Is China Spawning Global Deflation? Maybe not intentionally, but some of China’s recent actions are putting deflationary pressures on global prices. A weaker yuan is allowing China to offload excess output in steel aluminum, refined petro-products and will likely spread to basic materials and manufacturing goods.
Additionally, China has been shrinking cash reserves at a fairly rapid pace, with January’s drop alone tallying $99.5B to bring their foreign currency reserves to $3.23T – the lowest level since 2012.
The Fed Doesn’t Want the Blame for Market Volatility – In a statement Wednesday, Janet Yellen seemed to concede that the economy is feeling the strain of late cycle growth pressures. She said that “financial conditions in the United States have recently become less supportive of growth.” She’s likely referencing widening credit spreads, which can put a squeeze on bank lending, and the market volatility which generally makes everyone a bit uneasy. The Fed has made a habit of seemingly ‘responding’ to market volatility as though it is tied perfectly to their actions. Liquidity certainly plays a role in investment cycles, but it’s not the end all. Yellen wanted to make that message even clearer to markets by stating that market volatility is a product of a shift in global growth expectations, not necessarily U.S. interest rate policy.
European Banks Getting Slaughtered – Europe’s bank situation is much different than the U.S.’s when it comes to the Energy and oil story. Banks in Europe generally have around the same exposure to Energy and resource-sensitive loans as the U.S., but the difference is that Europe was much slower to recapitalize following the financial crisis. Since European banks generally have fewer assets than their U.S. counterparts, the Energy hit is harder on a relative basis. Even so, we don’t see the impact as being enough to spur a credit crisis in Europe (which would be devastating now given the recovery is still very fragile), but we do understand the crisis in confidence that has emerged. As the commodities story continues to play out, these banks could continue to feel the sting. Most investors should be protected from the impact on banks – a well-diversified investment portfolio shouldn’t have much European financial exposure at all.
Crude Oil May Have Further to Fall – in a meeting over the weekend, ministers from Saudi Arabia and Venezuela discussed crude oil prices, but didn’t talk too much about what everyone was hoping for: ways to provide price support. Their message appears to be to maintain the status quo for production, with no potential cuts in the works. It may help matters that Iran has stated they are willing to cooperate with OPEC when it comes to production, but that doesn’t mean a whole lot given that Iran just came online and will likely be reluctant to back off producing and selling. Supply is the big culprit in the price drop, and it doesn’t appear as though measures will be taken to reduce it in the near future.
Disclosure