STOCK MARKET WATCH -- Monday, 10 August 2015

[Demeter]

16. The Seventh-Largest Economy in the World Spirals Down by Wolf Richter

CHINA, BRAZIL, RUSSIA....SOMEBODY'S TRYING TO LEVEL THE BRICS!

http://wolfstreet.com/2015/08/06/getting-worse-and-worse-in-brazil-service-sector-manufacturing-financial-crisis-hsbc-bradesco/

HSBC, which knows a thing or two about the world, and about Brazil, is bailing out of Brazil.

It’s unloading its “entire business in Brazil,” it said this week, including retail banking and insurance. It will hand its long list of wealthy clients and over 21,000 employees to Bradesco, one of the largest private banks in Brazil, for $5.2 billion. Too much? Bradesco’s stock has since plunged over 9%. Once the deal gets regulatory approval and closes, HSBC is out of Brazil. “The transaction represents a significant step in the execution of the actions announced during the Investor Update on 9 June 2015,” it said. After that update, Reuters had described HSBC’s motivations with these choice words:

For shareholders, betting on Brazil was risky as lenders grapple with tax hikes, weak credit demand, rising defaults, and the impact of what looks likely to be the country’s worst recession in over two decades.

The seventh largest economy in the world in 2014, according to the World Bank, is spiraling down, with private sector output, as Markit put it, falling at the “sharpest pace since March 2009.” This is how Markit titled its Brazil Services PMI report on Wednesday: “Service sector activity drops at joint-fastest rate in survey history.” The index hit 39.1 in July (50 is the dividing line between contraction and expansion), the fifth month in a row of contraction, with all sub-sectors in the survey “registering substantial falls in business activity.”

To add to the toxic mix, costs soared, with the rate of increase reaching an 81-month high, third fasted in survey history, due to “inflationary pressures, exchange rate factors, and client fee adjustment.” No green shoots in the immediate future: new orders fell for the fifth month in a row. The “deteriorating operating environment” caused the pace of job losses to accelerate “to a survey record.” Some companies still nurtured glimmers of hope: 29% of them expected activity to be higher in one year, based on the notion that the economy would somehow recover “in the coming months.”

This gloomy report on the service sector came on the heels of Markit’s Manufacturing PMI report, which had inched up to a less dreadful 47.2 in July, but remained “among the lowest since 2011, reflecting a slumping economy.” There too were some glimmers of hope, such as the “stabilization” of export orders and slower rates of declines in some categories, but mostly it was unadulterated gloom: “Brazil’s manufacturing slump extended to July.” New orders and production were in contraction for the sixth month in a row, “with tough economic conditions being widely cited by survey respondents.” Companies tried to control their ballooning costs by shedding jobs. And they cut their purchases for the sixth month in a row, and did so at an accelerating pace as “operating conditions continued to deteriorate.” This led to a decline in inventories for the seventh month in a row. Markit:

Sub-sector data highlighted broad-based declines in new orders, output, buying levels, and employment, with contractions noted across the three monitored market groups. The worst performing category in July was capital goods. Latest data pointed to a ninth consecutive monthly increase in cost burdens faced by Brazilian goods producers.

While services companies and manufactures were able to raise selling prices on average to deal with inflationary pressures, they couldn’t do so enough as “strong competition restricted some firms’ pricing power.” Hence more cost cutting where they could: In the private sector overall, job shedding “accelerated to the quickest since April 2009.”

Markit concluded that the “overall scenario” was “bleak”:

The survey indicates that the combined output of the manufacturing and service sectors suffered the largest fall since early-2009. Weak demand, high interest rates, fiscal tightening, strong inflation, and rising unemployment are expected to continue to hamper activity in forthcoming months.

These references in both reports to the trough of the Financial Crisis and to data that is the worst “in survey history” make for a chilling read. Brazil’s economic problems run deep; and a good part – as in most countries – is home-brewed….And the Brazilian real dropped to $0.2829, the lowest since 2003, down 35% from a year ago.

Perhaps it’s possible to clean up the way business got done. But the financial uncertainty and upheaval is wreaking havoc on the economy. HSBC must have seen that this wasn’t just a short-term blip, something that would blow over in a few months. It must have had visions of corporate defaults cascading through the banking system. Perhaps it imagined the possibility of other un-pleasantries that could get very costly for a bank. At any rate, it got out at a big valuation while it still could.