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Supply chain disruption: is the worst over?

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November 3, 2021

By Stefano Rebaudo

(Reuters) – As companies, investors and policymakers fret over port logjams, freight costs and chip shortages, some indicators are starting to signal that global supply chain stress may be on the wane.

Supply chain glitches dominated the latest company earnings season, with mentions of the issues by chief executives jumping 412% from last year, according to a BofA tally.

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The coming months will show if the snarl-ups portend a toxic scenario of stagflation for the world economy or are just a bump in the road to recovery. They will also determine how inflation expectations, monetary policy and corporate earnings pan out.

Here are some indicators that may show the problems easing:

1/SHIPS AND PORTS

Cargo shipping costs tracked by the Baltic Exchange Dry index are down a third in the past month after hitting their highest since 2008 in October.

Further out, data from shipbroker Alibra Shipping shows six-month contracts for Atlantic and Pacific Ocean routes cost $54,000 and $52,500 a day respectively for capesizes, the largest dry cargo vessels. For contracts in 12 months, Pacific routes slip to $36,000 and then $26,000 two years out.

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“This could mean the market doesn’t anticipate that the port congestion situation will be as big a problem next year,” Alibra’s head of research Rebecca Galanopoulos said.

Port congestion has eased at most Chinese ports but the giant Los Angeles/Long Beach container port still has a backlog of 222,0000 TEUs (twenty-foot equivalent unit), RBC analyst Michael Tran said.

RBC’s Time of Turnaround metric for the key U.S. port is at 7.5 days compared with 3.5 days before the coronavirus pandemic and Tran doesn’t expect normality to be restored until May 2022.

(GRAPHIC: Baltic Dry index – https://fingfx.thomsonreuters.com/gfx/mkt/znpnekdlavl/Pasted%20image%201635937608713.png)

2/INVENTORIES

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Purchasing managers say delivery times for manufacturers worldwide are deteriorating, with the global delivery time index down to 34.8 last month. Any number below 50 shows deliveries are taking longer and October’s reading was the worst on record.

Jefferies analysts expect shortages to intensify at the end of 2021 before demand shifts towards services. They said that should ensure supply chain bottlenecks begin to clear by the first quarter of 2022 as seasonal demand drops sharply and inventories are rebuilt.

The purchasing mangers orders-to-inventories ratio in the euro zone has been declining and some manufacturers are already bracing for shortages to turn into gluts https://reut.rs/3nVb9D7.

“Today’s level of durable goods demand is unsustainably high,” said Paul Donovan, chief economist at UBS Global Wealth Management, who expects consumers to switch away from buying goods to buying more services.

(GRAPHIC: global PMI – https://fingfx.thomsonreuters.com/gfx/mkt/byvrjrznqve/global%20PMI.JPG)

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3/CHIPS

The outlook for semiconductors is murkier.

Chip shortages will cut global light vehicle production by 5 million this year, IHS Markit estimates, while some carmakers warn that constraints could last through much of 2022 https://reut.rs/3nND2g.

Toyota executive Kazunari Kumakura, however, said the worst was over https://reut.rs/3nMHfRq.

Asset manager Capital Group says carmakers who cancelled orders when the pandemic hit were then caught out as spiralling chip demand from the gaming and cloud computing sectors gobbled up available semiconductors.

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“Since it takes about four months to manufacture auto chips, the situation is likely to correct itself by the end of this year,” the asset manager wrote in August.

While Malaysian chip suppliers predict it will take two to three years for the market to normalise https://reut.rs/2ZKCIqr more broadly, the industry is also boosting production with Q3 sales rising to $145 billion, the Semiconductor Industry Association says.

(GRAPHIC: semiconductorsales – https://fingfx.thomsonreuters.com/gfx/mkt/znpnekdkavl/semiconductorsales.JPG)

4/WOOD, PAPER, METAL

China’s growth slowdown may play against further commodity price rises, with the Fitch agency noting that weaker property markets are “resulting in a plunge in the price of iron ore”.

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Beijing has also moved to tame energy prices after power shortages shuttered swathes of factories and mines. Those steps knocked coal futures off record highs and also hit metal prices.

Similarly, China’s record paper pulp market rally early this year sent prices sky-rocketing globally, causing shortages of packaging materials. But since May, Shanghai-traded wood pulp futures are down 30%.

U.S. futures for lumber, a key housebuilding component, are also 60% below springtime highs.

(GRAPHIC: supplyshock – https://fingfx.thomsonreuters.com/gfx/mkt/zgpomkwkqpd/supplyshock.JPG)

5/COVID

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Vaccination rates against COVID-19 are creeping higher in key manufacturing nations, especially chip suppliers such as Malaysia and Taiwan, making production disruptions less likely.

UBS estimates vaccination rates in Vietnam, Taiwan and Malaysia should reach 80% by January 2022.

Jack Janasiewicz, portfolio strategist at Natixis, is optimistic about supply chains, as long as COVID-19 is tamed.

“If we can’t keep COVID under control, we’re going to end up having the same issues again and again. They’re going to keep coming in waves,” he said.

(GRAPHIC: lumber – https://fingfx.thomsonreuters.com/gfx/mkt/znvnekdjopl/lumbercorrected.JPG)

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(GRAPHIC: shippingindex – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwexgxmvw/shippingindex.JPG)

(Reporting by Stefano Rebaudo; Additional reporting by Saikat Chatterjee; Editing by Sujata Rao and David Clarke)

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Investors brace for potential hit to earnings because of Omicron

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December 6, 2021

By Caroline Valetkevitch

NEW YORK (Reuters) – As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to U.S. corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.

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That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.

“Are we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?” she said. “The other area of vulnerability of course is supply chain disruptions.”

She and other strategists said it’s too early to tell the extent to which the variant could affect earnings.

The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of U.S. states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, U.S. health officials said on Sunday.

Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for U.S. economic growth to 3.8% for 2022. While the variant could slow economic reopening, the firm expects “only a modest drag” on service spending, it said in a note.

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U.S. companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarter’s.

Analysts see fourth-quarter S&P 500 earnings up 21.6% from the year-ago quarter, while third-quarter earnings growth was at about 43%, according to IBES data from Refinitiv.

That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.

Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index down 8.3% since the close of the session before Nov. 26.

For companies, “the significance of the impact will depend on how long the Omicron measures last,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “There will be some short-term impact… It’ll surely cause some short-term disruption to travel.”

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Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in U.S. air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.

“This recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, they’ve been comfortable flying on airplanes,” he wrote.

Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.

Even before the Omicron news, Tuz said investors were reading “more and more about inflation and wages and other inputs,” and that was expected to continue into 2022.

“I don’t know if the ability to pass along these higher costs is going to exist as much,” he said.

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(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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Bank investment chiefs signal China and emerging market caution

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December 6, 2021

LONDON (Reuters) -Market volatility and uncertainty over China’s indebted property sector is making bank investment chiefs cautious about its assets, amid more general nervousness about broader emerging markets.

“I would take a wait-and-see approach on emerging markets,” Credit Suisse global chief investment officer Michael Strobaek told the Reuters annual Investment Outlook Summit.

“I would take a day-by-day, week-by-week approach to China, to see what’s unfolding on the default side and the policy side,” he said, referring to problems in the country’s giant corporate debt sector.

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“Only if I see real deep opportunities, I’d go back in.”

Willem Sels, Global CIO, Private Banking & Wealth Management, HSBC, said clients needed to take a longer term view on emerging markets after many were hurt by recent volatility.

“We have a neutral view on China, we try to diversify,” he said.

“We try to get the confidence of investing in China. We try to align ourselves with what is clear in terms of government policy, and that’s the net zero transmission.”

Investors can still “find some winners” in China by digging down into areas like green tech and 5G-related businesses where the government was showing significant support, said Mark Haefele, CIO at UBS Global Wealth Management.

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(Reporting by Tommy Wilkes, Sujata Rao and Dhara Ranasinghe; Editing by Alexander Smith)

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IMF says euro zone should keep supporting economy, high inflation is temporary

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December 6, 2021

BRUSSELS (Reuters) – Euro zone governments should continue to spend to support the COVID-19 economic recovery, though in an increasingly focused way, and consolidate public finances only when it is firmly under way, the International Monetary Fund said on Monday.

In a regular report on the euro zone economy presented to the group’s finance ministers, the IMF noted, however, that while consolidation itself could wait, a credible way of how it would be done in the future should be announced already now.

“Policies should remain accommodative but become increasingly targeted, with a focus on mitigating potential rises in inequality and poverty,” the IMF said.

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“Fiscal policy space should be rebuilt once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now,” it said.

The Fund also noted that the rise in inflation, which hit a record high of 4.9% on a year-on-year basis in November, was temporary and, therefore, not a big threat because it did not translate into a spike in wages, called a second-round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with large second-round effects unlikely,” the report said, adding that the European Central Bank’s monetary policy should therefore continue to be accommodative.

“Structural reforms and high-impact investment, including in climate-friendly infrastructure and digitalization, remain crucial to enhancing resilience and boosting potential growth,” the IMF said.

(Reporting by Jan Strupczewski; Editing by Paul Simao)

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