Europe and China are on high alert.
European Central Bank President Mario Draghi made it known that the ECB will do everything in its power to “expand its asset purchase programs if inflation fails to show signs of quickly returning to the ECB’s target.” Just a few weeks ago, Draghi had sent shudders through the global equity markets with his view that “without reform, there can be no recovery.” It appears that significant and aggressive monetary action may be the only option for a European continent that could once again be headed into recession and/or deflation. This announcement won’t be the last that we hear regarding moves to aid the European economy.
Iron ore prices have been in free fall and reached the lowest prices in more than five years this week. China is the largest user of seaborne iron ore, and recent data from the country has not been very encouraging with respect to the trajectory of growth. BHP (BHP), Rio Tinto (RIO), and Cliffs Natural (CLF) may be most heavily tied to the spot price of iron ore, but even steel stocks from US Steel (X) to South Korea’s POSCO (PKX) haven’t been faring all that well on account of global economic concerns (despite lower input costs). We had been expecting iron ore prices to fall, but they have really taken a turn for the worse as of late.
According to the National Bureau of Labor Statistics, data revealed that new-home prices in China fell in all but one city during the month of October. We don’t have to explain what happened to the US equity markets once housing prices started to fall, and we’re on high-alert as a result of this development. Though it certainly will impact the construction and steel markets if building in China slows, we’re more concerned about the implications on the global financial sector under a situation where asset values are falling. We’ve highlighted the housing bubble in China before (see here). In Shenzhen and Shanghai, housing prices are more than twice those in New York, according to the IMF’s house-price-to-wage-ratio.
It should then be no surprise that the People’s Bank of China is acting fast. The country’s central bank cut its one-year benchmark lending rates by 40 basis points, to 5.6%, and lowered one-year benchmark deposit rates by 25 basis points, effective Saturday. This is the first move by the PBoC in more than two years, and while it may be surprising to some, the slide in commodity prices from iron ore to crude oil coupled with falling housing prices made it almost an eventuality. China’s gross domestic product is still expected to grow at a 7%+ pace in 2015, a breakneck pace.
There’s no reason to panic, but we want you to be aware of the myriad challenges the global economy continues to face. The weightings in the newsletter portfolios remain unchanged.
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