Spectre of an economic relapse stalks markets as China wobbles
Fears of an economic relapse across the world have begun to stalk markets again after pending homes sales in the US crashed by a third and a slew of weak data from China and Japan sent bourses tumbling across Asia.
By Ambrose Evans-Pritchard
01 Jul 2010
The credit system is once again flashing warnings of extreme fragility, with the yield on 10-year US Treasuries plummeting back to crisis-levels of 2.89pc. Japan’s 10-year bond dropped to 1.06pc, the lowest since the country’s deflation battle seven years ago. Tokyo’s Nikkei stock index tumbled to the lowest level since 2005 as safe-haven flight into the yen surged to levels that leave many Japanese exporters underwater.
“Double-dip is back in the lexicon,” said David Bloom, currency chief at HSBC. “Everybody hoped that China’s huge fiscal package would keep global growth going long enough for the West to recover, but it does not look like that is happening.
“China is now slowing but the US housing market is falling off a cliff. It’s cataclysmic. In Japan the data is turning nasty, and fiscal tightening is just starting in Europe and the UK, so everybody is asking where the growth is going to come from,” he said.
Goldman Sachs said its gauge of Global Leading Indicators had peaked. “Signs `under the hood’ have pointed to some slowing momentum. Industrial growth is set to decelerate,” said the bank.
The US National Association of Realtors said the numbers of home buyers signing contracts dropped 30pc in May from a month ealier, confirming fears that the expiry of subidies would lead to a cliff-edge fall in sales. “Tax credits merely cannibalised sales for the coming months, and did not succeed in jump-starting a lasting recovery of the housing market,” said Teunis Brosens from ING.
The US property market is haunted by worries that a cluster of “option ARM” mortgages will reset upwards over the coming months, leading to a fresh wave of defaults. “Payment option ARMs are about to explode,” said Iowa’s Attorney General Tom Miller after a White House meeting on housing.
The new twist for investors is the sudden slowdown in China. The HSBC/Markit index of Chinese manufacturing has fallen from a high of 57.4 in January to 50.4 in June, the result of monetary tightening and curbs to cool the red-hot property market.
Wensheng Peng from Barclays Capital said the risk of double-dip is small. “We are seeing a policy-led soft landing, a slowdown that is desired and targeted by the government,” he said.
However, analysts are deeply divided on China. A report by the European Chamber in China said there was pervasive over-capacity in steel, cement, chemicals, refining, and energy equipment.
“The Chinese government’s massive stimulus package is being pumped into building new plants and adding uneccesary capacity. The problem is getting worse in many industries,” it said, claiming that usage rates were as low as 35pc in some sectors.
Professor Victor Shih from Northwestern University in the US has warned that local entities have borrowed $1.7 trillion, using inflated land values as collateral. China’s authorities have played down these concerns, denying that credit has been allowed to balloon out of control as it did in Japan during the 1980s. But it is an open question whether the Communist leadership can calibrate fine-tuning any better than the rest of the world.
Clearly China’s slowdown is starting to send ripples through Asia and commodity markets, with knock-on effects for Australia. The Baltic Dry Index measuring freight rates for bulk goods has almost halved since October, a trend that is now surfacing within Chinese shipping and port data.
Japan’s unemployment jumped to 5.2pc in May, and households have cut spending over the last two months. Industrial output slipped 0.1pc. Overseas shipments fell 1.7pc.
Europe’s recovery looks ever more fragile. French consumer confidence has weakened for five months in row. The eurozone manufacturing index slipped in June. Britain has seen a sharp fall in new export orders. Turkey’s exporters have reported a sudden drop in demand from Europe in June.
It is not yet a global double-dip, but bourses from Tokyo to Shanghai, Frankfurt, London, and New York are all signalling a clear risk that we face a “truncated” V-shaped recovery, a plateau where we grind along at best with stubbornly high unemployment. At worst, it could be the start of a deeper slump as yet more chickens come home to roost from the credit crisis.
“The world is starting to look more and more like Japan,” said Mr Bloom.