G-20 Summit: Lots of Bark, But no Bite
Strategy Team, Saxo Capital Markets
SINGAPORE, Nov. 12, 2010 /PRNewswire-Asia/ --
Tensions are running high as the G20 summit draws to a close, but will those tensions translate into concrete actions? The markets seem to have adopted a slight risk-off attitude ahead of the meeting.
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There is a possibility the G20 summit will actually be eventful; the US wants a cap on the trade balance of economies of 4% of GDP, the Germans are cranking up the currency manipulation rhetoric against the US to a degree previously unheard of and the Chinese authorities have downgraded US sovereign debt, perhaps in retaliation for the failure of US authorities to recognise the Chinese company Dagong as an official credit rating agency in the US.
But we take the stance that nothing significant will materialise. The G-20 gathering is likely help move forward slightly on the SIFIs (Systemically Important Financial Institutions), a plan for dealing with future banking crises. However, we do not expect much to be accomplished beyond that. This outcome could be supportive of equities while the US could resume the quarterly-long sell off, which has been briefly interrupted in the last seven days.
Do we expect the US to seriously pursue a cap on trade surpluses? Not only is the idea nonsensical on its own, but it also fails to take into account the fact that the idea came forth right before the midterm elections in the US. Elections in which the Democrats were at the time expected to � and eventually did � suffer a heavy defeat at the hands of the Republicans. Could some stern remarks from Treasury Secretary Geithner stating that "G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years" have been nothing but a part of a domestic election campaign? There is undoubtedly more than a grain of truth to that, but we also fear that policy makers actually believe that trade imbalances must be corrected.
There is, however, nothing fundamentally wrong with trade imbalances. The problem seems to be that policy makers only give attention to the trade balance (basically, the current account). This is the balance, which is very negative for the US at the moment, that highlights citizens of the US buy more goods and services from foreigners than they sell. This is the "trade deficit", which we hear so much about. Perhaps the use of deficit and surplus makes people draw the false conclusion that the former is bad for the economy while the latter is good. But if the sellers of goods to the US (the buyers of dollars) turn around and invest these dollars in a factory or other assets in the US that would certainly be a positive for the US, not a negative.
The problem at the moment is, however, that it is mostly the developed, slow-growing economies of Europe and the US, which are running huge trade deficits as government spending has run amok. They fund these by issuing sovereign debt. Perhaps, the developed countries should send a "thank you note" to China and other exporters, since they are apparently happy to buy expensive, low yielding bonds such as US Treasuries in exchange for their goods.
But we digress. Has the US backed itself into a corner? Attention quickly turned from China the Currency Manipulator to US the Debt Monetizer at the "pre-G20" meeting a few weeks ago when the German Finance Minister went further with his criticism of US monetary policy than we have probably ever seen before. Considering that the Federal Reserve has just announced that it will do another round of quantitative easing (the thinking seems to be that since QE1 didn't work, let's try the same thing all over again) and with that announcement, ammunition is looking in short supply if you are in favour of a cap on trade imbalances.
So what should we make of it all? We think that we will be in for a repeat of the statement issued a few weeks ago calling for members to "refrain from competitive devaluations". Indeed, the initial draft released yesterday contains precisely that sentence and also states "We will move towards more market-determined exchange-rate systems and enhance exchange-rate flexibility to reflect underlying economic fundamentals." All in all, we look for a lot of talk and very little action, which could suit the "everything up, but the US dollar" trade.
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