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Weekly Asia Risk Monitor: Party On or Premature Celebration?

Conclusion: Amid mixed-to-sour economic data, Asian currencies, equity markets, long-end bond yields, and 10Y-2Y spreads exhibited broad-based signs of bullishness on a week-over-week basis – likely due in part to the perceived “resolution” in Greece. Asian credit had a strong week as well, from both a spreads and swaps perspective.


Below we introduce our first installment of a weekly recap of prices, economic data, relevant news, and internal analysis across the Asian geography. We’ll generally keep our prose to a minimum in this piece, only chiming in where our analysis adds value to the data (please email us if you’d like more color on a particular topic). Further, we’ll parse the data and analysis into three distinct sections for ease of interpretation: 1) Key Economic & Policy Data; 2) Price Action; and 3) Correlations. So without further adieu…





  • China’s National Audit Office published a report finding total liabilities of China’s Local Governments to be 10.7 trillion yuan ($1.7T) and flagged an overreliance on land values as collateral for credit as a major repayment risk over the long term (70% of loans mature within the next five years).
  • Chinese Premier Wen Jiabao affirmed recent government forecasts that CPI will slow in 2H.
  • PBOC liquidity injections helped China’s recent money market tightness ease throughout the course of the week, with the seven-day repo rate falling -266bps week-over-week.
  • Effective today, China will cut its import tax on refined oil products to ensure adequate supplies for domestic demand.
  • China raised its monthly personal income tax threshold +75% to 3,500 yuan ($542) in an effort to spur domestic consumption by lowering the consumer’s tax burden.
  • Manufacturing PMI fell to 50.9 in June vs. a prior reading of 52. The New Orders sub-index also declined, falling to 50.8 vs. a prior reading of 52.1. On the positive side, the Input Prices sub-index fell to an 11-month low of 56.7.
  • An unofficial index provided by property developer SouFun Holdings Ltd. showed that growth in Chinese Real Estate Prices slowed marginally to +0.4% MoM in June vs. a prior reading of +0.5%, marking the 10th consecutive month of positive growth.

Hong Kong

  • Home prices (up +70% since the start of 2009) and retail rents (up +27% over the same duration) are putting upward pressure on CPI, which, in turn, is causing increased civil unrest within the territory.
  • Burgeoning consumer prices (latest: +5.2% YoY) and a growing reputation for pandering towards the elite caused Chief Executive Donald Tsang’s approval rating to drop to 46.5% - the lowest reading since he took office in 2005.
  • The Hong Kong economy continues to overheat with Money Supply (M3) growth accelerating in May to +11.4% YoY vs. a prior reading of +6%.


  • The Central Bank of China (Taiwan) raised its discount rate +12.5bps to 1.875%.
  • HSBC Manufacturing PMI plummeted in June to 49.9 vs. a prior reading of 54.9.


  • Small Business Confidence edged up in June: 43.1 vs. a prior reading of 37.8.
  • Prime Minister Naoto Kan pledged to remain in office until the following three controversial bills are passed by the Diet: 1) a second (smaller) stimulus bill; 2) deficit financing legislation; and 3) a renewable energy bill.
  • On MoM basis, Industrial Production growth accelerated to a ~68-year high of +5.7% as factories came back online in certain areas. On a YoY basis, however, growth contracted at -5.9% rate, suggesting that the headline “growth” number is rather illusory.
  • Manufacturing PMI ticked down in June to 50.7 vs. a prior reading of 51.3.
  • Overall Household Spending growth accelerated in May to -1.9% YoY vs. a prior reading of -3%.
  • 2Q11 Tankan Survey Results:
    • Large Manufacturers Index ticked down to -9 vs. a prior reading  of 6;
    • Large Non-Manufacturers Index ticked down to -5 vs. a prior reading  of 3;
    • Large Manufacturers Outlook came in flat at 2;
    • Large Non-Manufacturers Outlook ticked down to -2 vs. a prior reading  of -1;
    • All Industry CapEx Guidance ticked up to +4.2% vs. -0.4% prior vs. consensus expectations of +2.4%.


  • The Centre for Monitoring the Indian Economy reported that due to tighter credit conditions, the number of stalled corporate projects grew +18.1% YoY in 1Q11 alongside a -9.3% YoY contraction in the number of new projects announced.
  • Food Inflation slowed to +7.8% YoY vs. a prior reading of +9.1% in the week ending June 18.
  • Energy Inflation accelerated to +13% YoY vs. a prior reading of +12.8% YoY in the week ending June 18.
  • The central government’s recent decision to remove crude oil import duties and the Finance Minister’s affirmation of his lofty growth assumptions is raising concern that the government will fail to meet its deficit reduction target.
  • HSBC Manufacturing PMI fell to the lowest level in nine months in June (55.3 vs. a prior reading of 57.5).

South Korea

  • Bank of Korea Manufacturing Business Survey declined in July to 90 vs. a prior reading of 97.
  • Bank of Korea Non-Manufacturing Business Survey declined in July to 84 vs. a prior reading of 86.
  • The Finance Ministry increased its full-year inflation forecast +100bps to +4% YoY while lowering its growth forecast -50bps to +4.5% YoY.
  • Slowing growth and accelerating inflation have caused President Lee Myung Bak’s approval rating to drop to 28.8% in June vs. 76% when he came into power in February of 2008.
  • CPI accelerated in June to +4.4% YoY vs. +4.1%.
  • Slowing Export growth (+14.5% YoY) caused South Korea’s Trade Balance to contract -$3.5 billion on a YoY basis.


  • Industrial Production growth slowed meaningfully in May: -17.5% YoY vs. a prior reading of -9.5% YoY.
  • The Monetary Authority of Singapore set capital levels for domestic banks +200bps above Basel III standards, further strengthening the health of its highly-rated banking sector (three banks in the top six globally per a June Bloomberg Markets analysis).


  • The controversial Pheu Thai, leading in the polls ahead of Sunday’s election has pledged more populism and hinted at a potential currency devaluation if elected.
  • Slowing Export growth (+17.3% YoY) and faster Import growth (+34.4% YoY) caused Thailand’s Trade Balance to contract -$2 billion on a YoY basis.
  • Headline CPI slowed in June to +4.1% YoY vs. a prior reading of +4.2%. Core CPI accelerated to +2.6% YoY vs. a prior reading of +2.5%.


  • CPI slowed in June to +5.5% YoY vs. a prior reading of +6%.
  • Accelerating Export growth (+45.3% YoY) helped Indonesia’s Trade Balance expand +$1.4 billion on a YoY basis.


  • AIG Performance of Manufacturing Index jumped to 52.9 in June vs. a prior reading of 47.7.



Amid the mixed-to-sour economic data, Asian currencies, equity markets, long-end bond yields, and 10Y-2Y spreads exhibited broad-based signs of bullishness on a week-over-week basis – likely due in part to the perceived “resolution” in Greece. Asian credit had a strong week as well, from both a spreads and swaps perspective.


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 1


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 2

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 3


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 4

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 5

Weekly Asia Risk Monitor: Party On or Premature Celebration? - 6


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 15




The following tables showcase the outputs of multi-duration regressions with various assets throughout Asia and select key Global Macro indices (the independent variables are denoted in yellow at the top right corner of each table). A couple of key callouts are the breakdown in the positive correlations between Greek 2Y yields and Asian currencies YTD, as well as a developing trend of high inverse correlations between the CRB Raw Industrials Index and Asian CDS.


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 7


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 8


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 9


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 10


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 11


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 12


Weekly Asia Risk Monitor: Party On or Premature Celebration? - 13


Weekly Asia Risk Monitor: Party On or Premature Celebration? - A


Happy Fourth of July weekend,


Darius Dale


The Week Ahead

The Economic Data calendar for the week of the 4th of July through the 8th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

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European Manufacturing Cools in June

Positions in Europe: Long Germany (EWG); Short Spain (EWP)


Below we show a table of European Manufacturing PMI according to Markit’s survey. The key take-away that we’ve been noting over the last months is that both inflation and the risk of contagion is eating into both the Manufacturing and Services PMI figures across the continent. In fact, the Eurozone aggregate Manufacturing figure for June is down for the third straight month.


European Manufacturing Cools in June - PMI MH


Other data released today shows that Eurozone unemployment remains sticky, at 9.9% in May, unchanged from April. We continue to highlight the longer term tail headwinds of unemployment in Spain (20.9%); Greece (16.2%) and Ireland (14.2%), in particular. [For more, see our post from 5/20 titled The Push and Pull of Europe’s Borders and Demographics].


Finally, Italy’s Cabinet late yesterday passed legislation to push through €47 Billion in deficit-cutting measures by 2014. This is a first step toward balancing the budget in the coming years as PM Berlusconi’s credibility to govern remains in check. Interesting, some €40 Billion of the plan is back-loaded to 2013 and 2014, a threat as sovereign debt contagion fears remain front and center. From a deficit perspective, Italy is in a better position than its peripheral neighbors, at -4.6% of GDP in 2010 (and -7.7% of GDP in Q1 2011), however its debt remains the second highest in Europe (after Greece) at 119% of GDP in 2010.   


The Cabinet also approved measures to overhaul the tax system to combat tax evasion. A final vote on the package by the legislature is expected before the August recess.


The EUR-USD continues to hold up in our trade range of $1.42 to $1.45, a band we expect will hold as Troika (EU, ECB, IMF) is prepared to fund bailout packages and debt concessions to peripheral nations at all costs. Big brother backstop is a force we’ll be continuing to manage risk around.


Happy 4th!



Matthew Hedrick



TODAY’S S&P 500 SET-UP - July 1, 2011


As we look at today’s set up for the S&P 500, the range is 27 points or -2.02% downside to 1294 and 0.03% upside to 1321.






THE HEDGEYE DAILY OUTLOOK - global performance


THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: 1398 (+270)  
  • VOLUME: NYSE 996.05 (+9.10%)
  • VIX:  16.52 -4.34% YTD PERFORMANCE: -6.93%
  • SPX PUT/CALL RATIO: 1.38 from 1.40 (-1.77%)



  • TED SPREAD: 23.05
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 3.18 from 3.14
  • YIELD CURVE: 2.73 from 2.67 



  • 9:55 a.m.: UMichigan Confidence, June F, est. 72.0, prior 71.8
  • 10 a.m.: Construction spending, est. 0.1%, prior 0.4%
  • 10 a.m.: ISM Manufacturing, est. 52.0, prior 53.5
  • 1 p.m.: Baker Hughes Rig Count
  • 2 p.m.: USDA cattle, hog slaughter


  • Questions about credibility of accuser in ex-IMF chief Strauss-Kahn’s case said to place it in jeopardy
  • NBA becomes second U.S. sports league to lock out players
  •  Treasury Secretary Geithner’s potential departure from the administration would force President Obama to assemble a new economic team as the 2012 election looms, with jobs a top voter concern.
  • Senate in session, House in recess




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • China May Buy U.S. Corn as Price Slumps 11% on Acreage: Chart of the Day
  • Corn Extends Worst Monthly Loss Since 2008, Wheat Drops as Food Costs Ease
  • Commodity-Futures Trade in China Plunges 30% as Rules Restrain Speculation
  • Oil Drops on Signs of China, U.S. Slowdown; IEA and OPEC Supplies Increase
  • Gold Falls to Six-Week Low Amid Reduced Concern Greece May Default on Debt
  • Coffee Falls on Signs of Limited Frost Damage in Brazil; Cocoa Retreats
  • Copper Erases Drop on London Metal Exchange, Trades at $9,445 a Metric Ton
  • U.K. Crop Losses Narrow as Rain Last Month Follows Driest Spring on Record
  • Rice Output in Indonesia May Climb on Increased Planting, Reducing Imports
  • Lead-Battery Production in China Seen Dropping by Half on Pollution Rules
  • Muddy Waters Is Looking at More ‘Suspicious’ Chinese Companies, Block Says
  • Brent to Recover From Decline as Supply Boost Seen Failing: Energy Markets
  • Philippine Investment Push Lures Sumitomo as Aquino Plans Roads, Airports
  • Gold May Gain Next Week as Slowing Economies Stoke Demand, Survey Shows



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • European equity markets trade mixed.
  • Jun final Manufacturing PMI; France 52.5 vs preliminary 52.5; Germany 54.6 vs preliminary 54.9
  • EuroZone 52.0 vs preliminary 52.0
  • UK Jun Manufacturing PMI 51.3 vs consensus 52.1, prior revised 52.0 from 52.1


THE HEDGEYE DAILY OUTLOOK - euro performance




  • Asian market are generally higher..


THE HEDGEYE DAILY OUTLOOK - asia performance









Howard Penney

Managing Director

Pax Canadiana

This note was originally published July 01, 2011 at 08:25 in

Me debunk

An American myth?
And take my life
In my hands?
Where the great plains begin
At the hundredth meridian.”

- The Tragically Hip


There is no doubting American global dominance in both military and economic affairs. The United States is the world’s reigning superpower and has been really since before the end of the Cold War. While the Soviet Union was considered a rival to the United States for many years, this was primarily due to the nuclear arms race and MAD, or mutually assured destruction. In reality, the Soviet Union was never really on par with the United States from an economic perspective.


The term Pax Americana is used to describe the relative peace enjoyed by the Western World due to the preponderance of power held by the United States over the last century. Since World War II, the idea of Pax Americana has manifested itself in the many international institutions backed by American influence and finance. Initially, this began with the Marshall Plan and the rebuilding of Japan, and eventually transitioned to the UN, NATO, the IMF, and the World Bank.


Immediately following World War II, the United States was responsible for roughly half of the world’s industrial output, held 80% of the globe’s gold reserves, and was the sole nuclear power. Even if America has lost share over time, she remains the world’s dominant economic power at 25% of the world’s output, so it is with some jest that I use the term Pax Canadiana to characterize the growing role of Canada in the global economy. But today is July 1st, or Canada Day.


In his book, "The World in 2050: Four Forces Shaping Civilization's Northern Future", the UCLA Geographer Laurence C. Smith highlights some of the key forces driving economic share gains of the Northern Rim Countries, or as he calls them NORCs. Ironically, global warming will potentially be a major positive for the NORCs. Some of the key points that Smith highlights, which I’ve excerpted from the Globe and Mail, include:

  • New shipping lanes will open during the summer in the Arctic, allowing Europe to realize its 500-year-old dream of direct trade between the Atlantic and the Far East, and resulting in new access to and economic development in the north;
  • Oil resources in Canada will be second only to those in Saudi Arabia, and the country's population will swell by more than 30 percent, a growth rate rivalling India's and six times faster than China's;
  • NORCs will be among the few place on Earth where crop production will likely increase due to climate change; NORCs collectively will constitute the fourth largest economy in the world, behind the BRIC countries (Brazil, Russia, India and China), the European Union and the United States; and
  • NORCs will become the envy of the world for their reserves of fresh water, which may be sold and transported to other regions.

Keith has previously mentioned Smith’s work and the NORC theme is one you will likely see us revisiting in the coming years.


Interestingly, Canada is actually starting to show some subtle shifts in its economy versus the United States. Coming out of the depression of 2008 / 2009, Canada has had much more stable and even economic growth. A primary driver of this is the relative health of Canadian banks, which didn’t underwrite as many bad loans during the housing boom of the late 2000s and therefore still have the ability to broadly extend credit to consumers.


From a fiscal health perspective, Canada is in very strong shape versus its southern neighbor, and really much of the Western World. Canadian debt-to-GDP is estimated at 42%, which is roughly half of that of the United States. Further, Canada’s current budget, which was passed by the Conservatives in the fall of 2010, projects a balanced budget by 2015. Currently, not even in its long term projections, through 2035, does the Congressional Budget Office anticipate a balanced budget in the United States.


Finally, from a longer term perspective, the United States has literally always had a lower unemployment rate than Canada, or at least going back as far as World War II. In the chart of the day, attached below, we’ve charted relative unemployment rates comparing the United States and Canada. Currently, Canada’s unemployment rate is 7.4%, while the United States’ is 9.1%.


Much like the excerpt from the iconic Canadian band, The Tragically Hip, I’m not going to take “my life in my hands” and “debunk an American myth”, but I would advise keeping Canada and the rest of the NORCs front and center in the coming years as you and your colleagues scour the globe for investment ideas.


While Canadians are certainly excited about the economic prospects of their nation, all Canadians respect the long standing special relationship shared with the United States. President John F. Kennedy perhaps summarized this relationship up best when he said in an address to Canadian parliament in 1961:


“Geography has made us neighbors. History has made us friends. Economics has made us partners. And necessity has made us allies. Those whom nature hath so joined together, let no man put asunder. What unites us is far greater than what divides us.”


Both Canadian and Americans should be proud of this special relationship and the good it does in the world.

Happy Canada Day! Happy July 4th! And happy 100th birthday Bassano, Alberta!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Pax Canadiana - Chart of the Day


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