Martes, 14 de Noviembre de 2017 Redacción

ECONOMICS Eurozone: Better growth dynamics • Eurozone growth and economic data continue to surprise positively, dispelling any remaining pessimism regarding the economic outlook. • Solid growth will continue in 2018, with the legacy of this year’s euro appreciation and less support from China and emerging markets, resulting in moderate growth deceleration.

The European Commission revised its growth forecast for the eurozone markedly higher for this and next year. We pretty much agree with this upbeat view. The Commission’s expectation of 2.2% growth in 2017 is well justified, based on already published data. Advanced gross domestic product (GDP) estimates for the third quarter, published end of October, have been very strong, indicating annual growth dynamics of 2.5%. We have been revising our eurozone GDP projection for 2017 upwards since May this year and currently expect a marginally stronger figure (2.3%) for 2017. Next year, eurozone growth will remain solid as well, but should decelerate slightly to 2%. The European Commission expects growth to follow the same trajectory (forecasted at 1.9%). The major reasons are the lagged effects from a stronger euro exchange rate on growth and slowing growth dynamics in China. The euro has appreciated by about 10% against the US dollar, which is, according to our calculation, equivalent to a tightening of monetary conditions by more than a 100 basis-point rate increase.

China’s GDP growth is expected to slow to 6.3% in 2018 after an impressive 6.8% this year. Eurozone exports tend to be quite sensitive to demand swings in China and emerging markets. US growth, in contrast, tends to be less affected by emerging markets’ growth dynamics and should enjoy mild support next year from this year’s US dollar weakness. As a consequence, we expect the US economy to outperform the eurozone in 2018 with 2.5% GDP growth, after being on par this year.

 

David Kohl, Chief Currency Strategist, Julius Baer

 

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ECONOMICS

 

China: Progressing on the reform agenda

 

• China continues its reforms towards a consumption-oriented economy with financial-sector liberalisation on the one side and supply-side cuts on the other.

• Aluminium is affected the most by China’s capacity cuts, but not to the extent as implied by today’s elevated prices.

 

Following last weeks’ official visit of US President Trump, China’s leadership announced an opening of its financial sector to foreigners. During President Xi’s second term, foreigners will be allowed to hold a majority stake in banks and other financial institutions. This is a step towards a further liberalisation of the services sector, may help to increase productivity and will boost foreign direct inflows, thereby alleviating capital outflow pressure. New growth drivers are needed as the government aims to reduce capacity in the ‘old’ industries and stabilise the debt bur-den. It seeks to reduce the polluting production in the heavy industries as less output will be needed for construction in line with a peaking Chinese population. With the start of the traditional heating season coming up this Wednesday, the so-called supply-side cut reform will be pursued over the winter. Production cuts have been ordered in the North for environmental production reasons. These should lead to a cooling of industrial production growth and will, together with an orchestrated mild slowing in the housing market, also lead to a moderation of overall economic growth from now onwards.

One of the industries affected the most by the heating season capacity cuts is aluminium, not only in terms of primary production but also raw materials. While the government’s order to cut 30% of capacity appears clear at first sight, uncertainties have emerged whether planned starts of new smelters or closures of ‘illegal’ ones can be counted against that. If true, the impact on the market would be much more limited than initially feared. Furthermore, doubts are growing over the accuracy of China’s official aluminium production data, which appears much too low when compared to private data or matched against ballooning inventories in the country. With raw materials also affected by the cuts, production costs have increased significantly as of late. However, this effect should be transitory in our view as any short-ages in China should be offset by rising imports. All in all, we continue to believe that expectations of a material tightening of the aluminium market are not warranted to the extent implied by today’s elevated prices. Evidence of an amply-supplied market during winter, e.g. inventories remaining on elevated levels or exports ticking up, should weigh on market sentiment and trigger a correction in prices. That said, as the capacity cuts have just started, it is too early to position for falling prices just yet.

 

Susan Joho, Economist, Julius Baer

Carsten Menke, Commodities Research Analyst, Julius Baer

 

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COMMODITIES

 

Oil: Saudi turmoil energises oil bull

 

• The Saudi power consolidation fuels the oil rally. But geopolitics cannot undo the post-super cycle oil order.

• We stick to our cautious view but raise our short-term oil price target to USD 55 per barrel.

 

Geopolitics maintains its firm grip on the oil market. Brent oil prices surged towards USD 65 per barrel last week in part fuelled by the concerns and uncertainties unleashed by the unexpected Saudi Arabian corruption probe. The Saudi power consolidation adds to ongoing geopolitical events such as the lingering Kurdish tensions and the increased Nigerian militant threats. We still think that oil’s fundamentals are not as price supportive as the market consensus believes. Supplies have tightened namely on the back of solid growth and strong demand but remain ample from the historical view. The pricing element of the emptying storage along the US gulf coast gains the most attention, but this trend should be seen in perspective with others such as the significant inventory gains in China and solid output growth in Canada and Brazil. The bullish market mood, growth optimism and the geopolitical risk premium rather than the fundamental supply situation have pushed the oil futures curve into backwardation.

Most importantly, today’s prices are a blessing for the shale business. Investors are increasingly demanding sustainable profits instead of growth but with oil above USD 55 per barrel the shale companies are likely to deliver both. Hedging activity has in-creased significantly and the drilling and supply response should follow swiftly. Geopolitical concerns and the petro-nations’ supply deal cannot undo the post-super cycle oil market order. We stick to our cautious view and see more price downside than upside. That said, based on the lasting bullish mood and strong demand we raise our price targets to USD 55 and USD 50 on 3 and 12- month horizon, up from USD 47.5 per barrel. Our short position in Brent has been stopped out mainly because we wrongly assumed that the bullish mood could not become more bullish. Although we succumb to market sentiment we need to remind that if everyone buys, everyone will eventually sell.

 

Norbert Rücker, Head Macro & Commodity Research, Julius Baer

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