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Great Unwinding sees dollar rise, oil prices fall

By Paul Hodges on 15-Sep-2014

UnwindingThe day after our China Economic Transformation webinar last week, Premier Li Keqiang confirmed its key message:

There’s already a lot of money in the pool, and we can’t rely on monetary stimulus to spur economic growth…Facing the New Normal state of the Chinese economy, we have remained level-headed and taken steps to tackle deep-seated challenges….in the latter half of the year and beyond, we will accelerate the transformation of the development model.

As the blog has argued ever since publishing its major Research Note on China in February, there will be no repeat of the panic stimulus measures taken by the previous leadership after 2008.  China is, in fact, reversing course, in order to move onto a more sustainable path for future growth.

Already, there are clear signs that 6 of the 7 key directions outlined in the Research Note are underway, and we can expect the 7th to follow in the medium-term.  It is impossible to overestimate the impact this Transformation is already having on the global economy.  And, of course, it is only just getting underway.

We had a record turnout for the webinar, and an excellent debate in the Q&A.  Many thanks to all who joined us.  If you missed the webinar, and would like a copy of the slides, please click here.

This was the Wall Street Journal’s headline at the weekend, confirming that the Great Unwinding of policymaker stimulus is now well underway.  And the market data confirms this is no ‘flash in the pan’:

  • The US$ is at its highest level versus the Japanese yen since 2008
  • The euro is at its lowest level for 14 months
  • Brent oil prices are down 14% since mid-June
  • US Treasury yields have risen to 2.61%
  • Liquidity is disappearing in emerging markets as the dollar rises, and China scales back lending

New readers may like to look back at the blog’s key forecasts for the Great Unwinding

August 18:  The Great Unwinding of policymaker stimulus has begun
August 27:  Oil prices break out of their triangle – downwards
September 3:  US dollar rises as investors worry low-cost money may disappear
September 10:  Great Unwinding of policymaker stimulus creates interest rate risk

On Wednesday, the blog will look at the likely impact of this Unwinding on US equity markets.

What we are seeing is markets starting to refocus on their true role of price discovery.  They have been dominated by central bank and policymakers stimulus since 2009, as these have mounted a vain attempt to turn back the tide of demographic change.  But as the blog has noted, “You can’t print babies”.  So, in the end, this stimulus cannot return the global economy to the BabyBoomer-led growth levels of the SuperCycle.

Instead, new opportunities are opening up for companies and investors, due to the appearance for the first time in history of the New Old 55+ generation, as we describe in ‘Boom, Gloom and the New Normal’.  If policymakers had accepted this logic in the past, the Great Unwinding now underway would not have been necessary.


The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 10%
Naphtha Europe, down 8%. “Prices fell to a yearly low this week as upstream ICE Brent crude oil futures declined on rising supply and slow demand”
Benzene Europe, down 7%. “Prices dropped to a three-month low this week, with bearish downstream sentiment, tumbling upstream energy numbers and lower US pricing weighing down on the market”
PTA China, down 6%. ”Average operating rates of China’s PTA facilities has increased slightly during the week to around 55-56%”
US$: yen, up 2%
S&P 500 stock market index, up 8%
HDPE US export, up 13%. “Ongoing production problems at a few key suppliers are keeping the market tight”