For the astute listener, second- and third-order effects were the golden nuggets of information that could be gleaned from the presentation of CME Group Chief Economist Blu Putnam this week at the 41st Annual International Futures Industry Conference in Boca Raton, Fla. Putnam's high-level perspective on the 2016 outlook for the global economy was overall strong, but he noted differentiators in the data, which could be of concern going forward.
The futures market dynamics in east Asia are not only volatile, but spread across multiple sectors. Whether it be iron ore, copper, or oil, Chinese markets are not expected to take on heavy volatility in these sector without problems.However, Putnam noted that all of those commodities seemed to be bouncing off of their lows (see chart).
A second order effect of these changes will be realized within China's outlook in the foreign reserves sector; export stagnation and capital outflow are key differentiators that might lead to further depreciation of the RMB. Putnam noted a case-in-point example of the price of British Thermal Units (BTUs) of crude oil versus natural gas. The purchase power of one US dollar can buy roughly 2.5 times more BTUs of US natural gas than BTUs of US WTI Crude Oil (see chart).
The El Niño Use Case
Speaking on the effects of weather on markets, Putnam noted the the relationship between El Niños and La Niñas. Since 1950 there have been 11 El Niños followed by 8 La Niñas. The stronger an El Niño comes on, the stronger a La Niña does as well; the inverse of those is also true. This is something Putnam highlighted as La Niña means a huge flip on wet/dry areas. The speed with which this year's El Niño formed should be a cautionary tale for those in futures and risk management (see charts).
The China Volatility Use Case
In sidebar conversations, Putnam highlighted the myriad challenges a rising China battles, including:
- Missing internal growth projections
- Quelling internal uprisings
- Rising as a leader in markets in Asia
- Fixing the RMB
- Balancing an aging population with a mass of migrant workers
- Managing the results of a decades-old one child policy
The issues China faces going forward are as a numerous as the possibilities to find a solution. While Putnam did not offer his take on a possible solution, he did say he believes China has about 5-7 years before the country levels off, which to an already slowing China will feel like negative growth.