Australian new home sales declined by -5.6% in July M/M, to the 2nd lowest on record. The economy is highly dependent on the mining sector, which is dependent on China. Personally, I believe that the Australian economy is likely to slow much further, which is bearish for the A$, Aussie banks etc. The RBA is to meet on 4th September, though is not expected to cut rates;
Japan did indeed downgrade its assessment of its economy, for the 1st time in 10 months. They suggested that the economy, which grew by +0.3% in the period April to June, would shrink this Q. The Cabinet office added that risks included a “further slowing down of overseas economies and sharp fluctuations in the financial and capital markets”. The BoJ is expected to respond, probably in October. Political differences may also result in a financing crisis. The Yen remains strong, though……;
Analysts are reducing their forecasts for the Yuan. YTD, the Yuan has declined by -1.0% YTD and it is clear that the Chinese authorities want to reduce its value further. At present they are being held up by a fear of a response from US politicians, especially in a Presidential election year. Investors are likely to continue to export funds out of China, adding to pressure on the currency;
Spanish 2nd Q GDP declined by -0.4% Q/Q as expected. However, on an Y/Y basis, GDP declined by -1.3%, worse than the -1.0% expected, due to a weaker than expected 1 st Q, which was revised lower to a contraction of -0.6% Y/Y, from -0.4% previously. Spain will be in recession for the 2nd year – last years GDP growth of +0.7% was revised to a decline of -0.4%. Domestic demand declined by -2.2% on an annual basis in the 2nd Q, to the lowest since 2009, much worse than the decline of -1.5% in the 1st Q;
Germany and France have agreed to work together on European banking and fiscal union and growth and competitiveness issues. The working group will be headed up by Mr Thomas Steffen, the German deputy finance minister and Ramon Fernandez, the head of treasury;
German September consumer confidence came in at 5.9, slightly better than the 5.8 expected and the 5.9 in August reports GfK. They added that “German consumers fears of a noticeable weakening of the economy continued to rise in August”. However low unemployment and relatively higher wages is helping. Whilst the export and production side of the German economy continues to weaken sharply, domestic consumption has held up well so far;
Irish retail sales improve. July retail sales rose by +0.7%, as opposed to a downwardly revised -1.0% in June. This number together with other recent positive data, suggests that the Irish economy has stabilised and indeed, is picking up marginally. However, Ireland is very dependent on the EU;
Draghi has cancelled his trip to speak at Jackson Hole on Saturday, due to a “busy schedule”. Hmmmm. Clearly it would be difficult for him to comment. However, its getting tricky;
Fitch has warned that the US faces a downgrade to its AAA rating in the 1st half of 2013. Mr Riley of Fitch stresses the negative impact of the fiscal cliff. (Source Bloomberg). The news has resulted in the Euro rising further – currently US$1.2549;
Outlook
Asia markets closed mixed and European markets are marginally lower. Futures suggest a flat US open. The Euro is strengthening against the US$, following Fitch’s comments. Brent is around US$112.74, up on the day, with gold flat at US$16635. US, UK and German bond yields are relatively flat. Still find it difficult to believe that UK 10 year yields are below that of the US (1.51%, as opposed to 1.65%) with German 10 year yields at 1.36%.
I’m getting increasingly cautious and remain highly liquid.
The A$ and, for example, Australian banks, look overvalued. The country’s dependency on China looks more than just problematical. For full disclosure purposes, I’m short.
Kiron Sarkar
28th August 2012
