The Australian Central bank, the RBA, did indeed cut its benchmark rate by 25 bps to 3.0% as expected. Rates are now at their 2009 lows, indeed an over 50 year low. With unemployment creeping up, a weaker mining sector, declining inflation and generally a slowing economy, analysts had expected the move. The RBA remains surprised by the strength of the A$, so do I, I must admit – its currently trading around US$1.0475, actually higher following the interest rate cut by the RBA. However, I would argue that the RBA is at fault. The RBA has been particularly cautious in the past and the market does not expect the central bank to continue to cut rates aggressively – it needs to cut rates by over 100 bps in 2013. In addition, the interest rate differentials with other developed economies remain high and local banks have not passed on the rate cuts to customers. I continue to believe that the RBA will act, finally, next year and that the A$ is overvalued. I will increase my short (against the US$) further, though I must admit its been a pretty boring trade so far;
Robert Hardy of Stratfor (an excellent Internet based geopolitical newsletter – you really should subscribe to it) reports that the Chinese English language newspaper, the China Daily, carried a story that the southern island of Hainan has authorised its border police to “board, search and/or seize foreign ships that (the Chinese authorities deem) “illegally” enter the Province’s waters“.
Wow. This is big stuff.
The Indian navy is preparing to deploy vessels to the South China seas, on “exercises”. In response to a question about China’s announcement that they would board ships, the head of the Indian Navy stated that India had the right to “self-defence”.
Recently, Vietnam claimed that Chinese vessels cut the cables of their exploration vessels, which are operating in areas claimed by China. These exploration sites are partly owned by Russian interests, whilst others are co owned by US interests. The Philippines have raised material concerns about Chinese policy, as well. This is a big issue and markets have (dangerously) ignored it so far;
Mr Schaeuble, the German finance minister and Mr Juncker, the head of the EZ finance ministers, stated that Portugal and Ireland should not seek to renegotiate the terms of their bail outs, echoing comments by the Dutch PM, Mr Rutte. Oh yeah – no chance guys. Portugal and Ireland must negotiate aggressively to get better terms – I don’t understand why they have not done so as yet;
A decision on the bail out of Cyprus has been delayed till 13th December, the same date that the EZ wants to sort out (well for the time being, at least) Greece. The bond buy back proposals should succeed – ends this Friday. Interestingly Greek 10 year yields are up today, having declined in previous sessions, suggesting support for the buy back;
EZ finance ministers approved aid amounting to E39.5bn to Spanish banks, much lower than the E100bn initially allocated. The loan will have a 12 1/2 year maturity, with a 10 year grace period and a 1.0% interest rate charge in the 1st year. Will E39.5bn be enough – certainly not?. The amount necessary will prove to be multiples of that ultimately – just follow the Irish example, which has had to provide over E60bn for its banks, and Ireland’s population is just 10% approx of Spain’s. In addition, Spanish banks have been far far slower to provide for losses in respect of their property sector.
Spanish November unemployment rose by +1.5% or 74.3k M/M to 4.9mn, though below the increase of 90k expected and 128.2k in October. The number of registered unemployed has risen by 11% Y/Y, with no improvement seen in the near future;
EZ October PPI came in at +0.1% M/M, slightly higher than the unchanged expected, though lower than the +0.2% in September. Y/Y, PPI came in at +2.6%, lower than Septembers +2.7%;
US November ISM manufacturing came in at 49.5 M/M, lower than 51.4 expected and 51.7 previously. The prices paid component was better at 52.5, as opposed to 53.3 expected and 55.0 in October. Employment (48.4, as opposed to 52.1 previously), inventories (45, as opposed to 50 previously), exports (47, as opposed to 48 previously) and new orders (50.3 as opposed to 54.1) were sharply lower. Respondents cited a slowdown in demand and concern over the fiscal cliff. However, I believe that the data will bounce back in early 2013, when a deal on the fiscal cliff is done – likely. If it not done, well…..;
US October construction spending came in at +1.4% M/M, higher than the 0.5% expected and the +0.5% in September. The rise was the largest since September 2009. Residential housing was a key component, up 3.0%, its highest since November 2008 and +21% Y/Y. Non residential construction was up just +0.3% M/M, though +11% Y/Y. The US Commerce Department stated that residential housing contributed +0.32% to the overall +2.7% annualised GDP growth in Q3;
The SEC has accused the Chinese affiliates of the Big 4 accounting firms, together with BDO, of breaking securities laws, following the refusal by these firms to provide their internal audit documents on Chinese firms listed in the US. The move could result in a number of Chinese firms being delisted. Chinese laws forbid these firms to share info, though US laws require them to do so !!!!. Hong Kong faces a similar problem. In theory, the audit firms could be barred from auditing US-listed companies. Oops;
The IMF has reversed its position and now believes that capital controls can be used, though such measures should be “transparent, targeted and generally temporary“. However, a number of economists suggest that the IMF has not emphasized the impact of loose monetary policy in developed economies, which have resulted in flows into emerging markets and which have, on occasions, required the imposition of capital controls;
Outlook
Asian markets closed mixed, with the Shanghai Composite recovering late in the day to close some +0.8% higher. Will Chinese markets pick up, for the 1st time for years – too early at present but, on balance, I believe they will. However, I will wait, as I need more confirmation.
European markets are flat to higher. US futures suggest a flat opening.
The Euro continues to strengthen, currently US$1.3074. The Yen is trading marginally below Yen82. The outcome of the impending Japanese general election can be best described as “confused”. Basically its Japan.
Gold is trading at US$1705, with January Brent at US$110.31..
The ECB meets on Thursday – mixed views, with some analysts expecting a 25 bps cut. I do not think so, though the ECB will release updated economic info. I believe that an ECB rate cut is more likely in early 2013.
Overall, I have been more positive on Italy (the market is 1%+ higher today) than, for example Spain, for some time. Whilst I remain cautious on Spain, other than as a trading play, I am becoming cautious about Italy as well following the political developments which I reported yesterday. Whilst I continue to believe that Italy is more resilient than the market believes and that its market will perform in the short term, the outcome of the upcoming general elections in spring next year are being ignored by the markets. There is an increasing risk that Mr Monti will be replaced as PM – not good news. Early days, but I will watch even more carefully.
Lots of reports of political games re the fiscal cliff in the US. Whilst I believe that a deal will be done – most probably after the deadline – these stories are likely to continue to weigh on US markets.
I would like to add to my equity holdings, but will wait for a while longer.
Kiron Sarkar
4th December 2012
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