Wednesday, May 4, 2011

Financial Review 2011 Q1: Rising Inflation Concerns

You may still remember our article Financial Review 2010: where had all the Hot Money gone which concerned local China news and some other important international news last year. Since we have gained great success in this article (it is still one of our top 5 most popular articles by the end of 2011 Q1), we decide to do something different this year. We want to improve our annual Financial Review by increasing the frequency of our Review.

From now on, we start publishing Financial Review on a quarterly basis. We believe we can then include more important news with more details about each of them which you may concern. It should also help you to understand the overall trend for the next quarter and to set up timely plans to manage your investment strategy.

Here are the key events in business and financial news for the first quarter (Q1: January to March) of this year 2011:

Jan. 4:U.K. started increasing Value Added Tax (VAT) from 17.5% to 20% to tackle national budget deficit crisis.
Jan. 10:Australia flooding escalated and hit Brisbane extensively upon weeks of heavy rain.
Jan. 13:(1) China announced a historic Renminbi overseas direct investments (RMB ODI) pilot program for non-financial mainland enterprises, in order to reduce pressure on its excessive foreign exchange reserves.
(2) Trichet warned that European Central Bank (ECB) might raise interest rates in spite of the ongoing European sovereign-debt crisis, as Euro region CPI rose +2.2% YoY in December 2010 and already breached ECB annual limit of +2% for the first time in more than 2 years.
Jan. 17:Co-founder of Apple, the iPods, iPhones and iPads maker, Steve Jobs announced to take a medical leave of absence.
Jan. 25:China started to draft rules to allow QFII (Qualified Foreign Institutional Investors) participating in its stock index futures trading.
Jan. 26:China introduced the so-called "New National Eight" to help reduce pressure on rising property prices. Learn more about: How New National Eight can Cool China Property Market.
Jan. 27:Japan sovereign-debt credit rating was downgraded, the first time since 2002, by Standard & Poor's (S&P) on deterioration of the government's debt ratios.
Jan. 28:Shanghai and Chongqing became the first to impose residential property taxes in the mainland China. Read more about: Shanghai Property Tax Freezes Purchases and Boosts Rents.
Jan. 31:London Brent North Sea crude oil futures surged over USD $100 per barrel, the first time since the 2008 global financial tsunami, amidst fears of Egypt and Tunisia political crisis might trigger a contagion effect spilling to other countries in the Middle East and North Africa regions.
Feb. 7:J.P. Morgan Chase (JPM) accepted physical Gold as collateral to secure tri-party repos (re-purchase obligations) and some other funding transactions. This essentially reinforces Gold as an alternative currency when most developed economies have implemented monetary easing policy to devalue their currencies.
Feb. 8:(1) People's Bank of China (PBoC) raised interest rates by 0.25%, the first time in the year, matching with our expectation: More Interest Rate Hikes Against Inflation in 2011. This time PBoC also raised the interest rate for saving accounts by 0.04% to 0.4%, the first time since China kicked off the current interest rate upcycle for time-deposit accounts earlier on October 19, 2010 to contain inflationary risk.
(2) WikiLeaks revealed that Saudi Arabia, the world's largest crude oil exporter, had over-estimated its crude oil reserves by almost 40%, equivalent to 300 billion barrels.
Feb. 10:(1) The Vietnam Central Bank suddenly depreciated its currency by 8.5% to fight against its trade deficit, and also narrowed its currency floating range from 3% to 1%.
(2) Verizon started offering iPhone 4, providing U.S. consumers one more service option other than AT&T version.
Feb. 14:(1) Eurozone leaders decided to nearly double the future effective lending capacity by setting up a permanent eurozone rescue fund with an initial capacity of EUR 500 billion.
(2) Obama proposed a federal budget to cut the U.S. fiscal deficit by USD 1.1 trillion over the next 10 years, including a freeze on many projects except education and clean-energy technology.
Feb. 15:(1) China announced to apply a new formula to recalculate CPI since January 2011. The weight of housing was increased by 4.22%, while the weight of foodstuff was decreased by 2.21%. Base year for price comparison was also changed from 2005 to 2010 as the new reference year. By this recalculation, China CPI rose +4.9% YoY in January.
(2) Beijing introduced the "Beijing 15 Articles" to cool the property market of the city. Read more about: Beijing Restricts Foreign Property Purchases.
Feb. 21:(1) Shanghai Stock Exchange (SSE) signed a dual-listing agreement with Brazil BM&F Bovespa, the biggest exchange operator in Latin America. Read also: Shanghai Strategic Plan in the Next 10 Years.
(2) Hong Kong launched its first-ever HSI Volatility Index (VHSI), based on the methodology of the Chicago Board Options Exchanges VIX Index.
Feb. 22:A massive earthquake hit Christchurch of New Zealand.
Feb. 23:South Korea banned Deutsche Bank from proprietary stock trading, Direct Market Access (DMA) business as a broker and also Exchange-Traded Derivatives (ETD) transactions as a dealer for a 6-month period, due to the Bank's misconducts of market manipulation on 11 November 2010.
Feb. 24:Nymex (New York Mercantile Exchange) of CME Group raised margin requirement on its New York crude oil futures by 20%. ICE (Intercontinental Exchange) in London also raised its Brent crude oil margin requirement on Europe oil futures contracts and over-the-counter (OTC) trades by 14%.
Feb. 27:China premier Wen Jiabao announced in a public broadcast that annual GDP growth rate target should be reduced to +7% in the current 12th 5-Year Plan (2011-2015). This target was then officially published in China's 12th 5-Year Plan and Government Work Report. See also our Investment Guide for 12th 5-Year Plan.
Mar. 2:China lifted personal income tax threshold from RMB 2K to RMB 3K per month, which would lower the percentage of working people paying personal income tax substantially from 50% to 20% and hence should help promoting domestic consumption.
Mar. 3:(1) Trichet warned to raise interest rates on the next ECB meeting (April) for rising inflation concerns.
(2) Myanmar suspended rice exports to keep local rice prices down.
Mar. 5:China 12th 5-year plan officially targeted CPI as +4% and GDP as +8% in 2011. Read more about: Chinese Government Key Targets and Work Plan for 2011 and Top 10 Focus Areas for Chinese Government in 2011. See also our corresponding 2011 China CPI target as well as our 2011 China GDP target.
Mar. 9:Pimco's Total Return Fund, the world's largest bond fund headed by Bill Gross, cut its U.S. government bond holdings to zero by the end of February 2011, the first time after the 2008 global financial tsunami.
Mar. 10:(1) A massive 9.0 magnitude earthquake hit northeastern Japan. This biggest quake ever in Japan also triggered a deadly tsunami, knocked out the cooling systems of reactors at the Fukushima Dai-ichi Nuclear Power Plant, and then led to massive explosions and serious radiation leaks.
(2) China reported a trade deficit in February 2011, the worst in recent 7 years. See also our 2011 China Trade Balance target.
(3) New Zealand cut interest rates, the first time since June 2010, on the ground of supporting the deteriorated economy after the Christchurch earthquake in February 2011.
Mar. 14:Japan increased its size of quantitative easing package to JPY 40 trillion and also extended the asset purchasing period to mid 2012 upon the massive earthquake on March 11, 2011.
Japan also injected an extra JPY 18 trillion liquidity into its banking system as of March 14, 2011 and allowed no re-absorption of such additional liquidity injected into the system.
Mar. 15:Japan Credit Default Swaps (CDS) spiked over radiation leakage fears at Fukushima Daiichi Nuclear Power Plant battered by the devastating earthquake.
Mar. 17:(1) Yen soared as unwinding JPY crosses and USD/JPY hit a fresh peak of 76.25 during the morning trading section, for fear of Japanese insurance companies needed urgent repatriation of JPY capital back to Japan after the earthquake.
(2) New York crude oil futures shot back above the psychological threshold of USD$100 per barrel as the ongoing geo-political turmoils in the Middle East and North Africa might hinder oil production.
Mar. 18:(1) G7 determined to jointly intervene the global currency markets, the first time since the year 2000 for defending Euro, amidst the rapid Yen appreciation. JPY then retreated with USD/JPY staying beyond 80 level at the close.
(2) People's Bank of China (PBoC) increased the reserve ratio on bank deposits by 0.5% to reach a record high level of 20%. Read more about: 5 Key Methods to Curb China Inflation.
Mar. 20:(1) Military forces, headed by the U.S., France and U.K. from North Atlantic Treaty Organization (NATO), invaded Libya against Gaddafi through air strikes to establish no-fly zone over Libya that approved by the UN (United Nations), although Libya said to accept cease-fire agreement.
(2) U.S. AT&T announced to acquire T-Mobile USA from Deutsche Telekom AG, so as to surpass Verizon Wireless to become the biggest U.S. mobile broadband carrier.
Mar. 21:(1) U.S. 10-Year government bonds tumbled as U.S. Treasury decided to, starting March 2011, orderly wind down its remaining holdings of USD 142 billion in agency-guaranteed Mortgage-Backed Securities (MBS) that purchased since the 2008 financial tsunami. The concerned MBS sales would be no more than USD 10 billion per month.
(2) U.S. regulators approved the first new offshore deepwater exploratory wells drilling plan, submitted by Royal Dutch Shell PLC, in Gulf of Mexico since the BP's explosion and massive oil spill disaster last year.
Mar. 23:(1) Portugal Credit Default Swaps (CDS) rose as Portugal parliament rejected a Budget Plan for deficit reduction.
(2) U.S. Federal Reserve decided to reject the 2011 Q2 dividend hike plan as proposed by the Bank of America Corp. (BofA) on its potential risk of mortgage claims.
Mar. 24:A massive earthquake hit northeastern Myanmar (Burma).
Mar. 29:Portugal sovereign-debt credit rating was downgraded to the lowest investment grade (just above junk status) by Standard & Poor's (S&P).
Mar. 30:Natural Gas prices climbed as Obama targeted to cut crude oil imports by one third in the next decade. In order to reduce U.S. dependence on foreign oil, Obama planned to use more Natural Gas, ramp up U.S. domestic oil production, boost next-generation biofuels and also increase fuel efficiency.
Mar. 31:(1) China launched its first-ever onshore USD/RMB currency options trading.
(2) U.S. Federal Reserve disclosed more detailed information about emergency transactions conducted through its discount window to stabilize financial markets in the panic of 2008 credit crisis. It turned out that tens of trillions (in USD) were lent through eleven special lending facilities including Primary Dealer Credit Facility (PDCF), Term Auction Facility (TAF), Term Asset-Backed Securities Loan Facility (TALF), Troubled Asset Relief Program (TARP), Temporary Liquidity Guarantee Program (TLGP) etc. to large financial institutions such as Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Citigroup, Bank of America, Wells Fargo, as well as big corporate giants such as General Electric, Chrysler Financial Services, AIG, Pimco, Verizon, McDonalds and Harley-Davidson.

In conclusion, inflation concerns continued to rise in emerging markets for 2011 Q1 and also started spreading to European countries.

By 2011 Q1, U.S. Federal Reserve's near zero interest rate and quantitative easing policies have successfully made USD, the world's major reserve currency, an attractive source of funding for carry trades. USD's extremely low yield has provided easy money for people to invest globally in riskier but higher-yield assets, thus triggered inflationary hazard around the world.

Japan, on the other hand, also made use of printing extra money to finance the re-construction efforts needed after its recent devastating earthquake and tsunami.

Facing such a complex investment environment, however, investors should carefully keep focusing on corporate earnings because there has been a downward trend of profit margin for a number of companies in 2011 Q1 as inflation and operating costs rise.

Last but not least, there were notable numbers of human and natural disasters in 2011 Q1. Natural disasters were of course terrible, but not comparable to human disasters that included radiation leakage at Fukushima Daiichi Nuclear Power Plant and also the war in Libya. While no one really enjoys radiation leakage, WE, MR CHINA, ALSO HATE WARS. We do hope the Libya war can be over soon!

Our next Financial Review will be for 2011 Q2, see you all by then.

UPDATE - Next article: Financial Review 2011 Q2: Crisis Recurred

Related article(s):
An Important 2010 Internal Review for you


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