GLOBAL ECONOMICS AND POLITICS
Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.
Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.
Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.
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Many academic, financial, and political circles have long been married to “free market” ideologies. Nevertheless, the manipulation, maneuvering, or managing of a nation’s currency level and trends often occupies the deliberations and behavior of that territory’s central bankers, finance ministers, and many politicians. As in their efforts to control or at least influence interest rates (or stock marketplace trends), sometimes their reasoning, actions, and targets are explicit, often they are implicit.
Currency considerations are not islands apart from interest rate, stock, real estate, commodity and other marketplaces. So policy makers enamored of free market propaganda do not necessarily restrict their efforts to affect economic results to their home currency (or that currency’s cross rate relationship to one or more key trading partners). For example, picture the Federal Reserve Board’s longstanding yield repression policy, which has pinned the Federal Funds rate close to the ground.
Although the majority of currency observers and strategists focus their attention on crucial cross rates such as the US dollar against the Euro FX, broad real trade-weighted (effective) exchange rates influence important national policymakers. Analysis of these trade-weighted measures can unveil signs as to important (even if implicit) levels watched by central bank, finance ministry, and political guardians. Such trade-weighted foreign exchange measures consequently provide instruction as to potential strategy responses or changes by these often-vigilant sentinels. National and international policymakers of course are not the only ones looking and waiting around in marketplace games; Wall Street and Main Street likewise wait, watch, and act. Because these broad foreign exchange indicators (and the underlying cross rates) interrelate with perspectives on and decisions relating to current and potential elevations of and movements in numerous interest rate, stock, and other marketplaces, they offer insight into past, present, and future levels and trends of these arenas.
Dollar weakness does not necessarily (inevitably; forever) encourage or reflect a strong American economy or continue to help propelling US equities upward. Suppose a significant run against the “dollar in general” (TWD) occurs, whether via Chinese renminbi, Japanese Yen, or Euro FX (or other currency) strength against the dollar. A TWD dollar dive (especially under the July 2011 low) could force the Fed to significantly reduce or even abandon its interest rate repression and quantitative easing (money printing) policies. Consequently the effort by many American leaders and businesses promoting further weakness in the dollar relative to the renminbi may have some enthralling consequences not only for the dollar in general, but also for American (and other international) interest rate and equity marketplaces.
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Currencies- the Waiting Game (11-4-13)
For the benchmark NYMEX natural gas contract, most traders, “investors”, hedgers, and the media focus closely on the significant price travels and levels of the rolling nearest futures continuation contract, or on the current actual front month contract (such as November 2013). Some marketplace watchers extend their attention to the next several months (as in the winter 2013-14 or summer 2014 gas calendar strips), or perhaps a year out from any given current time. Relatively few clairvoyants outside of a relatively small handful of natural gas and electricity professional insiders intensively examine the price action and levels of forward months over a year out, as in the NYMEX calendar 2015, calendar 2017, and calendar 2020 natural gas strips.
Distant time horizons in financial and commodities marketplaces are not islands apart from the spot (physical) and near term periods. Therefore surveying the price flights, dives, and levels of such “outer limit” time horizons within the NYMEX natural gas marketplace complex provides insight into trading spans (forward marketplaces) close to the current time.
The current sideways trend for NYMEX nearest futures natural gas to some extent encourages a similar pattern in that universe’s distant year periods. The wide-ranging uncertainty relating to NYMEX natural gas’s distant period supply/demand situation- including liquefied natural gas export volumes, the extent of United States economic and electricity demand growth, and issues relating to coal and renewables- to some extent encourages the persistence of a sideways trend for the long run horizon, and thus for NYMEX nearest futures continuation.
What’s the overall current trend for NYMEX distant month natural gas marketplaces such as the NYMEX 2015 and following year calendar strips? On balance, though these assorted calendar strip arenas are at different price levels and do not have exactly the same supply/demand situation, on balance these are in a sideways to down trend, not just a sideways one. Assuming normal weather for upcoming winter 2013-14, although nearest futures continuation will remain trapped in its broad range, nearest futures probably will drift lower from current levels, with a significant chance of challenging its calendar 2013 depths around 305/313. This probably will encourage a renewed test and probable breaking by the calendar strips of 2015 and thereafter of their April (or June, in some cases) 2012 bottoms (which are comparable to those achieved, depending on the calendar strip, in early August 2013 or thereafter). Note that even if America’s LNG exports may be potentially large, any such actual (noteworthy) exports probably will not occur for at least around another couple of years from now.
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Industrial metals such as copper and aluminum of course have different supply/demand fundamentals. They intertwine in diverse ways with significant movements in interest rate and currencies, especially the United States dollar. The overall base metals complex often travels in the same fashion (direction) as precious metals. Yet focus on global stock marketplaces in relation to base metals “in general”. Significantly, from the later stages of the glorious Goldilocks Era to its dreadful decline, from the ensuing worldwide recovery up to the present, trends in base metals “in general” very often show the way or confirm trends in key global stock marketplaces.
Price trends in base metals indeed have been closely tied to the China growth story. Yet significant marketplace trend changes in base metals also fit those in emerging stock marketplaces as a whole. The voyage of the base metals complex since roughly mid to late 2007 closely resembles that of emerging marketplaces “in general”. What about in relation to America’s S+P 500? Since its high on 2/14/11 at 4478, the London Metal Exchange base metal index (“LMEX”) has been in a massive bear trend, falling about 35.0 percent to its 6./24/13 low. In contrast, the S+P 500’s glittering advance has continued up to a 1730 high on 9/19/13. But as before 2011, the timing of the S+P 500’s turning points from 2011 to the present in its overall upward climb generally fit rather closely to those in the LMEX index.
The sustained decline in the base metals battleground “in general” since first quarter 2011 continues to signal slower growth in emerging marketplaces in general and in China in particular. Note the continued lowering of growth estimates for China in recent months. In addition, despite the overall directional price trend divergence between the LMEX and the S+P 500, the sustained base metal weakness warns that growth probably will be weak in advanced nations, and that the glowing strength in the S+P 500 will not be eternal.
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From the end of the Goldilocks Era in mid-2007 to the depths of the worldwide economic crisis in late 2008 and early 2009 and onward through the ensuing global recovery up to now, “overall” emerging stock marketplaces and commodities “in general” generally have traveled together. The emerging stock marketplace and commodities domains have been in a sideways to bearish trend since their spring 2011 peaks. In the wake of Federal Reserve Board tapering talk, they established interim lows in late June 2013. Yet despite the notable rally since then, in recent weeks they probably have resumed their interrelated downtrends. These bear moves probably will continue. Within the commodities realm, the tumble of the petroleum complex is especially noteworthy.
The bull and bear adventures and timing relationships between emerging stocks and the broad GSCI are not perfect. However, in recent years they have been rather close. Since the peaks in spring 2011, note the pattern of lower and lower highs as the downtrends have proceeded.
Petroleum constitutes an important part of the broad GSCI and many other commodity indices. The petroleum story and its supply/demand situation are important components for the emerging marketplace growth theme. However, note the late summer 2013 reversal of the petroleum bull move that began around a late June 2013 take-off point. In addition, the overall worldwide petroleum situation is bearish. Weakness in various corners of the oil marketplace in recent weeks suggests that commodities “in general” probably will continue to venture lower over the next few months. So what does the historically close association between trends in emerging stock marketplaces and commodities in general suggest? The renewed bear trend in petroleum since late summer 2013 indicates that the MXEF will continue to drift lower as well.
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