12 Apr, 2017 - Story of the Week: The impact of Cyclone Debbie on Australia (GDP, AUD, Coking Coal, Agri, Tourism)

Cyclone Debbie hit north-east coast of Australia could have a significant impact on the countries’ GDP in the 2^nd quarter of this year. The most hit state, Queensland generate 19.5% of Australia GDP. The three most important sectors in the state are Agriculture, Tourism and Mining and all of them will feel the pain after Debbie, however shouln't have significant the impact on the Australian economy overall. 

Agriculture - Sugar Cane Production

Queensland add approximately AUD 10bil or 27% to the agriculture industry of Australia. The damage is currently assessed but the process seems to be difficult due to lost connection due to flooding. Approximately 95% of Australia’s sugar cane production comes from Queensland and the industry directly employs 16.000 people across the growing, harvesting, milling and transportation sector. The damage caused by Debbie will be in hundreds of millions.  According to USDA data Australia accounts for almost 3% of global sugar production with 80% exported.

Tourism 

The impact in tourism will be rather local, with main damage in Whitsunday region Queensland. There are however fears that the Great Coral Reef barrier could have suffer significant damage due to the extreme weather. However the impact on the reef could be also positive as the cyclone could cool down the waters around the coral reef which was significantly overheating the last year. According to the latest news the damages caused by Debbie on tourism should be less significant and the industry is already getting back on its feet.

Coking Coal Mining

Australia is a major global supplier of coking coal mining and related industry account for approximately 3-4% of Australia’s GDP. According to mining.com the worst hit area of the country, Queensland produces more than 50% of world coking coal production, mostly exported to China. Major producers like BHP Billiton and Peabody Energy already declared force majeure due to closed railways due to landslides and heavy rains and Australia’s coal exports may be disrupted for weeks. However material damage should be minimized as companies started preparation for the cyclone in time. The major damage will appear in the transportation infrastructure especially the railway lines.

Overall Queensland accounts for approximately 20% of Australian GDP and the Cyclones effect will be probably seen in the Q2 data. Debbie however didn’t reach the strength of the Cyclone Yashi in 2011 and relatively quickly calmed down. The impact should not be significant and we expect the more important will be the development in the construction industry and on the industrial metal market where iron ore and copper prices dropped the recent weeks. 

AUD is ahead of important support levels in several crosses but the break below these levels will also depend on the USD strength as this will largely affect commodity markets which the economy is largely dependent on. Follow the developments on Iron ore and copper front, also May housing data (Building approvals and Construction work done) for a hint how Q1 GDP growth could look like.

Good Luck and remember to watch your risk and be consistent

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com

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Dec 05, 2016 - Story of the Week : Mixed outlook for Australian GDP

If we compare Australia with major economies of the world we see a very nice picture. The country has low unemployment rate, low inflation and low government spending accompanied with one of the fastest growing GDP. However, there could be a storm coming as we can already spot the dark clouds if we look closer at the main factors that moved the Aussie economy the last year…

The next release of GDP will available on 7th of December, the day after the rate decision. Altough we will get some hints from the RBA Rate Statement tonight, many traders are asking what to expect? So lets look at few details.

Despite generally bad outlook at the beginning of 2015 the Australian economy managed to perform well in 2015/2016 financial year although worrying signs are still in place. 

While the year on year GDP growth measured by comparing same quarters of 2 years grew to 3.3%, the growth slowed down in the second quarter from 1% (downward revision from 1.1%) to only 0.5% in the Q2. In order to be able to make an estimate or just to have a feeling about the upcoming GDP, we can look at the key sectors contributing the most to the growth of the economy. Mining and Construction both making up a significant part of the Gross Domestic Product trend.

In Q2 the growth was supported mainly the Mining sector which added 0.8% while Construction, a  0.2% while also financial and insurance services had a high 0.5% impact. 
The impact of mining could be positive this year as it came mostly from mineral exploration which was caused by the increase in Commodity prices this year which keep rising massively.

The overall mineral exploration activity was flat in the second quarter but gold and iron ore bounced from the first quarter bottom as you can see from the chart below. As the prices of these two continued rising  in the third quarter, this can have again large positive affect on the GDP growth. Also RBA expects the investmnets in the industry to pick up soon. 

However, before we get overoptimistic, let’s look at the Housing market too which is the key concern of the policy makers currently. The figures released in November shows that these concerns have a good base as all the housing components show negative or flat trend, except maybe Home Loans. 

One of the most followed housing indicator is the Construction output due to its complexity and as it covers a whole quarter of production. In the third quarter the finished construction works fell by 4.9%. To have an idea how serious it is, the construction output didn’t fell so much in a quarter the last 16 years...

What is worse, the future doesn’t look brighter either. While housing prices in major cities started to rise again in the second quarter, the demand for owner occupied housing is declining. This will likely cause further decline in construction output in the coming months if investment housing will not be able to compensate this outage in demand.

The change in the trend of demand is clearly visible in dwelling commitments. The dwellings commitments were falling rapidly in the summer. Despite the overall housing commitments rebounded in September 2.3% the problem is visible if we break down the numbers. The investment housing increased by 4.6% compared to the number of owner occupied dwelling which increased only by 0.9%.

The change in the number of commitments is showing us the story behind. One of the best value indicators are owner occupied house and apartments purchases. While the increase in the number of these dwellings was the same 0,9% as the percetual increase of value of this housing, the number of investment housing increased only by 2.0 % compared to the increase in the value at 4.6%. This indicates a shift in demand toward a more expensive or even luxurious housing investments.

Another great indicator is the mood among builders, which is definitely not optimistic either. While in September the Construction Index published by AIG rose above the key 50 points level, it fell again sharply in October. This indicates, that the construction companies already feel the pain and in this environment they will likely be reluctant to start new development projects. 

According to the AIG report one of the reason behind the worsening sentiment are the new orders. These were falling overall in the construction business but the demand for houses and appartments declined significantly the last few months. 

As we went quickly through two major GDP components, it seems that the very positive outlook in mining may be mostly offset by the problems in the Construction sector. This sector can also influence the Financial services in a negative way. This sector  is also a signifcant part of the country's GDP so the effect could be stronger. 

I expect a significant decline in the quarterly growth rate despite the supporting efect of rising commodity prices on mining activity. The reason for this decline is the fact that the two sectors will compensate each other hence the effect would be neutral, which is equal to no or minimum growth in the two sectors together. It seems that market is still not really priced in this possible change and therefore be prepared to sell the fact after the release.

Remember to watch your risk and be consistent

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com

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Weekly Macro Overview - Week 28

Previous Week Summary

Bits and pieces of Brexit referendum were still present in the market with not surprising suspension of redemptions from real-estate UK funds, making GBP 15 bln out of GBP 24 bln locked. The GBP is firmly sitting below 1.3000 handle, USDJPY very close to critical level (please bear in mind, that BoJ may show its teeth soon). The Italian banking crisis is keeping Rome, Brussels and Frankfurt busy, as the banks cope with EUR 360 bln of non-performing loans (1/5 of country’s GDP), but the highlight of the week were US NFPs. US stocks flirting with all times highs at the same time as bond yields are printing new lows. No comment on that… Meanwhile, Yuan is weakening fifth week in a row and PBoC doesn’t seem to care as FX monthly report showed big one month rise in foreign FX reserves. Likely, PBoC has stopped its interventions, so the CNY is left to weaken to support the growth. As the situation in Chinese economy deteriorates, another round of RRR cuts may also be on the table in the weeks to come.

Monday – Australia’s elections didn’t resolve the deadlock and S&P lowered the outlook to Negative due to strong budget deficit risks that may not be properly addressed. S&P also commented on UK’s GDP and see it declining 1.2% and 1.0% (2017/18) on Brexit, BoE lowering rates 50 bps before yearend. EZ Sentiment Index was lowest since Jan 2015, UK June Constructions PMI was horrible and corporate tax rate can do to 15% from 20%. All in all more UK is slowing down, more QE we can see. After Boris Johnson, Nigel Farage was the second key Brexit figure leaving the mess he had created to be cleaned up by someone else. I love politicians…

Tuesday – after RBA market sees further easing already in Aug (55% probability); ECB – no need for rate cuts at the moment & bank sector needs consolidation; EZ June Services PMI better, UK’s worse; BoE report – Brexit risks crystallizing, to provide substantial FX liquidity and to support jobs and growth. US Durables and Factory orders lower than expected and Dudley (Fed) pointing to patience with hikes due to low inflation and global uncertainty. Fed stays data dependent and US economy doing OK on average according to him.

Wednesday – Ireland, Spain the highest growth in EU; Greece may return to bond market next year; CH government proposed automatic tax exchange; GE FinMin Schauble on Deutsche Borse/LSE merger – must follow the rules, location of HQ key to approval; US Trade Balance worse, Final Markit Services PMI better, ISM Non-Manufacturing PMI better – proving growing confidence in US economy, will reflect good in Q2 GDP number.

Thursday – UK Industrial & Manufacturing production declined less than expected, ECB Minutes – Brexit risks, inflation conditions weak, not important which assets are purchased under QE, recovery proceeding as expected, drive by domestic demand. US ADP Employment Change and Initial Jobless Claims better, EU – Spain/Portugal failed in reducing budget deficits, may face sanctions.

 

Friday – US NFPs – headline 287k vs 180k exp, Unempl. rate 4.9% vs 4.8% exp, Average hourly earnings 0.1% vs 0.2% exp M/M, 2.6% vs 2.7% exp Y/Y, Participation rate 62.7% vs 62.6% exp. Overall very strong report that put the September rate hike again on the table but recall the above comments from Dudley (Tuesday). The negative was the 11k revision down of previous number from 38k to 27k, what brings the May/June reports at 157k each, thus Q2 average moves to 147k vs 196k in Q1.

Goldman Sachs see markets underpricing the likelihood of Fed hiking the rate at this point and we should see the 2/3 probability or rate hike by yearend.

Upcoming Week Outlook

Sunday were held General elections in Japan where Abe`s Liberal Democratic Party have won a simple majority and will probably able to form a super majority coalition. As the Japanese ultra-easy monetary policy didn`t bring the desired boost to the economy, the government is expected to introduce a stimulus package after the election that could exceed 10 trillion yen. Despite this seems to be partially in-line with the recommendations of the world` s central banks to activate fiscal policies the success is not granted. If the government goes for big infrastructural projects only the positive effects will be short-lived without the tough structural reforms so needed for the economy. The Chinese inflation data released on Sunday were in-line with the expectations.

US earnings season will bring some interesting names during too including some big banks. These earnings can serve as leading indicators on US economy as banks are the centre of the economies financial bloodstream.

Monday –EuroGroup meetings can bring some volatility if info regarding Brexit released. Ester George, (hawkish voting member of FOMC in 2016) will speak about the US economy at the Mid-America Labor Market Conference in Missouri, key Q if there will be any hike this year… The boring start to the week however may offer some healthy short term trends, in the aftermath of the Japanese elections, most likely positive effects on the stock market. For CAD traders the key Q is if there is a housing bubble or not. Housing starts will be released at GMT 12:15 PM may give a hint.

Tuesday – Pound traders should be on the guard during the second day of the week as Inflation hearings will take place in London. Carney and some MPC members will testify before Parliament's Treasury Committee on economy and inflation outlook and while there is no timeline, comments on BOE planned easing can create market volatility. Later on Tuesday BOE Quarterly Bulletin will be released at GMT 11:00 AM and US JOLTS at GMT 02:00 PM. The later will be watched due to the surge in NFP numbers last Friday. Traders will be likely looking for what`s behind the improvement.

​

Wednesday – We will start the day with the Chinese Trade Balance before European session, no exact time yet. Bank of Canada will announce overnight rate at GMT 02:00 PM, news conference is held at GMT 03:15 PM. Between them the US crude inventories may create volatility in CAD crosses due to high dependence of the country from oil industry. No rate change is expected but one shouldn`t forget  

Thursday – Malcolm Turnbull`s narrow win in the long Australian elections raises the question how stable will be the new government. Some rating agencies already declared that strong government is needed to keep AAA rating for the country as only this will allow to proceed with the necessary structural reforms which will be painful for the nation. Therefore, the Employment data at GMT 01:30 AM will be watched closely by traders and analysts. The trend in Unemployment rate is to the downside and even there is expected an uptick, this will not change the overall trend. Turnbull promised in his campaign he will seek change in the country`s dependence on mining industry but didn`t specify how he want to do that.

The event of the day will be however the BOE rate decision and Monetary Policy Statement GMT 11:00 AM, where the expectations are mixed from 25 bps cut to no change. But we can agree on that if there is a cut it shouldn`t be more than 25 bps. We thing it would be too soon for the BoE to cut the rates. The pound is weak this itself will boost the economy and MPC may wait with any major stimulus until the implications of the Brexit vote on the UK economy will be clearer. Later the day there will be producer`s inflation and unemployment claims from US, both are expected to worse compared to the last release.

Friday – China GDP will be in focus and it`s expected that the slowing trend of growth will materialize in 6.6% growth rate. As China is the second biggest economy in the world if the slowing pace of growth is confirmed, this will have broad implications on the global economy also to the decisions of central banks (especially Fed) in the coming months. 

Later the day Carney will have a speech in Toronto regarding climate change and economy, we expect some more hints on how they will deal with the Brexit case. Later a bunch of US data is expected, foremost the US inflation and retail sales data may bring some the volatility, no changes are expected except Core Retail Sales. The trend in total vehicle sales turned down this year. As this could be taken for a leading indicator to US consumer confidence than there are more clouds on the horizon as Fed is considering another rate hike this year. The University of Michigan consumer sentiment index at GMT 02:00 PM will be important for the same reason – are the consumers confident enough the spend more money and boost the inflation…?

Event Risk Calendar

 DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading       teams view on past and current economic and capital market environment. It is not and shouldn´t been viewed   as an investment advice and the creator of this material shouldn´t been hold liable for any loss resulting from       action where despite this disclaimer someone would consider this  material  as an investment advice. 

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