China, Europe Export Gloom

03/22/2012 11:22 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

European markets took a hit after overnight surveys from European and Chinese manufacturers implied contraction, and China’s weakness has now infected key trading partners, writes senior editor Igor Greenwald.

Another day, another early-morning cold shower, courtesy of our foreign friends.

Market enthusiasm over recent signs of improved hiring and stronger housing demand in the US is being tested, once again, by bad news from Europe and China.

The Chinese purchasing managers index compiled by HSBC wilted to 48.1 from 49.6 last month. And though the Chinese bank cut the reserve requirements for hundreds of branches of Agricultural Bank of China in a bid to spur lending, there was widespread concern that such moves won’t alter the economy’s worrying trajectory.

A leadership transition in Beijing featuring the fall from grace of a populist party boss and even far-fetched rumors of a coup may be adding to the impression that China’s rulers are a bit distracted at the moment.

The Shanghai Composite is down 2% from its recent peak, 6% since mid-November, and 22% since April. Its weakness has begun to spread to China’s key trading partners: markets in Hong Kong, Singapore, Taiwan, Australia, and Canada have been clear laggards this month on the global scene, according to MSCI Barra. Meanwhile, Brazilian ADRs, dominated by the big resource exporters, have significantly underperformed Brazil equities on the whole.

European stocks have fared better this year, but that resilience is being tested by today’s disappointing data and heavy selling. Stocks across Europe were down 1.6% midmorning after European manufacturers proved no sunnier than Chinese competitors.

Notably, Germany’s PMI came in at 48.1, way below forecasts of 51 (with 50 separating expansion from contraction). France registered 47.6, down from 50 the prior month.
Rates on Italian and Spanish bonds rose, with Spanish ten-year yields up 60 basis points since March 1. Spain’s attempt to flout its austerity target amid shrinking revenues has investors fretting a severe recession as the property bubble continues to deflate.

The newly released UK “austerity” budget aims for a deficit equal to 7.6% of GDP next year, which must sound generous to Spaniards who’re being told in Brussels that their 5.8% goal is unaffordable. The UK has surprisingly little to show for its two years of budget cutting, in terms of either greater fiscal rectitude or economic growth.

February saw even chillier retail sales as consumers worried about disappearing jobs.

Maybe this is just a routine correction, or maybe Europe is finally succumbing to its failed austerity campaign. Either way, the smart money seems to be betting on a rebound in Asia first.

Jaguar Land Rover, owned by India’s Tata Motors (TTM), has just signed a deal with Chinese auto maker Chery for a Chinese manufacturing joint venture said to be worth nearly $3 billion.

Chinese auto sales are down 6% so far this year. But Tata, which bought Jaguar Land Rover from Ford (F) for a song in 2008, obviously sees better days ahead.

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