Impact of Greece Default on Institutions and Countries

Impact of Greece Default on Institutions and Countries

 Greece Debt Exposure by countries

Greece Debt Exposure by countries and Institutions 

Chinese Inflation data tomorrow

China is due to release its consumer price inflation data for May. As per median forecast available from Bloomberg News Survey, CPI in the country is expected around 5.5% compared to 5.3% in April. Consumer inflation hit a 32-month high of 5.4% in March. To curb the rising rate of inflation, the PBoC hiked its benchmark interest rates 4 times since October 2010 and raised the required reserve ratio for commercial banks 5 times this year to a record high of 21 %. The government’s target for full year is 4% inflation.

Why Chinese CPI is important?

China, India and emerging Asia has been leading contributor in global recovery after a major recession started from late 2007. Chinese economy is the second largest in the world to replace Japan recently. Chinese economy has been growing at a pace of 9%-11% while the US and EU are growing a pace of 1.8% and 2.5% respectively. Japan is now in a recession with GDP falling 3.5% during 1^st quarter.  Both and US are not likely to cross the 2% mark as indicated by recent data releases.

Now, a rise in inflation is a risk (short term problem) may impact the long term objective of the policy markers. Chinese property bubble is a growing threat for the domestic economy and the same way for the global economy. If inflation level persists then we may see further tightening policy by the PBoC (People bank of China) which may slow down economic activity. The Chinese tightening may impact financial market to a considerable extent leading decline in industrials and energies, deep correction in global stocks.

As per World Bank, inflation control should still be the government top priority.

This lead a bearish mindset for markets

Few Thoughts about market

The Euro and GBP is expected to depreciate against the US dollar on phasing out of US QE2nd. The ECB hawkish comments failed to bring in any rally in Euro as market ignored yield differential and looking at rising yield of PIIGS nations. A concern of public debt is to weigh on the common currency.

Chats of EURUSD looking bearish, expected to test 1.43 and probably 1.41 as well. GBPUSD may drop till 1.60 or 1.58 this time.

Macro economic data across the globe is at poor reading. Globe growth to slow down during the 2^nd quarter. US dollar should appreciate as a safe haven on weak economic data. Apart from end of QE 2^nd may lead to winding up of carry trade in US dollar.

Japanese yen may see some investment interest on risk aversion.

Commodities such as industrials, energies and dollar prices commodities to decline this June

Indian stocks see lower on to see lower move on rate hike prospects due to higher inflation level, weak manufacturing data and global selling in riskier assets.

Weak global PMI, Inflation and end of US QE2nd - Pressure on commodities to build up from June

The starting of June was disappointing from economic data perspective. As per reports released on 1^st June, Manufacturing PMI across Europe, US and Asia fell during May.  

China known as the major consumer for metals and energy has seen manufacturing activity slowing down for second straight month in May. Chinese manufacturing PMI fell to 52.0 in May from 52.9 in April. It is evident that the world's second-biggest economy is slowing marginally but does not point to a sharp slowdown in its vast manufacturing sector. Chinese inflation is still above 5% which may prompt PBoC (People Bank of China) for further monetary tightening. China’s economy has entered a tough period in June, with the drought crisis and power outages. Enduring high inflation pressures and uncertainties in external liquidity also add to the need to combat excessive price gains rather than maintain growth

In Europe, apart from public debt concern from Greece, Portugal, Ireland, Spain and Italy, slowing down of manufacturing activity has a reason for concern. The Inflation in the common area rose to 2.8% above the target rate set by the European central bank. The ECB which has more focus on price stability compared to Bank of England. Fuelled by a spike in energy costs as well as for raw materials, the ECB lifted its benchmark interest rate from 1% to 1.25% with a further quarter-point rise expected over the summer. Rise in rates along with public debt concern may further dampen the manufacturing growth in the common currency area. As per reading of May, EU Manufacturing PMI dropped to 54.6 from 58.0 in April. The fall in the index was the largest since November 2008.

Moving to UK, manufacturing PMI read at 52.1 in May, from a downwardly revised 54.4 in April. Growth in Manufacturing in the UK is the slowest pace in last 20 months. The UK is now witnessing a high level of inflation with CPI slightly below 5%. Inflation expectation are growing in the economy with rise in commodity prices, however the BoE is still very cautious on taking any step towards monetary tightening. UK GDP growth for 1^st quarter is expected at 1.8% as per estimates.

In US, the US Institute for Supply Management's manufacturing index also came lower than the previous month, with a May reading of 53.5 compared April's reading of 60.4. Most of the developed market except Australia and Japan has a reading of 50 in their PMI till now, which shows expansion, otherwise contraction. As inflation is heading up, any monetary tightening may hinder expansion of manufacturing sector and may lead to further softening. We do not see any tightening policy further in US and UK for next 2-3 months, but sentiment may build up in the market as ECB set for rate hike in July meeting.

In emerging Asia, most of the economies are witnessing higher inflation and now with manufacturing slowdown. Headline inflation in Asia ex Japan has been rising rapidly since the second half of 2010, reaching a 29-month high of 5.8% in March 2011. While food inflation has been driving headline inflation higher, core inflation pressures have also been elevated, tracking at a high of 3.9% in March 2011. The process of taming inflation will ultimately be damaging to growth. The results seem revealed now. As per recent data Purchasing Managers’ Indices for India, Korea, Taiwan and Singapore all worsened.

In India, the HSBC Markit PMI based on a survey of around 500 companies, fell to 57.5 in May from 58.0 in April. It was the lowest level since it hit 56.8 in January. The decline was less than those of developed market. South Korea manufacturing growth dropped to its slowest pace in six months, with HSBC's PMI falling to 51.2 from 51.7. Taiwan's had a similar drop with the HSBC PMI falling to 54.9 in May from 58.2 in April. In Singapore, the index dropped 1.7 points to 50.8 in May, from 52.5 in April. In Asia pacific, Australian AIG May PMI fell to 47.7, a contraction for 3^rd Month. Nine out of the 12 manufacturing sub-sectors recorded declines in activity during the month, with the clothing and footwear sub-sector recording the steepest contraction, followed by the chemical, petroleum & coal products sub-sector.

The result suggest pressure on commodity prices as slow down of demand in industrials such as Copper, Nickel, Lead, Zinc, aluminium and Silver and for energies like Crude oil and natural gas. Another critical factor need to be mentioned is the end of Quantitative easing by the Federal Reserve Bank, US which has been a major driver rise in global commodity prices. Last November, the Fed announced that they would buy an additional $600 billion of long term treasuries ($75 billion each month) pumping liquidity in the market and keeping the market rate of interest at lower levels. These purchases are scheduled to be completed by the end of June which will provide a focal point of speculation about the impact on the prices of a wide range of assets, including commodities.

Ultra-loose monetary conditions are particularly helpful for commodity prices because they minimize the opportunity cost of holding assets that do not pay any interest, while increasing demand for hedges against inflation. Global commodity prices do at least appear to have tracked the increases in the Fed’s holdings of Treasuries since early 2009. The end of the Fed’s Treasury purchases under QE2 may become a major turning point for commodity prices, which may lead to US dollar recovery and pressure on dollar prices commodities.

Commodity prices should ease with demand slowdown along with US dollar recovery after the end of QE 2^nd.