Asian perspective on the US Presidential debate

<p>Two key issues stand out from today’s US Presidential debate for the markets. The first is an on-going focus on the price of fuel which […]</p>

Two key issues stand out from today’s US Presidential debate for the markets. The first is an on-going focus on the price of fuel which ordinary US citizens are paying – it’s a point which we have focused on in the past and one which we hope to elaborate on here. The second is the issue of China’s economic competitiveness and how Romney plans to address the manufacturing challenges in the United States.

Fuel prices dominated a good part of the debate – the conversation turned towards which political party has done what for the local oil production industry in recent history, but there is no doubt that the topic was raised because the US economy is starting to feel the pain of high prices. The recent BP Energy Statistical Review showed that the United States is still the largest global consumer of oil by a very large factor. The US economy consumes in excess of 18 million barrels of oil per day, around twice the amount of China.

Sure, President Obama’s assertion that oil consumption is moderating is factually true. The rate of growth in consumption in developing economies compared to the United States is much higher. The Obama administration has taken some solid measures in order to promote fuel efficient transportation but the impact is unlikely to be material to oil consumption and energy markets in the near term, maybe in a decade or so. Brent crude is likely to struggle rallying above US$115 per barrel ahead of the December OPEC meeting as the US economy struggles to contain higher energy costs.

The world’s largest consumer of oil is feeling the economic pressure of an elevated price and the world’s largest swing producers – namely Saudi Arabia – will be vocal in their ability to help drive down the price towards something more sustainable. Our US$105-$115 range for Brent is unchanged though until the end of 2012. The points President Obama made about renewed piping and drilling of previously unconventional energy sources is also very important. The recent fall in the US natural gas price is in direct reaction to growing supplies entering the market. It’s something neither candidate touched upon.

Energy markets will be closely watching any future plans to expand US energy independence. The outcome for pricing is crucial over the next few years. The United States not only houses huge energy reserves but has the right infrastructure and geography to make sure it can be extracted and sold into the domestic market at an economic price. China on the other hand enjoys large reserves, but lacks the technical expertise and geological attributes to make new investment profitable in its shale reserves.

More on China and the currency wars

This brings us to our next point. The conversation among US politicians about China’s currency is nothing new, President Obama to his credit did note the efforts by China to revalue its currency gradually, which have recently been flowing through to the market. The thing that struck us most was Romney’s focus on Latin America – a key threat to China’s competitiveness. Not only does Latin America have significant labour cost advantages but it also has a geographical advantage in that it lies on the doorstep of the United States. Eventually, the Chinese coastal manufacturing hubs will start to compete more aggressively with places like Mexico and the Chinese know this very well.

The shift towards Latin American trade ties is nothing new, but if hawkish US politicians were to run the White House, one way they could chip Chinese competition away would be to push further south in trade ties. Between 1998 and 2009, trade between the United States and Latin America grew an average 82%, surpassing a 72% average with Asia. The next decade will be very interesting.

The rhetoric is likely to see China ramp up the development of its second and third tier cities, knowing very well that if migrant workers move back home because of changes in the jobs market, they need new jobs at home. China is likely to announce more plans in coming months similar to the ones of its Central Plains policy which we previously wrote about in our note titled “Is the Chinese growth story over?”

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.