Overview
Commodity prices suffered a tectonic shift recently. With prices at apparently speculative levels, a correction was inevitable. This has triggered talk about whether we’re in a rotation from “risk” trades to a more sedate stage for markets or whether commodity prices will resume their ascent.
This pause has been significant and, even if prices stabilize at current levels, we believe it represents a material “sale sign” for users of commodities and could serve to support future consumer and business demand, economic growth in countries that are net users, and global earnings.
North America
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
The U.S. economy continues to grow with two steps forward and one step back. Even as the consumer and business sales/inventory growth surprise pundits to the upside, there are enough question marks to keep the markets off balance – including accelerating inflation and volatile new jobless claims.
The U.S. has also been buffeted by fears of the possible impact of a sovereign default in Greece. This is euphemistically being described as “restructuring” or “reprofiling” of maturities by politicians navigating the shoals of public opinion in Germany, Finland and other donor nations where right-wing parties hostile to additional rescue funding are gaining at the hustings.
Japan
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
At least for now, the reactor situation at the Fukushima Daiichi nuclear plant is not devolving into the worst-case scenario, but there is no doubt that industrial supply chains have been disrupted. The power grid, which is about to face the high-demand summer season, remains inadequate at times.
It remains to be seen whether shifting of manufacturing offshore, as a result of infrastructure and plant damage, will be temporary. Post-quake data suggest that industrial production was severely impacted, registering a record -15.3% drop month-over-month. Household spending also dipped, although employment appears to be holding steady for now.
Europe
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
The debt load of Greece has once again become a key concern. The inability of the country to sufficiently grow its revenues or cut expenses has many speculating on the need for debt restructuring. Although the Greek economy is relatively small, there is concern that this “polite” default could impact the financial stability of the many major European banks that own a significant portion of Greece’s (and Ireland’s and Portugal’s) sovereign bonds.
Meanwhile, the ‘core’, larger economies have participated in the global recovery in manufacturing, especially Germany. Much of this performance has been driven by exports, especially to emerging markets. Looking forward, the recently stronger Euro (which makes European exports more expensive) and the efforts of many central banks in emerging markets to slow their rapidly growing economies by tightening monetary policy will likely test the strength of demand for European exports and manufacturing.
UK
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
GDP grew at a nearly 2% annual rate in the first quarter, arresting concerns of a “double dip” in economic growth. Production industries and services were strong. However, construction was very weak, contracting at nearly a 20% annual pace – the steepest decline since early 2009.
Purchasing managers data suggest that the UK economy will not re-enter a recession over the course of the summer. However, subdued growth is expected. Headwinds include weak home prices, stagnant wage growth, and low job gains. Manufacturing is an offset to these pockets of weakness. In addition, monetary policy remains stimulative.
Emerging Markets
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
As Eric alluded to in his European review, tighter monetary policy is a consistent theme across many emerging economies, the result of strong growth in credit and economic growth and rapidly accelerating inflation. Some are further exposed to speculative bubbles (e.g., China real estate) and the risk for dislocating shifts in the economic landscape.
However, there is hope. However unpleasant, rising interest rates, reduced fiscal stimulus not needed in booming economies, and stronger currencies – now, even in China! – may have sown the seeds for a slowdown in economic growth to more sustainable levels. In the short term this is leading to concerns about equity market performance in emerging markets, as it should. But this is a typical stage in the normal cycle of modern economies, and, we believe, a healthy event.