Showdown in the U.S.,political troubles in Italy and downward revision of China's PMI puts global markets under pressure

U.S. stock futures and the dollar came under pressure on Monday as a shutdown of the U.S. government seemed ever more likely, while the euro had political troubles of its own as the Italian government teetered on the edge of collapse.

Hardly helping was a surprise downward revision to activity in China's factory sector. While the final HSBC Purchasing Managers' Index (PMI) did edge up to 50.2 in September, that was well down on the preliminary reading of 51.2.

The end result was a shift out of equities and toward safe havens including the yen, Swiss franc and some sovereign debt. U.S. Treasuries also benefited from a view that the economic damage done by a government closure would be yet another reason for the Federal Reserve to keep interest rates low for longer.

Source: Reuters

China funds trim suggested stock, cash allocations, raise bonds

 Chinese fund managers trimmed their suggested equity and cash holdings for the next three months, while raising bond allocations on fears that a rally in high-growth stocks has outpaced fundamentals, according to a Reuters poll.

Average recommended stock weightings in a portfolio fell to 83.8 percent in September from 85 percent a month earlier and to 9.9 percent from 10.7 percent for cash, while climbing to 6.4 percent from 4.4 percent for bonds, according to a monthly poll of eight China-based fund managers conducted last week.

"There is a risk that stocks that have rallied strongly, particularly those driven by several popular investment themes earlier this year, could correct as we go into year's end," said a Shanghai-based fund manager.

The ChiNext Composite Index .CHINEXTC of mainly technology-related high growth start-up counters has surged nearly 70 percent in 2013 and currently trading at 52 times price-to-earnings, outshining the large cap-focused CSI300 . The large-cap index is up 19 percent from its June low but is still down 5 percent so far this year and is trading at 14.5 times.

Some respondents also said some good opportunities could emerge if initial public offerings in the A-share market resume at moderate valuations. Investors have suffered when IPOs were priced at excessively high valuations in the past, only to see share prices dive on listing debuts.

IPOs in the mainland have been suspended for nearly a year in a bid to reform the capital raising process with protecting investors' interests among its the regulator's aims.

Source: Reuters

China September final HSBC PMI disappoints

"China's factory sector grew only slightly in September as domestic demand faltered, a private survey showed, an unexpectedly weak outcome that suggests a firm rebound in Asia's economic powerhouse still remains elusive.

The final HSBC Purchasing Managers' Index (PMI) edged up to 50.2 from August's 50.1, figures on Monday showed.

Although a five-month high and showing the sector was growing, the survey was disappointing for investors as it was well below last week's flash reading of 51.2, with domestic orders weaker than preliminary estimates suggested.

New export orders picked up the slack, climbing to 50.7 from 47.2 in August to be above the 50-point mark separating expansion from contraction. After seasonal adjustments, however, the expansion was slight, HSBC said.

The Australian dollar, a proxy for growth in the world's second-largest economy, fell a quarter of a cent on the disappointment that activity was not as strong as hoped.

"The final reading was weaker than the flash and it showed that activity has weakened in the last 10 days," said Tao Wang, an economist at UBS in Hong Kong, adding a rebuilding of stocks by firms that had led the economic pick-up was slowing.

The softer-than-expected final HSBC PMI reading was in line with investor bets that China's economy is stabilizing, even if the revival is feeble and perhaps short-lived. Indeed, parts of the PMI poll suggested the economy is not out of the woods.

Factories cut jobs for the sixth consecutive month in September. And although output and new orders grew in September, HSBC noted the expansion was fractional after seasonal adjustments. In fact, it said some firms reported a contraction in output, citing unstable economic conditions.

"Growth is bottoming out on Beijing's mini-stimulus," Qu Hongbin a HSBC economist said, noting however that growth in domestic demand was unchanged from August.

Beijing's support and firmer growth in the United States, China's second-biggest export market, have put a floor beneath China's economy, which has slowed in 12 of the last 14 quarters".

Source: Reuters

Precious Metals Prices 09/29/2013 10.18p.m. Eastern Time

Gold Price Futures          3 months        US$   1,339.41

Silver Price Futures         3 months        US$        21.67

Japan:Boxed in by tax hike, Abe bets on business

Prime Minister Shinzo Abe's long-awaited decision this week on whether to go ahead with the first stage of doubling the sales tax is a major political gamble that proved career-ending for his predecessors, analysts say.

Since sweeping December elections on a ticket to kick-start the world's third-largest economy, the prime minister launched an unprecedented policy blitz - dubbed "Abenomics" - that appears to be taking hold as the economy expands and the stock market roars.

Abe underscored that early success with an upbeat speech to the New York Stock Exchange last week, calling for investors to get on board with his bid to regain Japan's one-time economic glory.

"Japan, as the third-largest economic powerhouse on the planet, will be back in full force again," he promised.

But his decision on hiking the tax levy, seen as crucial to chopping Japan's massive national debt, threatens to sink Abe's growth plans and subsequently his popularity.

Few, however, see the 59-year-old as having much choice, given the size of the national debt, proportionately the worst among the world's richest nations at more than twice the size of the economy.

The International Monetary Fund, among others, has been calling on Tokyo to fix its books, after credit rating agencies lowered their ratings on Japan.

NewsOnJapan

Japan's consumer prices up 0.8% in August

Japan's consumer prices rose 0.8 percent in August from a year earlier on higher gasoline and other energy prices, posting the highest margin of increase since November 2008, government data showed Friday.

The core consumer price index, excluding fresh foods, stood at 100.4 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. It registered the third straight month of increase.

In addition to rising energy prices, a narrower margin of decline as well as an increase in some durable goods pushed up overall prices, the ministry said.

NewsOnJapan

China Central bank has reiterated policy coordination

China's central bank has reiterated its commitment to a prudent monetary policy while also pledging to make its policy more targeted and coordinated to support the real economy.

"The central bank will fine-tune its policy in a timely and proper manner to seek a balance between stabilizing growth, advancing restructuring, promoting reforms and preventing risks," said a statement released on Sunday after a regular meeting of the People's Bank of China.

The bank vowed to optimize the distribution of financial resources to create a steady environment for China's ongoing economic restructuring and upgrading.

It also reiterated its pledge to push forward market-oriented reforms in its interest rate and exchange rate mechanisms.

The latest comments came amid the country's increasing efforts to deepen financial reforms.

China on Sunday opened a pilot free trade zone in Shanghai, which will be a test bed for a wide range of market-oriented reforms, including easing restrictions on finance, investment and trade, a move widely hailed as a crucial step in the country's reform and opening up.

Source: Xinhua

China's market feels muscle of first tourism law

"The cost of a four-day package tour to Hong Kong was about 2,500 yuan (around 400 U.S. dollars) previously, but it is as much as 5,000 yuan during the holiday," said Liu, 27, who works for an Internet company in Beijing.

The bad news for people of mainland China  is that both package and individual tour prices are expected to skyrocket from Oct. 1 when China's first tourism law comes into force.

These price rises are, in a large part, because of the law, but they are certain to unleash a torrent of gripes and acrimony in an already complaint-riddled industry. The hope is that the new regulations will help the industry to regulate iteslf in the long run.

The law includes provisions to counter the practice of zero, or even negative, fare tours. These are tours sold at or below cost price to lure ingenuous travelers who are then forced to purchase goods or tip guides while on holiday.

Travel agencies will be prevented from selling services at unreasonably low prices, or to profit by arrangements with designated stores. Travellers will not be obliged to accept any paid extras other than those specifically mentioned in contracts.

For time immemorial tour guides and travel agencies have been suspected of sharing profits with owners of stores, of taking commissions and kickbacks, but this will be illegal as of October.

"The domestic travel agency arena is a very competitive one. It's hard for travel agents to survive through low-price services alone," said Li Guang, general manager of the compliance office of the China Youth Travel Service (CYTS), one of China's leading travel agencies.

The law also address the problems of unfair competition and wanton price hikes which have bedevilled the travel industry for years and exasperate the public.

"These are deep-rooted problems which attract a lot of complaints. The the key to fixing these problems lies in strict implementation of the law," said Li Xinjian, a professor with the tourism management department in Beijing International Studies University.

Tourism insiders argue that the new round of price rises shows China's travel market returning to normal.

"Price wars were vicious in the past, while the recent rises are a sort of reasonable return to fair competition," said Wang Yanqi, director of the Research Center of Leisure Economy of China.

China's domestic travel market is the world's largest. Domestic tours totalled 2.96 billion in 2012, according to the China National Tourism Administration.

"The new law is not to impose restrictions on tourism shopping, but to target guides or agencies charging hidden commissions," said to Li Guang.

There are also calls for strict supervision of prices at popular locations.

"If prices were at normal levels in tourist attractions, there would be less scope for illegalities such as forced purchases and outrageous commissions," Wang Qiyan added.

Source: Xinhua

Faith in Economic revival put to test

Yet another budget showdown in Washington and yet another government crisis in Italy herald more turbulence for a global economy growing below trend. On top of these problems, banks and households in Europe are still shedding debt, several big emerging economies are slowing and markets are struggling to decode the Federal Reserve's policy signals. Yet there is a guarded confidence at some banks that a recovery, not powerful but worthy of the name, might finally be within reach.

Credit Suisse, for instance, is pencilling in 3.8 percent global growth for 2014, up from 3.0 percent this year and surpassing what it sees as the trend rate of 3.5 percent.

A lessening of fiscal headwinds will be important in allowing the hoped-for pickup in the United States, said John Calverley, head of macroeconomic research with Standard Chartered Bank in Toronto.

"So you should start to see growth moving up well into the 2.5, 3.0 percent range, maybe more, over the next couple of years," he said. The U.S. economy has expanded at an average pace of less than 2 percent in the last four quarters.

But that view could be sorely tested in coming days.

The White House, in its fourth major budget standoff with Congress since 2011, has vowed to veto a bill

approved by the Republican controlled  House of Representatives,to delay Democratic President Barack Obama's landmark healthcare law for a year as part of an emergency spending bill.

Italy's political instability has also revived concerns about its stagnant economy. Centre-right leader Silvio Berlusconi effectively brought down the government of Prime Minister Enrico Letta by pulling his ministers out of the cabinet on Saturday, further delaying agreement on changes intended to reduce debt and revive growth.

Source: Reuters

Brazil:Natural gas production grows faster than oil's

The Brazilian natural gas production growth curve is decoupling from oil’s. Since January 2012, when the country achieved the last monthly record of oil production (2.231 million barrels per day), that indicator has continued to fall and currently stands at 1.974 million barrels/day (11% less than the record level).  In the same period, the country’s natural gas production hit seven monthly records and reached 78.5 million cubic meters per day, 10.4% more than the volume recorded early last year.

According to Marcelo Colomer, an expert at UFRJ’s Energy Economy group, about 85 % of the Brazilian production of natural gas depends directly on oil production, by means of associated natural gas. “The trend is natural gas production becoming a little more independent," he says.

The decoupling of natural gas and oil production will also depend on the successful exploration of areas that will be offered at the 12th Round of Auctions of the National Agency of Petroleum, Natural Gas and Biofuels (ANP). Scheduled for November, the auctions will offer blocks with potential for the development of unconventional resources such as shale gas, whose production is booming with competitive costs in the US.

Gas Energy consulting firm director Marco Tavares also believes the growth of natural gas production in the country. According to him, the expansion of oil and gas is shifting from the Campos Basin to the Santos Basin, where the gas/oil ratio – which indicates the amount of gas produced for the same volume of oil – is greater.

Mr. Tavares says that, in the best case, the Campos Basin produces 80 meters cubic of gas for each cubic meter of oil. The pre-salt layer of the Santos Basin has an average of 220 cubic meters per cubic meter of oil after carbon dioxide is filtered out.

What now is a positive factor may turn into a problem. Brazil will probably double its domestic production of natural gas by 2020, but there is not a market for this energy resource at its current prices, which are considered high.

Source: Valor Economico

Economic Structural Change Vital to Successful Development

When a country shifts from being a largely agrarian economy to one based on services or industry, it is said to have undergone “structural change”. This has happened in some Asian countries, contributing largely to their economic development. Many low-income countries, however, have yet to undergo this 
process of structural transformation.

Harvard University professor of economics, Dani Rodrik. 

All sustained episodes of growth are underpinned by fundamental structural change. Of course, you can get growth spurts because of an improvement in the terms of trade or a sudden burst of capital inflows. But those tend to peter out unless there is the emergence and expansion of new industries, and movement of labor from traditional industries into modern industries. This is the essence of structural change. Without these things happening, a country is not likely to achieve long-term growth.

Asia has been the archetypal example of a traditional model of economic development for those economies with surplus labor and very low productivity levels, which are dependent on subsistence agriculture.

Then, new industries started to emerge, mainly in urban areas, and although still poorly educated, farmers became more productive factory workers. They were able to increase their income, and could send their children to school. This increased productivity has also set in motion a self-sustaining process of improvement in human capital skills.

It has happened in many Asian countries—Japan being the earliest example of a non-western country to industrialize. South Korea and Taiwan quickly followed, and from the 1960s through late 1970s, more Southeast Asian countries became industrialized, most notably China.

These Asian countries have focused on achieving rapid industrialization through outward-oriented, or export oriented, industrialization. They have been very pragmatic and eclectic in the types of instruments they used. 

What would be some barriers to structural transformation

in some African and Latin America countries—what we have seen is an obsessive attachment to a particular ideology. For example, during the 1960s and 1970s, many countries took import substitution to extremes.

in the 1990s, these countries were encouraged to focus on the fundamentals, and structural transformation would follow automatically. This did not quite work out for them.

The principle concern, then, is for a country to do its homework and figure out what are the problems that would affect structural change.

about countries that are rich in natural resources

Those countries come with a set of advantages and the belief that having natural resources can make them richer more quickly. But there is also the disadvantage of being natural resource rich, because the country can suffer from so-called “Dutch disease,” which means that non-natural resource sectors tend to be very unprofitable. For example, those countries exporting natural resources like oil or copper may find it much harder to use modern manufacturing techniques competitively.

There is really no good way out of this situation. I think the amount of diversification that can be achieved by resource-rich countries is limited vis a vis resource poor countries.

The best route for those resource-rich countries looking to diversity is to develop the fundamental capabilities and skills of their human capital to help improve productivity in the service sectors, rather than focusing solely on manufacturing. While this is a longer process, they have still the cushion of natural resource wealth in the short term.

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