Global Macro Overview: Better Euro Zone Data

Kiron Sarkar lives in London and Ireland where he works as a money manager. His full bio follows below.

The A$ declined today – Government data revealed lower retail sales (down -0.6% MoM, against expectations of a rise of +0.3%) and building approvals (down -7.9% – a volatile series though). I believe that the A$ is grossly overvalued, buoyed up by exports of commodities to China. Interestingly, speculators have reduced long commodity bets to the lowest in a year. The RBA is unlikely to raise rates tomorrow. Australia looks like a good short in due course;

Chinese non manufacturing PMI declined to 57 in June from 61.9 in May, the slowest rate of expansion in 4 months. There were no interest rate hikes over the weekend, as a number of analysts had expected. As you know, whilst there may be 1 more (at least 2 are expected), I believe that the Chinese authorities are now far more worried about an economic slowdown (in particular in respect of credit starved SME’s) and will hold off from aggressive monetary tightening – Premier Wen effectively suggested that in his FT article and who am I not to believe him. “Official” inflation is expected to peak this month, but the Chinese authorities have imposed a number of price controls, so this is illusory.

The Chinese markets closed up +1.9%, Hong Kong by +1.7%, on expectations of a relaxation of recent monetary tightening;

Allies of the exiled former Premier Mr Thaksin Shinawatra won in this weekend’s elections. Don’t follow Thailand, but the Thai Baht rose, so seems positive;

Euro Zone Finance Ministers met and, as expected, agreed to release the next tranche of bail out funds to Greece, amounting to (including the IMF’s contribution) E12bn. They are to meet on 11th/12th July to consider the request for additional funds (expected to be E85bn), though it appears that any decision will be delayed to possibly even September. The communique was pretty “waffly”, which suggests that the French “voluntary” roll over proposals are not a done deal, though still likely, as there is no other alternative plan at present. I quote, “The precise modalities and scale of private-sector involvement and additional funding from official sources will be determined in the coming weeks”.

The Euro Zone Finance Ministers believe they have bought time (which they have) and, knowing the Europeans, will drag this out. One big issue is the level of participation of private sector bond holders in the “voluntary” roll over – unlikely to achieve the numbers suggested by the French. Another, is the negative attitude of the credit rating agencies – S&P, stated today that the plan may lead to Greece being temporarily placed on a “selective default”, as it would be deemed to be a distressed debt restructuring. Essentially creditors, in NPV terms, receive less under the French plan. Previously, Fitch have been particularly hawkish. Finally, the German Constitutional Court’s decision tomorrow is clearly critical – the market seems to have ignored it – dangerous. The European banking sector was hit by the S&P news, French banks in particular;

Investors are focusing on the PIIGS. However, what about France. Consumer spending (a major contributor to GDP) declined for the 3rd month in May, registering a -1.8% YoY decline. A number of economists suggest that France will report a near zero GDP growth for the 2nd Q. The budget deficit, which is forecast to be 5.7% of GDP this year (7.1% in 2010) appears optimistic. From running a current account surplus, higher than Germany, by 2005, France had a steadily increasing current account deficit – forecasts are for a deficit of 2.8% of GDP this year. Productivity is slowing.

French banks have some US$57bn of exposure to Greece and some US$87bn to Portugal and Ireland. If you include Italy and Spain, the exposure soars to US$550bn – all figures as at the end of 2010 (source BIS). This is the reason that the French created this ludicrous roll over scheme for Greece.

France is certainly a political leader (with Germany) in the Euro Zone and part of core Europe. However, its economy is showing signs of deterioration, which could well compromise its standing.

OK, the ECB raises interest rates by 25bps on Thursday this week. However, if, as is likely, French economic data continues to
deteriorate, what does the ECB do? – basically no further rate increases post this week’s, in my view. A number of analysts expect a further 25 bps rate rise in November, following Mario Draghi’s appointment as ECB President – the argument goes that he will need to confirm his anti inflation credentials. I do not believe that – wages are rising by only +1.8% in the 1st Q, well below inflation. In addition, I expect, European economic data to continue to deteriorate and inflation to start declining (basically YoY base effects) – as a result, I believe that rates will have peaked (post this weeks rise) and, indeed, I expect rates to be reduced in due course – the impact on the Euro (which is being supported by positive interest rate differentials), well………;

Spanish June jobless claims fell by 1.6% (below expectations) to 4.1mn people, the 3rd consecutive monthly fall, though unemployment is still over 20%. Basically temporary workers are being hired in respect of the Spanish tourist industry, as holiday makers switch to Spain from Middle East destinations. I expect this trend to reverse from September/October onwards ie post summer holiday season. Last week, Spanish PMI dipped was 47.3 and Ireland dropped below 50, for the 1st time in several months. Italy was also below 50;

The Euro Zone Sentix Index (investor sentiment), rose to 5.3 in July from 3.5 in June and well above the 1.1 forecast. This figure is a significant positive surprise and may reflect the attitude that Greece will be bailed out, following the Greek PM winning the 2 key votes in Parliament last week – should help European markets;

The German Government is raising its borrowing targets by over 10%, in accordance with their plan for 2013/15. Seems that they are preparing for more bail out costs. Indeed, the borrowing forecasts should have been reduced on buoyant tax revenues. German authorities remain confident that there will have zero borrowings from 2016, in accordance with a “debt brake” law, which was enshrined in the Constitution and which requires a zero budget deficit in 2016. Germany’s budget deficit is expected to decline to below 2.0% this year;

Better news on inflation. Euro Zone May producer prices declined by -0.2% MoM in May (should decline further in June), slightly better than the -0.1% expected. YoY its up +6.2%, slightly lower than the +6.3% expected;


Whilst I expected a rebound, last weeks rally was far greater than I had expected. Markets were over sold, the Greek Parliament passed the necessary legislation, economic data was positive (Japan and the US mainly) and end of Q/1st half window dressing played a role. However, volumes into the rally were low and a lot of it was short covering, I suspect.

Can the rally continue. Well, Friday’s NFP data will be crucial – a number of economists I follow are more positive than consensus. In addition, interestingly, the S&P news re the French roll over plan has not had as big an impact, as I would have thought. However, the Euro having initially been stronger, has taken a hit.

Asian markets were strong today – I expect the rally to continue for a bit longer.

US 2nd Q earnings releases soon – personally, I believe that current analyst forecasts are overly optimistic and, in any event, outlook statements will be cautious – negative for markets. Indeed, I believe that analysts will have to revise down earnings expectations for the year.

The ratings agencies having been asleep at the wheel (some would say complicit) during the financial crisis, seem to be in role reversal mode at present – I would have thought they would wait to see the proposals before they commented formally – I’m just annoyed as my Stan Chart shares are down today (in spite of a much stronger Asia) as is the banking sector generally, in response to the S&P statement.

Wont change my positions at present, though I must admit that Fear is beginning to rise and will sell/add shorts if the data/news deteriorates. I believe that US NFP data will be positive, though and really would like to wait for the report.

Most European markets are currently up.




A qualified UK accountant, Kiron joined the M&A dept of N M Rothschild in London. He was then appointed head of M&A of Rothschild (Hong Kong). On his return to the UK, he was a founding member of the Rothschild international privatisation team. Subsequently headed up the Central and Eastern European (“CEE”) team – rated No 1 in 4 out of 5 years (Privatisation International).

On leaving Rothschild, he worked as privatisation adviser to the UK Governments Know How Fund, which was established to advise Governments in CEE on policy, privatisation, economic, financial, regulatory and other issues. Subsequently European Head of Media, Tech and Telecoms at CIBC World markets. Following CIBC, Kiron advised on telecoms and energy deals in CEE.

Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.

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