Australian December business confidence surged to +3, from -9 in November, the largest improvement since October 2001. The lowest interest rates since 1960, combined with improving equity markets, has helped sentiment. However, with capex declining due to reduced investment in the mining sector, capacity utilisation decreasing and orders and credit demand weak, I have to say, I believe that this surge in optimism will prove short lived. The RBA may cut interest rates further next week (by 25 bps to 2.75%), though the market has ascribed a 30% probability only of that happening. In the past, the RBA has been relatively slow in reducing interest rates;
The IMF is set to reduce Korea’s GDP forecast for the current year to +3.0%, from +3.9% forecast last September. The Korean Central Bank’s forecast is +2.8% and GDP was +1.5% in Q4 Y/Y. The Korean government has front-loaded its budget spending programme to the 1st half of this year, which should help the economy tick over, though the weaker Yen, will impact its exports.The Korean Won has risen by around 21% against the Yen in the last year. (Source Bloomberg);
Japan’s 2013 budget for the fiscal year starting 1st April 2013 was announced today. The key points are
- Spending has been set at Yen 92.6 trn, down -0.3% Y/Y;
- Yen 13.1 trn has been set aside for a fiscal stimulus programme;
- Discretionary spending has been reduced, together with tax subsidies to local governments and a cut in education spending, together with lower pay for civil servants has been announced;
- New bond issuance has been set for Yen 42.9 trn, some 46.3% of spending and lower than the 47.6% for the current year – the balance will be raised in tax revenues;
- Debt service costs have been estimated at Yen 22.2 trn.
Great, but – sorry, there’s always a but. The GDP growth assumptions are optimistic, which means that revenue projections are too high and that debt issuance will be higher. The Japanese are playing the age old game of submitting optimistic forecasts. Indeed, unless they can address the China boycott issue and the nuclear electricity programme, the eventual numbers will be materially worse than that forecast, unfortunately. If today’s bounce in the Yen reflects the “better” Japanese budget numbers, its a total nonsense;
The Chinese Academy of Social Sciences (CASS) has raised its forecast for Chinese 2013 GDP growth to +8.4% for this year, up from +8.2% previously. They add that the 1st half of the year, should grow more strongly than the 2nd. There is no doubt that last years fixed asset programme, combined with a pick up in the residential property market has stimulated growth, with the domestic economy improving. However, these measures are temporary in nature and I do not believe that this rate of growth is sustainable, even if you believe in Chinese data, which I do not;
EM’s have built up their business on increasing debt to excessively high levels – for example, my friend Andy Lees of AML Macro advises that Chinese corporate debt has risen to US$1.7 trn recently, with financing costs rising to the highest percentage of GDP on record. For the real economy to expand, growth in non-loan credit would have to rise to 33% this year, up from 25% last year, based on the optimistic assumption that credit to GDP efficiency remains the same as last year – a heroic assumption. Corporate cash flows are roughly 50% of comparable rates in the west – high inventory and/or people not paying their bills?. Once again, whichever way you look at this, China faces significant problems ahead – there is no way out of this for them;
As expected, the Indian Central Bank, the RBI, has cut interest rates by 25 bps to 7.75%, the 1st cut since last April. The Central Bank has also cut the cash reserve ratio by 25 bps, to 4.0%, a surprise move which will make available some US$3.5bn of additional credit available. The RBI has faced significant pressure from the Indian government to cut interest rates, inspite of stubbornly high inflation, which will not have been helped by the recent rise in oil. CPI came in at +10.6% in December, though the headline wholesale price inflation rate declined to +7.2%. The RBI reduced India’s growth forecast to +5.5% this fiscal year (to 31st March 2013), from +5.8% previously, though reduced its inflation expectations to +6.8% by March 2013, from +7.5% previously;
The head of the Egyptian army and the Defence Minister warns of “the collapse of the state”. Problems in North Africa/Middle East remain a major threat, as I set out in my forecast for this year. A number of investors continue to dismiss these issues, as being irrelevant – dangerous, in my humble opinion. Trying to impose a fundamentalist regime (as President Morsi is trying to do) on a country of well educated and relatively liberal people ain’t going to work. Will the army take over. Quite possibly, but what happens thereafter. A complete mess;
The Russian PM has indicated his willingness to help out Cyprus – going to be interesting how the Russian government sells that to their people. The German’s are calling for a bailout of Cyprus, only if it represents a systemic threat to the EZ – its their impending general elections in September – they really don’t want their public to witness further bailouts, especially of a country that has been involved in tax evasion and money laundering, allegedly on behalf of Russians;
Mr Draghi, the ECB President, though former head of the Bank of Italy, visited Rome to discuss the Monte die Paschi di Siena debacle with the Italian Finance Minister. No information was released. This rescue of the bank is being exploited by Berlusconi, ahead of the impending Italian elections;
E93bn has returned to the peripheral EZ countries of Spain, Portugal, Italy, Ireland and Greece in the last four months of 2012, following the ECB’s announcement of its OMT scheme last September, as opposed to the outflow of E406bn in the first eight months of the year, according to ING bank. Outflows amounted to E300bn in 2011. Debt deals are attracting investors, including non-EZ investors and, in particular, US investors. Furthermore, short term yields are rising in the EZ (the ECB has not reduced interest rates either, though I do believe that they will in coming months, especially if inflation declines below 2.0%) and details from the most recent US CFTC Commitment of Traders report revealed that net long Euro positions (against the US$) were the highest since last summer. There is nothing I can see on the horizon at present that suggests that this sentiment will change in the immediate future, but when it does, as is more than likely, the Euro will take a beating. Currently trading at US$1.3455, near a 11 month high, it could well increase further. However, I continue to believe that the Euro will offer a good shorting opportunity and will start looking at it seriously at somewhat higher levels – US$1.36/37 – hope it gets there. (source FT);
The EU is to allow Spain to exceed its previously agreed budget deficit targets – well, Spain was never going to achieve its targets in any event. The more important issue, is that the EU will be less austerity minded and more forgiving of countries that miss their budget deficit targets this year (as will Germany, given their impending general elections in September – Mrs Merkel wants to avoid a problem in the EZ), across the EZ. The impact of fiscal multipliers shows (clearly, in my humble view) that further austerity merely worsens the situation. Having said that, can countries such as Spain get out of their current mess – unfortunately, I do not believe so. Yes, their current account deficit has improved, though mainly due to lack of domestic demand. Exports are rising, but not by enough to make a material difference. The recent rise of the Euro will not help. The bottom line is that Spain’s borrowings are far too high (and continue to rise) and will have to be restructured.
Today’s Spanish retail sales data is yet another indicator of the serious problems affecting the country. December, calendar adjusted retail sales, came in -10.7% Y/Y (and that’s before the further austerity measures, which are due to take effect this year by the way), much weaker than the -7.8% in November and the -8.8% decline expected;
The French Labour Minister, Monsieur Michel Sapin stated that France was “totally bankrupt”. Well Mr Sapin is clearly right – the country is, but to say it in public. Oh la la. Capital outflows are surging, with no sign of a slowdown. I don’t hold much hope for Mr Sapin’s future political career, but his comments are, of course, totally accurate. The French Finance Minister deemed the comments “inappropriate”, and denied the statement, stating that the country was “solvent”, “credible” and “starting to recover” – well, he has no choice, but to say that. Inspite of all of this, the Euro continues to strengthen !!!!. I have to say, I suspect that there is going to be a great opportunity to short the Euro coming up. I continue to believe that France, in particular, though also Spain, remain the major risks to the EZ – the other countries are manageable and Italy will bumble along.
French January consumer confidence was unchanged at 86, in line with forecasts and December’s reading – slightly better news;
EFTA, (the European Free Trade Association) has ruled that Iceland does not have to compensate the UK for the failure of its banks, which took deposits in the UK, inspite of a national deposit insurance scheme. The ruling suggests a precedent has been set in respect of foreign owned banks, though the decision is not binding on the EU’s European Court of Justice. If the decision is deemed a precedent, does that mean that local regulators will demand more oversight and higher capital from foreign banks – I would think so;
The German Gfk consumer confidence survey rose to +5.8 for February, up from +5.7 in January and the +5.7 expected. Stable employment and higher earnings, combined with a moderate inflation outlook were the reasons given for the improvement. Gfk added that economic expectations rose to -11.3, from -17.9. The income expectations component rose to +36.0, from +21.2, which has increased the willingness to buy component to +35.3, from +20.1. I continue to believe that current forecasts for German GDP this year will be raised from the current +0.4% to around +1.0%.
German December import prices declined by -0.5% M/M, much more than the -0.1% expected and the unchanged last month;
The latest Sentix poll suggests that just 17.2% of investors believe that one or more of the EZ countries will exit the Euro this year, down sharply from 73% in July last year. Greece remains the most likely candidate, though the percentage is just 13.9%;
Fitch stated that the UK faces a significant risk of a downgrade. However, I continue to believe the UK economy is performing better than the official data suggests;
Moody’s has downgraded 6 of Canada’s largest banks by 1 notch, given their exposure to consumer credit and high home prices. Household debt to personal income amounted to 165% at the end of September last year, some 30 percentage points higher in 5 years. Moody’s also cites over-reliance on financing from the wholesale markets. As my friends from Brown Brothers Harriman say, Mr Carney’s impending move to the BoE may prove to have been extremely well timed;
Caisse de Depot, the large Canadian pension fund is to increase its investment in the property sector by US$10bn to US$40bn (out of its total assets of US$160bn) over the next 18 months. The move is yet another indication that investors are moving out of low yielding bonds and into higher yielding and better inflation-resilient assets. JPM estimate that pension funds could increase their holdings of property assets to 25% of their portfolios, up from just 5.0% to 10% at present and, furthermore, that property assets will be deemed a core asset, rather than an alternative investment. The Norwegian Sovereign Wealth Fund has increased its exposure to the property sector in the US and Europe, as well. The move by Caisse will make it the worlds largest property investor. (Source FT);
Outlook
Asian markets closed mainly higher, though India closed -0.6% lower, inspite of the reduction of interest rates by the RBI. European markets are lower, with US futures suggesting a marginally weaker start.
Chinese equity markets rose by +0.5% and are 20% higher (a bull market) since 3rd December. Great, but I will be selling out of my residual Chinese plays in the next month or so, if not earlier.
The Yen continues to decline to above 91 to the US$, only to appreciate thereafter – currently US$ 90.52. There is nothing to suggest that the Yen should strengthen – indeed, comments from the Japanese government clearly imply that they would prefer a weaker Yen and today’s budget is no help.
The Euro is trading around US$1.3441 against the US$, slightly down from around US$1.3445/55. I get the impression that investors are buying the Euro at these levels more as a momentum trade, rather than being fundamentally convinced. Will be watching carefully for a opportunity to short – just hope it rises a bit further to US$1.36/37 at which time, I will look at it seriously.
Spot gold is trading around US$1622, with March Brent at US$113.23.
I continue to believe that markets remain overbought and far too complacent, though will not short as yet.
Kiron Sarkar
29th January 2013
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