Monday, September 7, 2009

Is the recovery real?

Since March, global equity and debt markets have recovered largely on the back of hopes that Chinese and developed economy fiscal stimulus measures would help pull the global economy out of recession. A pick-up in activity in China has also led to some recovery in growth across the entire region, but growth across much of the developed world still remains weak.

Despite enormous fiscal and monetary stimulus, in the US, the recovery there has only been a weak. Fresh data from the US Bureau of Labour Statistics (BLS) shows that the US unemployment rate rose to 9.7% in August – from 9.4% in July – its highest level since June 1983. The level of those under-employed – which includes those who have taken part-time work to make ends meet and those who had been searching for a job but have stopped looking – rose to 16.8%, the highest level since records began in 1994.

But while equity and debt markets are improving, the shipping market is crashing for the second time in a year, prompted by China’s reduction in raw-material imports and record numbers of new vessels setting sail. The rate for leasing capesize ships is expected to drop about 50% from the current price of $37,865 a day to as low as $18,000 before the end of the year. The Organization for Economic Cooperation and Development predicts a 16% drop in world trade for 2009. China’s State Council called for curbs on steel and cement production last week. Also pressuring shipping rates is the record 146 capesizes (equal to 28% of the fleet) that will be added to the fleet this year.

The key issue is that the Chinese economy is still heavily reliant on exports and unless export buying picks up, much of the increased production in China will be adding to inventories. Chinese authorities are endeavouring to implement measures to stimulate domestic demand, but re-transitioning the economy will take some time.

Curiously the $A is ignoring troubled waters ahead and has surged above 85USc, mainly on $US weakness, as it appears that Chinese purchasers of raw materials and commodity prices will be on the slide during the backend of 2009. Our bet is that the $A will be susceptible to another bout of global economic instability before the end of the year.

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