Greek PM survives – as expected; China Trouble?

Kiron Sarkar lives in London and Ireland where he works as a money manager. He occasionally attends the Scarsdales Equity idea lunches when he comes to New York, which is where I met him.

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Hi there,

Credit Suisse has recently issued an excellent report on Chinese banks

– basically downgraded them (ex ICBC) and the sector to “underweight”.

Basically they cite “asset quality concerns” – too true mate. The issues include:

Massive off balance sheet financing – credit to GDP has rocketed; Non financial companies have the lowest (since 2008/9) interest rate cover; Credit costs will rise; To summarise they remind readers that NPL’s were some 20% – 25% in the past.

BoA is likely to sell its approx 10% shareholding in CCB;

China’s National Development and Reform Commission forecast that inflation would rise above 6.0%. No surprise there. Indeed, actual inflation is likely to be above that number even now – however, Chinese statistics, well……..;

China’s response to its neighbours re Oil exploration in the South China seas “you are playing with fire”. China wants bilateral negotiations – no chance. In addition, they state that US involvement may end up making the situation “more complicated” ie go away. They add it would be better for the US to leave disputes in the South China Seas to the claimant countries – no chance;

Liquidity is proving a problem in China. Money market rates have risen to a 3 year high. The 7 day repo rate has doubled in less than a week.

The PBoC policy of hiking RRR ratios is clearly impacting;

Fitch stated yesterday that a Sovereign debt swap and/or a rollover of maturities, EVEN A VOLUNTARY ONE, will be deemed a default.

The FT refers to Article 125 of the Treaty on the Functioning of the European Union. It quote extracts from the relevant paragraph.

“A Member State shall not be liable for or assume the commitments of central governments, other bodies governed by public law, or public undertakings of another Member State”.

Just to remind you, the German Constitutional Court meets on 5th July to consider whether the present bail outs are legal !!!!!!!;

The Greek PM survived the confidence vote. Great, now he has to pass legislation through Parliament (on 28th June) to authorise a package amounting to some E78bn of spending cuts and revenues (the mythical privatisation proceeds). There are subsequently other hurdles.

Unions are calling for more public strikes etc – essentially the same old. same old.

Just listened to a representative of the Greek opposition party – now I know why they really should be given to Turkey;

The Euro Zone game has always been to avoid contagion spreading to Spain. However, a recently published IMF report is interesting reading. It states that “The repair of the economy is incomplete and risks are considerable” – tough remarks from the normally very diplomatic IMF. The Spanish Finance Minister was quoted as saying that the IMF report was “extraordinarily positive” – she’s was a pupil of Bernie Madoff, no doubt. The reality is that Spain is in deep trouble.

Interest rate spreads between Spanish and German bonds are large (currently nearly 250bps), Mrs Salgado !!!!!!;

Euro Zone April industrial orders were +0.7% MoM (+8.6% YoY – much lower than the +14.2% forecast), somewhat lower than the +1.0% forecast. Clearly shows slowing – may just be related to the Japanese disaster, but unlikely;

The BoE minutes have just been released. States that inflation will be over 5.0% (no surprise). In addition, more QE Рvirtual certainty in my view, as you know, though the vote was 8 to 1 to keep QE at £200bn for the moment. 2 members voted for a 25bps hike (as usual). The MPC judged that downside risks have risen and that current weakness in demand is likely to persist. Sterling is declining following the release of the minutes;

FED day today – unlikely to be anything of substance;

Summary

Markets mixed, though generally modestly lower – no real action.

Nikkei did quite well though. Oil down a bit and the Euro is strengthening somewhat. No real direction, but I remain bearish – looking to increase shorts – will dispose of my trading plays today. A clear warning sign was the VIX yesterday. US markets closed near their highs – but the VIX closed more than 1 point higher than its mid morning low. FED statement/press conference may result in something, but unlikely.

Added to IBEX short.

Have fun.

Best

Kiron

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