May 20, 2016 | Investment Advice

International News (Issue 400) – 20 May 2016

International News – 20 May 2016

The big global news was the release of last months US Federal Reserve meeting, which seemed to take an ever so slightly more hawkish tone than the market had expected.

The suggestion US rates might rise sooner (perhaps June) saw the US dollar surge mid-week, continuing a recent 3-4% rally against major currencies (EUR, JPY).

A stronger US dollar tends to be ‘anti-growth’ and hence ‘anti-risk’ since the US economy is still the predominant driver of global activity and particularly too since much of Asia has its currency linked closely to the US-dollar.

Further a stronger US-dollar makes global commodity prices richer to non-US consumers.

Of further interest this week was news of the substantial curtailment of official liquidity by the Chinese Peoples Bank in late April, with the release of its monetary aggregates last weekend.

Net lending to the economy collapsed by 60% during April as the PBOC seemed to recognize that the substantial liquidity provision year-to-date had likely been causing inefficiencies (ie bubble-like behavior) to occur (steel futures anyone?!).

This is a significant volte face and is a trend that will likely continue in the months to come, particularly now that we have seen official Chinese house price statistics that showed a 62% jump in Shenzhen, 28% in Shanghai, 18% in Beijing & 17% in Guangzhou.

Whilst I recognize most commentators hold concerns for the Chinese economy, for me the timing is key.

Further signs of irrational investor behaviour (the March surge in steel sector trading, recent property price strength) is putting me on edge and the lack of private sector demand improvement in spite of significant liquidity provision is another concern, at a time when more and pressure is being brought to bear on bank balance sheets.

China Inc is no different to the Wizard of Oz, or the parable of the Emperor’s New Clothes.

So long as the locals all still have faith in the Communist Party and its related arms of influence, all is fine.

Should we start to question its omnipotence, then it all falls apart.

On that note, have a terrific weekend.

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