GLOBAL

The strong recent numbers from Germany and rising cargo rates suggest the current economic gloom could prove short-lived, writes Prieur du Plessis of Investment Postcards from Cape Town.

While the general consensus view is that the austerity measures in Europe as a result of large budget deficits will force the eurozone into recession next year, economic growth in Germany, Europe’s largest economy, is surprising on the up side.

Growth in the second quarter accelerated to 2.2% annualized on a quarter-ago basis, while German business confidence in August rose to its highest level since July 2007. The business expectations index was marginally lower, but indicates no train smash ahead.

With the IFO business expectations index leading the euro zone GDP-weighted PMI (manufacturing and services) by approximately one month, I expect both the Markit manufacturing and services PMIs for August to be stable and even somewhat higher than in July.

[In another encouraging development,] after crashing from 4,209 in May, the Baltic Dry Index has surged by 62.1% from a recent low of 1,700. What does this surge in this ardently watched indicator of global economic activity mean?

Well, interestingly enough, last week, China’s bulk freight rate indices for metal ore and coal rose by 3.4% and 1.0%, respectively. A glance at the relationship between the manufacturing PMI for stocks of major inputs and the Baltic Dry Index suggests China’s manufacturers are again rebuilding commodity stocks, as the August PMI is likely to edge towards the 50 level and beyond.

The rebuilding of stocks of major inputs is probably as a result of higher export orders. [These] are likely to boost [the China Federation of Logistics & Packaging—CFLP] manufacturing PMI for August to be announced [this] week. That will be right in line with what we expect from a seasonal point of view.

After slavishly following the seasonal pattern of the previous two years’ first seven months, the jury is out insofar as the CFLP non-manufacturing PMI for August is concerned. A significant drop will mean the non-manufacturing industry is slowing considerably and therefore indicates weakness in the coming months as it did in 2008. As the containerized freight indices are holding up in a normally weak seasonal period, with the Northern hemisphere holidays, I expect the non-manufacturing PMI to again come in at an elevated level of just below 60.

China’s GDP-weighted PMI (manufacturing and non-manufacturing) can therefore be expected to continue to follow 2009’s seasonal trend and not to fall back to the trend set in the second half of 2008.

The outlook for the US GDP-weighted PMI (manufacturing and non-manufacturing) has also improved with the recovery of the Baltic Dry Index. With China’s GDP-weighted PMI for new export orders leading the GDP-weighted PMI for imports by one month the higher Chinese PMI suggests the US’s GDP-weighted import PMIs in August and September are likely to rise after the drop in July.

Possible investment implications:

  • Metal prices are likely to head higher in the coming weeks.
  • Global equity prices could bottom out.
  • Emerging-market assets are set to outperform.
  • The gold price could fall back.
  • US dollar to weaken against the euro and strengthen against the yen.
  • Government bond yields to bottom.

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