The Japanese government is to hold a special cabinet meeting today – more spending to stimulate their flagging economy?. Last week the authorities downgraded its economic assessment for the 3rd consecutive month. There is talk of an additional budget, as the country will not be able to settle its bills, post November, without raising additional funds. Political gridlock continues, with the opposition LDP demanding new elections by the year end – the DJP has suggested that they will be called “soon”, though clearly is delaying, given its low ratings in the polls. Japan is degenerating into a basket case;
The Chinese Yuan rose to a 19 year high. Anything to do with the impending US elections, do you think?. Governor Romney stated that he would call China a currency manipulator on the 1st day of his Presidency, if elected !!!!. That would have got China’s attention;
Greek media reports that talks with the Troika have broken down, though later said that progress was being made – well, it is Greece. The Troika are insisting on labour changes (a lower notice period in respect of dismissals, combined with lower compensation), together with an immediate reduction of the extremely bloated public sector. Mr Kouvelis who heads up the second largest party, the Democratic Left, is refusing to concede. Mr Venizelos, the leader of PASOK reports that the Troika is playing for time, which is almost certainly true. The saga continues and continues and…………The next meeting is scheduled for next Tuesday. Greece revised its 2013 GDP forecast to -4.2% Y/Y;
The Italian budget deficit came in at E50.5bn for the period Jan to Aug 2012, marginally lower than the E51.2 reported in the same period in 2011. Italy runs a primary surplus as well. Recent data suggests some stabilisation of its economy and the government is cutting some taxes, whilst reducing a proposed VAT rate increase;
A senior German MP retracted his statement that a precautionary line of credit, from the EFSF/ESM, for Spain was acceptable to the German’s. Obviously he has been summoned to appear before headmistress Merkel and had to recant. The German position remains the same ie that they want to try and avoid seeking Parliamentary (the Bundestag) approval at this time (as they fear a rebellion from the FPD and members of the CDU, as well – the opposition, who in the past has enabled Mrs Merkel to achieve her majority in the Bundestag has demanded “political concession” if their support is required in the future) and to try and resolve all bail outs in one go. However, if Mrs Merkel’s party and her coalition partner continue to get stroppy………..Spain will, finally, request a bail out – it cannot survive with borrowing rates at these levels. At that time, I cant see Germany agreeing to a condition lite bail out – Mrs Merkel will have even more difficulty in persuading the Bundestag. The bottom line is don’t expect a request for a bail out (by Spain) any time soon. Moody’s reaffirmed Spain’s credit rating at Baa3 (with a negative outlook), though advised that it would cut the rating by more than 1 notch, if there was doubt as to sovereign financing. The Spanish PM continues to dither;
A senior German official clarified the German position ahead of the EU Heads of State Summit. He stated:
- Don’t expect any decisions on banking union;
- Expects central invention if countries beach EU rules in respect of national budgets;
- Pushing for economic coordination within the EZ;
- It was up to Spain to decide whether it wanted a bail out or not;
- Spain was on the right course with its reforms and is supported by Germany;
- Any direct aid for banks would require prior agreement on bank supervision;
- Many of the reforms would require a new EU treaty;
- Conditionality is part of every aid programme and it was up the Troika as to the conditions;
Pretty clear stuff. The market is ahead of itself.
Mr Asmussen, one of the 2 German representatives on the ECB board, stated that the EU Commission should have the power to reject national budgets (of EZ countries) in their entirety if they don’t credibly meet their targets – almost certain in the future. He does not expect a discussion on Greece tomorrow and certainly not ahead of the Troika’s report;
Mr Pandit was indeed removed due to disagreements over poor execution (failure over the stress tests, sale of banks stake in Smith Barney, etc) and, in addition, discussions over succession planning, which he objected to. Yesterday’s alleged “resignation” by Pandit seemed more than a little strange. As you know, I have never rated Mr Pandit and, as a result, do not believe that his departure is a great loss – quite likely the reverse. Sheila Bair, the former head of the FDIC, stated that Mr Pandit’s ousting was “a positive move”. Analysts suspect that the new CEO, Mr Corbat, an experienced banker, will prove better. Citi shares having declined following the unexpected news, closed higher – the new CEO certainly has his work cut out;
The German government has reduced its 2013 GDP forecast to +1.0%, from +1.6% previously, though raised 2012 to +0.8%, from +0.7%. It cut 2013 export growth to 4.4%, from 5.0% and kept its 2013 inflation forecast at +1.9%;
UK August unemployment fell to 7.9% over the last 3 months, better than the 8.1% rate expected. Jobless claims fell by 4.0k, helped by the Olympics. The number of people in work surged by 219k to 29.6mn in the Q to August, the highest since records began in 1971. Sterling improved on the news;
US industrial production rose by +0.4% in September, much better than the -1.4% fall in August, (the largest decline since March 2009) and better than the rise of +0.2% expected;
The US NAHB builder sentiment index increased to 41 in October (40 in September), the highest since June 2006. Whilst better, a reading of 50 is a neutral reading, though I continue to believe that the US residential housing market is improving;
President Obama won the TV debate last night, but not impressively. However, the win will have stabilised his campaign, which was faltering. Governor Romney put up a solid and determined performance, though wanted to appear to be all things to all persons – a difficult task. However, no blood was drawn by either side. Intrade raised President Obama’s chances of winning to just under 64, following the debate, from 61.5, before. A CNN poll reported that 46% believed that President Obama had won, as opposed to 39% who thought Governor Romney had won. Other polls had a similar margin in favour of the President. It remains a tight race however;
US September housing starts rose by 15% to an annual rate of 872k annual rate, the highest for 4 years and well above the forecast of 770k. Building permits surged as well. They rose by 894k on an annualised basis, well above forecasts of 810k and also the highest since July 2008. Permits have soared by 45.1% since September 2011, the largest rise since 1983. Three of the four US geographical regions posted gains, with the West the best at 20.1% higher. The North East slowed. I really cannot understand why some analysts believe that the US housing market has not recovered – there’s enough of a data set to suggest it has.
Asian markets closed higher, with European markets following. US markets rose markedly last night. US markets have opened lower, though I would expect them to pick up. The Euro is trading around US$1.3120 on expectations of an imminent deal on Spain – optimistic, in my view – I don’t expect a deal until mid to late November at the earliest. Brent (December) is at US$113.91, with gold at US$1751.
Don’t fight the FED is the normal cry and well understood. Well, investors want to fight the ECB – pretty stupid in my view, especially, as ultimately it will do much more than the FED. Draghi has proved to be a master at playing the game, rather than that clown Trichet. OK, so no unsterilised QE in the EZ, as yet, but………….
I will not be keen to short these markets, with the Central banks opening up the taps and a lot more likely from the ECB, in particular, in coming months.
Have a great day.
17th October 2012