Dichotomies identify recent market activity. From U.S. GDP to Eurozone GDP, things look better. But add China's policy direction, with emerging market direction, and one can see the point. Coming political battles over U.S. debt ceiling, elections from Australia to looming elections across emerging markets and ultimate monetary policy stance in developed markets give cause for murky water.
Example of dichotomy appears when comparing GM's experience to that of emerging markets' maturing growth. On August 12, reports reveal GM plans to gradually exit South Korea due to rising labor costs and aggressive unionization. Movement like this for GM is significant in that South Korean production is roughly 20% of company's global output. Justification of move appears in South Korea's cost of production per vehicle being 40% above GM's average global cost.
Contrast GM's move away from production in South Korea with Apple's move into consumer markets in China. Apple's proposed deal with China Mobile fits well with growing labor costs and shortages in China. Fundamental for deal making is a rising consumer class prepared to buy smart phones, which is evidenced by generally recognized reporting of China smartphone use exceeding U.S.
Technological compatibility with China's "proprietary" mobile network (Qualcomm's TD-SCDMA compatible chip sets) and carrier subsidization are major issues of discussion. Both are necessary components of any deal making. Consider, however, Apple's loss of technology arising from Samsung production and a droid platform. Apple must be cautious entering a new space of shared technology. But for an estimated $50B benefit, one probably wouldn't care to test the water.
Perhaps palliative and insulating, but not curative, are rounds of currency swap negotiations among emerging markets and their major trading partners. India leads on this proposal. Sometimes called central bank liquidity swaps, these swaps essentially involve native currency deposits in a central bank with U.S. dollar reserves. U.S. dollars are loaned against native currency deposits, with interest rate differentials paid, but currency differential rate previously agreed upon.
India's major currency swap agreement is with Japan at $15B. This agreement was initially written in 2007 at $3B and was part of Japan's other similar agreements with South Korea, Malaysia and Thailand. All products, and extensions, of the "Chiang Mai Initiative", which followed 1997-1998 Asian currency crisis and resulting overtures of "ASEAN plus three" cooperation.
India appears ready to tap such resources, certainly out of need. To leverage resources, India is proposing to sell their obtained U.S. currency to native oil refiners. Thereby, India optimizes and controls flow of foreign currency reserves. Simultaneously, India is looking to support policies reducing petroleum consumption, and other causes of current account deficit.
Where Eurozone GDP flash report on August 14 exceeded expectations with a .3% increase, other influences still weigh. France, Germany, Finland and---Portugal---all saw positive growth. But, through Q3 so far, reports are certainly gaining strength that EU banks are over leveraged and under capitalized. This, despite how many years of struggle.
July 22, thefinanceinsider.blogspot.com reported EU bank assets are 3.5 times EU GDP at 33T euro. Obviously, European governments backstopping a general banking crises under this number are hamstrung. On August 11, ft.com reported EU banks generally must cut assets by 3.2T euro, and major banks specifically must cut 661B euro in assets and raise 47B euro of new capital. All must occur over next 5 years to meet Basel III standards and avoid specters of insolvency. Three banks are of most concern, being Barclays, Deutsche and Credit Agricole.
Supporting EU banking imbalance is July 30's Deutsche Bank's Q2 report showing net profit dropping by 49%, while revenue was up 2%. Net income found itself at 335M euro versus forecasts of 767.6M euro. Hurting profit was increasing provision for legal expenses by 630M euros to 3B euros.
August 29 showed Deutsche issuing stock to raise 2.96B euro at 32.90 per share in European trade. Goal for company was 2.8B euro, and despite dilution, exchange trade increased 6.9% according to Bloomberg. Goal is to increase capital by 5B euro and planned is a 2B euro subordinated debt issuance.
July 30, also saw Barclays' H1 profit down -17% at 3.59B pounds. Decline was due to restructuring costs and 1.35B pound provision for payment protection insurance impropriety and 65M pound provision for interest rate hedging impropriety.
Barclays has been under pressure from U.K.'s Prudential Regulatory Authority to raise capital, having identified a shortfall for the bank of 3B pounds end of 2012. Also on July 30, Barclays announced its plan to raise capital. Issuance of 5.8B pounds of new shares will address capital shortfall, along with issuing 2B pounds of convertible bonds, which appear subject to heavy hair cuts if bank has trouble.
Barclays on August 30 increased per share issuance expectation price from $88.00 to $92.00.
Overall, emerging markets aren't only cycling down, but are in broader transition. Where developed country money moves out of emerging markets, we also see hesitation of direct investment due to rising costs of production, consequent of a rising consumer class. Other hand shows a rising consumer class for sales prospects. Europe looks to be improving, but banks remain over extended, despite a considerable period of deleveraging. Even with years of deleveraging, European bank stock issuance to re-capitalize is being well received. Imbalances seem intuitive.
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