It is Hungary This Time!

US stock market dropped precipitously yesterday as Hungary spooked investors with another potential sovereign debt default after Greece.

From Wall Street Journal

Lajos Kosa, vice president of the right-leaning Fidesz party, which won an overwhelming victory in the April elections, said Thursday that Hungary was in a Greek-style sovereign-debt crisis. And Friday, the prime minister's spokesman, Peter Szijjarto, roiled markets by saying the economic situation is severe and that Hungary isn't likely to meet budget-deficit targets prescribed by the International Monetary Fund.

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Mr. Szijjarto's remarks clobbered the Hungarian forint and the euro Friday. The reaction spilled over into sovereign debt-insurance markets across Europe and into the currencies of Poland and the Czech Republic, the two other large non-euro countries in the former Communist east.


The euro sank below $1.20 to a fresh four-year low, trading at $1.1966 late Friday in New York. The cost to insure against sovereign debt default rose sharply early Friday in Europe—to the highest levels in nearly a month for Greece and Portugal. Bigger economies, such as Spain and Italy, also saw debt-default insurance costs rise to their highest levels since at least the start of 2009, according to data provider Markit.

Mr. Szijjarto said at a news conference that Hungary's new government is "ready to avert the Greek road," but he added that "there is nobody in the country apart from the previous government who still says the budget deficit of 3.8% of gross domestic product can be reached." That is the IMF's target for this year.

The Danger of Hot Money

Dubai shook the world last week with a potential default. The country, until recently, with $60 billion foreign debt has been the rising star in emerging markets in the recent years. On Wednesday, Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt. Influential bank analyst Richard Bove said in a note "it does not appear that American banks have any major direct impact from this event."


Dubai’s problem may not have direct impact on the global economy. However, Dubai’s crisis is just a tip of an iceberg of a potential global calamity. Since the eruption of subprime crisis that originated from the United States, historic low interest rates and weak economic recovery in the United States and Japan have led to massive carry trade. Arbitrageurs borrow “cheap money” at very low interest rates from countries like the United States and Japan in search for higher returns in many emerging markets.

China's foreign currency reserves rose $141 billion from July to September alone, up 20 percent from the same period in 2008. The China International Capital Corporation estimates that $50 billion in speculative capital flowed into China in the third quarter. In the meantime, Southeast Asian countries are growing increasingly concerned about strong inflows of hot money that could lead to asset bubbles in the region, says the Asian Development Bank (ADB). Noritaka Akamatsu, senior adviser at ADB’s Office of Regional Economic Integration, said that some regional governments are thinking of limiting capital inflows in the “short-term, liquid side of the market” as they could destabilise financial systems. “Last week, Indonesia’s central bank said that it was “studying” possible limits on foreign ownership of short-term debt but has no plans for controls on capital or the currency. The South Korean government plans to hold talks on what can be done to handle inflows financed with cheap US-dollar loans. Outside Asia, Russian Finance Minister Alexei Kudrin said that he was alarmed by the amount of hot money flooding into Russia and would support 'soft measures' to stop speculators from inflating the value of the stock market.

Hot money is speculative and destabilizing short-term capital flow. Its elusive and abrupt reversal characterized many previous financial crises such as the Asian Currency Crisis in 1997. Should carry trade unwind due to monetary policy tightening of the United States and/or sudden heightened risk aversion among foreign investors, a financial calamity in emerging markets is foreseeable in the absence of preemptive actions to slow down hot money.

China and Copper 2009-2010

The $586 million ( 4 trillion Yuan) by the Chinese government has boosted the economy significantly.

In an article by the Associate Press yesterday,

China's economy expanded more than 7 percent in the first nine months of the year and will certainly surpass the 2009 growth target of 8 percent, a top economic official said Monday.


"Achieving a growth rate of 8 percent for the year is basically no problem," Xiong, a deputy director of the National Development and Reform Commission, told reporters........

Statistics for September showed improving trade, housing sales, manufacturing and car sales. The data suggest that resilience in retail sales and industrial production are helping offset the blow from falling exports to China's economy.........

Separately, Yu Bin, a senior researcher with the Cabinet-affiliated Development Research Center told a conference over the weekend that growth was forecast to exceed 9 percent in the second half of the year, the financial magazine Caijing reported Monday.

"The internal and external environment for China's economic growth will be better next year," Yu said.

These bullish forecast shed glossy light on industrials and basic materials. Copper, used in pipes, power cable and other infrastructure, has been in high demand. The apparent consumption in China is very high compared to inventory. The apparent consumption of China in August was reported to be 578300 tonnes compared to 86625 tonnes of exchange inventory in warehouses at Shanghai, Guangdong and Wuxi of Shanghai Futures Exchange. The price of copper is standing near its 2009 high [Click the diagram to enlarge]

Here is a short list of companies listed in the US stock exchanges: PCU,ETQ,AZC,FCX,TGB,TCK,CHNR, VALE

You may also be interested in articles in similar categories:
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Disclaimer: Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of October 20,2009

China's crackdown on overexpansion, commodities and industrials

In a previous blog post , it was stated that steel prices have been dropping since their peak in July due to oversupply. Apparently, that, together with oversupply in other focused industrial sectors demanded action by the Chinese government.

In a report entitled China orders crackdown on industrial overcapacity, the Associated Press reported that

"China announced sweeping curbs on surging investment in steelmaking, cement and other industries, warning that chaotic overexpansion was raising the danger of job losses and trouble for banks........................................Under Wednesday's order, new aluminum production projects are banned for three years and regulators will limit spending on factories to make steel, cement, glass, polysilicon used in solar panels and wind power equipment

Beijing appeared to be trying to fine-tune measures to keep China's recovery going by ensuring adequate supplies of industrial goods while preventing a glut that could set off price wars, hurting financially weak producers....................................

The investment boom also has been fueled by government orders to state-owned banks to support growth by sharply raising lending in the first half of this year. Economists say that is likely to lead to excessive industrial investment, especially with stimulus-financed construction boosting demand and prices for steel, cement and other materials......................................

New steel mills, cement factories and other projects will have to meet higher environmental and energy efficiency standards, the Cabinet statement said. It gave no details of how each industry's production capacity might be affected..............................

China is the world's biggest steel producer, and Beijing is trying to make the industry more competitive by closing smaller, dirtier mills. Regulators have tried to enforce similar changes in cement and other industries but local leaders who don't want to lose jobs and tax revenue resist closing outmoded facilities..................

China's annual steel production capacity of 660 million tons already exceeds its needs of 500 million tons, and another 58 million tons of capacity is under construction, "much of it illegitimate," the statement said..............

"Steel production capacity could exceed 700 million tons and overcapacity could worsen if curbs are not imposed promptly," it said.

New steel mills must be approved by Beijing instead of local authorities to ensure they meet environmental standards, the statement said. Smaller blast furnaces are to be shut down by 2011, though it was unclear how many might be affected.

Coal and petrochemical projects must meet higher energy efficiency standards and regulators will "speed up the elimination of backward projects," the statement said. It said no experimental projects will be approved for three years.

Proposed cement factories will be reviewed and developers will be forced to redesign any that do not meet standards, it said. Proposed glass factories will be reviewed and must meet higher energy efficiency standards while "backward glass production" will be shut down.

New polysilicon factories must be able to capture and recycle up to 99 percent of waste gases, the government said. Facilities also will face minimum size requirements to promote efficiency and limits on how much land they can use."

Whether this crackdown can help foster a healthier environment for these industrials and consequently boost prices of these commodities such as steel hinges on how effective the central government of China is in reining in the spending spree at local levels. Judging from the decisiveness and success in the consolidation of steel industry not long ago, I am leaning toward at least a temporary success of resolving oversupply in these industrials.