China’s property bubble at risk?; What is driving oil prices?; Greek bond yields explode as Germany states support for restructuring
APRIL 16, 2011
Hat tip to the fine folks over at MacroBusiness Australia for these links…
China property bubble at risk?
Moody’s Investor Services downgraded China’s property sector to negative from stable citing deteriorating credit conditions over the next 12-18 months.
This comes as Chinese officials have sought to halt the rise in house values through rising interest rates and tightening bank capital requirements in an attempt to curb credit demand. The report also indicates that falling sales and a correction in house prices are widely expected.
It appears that the Chinese government is indeed in a bind. The average house price has pushed well beyond the capacity of the average citizen to afford it. Yet in their attempt to rein in construction and speculation, they risk slowing GDP growth. Furthermore, while actively attempting to gently deflate their housing market, the wealth of many speculators is put at risk.
We also found out yesterday just how potentially successful these attempts to control rising property values have been as new house prices in Beijing fell a stunning 29% month-over-month in March following a 70% slump in new house sales in February.
From a Canadian perspective, it is not yet clear whether this news is positive or negative for the Canadian real estate market, particularly those running on fumes and relying extensively on foreign inflows to sustain prices. The tightening regulatory environment may force capital offshore and potentially into real estate in sought-after locations. Conversely, a rapid unwinding of property prices in China will also sap wealth from those same investors looking to park their funds in Canadian real estate.
Just how this will play out remains to be seen, though I expect that it will be spun from two decisively different angles.
What is driving oil prices?
As US inflation jumped 0.5% in March on the back of rising energy, it’s worth looking at exactly what is driving the rise in oil prices. I’ve discussed before that inflation as it is currently (and arguably erroneously) calculated can be affected by numerous other factors beyond the true lasting inflation caused by the expansion in the money supply relative to goods. In a fascinating graph by David Wilson of Bloomberg (highlighted over at Ritholtz.com), non-commercial net positions in oil futures were compared against the rise in oil prices…
You’ll note that the recent boom in oil prices coincides with a rapid rise in net positions in oil futures. Simply put, expectations of future oil price movements are at least somewhat responsible for recent oil price movements.
When large net long positions exist in the futures market of any commodity, it can be a sign of heightened price volatility and downside price risk. These positions are stated in the weekly Commitment of Traders report issues by the CFTC. In this case, the most recent surge is likely the result of expected ongoing social and political unrest in major oil producing nations. While it would be a given that a rising threat of disruption in Saudi oil output (currently a very low risk) due to unrest would send crude skywards, the surge in net long positions seems to suggest that significant ongoing tensions are being priced into the oil market. Any ‘disappointment’ to this view, as in reduced levels of social unrest, may well set oil prices up for a nasty fall. Good for the consumer…..not good for the energy-heavy TSX.
Greek bond yields explode
In yet more sign that European debt woes are intensifying, Greek bond spreads over German bunds reached an unprecedented 1000 basis points today (10%) amid news that Germany would back a voluntary restructuring of Greek debt.
Greek 10 year bond yields have recently passed 13% and continue to trend higher as creditors are increasingly doubtful of Greek’s ability to repay its debt.
Should the restructuring proposal gain traction (and it’s hard to see how it won’t…they have few options remaining), the next big question is which European banks are most exposed to Greek debt and how will this affect their financial stability?