Tuesday, February 1, 2011
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BUSINESS Jobs, inflation and Egypt Reuters
LONDON – Fundamentals and nasty surprises are on investors’ minds heading into February, with big tests in the coming week about jobs and inflation and increasing worries over Egypt and its region. The latter has already hit oil prices and has started to rattle equities. U.S. crude oil futures ended more than 4 percent higher Friday, on concerns the civil unrest in Egypt could spread and threaten stability in the Middle East. Overall, however, the first month of the year has been a good one for investors willing to take on some risk. Until Friday’s sell off, global equities were gaining at a rate that would have produced one of the best years in the past four decades. Assets such as short-term highyielding bonds have also been in favor, while supposedly safe-haven developed market sovereign debt has suffered. This is all based on a consensus that arose toward the end of last year that leading developed economies — the United States, the euro zone and even Japan — were likely to become more dynamic. It has prompted a significant shift by investors away from potentially overbought emerging markets into developed ones. But it is also dependent on underlying evidence the big economies are improving and that consumers — the ultimate arbiters — will see this and act accordingly by spending. Friday’s U.S. growth data will have
added to the view of slow but steady improvement. The coming week will be more about the way improving growth has filtered down to consumers. The big data release, as usual, will be the U.S. jobs report Friday, but the euro zone employment picture will also be on view Tuesday. Employment growth tends to lag the wider recovery, but to date it has been anemic, prompting a degree of volatility. “It is a fairly shallow jobless recovery, and that will make markets move up and down,” said Franz Wenzel, a strategist with AXA Investment Managers in Paris. Despite the renewed growth hopes, meanwhile, there are severe underlying imbalances in many developed economies that may rise up to haunt investors betting on overall improvement. The International Monetary Fund said in the past week the United States and Japan needed to spell out credible deficit-cutting plans before financial markets started punishing them by selling off their bonds. Ratings agency Standard & Poor’s went as far as cutting Japan’s long-term debt rating and Moody’s Investors Service said the risk of the United States losing its top AAA rating, although
small, was rising. This is disturbing talk for investors and prompted downward pressure on Japanese assets such as the yen and stocks even though some, like Goldman Sachs, have recently been encouraging investors to look at Japan. What few, if any, large investors foresaw in their 2011 outlooks, however, was the potential for an entire region to come under sudden scrutiny as North Africa and the Middle East has in recent weeks. The focus is on Egypt, where President Hosni Mubarak’s long grip on power is being threatened by huge demonstrations. For global investors the specific stakes are small. Over the past five years, overseas investors have accounted for 15.9 percent of the Cairo stock exchange’s total trading value of less than $500 billion for the period. As for the region, Middle East and North Africa funds had net inflows of $237 million in 2010, according to EPFR Global, although more came in through frontier market funds. So, the money stakes are not the issue. What investors will be watching for in the coming week is how much the crisis spreads and triggers a broader flight to safety from emerging markets and riskier assets.
Japan industrial production up for second month Associated Press Writer
TOKYO – Japan’s industrial production expanded for a second straight month in December, as strengthening global demand injected companies with renewed confidence. Factory output rose 3.1 percent from November, the Ministry of Economy, Trade and Industry said Monday. Driving the gains were export-reliant industries including transport equipment, electronic devices and steel. Monday’s figure beat Kyodo news agency’s average market forecast for a 3 percent rise and prompted the ministry to upgrade its assessment of industrial production — a key barometer of Japan’s economic health. It now says output “shows signs of an upward movement.” Last month, it described industrial production as “weakened.” The result marked the strongest monthly showing of 2010 and indicates that overseas demand is starting to accelerate, sparking the manu-
facturing sector. Global appetite for Japanese goods, particularly from China, has served as a critical lifeline for the country’s recovery amid lackluster domestic demand. A steady slowdown in export growth between February and October last year, as well as a strong yen, had triggered concerns that the economy was faltering. Industrial production also declined for five consecutive months between June and October. Analysts are more bullish about 2011. Last week, the central bank upgraded its economic outlook for the fiscal year ending March 31. It now expects real gross domestic product to expand 3.3 percent, up from 2.1 percent forecast in October. Government data last week showed that exports from the world’s third-largest economy rose 13 percent in December from a year earlier, accelerating for the second straight month. Japanese automakers last week
also reported robust production gains in 2010. Nissan Motor Co. said global output surged 37 percent, with production in Japan up 27 percent. December’s industrial production survey points to further growth this month, with output forecast to rise 5.7 percent. February output is projected to slip 1.2 percent. The report also shows that shipments were up 1.1 percent in December from a month earlier, and inventories expanded 1.4 percent. Goldman Sachs economist Chiwoong Lee notes concern about rising inventories of LCD televisions, washing machines and other home appliances eligible for the government’s “eco-points” consumer subsidy program, which is scheduled to expire in March. “Yet, even if production falls back in March on the end of eco-points, we still think the stronger global picture, especially growing exports on stronger U.S. consumption, will drive improvement in production,” Lee said in a note to clients.
ICBC leads charge as Chinese banks go global Agence France_Presse
BEIJING – ICBC, the world’s largest bank by market value, is proving the most aggressive Chinese bank in expanding abroad, serving Chinese firms that are increasingly active globally after the financial crisis. Of the country’s “big four” banks, ICBC is leading the way as Chinese lenders restart plans that were put on hold by the global crisis and seize new opportunities left in its wake. Bank of China fulfilled that role in the 1980s, but times have changed as Chinese firms have been widely encouraged to invest abroad and Beijing seeks to boost the global profile of the yuan, the experts say. “BoC and ICBC are roughly at parity in terms of overseas activity. But it does indeed appear that ICBC is emerging as the most international of the Chinese banks,” IHS Global Insight analyst Adam Breen told AFP. For Andy Xie, an independent economist based in Shanghai, the process is the logical result of the global expansion by Chinese companies, which are branching out to secure vital natural resources and explore new markets. “Even Chinese companies of medium size are going global. If Chinese banks don’t offer them services offshore, then they might switch to other banks like HSBC that have both a China presence and an international presence,” Xie said. This month alone, ICBC opened branches in Paris, Amsterdam, Madrid, Milan and Brussels — following on from existing offices in London, Moscow, Frankfurt and Luxembourg. In December, it extended its reach to Pakistan. The month before, reports said ICBC was eyeing a takeover of South Korea’s Kwangju Bank. It al-
ready has two branches in Seoul and one in the port city of Busan. In addition the bank took advantage of this month’s highprofile visit to the United States by President Hu Jintao to announce it had signed a $140 million deal to buy a majority stake in the US subsidiary of Bank of East Asia. If the agreement gets approval from US banking regulators, ICBC will become the first Beijing-controlled financial institution to acquire retail bank branches in the United States. ICBC, which employs 386,000 people worldwide and has more than 200 million customers, now has more than 160 branches outside mainland China and more than 16,000 in the country, according to its website. Experts say Chinese banks’ global expansion is only just beginning. “It is rapid expansion only from a very low base,” explained Michael Pettis, a professor of finance at Tsinghua University in Beijing. “China is the second-largest economy in the world but in terms of outward direct investment, it is probably eighth or ninth.” At first, the banks will serve Chinese companies looking to invest in or buy local businesses, before they target foreign enterprises doing business with the Asian economic powerhouse, experts say. ICBC chairman Jiang Jianqing told the Wall Street Journal at last week’s World Economic Forum that the bank’s focus for now would be “mainly on emerging markets, which have good prospects for growth”. Breen, a specialist on China’s banking sector, said the “big four” should focus on developing economies, “where competition is lower, economic growth potential is greater, and the existing domestic banks are less sophisticated”.