EU’s plan to borrow from the poor boosts S&P 500

D'turn 30Oct11.pngThe brave new world of modern finance continues to amaze the blog.

It still has problems with the idea that the answer to having too much debt is to borrow some more. But last week’s Eurozone summit not only did this (as noted by the German central bank), but added a new element.

Its new bailout plan suggests that the European rich should now borrow from the emerging country poor, via the IMF. Thus the support of Italy (income per capita of $34k) depends on loans from China (income of $3k). Or, to put it another way, the world’s second wealthiest region aims to borrow from people who have some of the lowest incomes in the world.

Of course, President Sarkozy made some reference to ‘old style reality’ when he told the French people on Thursday night that “the problem is that we spend too much and we must work more.” But this is unlikely to be the message on which he campaigns for re-election next year.

Naturally financial markets rallied strongly at the news, with the US S&P 500 Index jumping 4% during the week. But in the real world, where those of us in the chemical industry work, markets failed to show similar enthusiasm, as this week’s IeC Downturn Alert chart above shows. Even Brent crude oil managed only a $0.85/bbl rise, whilst naphtha actually fell.

This caution was shared in the world of electical appliances, a key market for chemicals. Whirlpool and Electrolux, the two largest companies reported:

• “Sales gains in Asia and Latin America are slowing and aren’t sufficient to make up for sluggish demand in the U.S. and Europe”
• Electrolux estimate “N American appliance sales this year will be 25% below the 2005 peak; W European sales will be down 15% from 2006″
• Whirlpool’s CEO noted that the only “people who are buying, are people whose appliances break”.

ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:

Benzene NWE (green), down 30%. “Market remains under downward pressure this week, largely due to continued weak demand.”
HDPE USA export (purple), down 28%. “The window of opportunity for sales into China has basically closed as prices in Asia and the Middle East continue to fall.”
Naphtha Europe (brown dash), down 21%. “Demand from gasoline is reasonably healthy, while from petchems remains poor”.
PTA China (red), down 14%. “Demand remains weak on the back of limited procurement from the cloth and weaving sectors amid tight credit and higher inventory.”
Brent crude oil (blue dash), down 11%.
S&P 500 Index (pink dot), down 6%

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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