Australia’s forex reserves have risen materially – A$863mn in August and September. Basically, the Australian authorities are not converting forex inflows into A$’s – shows that they are concerned about the strength of the A$. Recently, the RBA has stated that the currency “was weighing more heavily on the economy than might have been expected”. I remain short, though reduced my short position recently – quite probably a mistake. (Source FT);
Japanese retail sales rose by just +0.4% Y/Y in September, much lower than the +1.7% rise in August and worse than the +1.0% expected. Sales declined by -3.6% in September M/M, the largest decline since March 2011. The cessation of subsidies on cars impacted the numbers. With domestic consumption declining, combined with a downturn in exports, the economic situation in Japan is worsening, with the likelihood of declining GDP in the 2nd half of 2012.
The Japanese finance minister states that Japan will run out of funds by the end of November unless the Parliament approves a bill to allow for further borrowings. The opposition have been blocking measures, demanding that the government first call a general election. This will, most likely, play out right down to the wire.
The BoJ meets tomorrow – expectations are that they will announce an increase in the asset purchase programme of Yen10tr, together with firming up their language towards reaching an 1.0% inflation target – expected to be changed to inflation “goal”;
Chinese markets declined to a 1 month low today. With corporate earnings and revenues from sales of land declining, the central authorities and the regions are facing reduced revenues. Reduced revenues will clearly restrict spending. Protests over building plants which are adding to pollution is rising. A planned petrochemical plant in Ningbo has been dropped. Pollution remains a serious issue in China, with a great deal of water supplies poisoned due to industrial development. As a result, agricultural production continues to suffer, which will require ever increasing imports;
The new Indian finance minister Mr Chidambaram plans to reduce the budget deficit to 3.0% of GDP in the year to March 2017, from the current 5.3%. He plans to sell further state assets and reduce subsidies. If the deficit is not reduced, the ratings agencies will almost certainly downgrade India to junk status.
The RBI meets tomorrow. A 25bps reduction in the cash reserve ratio is expected (going to be a tight decision), in spite of wholesale price inflation rising to 7.81% last month;
The Troika have proposed that the EZ agrees to steep haircuts on previous loans to Greece – absolutely no chance, especially at this stage, but inevitable in due course. In addition, they suggest Greece be given 2 more years to meet its budget deficit targets. Added to this, they suggest that Greece will require E38bn in new funding – yeah right. The IMF has made it clear that it will not provide any further money to Greece, unless debt is reduced to a “sustainable level”. The Greeks have not agreed to the Troika’s proposals. Basically same old claptrap.
One amazing report. The Greeks have arrested a journalist who reported on some 2,000 Greek tax evaders. The list was handed over to Greek authorities by Mrs Lagarde in 2010, when she was finance minister of France. The tax evaders – well they have not been touched. And yet the EZ wants to continue to pour money into Greece – go figure !!!!;
PM Rajoy is meeting with PM Monti today. He is trying to persuade Italy to join Spain to request a bail out – no chance. Mr Monti is pressing Spain to request assistance as soon as possible. Both Spanish and Italian bond yields are rising, given the uncertainty and, in Italy’s case, political concerns relating to Mr Berlusconi threat to withdraw support from Mr Monti (unlikely) and a potential loss of support following elections in Sicily. Preliminary indications suggest that the Centre left party seems to be gaining support in Sicily, with Berlusconi’s party next;
Spanish retail sales declined by -10.9% in September Y/Y, well below the decline of -6.2% expected. Yep, -10.9% – no typo. Retail sales were impacted by the higher VAT rate. Data on inflation, GDP and the budget deficit tomorrow will highlight the dire situation in Spain. The delay in requesting a bail out must threaten Spans credit rating, which is just 1 notch above junk. The Bank of Spain is to announce details of its proposal to set up a bad bank later today – expect to be disappointed;
German October inflation (CPI) came in at 2.0% Y/Y, slightly higher than the +1.9% expected, though unchanged from September;
Mrs Lagarde is to meet President Hollande today and Mrs Merkel tomorrow. The IMF is urging that the EZ accepts a haircut (significant) on loans to Greece – impossible, at this time. In addition, Mrs Lagarde will discuss the French economy with President Hollande. What’s the French for “a basket case”?;
UK September mortgage approvals rose to 50.024k in September, from 47.921k in August, above expectations of 48k. Net mortgage lending rose by +£0.5bn. Consumer credit rose by +£1.2bn, from -£0.1bn in August, the largest rise since February 2008. I remain long the UK (London based) building/property sector;
US September personal spending was higher by +0.8%, better than the +0.6% expected and +0.5% in August.Personal income was up +0.4%, in line with expectations and +0.4% in August.
The deflator came in at +0.4%, also in line with expectations and a similar reading in August;
Intrade gives a 63.1% chance of President Obama remaining as President;
Outlook
Asian markets closed lower, with European indicies following – Italy is particularly weak, given the political issues. US markets are closed, probably tomorrow as well, as a result of hurricane Sandy.
Euro is weaker – currently just below US$1.29, with Gold at US$1711, and Brent (Dec) at US$110.
Low volume in Europe, as US markets are closed.
I remain cautious, indeed increasingly so.
Kiron Sarkar
29th October 2012
