EU referendums create chaotic market
Macroeconomics
Over the past two weeks we have been given a true demonstration of how sick the patient called
The idea of a united Europe has clearly failed to appeal to its people and the two referendums in
The case, however, also demonstrates that people need faith in their economic situation and in the future outlook. At least three of the major European economies – Germany, France and Italy – are underperforming badly and there is little sign that they will swiftly manage their structural problems. In Germany the situation has even forced the government to consider earlier elections.
These fundamental problems in Europe have suddenly impacted the financial markets, particularly the currency market. The euro was suddenly sent into freefall and finished the decline on the level of 1.22, pushing concerns of the US deficit into the background.
Political leaders in Europe seem unprepared for this situation. It will take some time before stability is restored and Europe is now steeped in questions regarding the future existence of the euro.
Consequently, we have to expect further surprises from the currency market in the near future and it seems that the trading range for the summer will rank between 1.17 and 1.25.
As part of this 'earthquake', the financial community also delivered mixed information, urging financial analysts to voice many different opinions on the future of the global economy. One thing, however, can be said for sure: it has been a long time since we last saw so much conflicting economic data as we are seeing at the moment.
On the positive side, the American housing market continues to deliver a strong performance. Not only do housing sales remain strong but also property prices continue rising. Nobody can forget that exaggerated real estate markets generate a sense of wealth but can eventually become very dangerous to the economy. Orders of durable goods also rose in the USA and consumer confidence climbed again in May after the drop in April.
On the negative side, there was a drop in the purchasing manager index. In Europe the financial indicators were more negative with Germany’s economic sentiment heading south and the slowdown in the French economical activity.
Market intelligence
It is a difficult time to write about the leather pipeline. Day-to-day activity is more and more failing to deliver real information. Reports published around the globe lack valuable news or good stories. In fact, this applies to us as well.
Many publishers are concerned that readers might think they have a lack of information or insufficient sources. Well, there may be an element of truth in this. We have to deal with the fact that the key decisions in the pipeline are more and more taken behind closed doors and by fewer people.
We feel a lot of this has come with US reports. Most of them have recently not been very positive about the raw material markets, pointing to low sales and buyer interest, yet the market was not reflecting it at all. To the surprise of many, prices did not indicate a weaker trend which would reflect the sellers’ inability to generate sufficient sales and find homes for their products. Quite the reverse, the market was even able to obtain advances within a small range.
This is another issue. Small price movements are being turned into headlines these days. However, a closer look at the trading ranges, which we have had the chance to get used to in the past weeks, shows we have to accept the fact that raw material prices will remain within a very narrow trading range worldwide.
This makes life of independent traders much more difficult. Without a certain market valuation, it is almost impossible for them to generate an acceptable profit margin out of the market movements. This might also be the reason why reports from trading companies sounded much more pessimistic than conversations with producers.
It seems that we all have to accept that prices for raw material and leather have found a comfortable level and none of the market forces are really strong enough to drive them away from the plateaus.
Tanners and leather manufacturers, however, are still experiencing a strong purchasing drive from brand names and retailers, hoping that most of this pressure can still be absorbed by the raw material markets. A reasonable argument exists that this is not going to happen.
We believe, however, that the currency markets may influence the price direction in the coming months much more than any other factor. We must not forget that the exchange rate between the dollar and the euro has adjusted by around 10% since the beginning of the year. This is the first time in the constant process of devaluation of the American currency that the euro has lost a significant portion of its value over a longer period of time. If our assumption is correct the euro will not recover or, to phrase it better, the dollar will not continue its decline in the course of the summer . We may, therefore, see movements in hide prices as a reflection of the currency market.
Although they are not only expected in the raw material prices, the influence of currency fluctuation is not as direct and short term in manufacturing and retail. At the end of 2004, when there was a very weak trend in the dollar, all forecasts saw it falling further in 2005 and the only question was by how much. With the euro the level of 1.40 was taken as a fact, the only question was when.
Consequently, many businesses made their calculations and strategic decisions at levels which we have, at least until now, not even neared before. It seems pretty unlikely in current circumstances that the dollar will near anticipated levels in the coming months, possibly not ven until the end of the last quarter. If this scenario proves true, we will at least trade for nine out of 12 months in 2005, far away from the earlier projections.
Although there is a fairly long time lag between currency fluctuations and the effects down the pipeline, we think time has come to expect influences. The only question is whether it is going to inflate or deflate non dollar price levels.
Since the US dollar is still the basic currency for most raw material and consumer products, the probability that the effects are going to be more pronounced in the non dollar markets seems much higher. So, it might be advisable for those affected by the situation to reconsider and analyse the present parameters in the currency market and to decide what the influences on the individual businesses are going to be.
So far we have not seen any direct reactions. Quite on the reverse, dollar prices rose while prices in Europe were said to sense the market and price resistance, which only the preferred selections able to escape.
The split market in the past two weeks has seen a little bit of increasing interest. Splits deriving from blue splitting operations in particular successfully attracted more buyers. The price remains an issue but declines have not been rec orded and some pretend that even fractional increases were obtainable.
Splits from lime splitting operations are facing difficulties. Very high substance material is in short supply. Additionally, only splits suitable for suede can find buyer interest. The rest, i.e. the vast majority, is either too expensive or does not fit into the market frame of the articles.
The skin market has lost a lot of it is speculative momentum. All the gossip and rumour about the phantom buying cheap inventories, in particular in Europe, has evaporated. We fail to trace any evidence of great interest or large sales, except for the very high quality skins and the cheaper offers, particularly from the UK.
The main markets in Europe, such as Turkey and Poland, are reportong very limited interest for finished products and many sellers are still suffering from excessive inventories. Also China, the new star on the horizon, is not performing in skins as well as it should, suffering not only from fashion tendencies but also from the restrictions in the Russian trade. All the hope has to concentrate now on the next season and, as mentioned in the previous issue, the price of the raw material cannot be the prohibitive factor anymore.
There is still very little reason to expect more than just market adjustments in the coming weeks. Europe is ahead in the almost final round of price fixing before the holidays and anything other than a very restricted variation of prices would come as a surprise. High quality hides and heavy male hides are still definitely in very short supply.
This may enable sellers to squeeze a few more percents out of their buyers but cannot be seen as a road to new levels. In cows and hides used mainly in the standard upholstery productions, the higher value of the dollar could partly be offset by the declining demand of the European tanning industry.
The interesting part of the game is the demand in hides from Asia over the summer. If the Asian buyers take a reasonable amount of hides, which would not come as a surprise in July/August, the market may have the chance to reach new levels in the months to come. However, if we are to take a position, we believe more in the scenario that prices will continue to trade in very narrow ranges, mainly influenced by currency issues. New directions will finally be set after mid September.
