Saturday, January 2, 2016

Saudi executions spell tension; When corporate profit margins fall, can recession be far behind?; China's major military restructuring

1 Saudi executions spell tension (BBC) The United States has expressed concern that Saudi Arabia's execution of prominent Shia cleric Sheikh Nimr al-Nimr could further exacerbate sectarian rivalry in the Middle East. The US State Department urged leaders throughout the region to redouble efforts to lower tensions.

Iranian protesters angry over the execution stormed the Saudi embassy in Tehran, setting fire to the building. Sheikh Nimr was one of 47 people executed for terrorism offences. He was a vocal supporter of mass protests in the Saudi Arabia's Shia-majority Eastern Province in 2011.

Sheikh Nimr's execution sparked anger and protests in Shia communities across the region, with protests in Saudi's Eastern Province as well as in Iran, Bahrain and several other countries. Earlier, the diplomatic reaction from Shia-led Iran, the main regional rival to Sunni-led Saudi Arabia, had been fierce.

The foreign ministry in Tehran said the Sunni kingdom would pay a high price for its action, and it summoned the Saudi charge d'affaires in Tehran in protest. As the main Shia power in the region, Iran takes huge interest in the affairs of Shia minorities in the Middle East, making it inevitable that the two countries would clash over Sheikh Nimr's treatment.

Protesters shouted the slogans "The people want the fall of the regime", and "Down with the al-Saud family", reminiscent of the 2011 protests in the wake of the Arab Spring. Sheikh Nimr's arrest in 2012, during which he was shot, triggered days of protests in Eastern Province in which three people were killed.

Saturday's executions were carried out simultaneously in 12 locations across Saudi Arabia. Of the 47 executed, one was a Chadian national while another was Egyptian. The rest were Saudis.

2 When corporate profit margins fall, can recession be far behind? (Khaleej Times) Corporate profit margins are falling, an event that has occurred before every recession since World War Two. What's more, they are falling from record territory, which might imply either a rapid and bumpy descent or a long and slow one. 

By its preferred measure, Deutsche Bank says US corporate profit margins are down 7.3 per cent from their peak in the third quarter of 2014. Since the average time from peak to recession, at least since 1946, is eight quarters, that might put the US in line for a downturn in the second half of 2016.
It may be the US economy that catches a cold from the rest of the world, with a deepening and broadening downturn in emerging markets giving force to the usual downturn in investment that follows a fall in profits.

The slowing in China and its transition from an investment-based economy that sucks up natural resources to something more domestically focused is already dealing substantial pain to emerging markets, from Brazil, which is in recession, to South Africa, which is widely tipped as a candidate for one early next year.

All of this makes 2016 likely a difficult year for riskier assets like equities. The best-case scenario is gently rising wages and declining margins buffered by revenue growth as those higher wages are spent. But consumers still seem unwilling to use much leverage to expand their buying power, a factor that could blunt the positive impact of stronger wage gains if they come.

The negative scenario is quite a bit worse. If we were to get the beginning signs of a recession late next year, perhaps touched off by some debacle in China or emerging markets, the Federal Reserve would find itself with perhaps only 75 basis points of interest rates to cut. That would be a unique set of circumstances and not likely one investors will enjoy

3 China’s major military restructuring (Kor Kian Beng in Straits Times) China has launched its most ambitious military restructuring process in six decades, including the setting up of a separate leadership structure for land-based troops in the People's Liberation Army (PLA).

Observers say the move to set up a new general command unit for the army marks a shift from the current army-centric structure towards a Western-style joint command, in which the army, navy and air force are equally represented. Before, the PLA General Staff headquarters had exercised leadership over the army.

China has also set up a "Strategic Support Force" likely tasked to beef up its capabilities in cyber and electronic warfare, among others. A "Rocket Force" will replace the Second Artillery Corps (SAC) in controlling the nuclear arsenal.

Chinese President Xi Jinping said the military restructuring was part of a major decision by the Chinese Communist Party (CCP) and the Central Military Commission (CMC), which controls the PLA, to "realise the Chinese dream of a strong military".

Other key reforms set to take place include the re-zoning of the seven military regions into five new strategic zones; setting up a joint operational command structure; and cutting the 2.3 million PLA troop numbers by 300,000.

Chinese media say the changes mean China now has four armed services - the army, navy, air force and missile force. Hong Kong-based analyst Liang Guoliang said the Strategic Support Force is likely to operate as a de facto armed service.

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