebound in 2009 are off the planet. Some forecasts have US earnings rising 20% in 2009. The AMP’s chief strategist, Dr Shane Oliver said in a note on Friday that “It’s anyone’s guess as to where it will go in the short term. If the oil price continues to surge then shares will remain under pressure, if it falls back then shares will have a great rebound. “The high and still surging oil price along with slowing growth virtually everywhere, inflation worries and high bond yields are all short term headwinds for shares. Furthermore, the period out to September/October is often rough for shares.  “As such, it remains a time for investor caution and this is likely to be the case for the next three or four months. “Although the next few months are likely to remain rough with further falls possible, we still see shares rallying sharply in the December quarter as the oil price falls back to a level more in line with supply and demand fundamentals, the economic outlook starts to improve and investors start to take advantage of attractive share valuations. The last quarter of the year is normally strong. “Australian shares are now trading on their lowest forward PE since 1996 and their highest dividend yields since 1991, when bond yields were above 10%. See the above chart.  “While industrial companies are likely to see profit downgrades, current share prices are implying a greater than 20% slump in overall profits and this seems very unlikely. Prices from their highs last year they are currently trading on an 8.8% distribution yield, which is their highest since June 1996.  “Even if average distributions are cut by 10%, this still makes for a very attractive yield. “After the sharp rise in yields in the last few months, made worse by recent inflation fears, bonds should provide better returns over the next six months as yields decline if as we expect global growth keeps slowing and inflation fears abate. “While the ride for the $A will remain volatile, Australia’s strong terms of trade and high relative interest rates are supportive of further gains.  “We remain of the view that it is only a matter of time before parity is reached. The elimination of the monthly trade deficit on higher iron ore and coal prices will also likely be a positive for the $A.” But Goldman Sachs JBWere said in a commentary during the week: “During FY08 the Energy and Resources outperformed significantly and the only sectors to post positive returns.

 

“The brunt of the selling was experienced in Consumer Discretionary, REIT’s, Industrials and Financials which experienced declines exceeding 25%, the majority of this occurring over the last 6 months.

“To date the share price declines have been driven largely by PE deratings in anticipation of increasing earnings risk with relatively little by way of negative earnings revisions coming through outside of those companies with excessive leverage.

“The economic data flow during June provided further evidence that the domestic economy is slowing, with retail sales, building approvals and credit growth all continuing to soften. 

“Employment growth turned negative, recording the first fall in 18 months while the RBA kept rates on hold after confirming inflation is high and demand will need to slow.

“The AUD remained strong ending the month at 96.6¢ (+1¢).

“The key issue for investors remains the trade-off between risks to corporate earnings in light of a rapidly deteriorating domestic economic outlook and increasing inflation risks; versus increasingly attractive valuations for equities.

“We continue to favour defensive sectors over domestic leverage heading into the key August reporting period, particularly given the increasing uncertainty in the domestic earnings outlook over the next 6 months. 

“The potential for the USD to find support as sentiment around credit availability improves, suggests stocks with offshore earnings could outperform during FY09.”

 

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In London the FTSE 100 index closed on Friday at its lowest level since November 2005 as it threatened to join indices in Asia, the US and Europe among the bears.

The UK index has fallen 19.6% from its peak in October, leaving it just short of the 20% fall from a recent high that defines a bear market. (It dipped into the bear’s den briefly, before a small recovery.)

Friday’s 1.2% fall in London though capped a miserable week for shares around the globe: earnings are under pressure, especially in retailing; the credit crunch hasn’t gone away and continues to devour housing; oil is the big imponderable and that is making inflation more dangerous than it has been for 20-30 years.

According to figures in the weekend media in London the retail investors have deserted European markets in recent months, with $A65 billion of shares sold in the first five months of this year (that was after $A70 billion was sold off in the last five months of 2007).

The Dow joined the FTSE Eurofirst 300, Japan’s Nikkei 225 and the MSCI Emerging Markets index in bear territory.

National indices fell in all 18 western European markets. Germany’s Dax Index fell 2.3% and France’s CAC 40 3%. The FTSE 100 lost 2.1% over the week.

The MSCI Asia Pacific Index was down for a loss overall for a fourth successive week that has seen the index shed more than 12% in that time.

Futures on the Standard & Poor’s 500 Index fell 0.7% in European trading.

The MSCI World Index had its fifth weekly drop. Bloomberg reckons that more than $US11 trillion has been cut from the value of global sharemarkets so far in 2008.

Credit crunch related losses from subprime failures and dodgy securities, write-downs, bonds, corporate deals and other high leverage products are estimated to have topped $US400 billion so far, but the surging oil price, high food costs, slowing economies and accelerating inflation have combined to cut market values in every corner of the world.

 

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Asian shares fell for the fourth week in a row with Japan’s Nikkei 225 Stock Average posting its longest losing streak in 54 years. (And co-incidentally, General Motors’ share price hit a 54 year low last week as well!)

The MSCI Asia Pacific Index fell 3.1% last week and Tokyo’s Nikkei fell 2.3% last week, the 12 straight days of losses is the longest losing streak since 1954.

The MSCI Asia Pacific Index is down 16% so far this year.