Japanese exports slump

BHP has halted its US$20bn copper/uranium development. The Olympic dam project is another example of declining investment in the mining sector, including by Anglo American and Xstrata, mainly due to a sharp slump of exports to China. In addition, a number of Chinese customers continue to default and/or delay shipments of base metals. Profits (net income) at BHP declined by some 35%. However BHP remains committed to US$23bn of projects;

Australian banks overvalued?. A report in the FT states that the market cap of 4 of the largest Australian banks (ANZ, CBA, NAB and Westpac) exceeds the market cap of US Bancorp, Goldman’s, StanChart, Deutsche and the entire UK banking system. Since September last year, the Australian banking sector has rallied 35% while eps are unchanged and has delivered growth of just +1.5%. Hmmmmm. Overvalued, do you think. The next question is what about the A$?;

Japanese exports in July declined by -8.1% Y/Y, the most in 6 months and much worse than the drop of -2.9% expected. Much of the decline was due mainly due to a sharp reduction (by -25.1%) of exports to Europe – the largest decline since October 2009 – Japan posted a trade deficit with the region. Exports to China, Japan’s largest trading partner, declined by -11.9% Y/Y. However exports to the US rose by +4.7%, though were lower for the 3rd consecutive month. Imports rose by +2.1%. Overall, Japan’s trade deficit rose to US$6.5bn, almost double forecasts. Orders for exports to Taiwan, a forward looking indicator, dropped by -4.4% Y/Y (Source Reuters);

Yesterdays Yuan 220bn reverse repo operation will reduce expectations of an RRR cut, reports the Chinese Securities Journal. China certainly is taking its time to ease monetary policy and introduce more fiscal stimulus measures;

India intends to restructure US$35bn of debt accumulated by utilities to avoid another major blackout. Short term debt will be transferred to the relevant States, with the balance rescheduled by banks, with a 3 year moratorium on principal repayments. At present interest payments are being financed by additional borrowings. However, the bottom line is that electricity is subsidised, particularly to farmers, which is not refunded by the government;

Russia joins the WTO today, following a 15 year wait. It will be interesting to watch the impact in coming years, though hopefully it will help to introduce much needed legal, structural and other reforms in the country, amongst other things. Whatever, there will be more focus on its markets, which as I reported yesterday, looks very, very cheap;

The Greek PM is scurrying around Europe trying to get an extension on fiscal targets and, in addition, seeking further assistance. The problem is that most EZ countries cannot sell that deal to their electorate. In any event, the decision on Greece will be delayed – to October at the earliest;

The French PM stated that France would meet its budget target of 3.0% next year, even if they did not achieve their growth target of +1.2%. He added that economic growth “cannot be decreed”, in other words, the target will not be achieved – France has had zero growth for the 3 Q’s ending 30th June. The Pm did not rule out tax hikes on earnings, dividends and investment gains, though suggested that payroll taxes would be reduced. The PM also wants to reduce E25bn of its trade deficit, currently E70bn (of which E45bn is due to energy imports), over a 5 year period;

US mortgage applications dropped by -7.4% last week following a rise in mortgage rates as the 10 year bond yield rose to 1.80% – the 30 year rate rose to 3.86%. I suppose that could be an argument for QE43 – to buy MBS’s. However, a leading indicator for home sales (loan requests for home purchases) was +0.9% better (Source CNBC);

Sales of existing homes rose by +2.3% to a seasonally adjusted annual rate of 4.47mn, slightly lower than expected. Sales increased in the N E and the South. Slightly lower than expected, but the housing sector is improving, though at a muted pace. The key to the US economy remains a pick up in US home prices. Refi’s are not available to many, which is stifling a more robust pick up;

Glencore is playing hardball, threatening to withdraw from its offer for Xstrata unless the Qataris accept their offer. However, the CEO Mr Glasenberg has not deemed Glencore’s offer final, which still enables him to increase his offer. Tough call, but unless the sector declines materially, I suspect the deal will go through, quite possibly on somewhat better terms;

Outlook

Asian and European markets are off today, though US markets have opened flat – no particular reason, other than the weak Japanese export data.

I have been and continue to be cautious on the markets – don’t see any reason to change my mind.

The Euro is coming off its highs, though is still trading around US$1.2440. Bernanke is unlikely to hint at QE3 at Jackson Hole – bearish for Euro, if I’m right. However, Draghi is likely to deliver – positive for Euro. The decision by the German Constitutional court – impossible to assess, certainly at present, but I’m cautious, given their inclination to say yes, but……Then there’s the Dutch elections on 12th September. The lefter leaning parties are gaining ground and are anti the fiscal compact, one of the fundamental conditions imposed by the Germans – not good news. Basically, too much risk for little old me. Will sit back, cashed up (US$’s) and wait.

UK 10 year bonds are yielding 1.63%, whereas equivalent 10 year US bonds are at 1.75% (off over 5bps this morning). With UK borrowing likely to rise above forecast, that’s difficult for me to understand. However, the BoE will buy 40% of the UK Gilt market and may well increase further, whilst the FED has bought less than half that.

VIX up a bit – currently over 15, but still far too complacent. Gold is up to US$1640, with Brent (Oct) at US$114.

Kiron Sarkar

22nd August 2012