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.
(Logo: http://www.prnasia.com/sa/2010/01/18/20100118801199.jpg
)
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 每 and eventually did 每 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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