Overnight U.S. time, currency markets demonstrated conviction that the European Central Bank’s easing measures will be a fixture for the foreseeable future. The euro slid by an additional 1 percent against the dollar in a seemingly unstoppable decline towards parity. While this decline is in many ways providing ECB president Mario Draghi and his colleagues with the reaction that they have been seeking, a small rally in oil futures yesterday will not be enough to help offset deflationary pressures. With regional private sector credit and consumer confidence measures improving the big question for European policymakers is whether internal demand can pick up to complement and boost exports driven by quantitative easing.
Apple watch unveiled. In a highly publicized event yesterday, Apple demonstrated its long anticipated smartwatch. The Apple Watch is available in 38 variants ranging in price from $350 to $17,000 with an official product launch on April 24.
Chinese inflation rises. National Bureau of Statistics February inflation data released today demonstrated a modest rise in prices at the cash register with the headline consumer price index at 1.4 percent year-over-year to rebound from January’s five-year low. Producer price index levels declined by 4.8 percent from the same month in 2014, the 35th consecutive year-over-year contraction.
Credit Suisse CEO to step down. Brady Dougan will step down as chief executive officer of Credit Suisse according to reports today. Dougan has come under increasing pressure from Swiss lawmakers in the wake of charges that the bank aided international clients’ tax evasion. The bank settled with U.S. regulators for $2.6 billion last year, resulting in a loss for the second quarter that was the first in seven years. Replacing Dougan will be Tidjane Thiam, the chief executive of U.K.–based insurance company Prudential Plc.
Verisk Analytics to Buy Wood Mackenzie. In a merger valued at $2.8 billion, New Jersey–based risk management consulting firm Verisk Analytics yesterday announced an agreement to acquire Midlothian, Scotland–headquartered energy consulting firm Wood Mackenzie. The acquisition will provide the combined company with branches in Dubai, Singapore and Sydney.
European industrial output shows mixed results. France and Italy released January industrial output figures today. Activity in French factories rose 0.4 percent from December, well above consensus forecasts, though Italian data disappointed with a contraction of 0.7 percent. Both nations have seen manufacturing languish compared to neighbor and regional powerhouse Germany, with few signs that a weaker euro has sparked greater export demand.
Portfolio Perspective: The Dangers Lurking in China’s Stock Market — Michael Passante, Focused Wealth Management
Prospects for investing in China mutual funds and ETFs appear darker than the skies over Beijing. The economy is projected to grow 7 percent this year — the weakest pace in 25 years.
China’s red-hot growth inevitably has to cool given that it has already overbuilt and overborrowed. China’s debt load has exploded four-fold since 2007, largely on the back of shadow banking and a real estate boom. A February report from the McKinsey Global Institute reveals the country’s total debt load — including government, banks, households and corporations — now equates to 282 percent of GDP. It tops debt loads in the U.S., Germany, Australia and other developed countries. China’s corporate debt amounts to 125 percent of GDP.
What’s even more troubling is that one third of the country’s debts came from the shadow banking system. China’s government has the means to bail out the financial system if a debt crisis arises. It would be very difficult to control such crisis without hurting economic growth, consulting firm McKinsey & Co. stated in the report. Slowing economic expansion amid increasing debt loads makes it harder and harder for new debt to spur growth. Rising debt burdens makes servicing debt more difficult for borrowers and raises the risk of a crash.
Deutsche X-tracks Harvest CSI 300 China A-Shares ETF, which tracks the market traded by mainlanders, fell 4 percent year-to-date after soaring 61 percent in the past year, as of March 6, according to Morningstar. A good chunk of the move can be attributed to heavy margin borrowing. Stock market volatility has jumped this year as regulators took action against brokers for breaking rules for margin lending, which is worth 2.4 percent of the China market’s total market capitalization value. A modest stock market correction could give way to an avalanche of margin calls that results in severe selling and losses for heavily leveraged investors.
Michael Passante is a portfolio manager at Focused Wealth Management, a registered investment adviser in Highland, New York.
