Rumours of ECB rate cuts and liquidity measures next week is helping markets

S&P warns that Chinese developers face an “increasingly severe” credit outlook, forcing them to cut sales prices and to seek higher cost funding reports Bloomberg. S&P adds that the worst is not over as yet as developers brace themselves for lower prices and slower sales. Those developers who are exposed to short term debt will find refinancing difficult e.g. Greentown China. The majority of developers reported that cash flows worsened in August. S&P cut the outlook for Chinese property developers to negative, from stable in June;

A number of people still accept and rely on Chinese official economic data. Look, I will keep this simple. China NEVER revises its data unlike everyone else, including DM’s – indeed, the revisions to data from DM’s can be significant. As a result, Chinese data cannot be accurate;

In spite of rampant speculation, Hong Kong’s Financial Secretary John Tsang stated that the US$ peg would be maintained and, in addition, predicted a “soft landing” for the Hong Kong property sector. Its more hope than expectation, I suspect;

The new Thai PM, Ms Yingluck Shinawatra’s policy to raise the minimum wage is causing a major problem for Thai businesses, who are lobbying to have it changed. They claim that exports will suffer. However, it looks as if the Government will go ahead with its plans, which it also sees as essential to stimulate domestic demand, though also because of the composition of its voters – mainly the less well off rural population in the North of the country;

In spite of a slowing economy, India’s Central Bank governor reported that inflation remained above acceptable rates, suggesting that the tighter monetary conditions are unlikely to be eased, as was expected – personally, I expect one more 25bps hike. However, if growth declines below 8.0% (as is likely), analysts expect the RBI to be more cautious. Wholesale price inflation rose to 9.78% in August (the highest of the BRIC’s) and the weaker Rupee (now nearly 50 to the US$) will make the inflation numbers worse. The SENSEX is down approx 20%
YTD;

The French Socialist party are set to take control of the Senate (the 1st time in 53 years), following yesterdays elections, creating yet another problem for President Sarkozy ahead of the May 2012 Presidential elections. Whilst the Senate is relatively unimportant, it can delay the passage of legislation;

France has no plans to recapitalise its banks as the lenders are “solid”. Well the French are at it again. Denial continues to be the strategy. However, the French Budget Minister refused to confirm whether a meeting took place on 11th Sept, where it is alleged that plans to recapitalise 5 French banks were discussed. The problem that the French Government has is that if it goes ahead and recapitalises French banks (as is so desperately needed) it will, almost certainly, lose its AAA credit rating. However and totally amazingly, equity markets responded positively yesterday to the story that French banks did not need more capital;

German business confidence fell by less than expected in a report issued yesterday. The IFO index declined to 107.5 in September, from 108.7 in August, the lowest since June 2010, though better than the 105 forecast. However, the future expectations component declined to 98, the lowest since July 2008. However, the IFO institute, whilst acknowledging a slowdown, does not predict a recession in Germany. German consumer confidence came in at 5.2, unchanged from September, though better than the 5.0 forecast. Seems to bear out German views that their consumers are not as weak as many suspect;

Most now believe that the EFSF will be leveraged – personally, I believe it falls foul of the German Constitution. It is likely that, in due course, Germany will have to call a referendum. The current situation of pushing through measures without consulting the public (common practice in the Euro Zone/EU) will not work;

Reports circulated yesterday that the ECB would reduce interest rates by 50 bps at its next meeting on the 6th October, buy covered bonds and provide 12 month liquidity to banks – currently they are providing 6 month money only. It is crystal clear to everyone (except perhaps Trichet and his colleagues at the ECB), that the recent ECB hikes in interest rates were a complete and utter mistake, as they were in 2008, when the ECB had to U turn shortly thereafter – you would have thought that they would have learnt. It is clear, that ECB rates will be reduced, but my confidence in Trichet/ECB is zero. 12 month liquidity provisions are likely. Buying covered bonds is also likely – the ECB have provided liquidity. However, the ECB’s PIIGS bond buying took a severe step back last week. They bought only E3.95bn of PIIGS bonds last week, well down from the E9.8bn purchased the previous week. If the market believes that the ECB are slowing down their purchases, watch out;

President Medvedev, who is to become Russian PM, after Putin resumes as President fired Mr Kudrin, his Finance Minister yesterday. Clearly Mr Kudrin was eying up the PM job for himself. Mr Kudrin is widely respected and his departure will be seen as negative. In addition, it exposes the carve up deal between Putin and Medvedev;

Greece is to unveil E7bn of further cuts – oh great, yet more hot air. The PM is to test his Parliamentary majority today as he tries to get his colleagues to vote for a property tax. He has 154 members in the 300 seat Parliament. However, 6 members have threatened to opposes the measures. More public strikes have been called by the Unions. The Greek Finance Minister did a 180 degree U turn yesterday by stating that Greece would not default – here we go again. The next E8bn of aid for Greece is being postponed every day. The Greek PM is to meet Mrs. Merkel today;

The US Senate agreed to a bipartisan plan to avoid an US shutdown yesterday. Finally getting some sense. Poll results reported on Bloomberg reveal that the US pubic is beginning to blame the Republican Party more for the US budget impasse – Tea party take note;

US August new homes sales declined by 2.3% in August to an annual pace of just 295k – a 6 month low. The US will not recover until the housing market does;

More and more problems in Brazil – ever rising inflation and now a fast weakening Real. Political problems also abound. Going to be tough for Roussef. Cant see much relief in the near future;

Summary

US markets closed at their highs yesterday, suggesting that European markets will rally firmly today (2.5+%) – as are Asian markets. The Euro is marginally higher as is Gold. Oil rose materially from its lows yesterday – Brent is over US$105 at present. The market has convinced itself that Europe will address its problems. I totally agree that Europe (FINALLY) has understood the problems, but fix them – well forgive me for being TOTALLY sceptical.

Yesterday was the craziest day in European markets. Futures indicates a -1.5%+ loss first thing in the morning, though vague reports re the ECB spurred the market into action, The ECB reports were actually balanced – one Board member suggested that the market should not necessarily expect a 50 bps rate cut next month, whilst others did indeed say that a rate cut was possible. What amazed me was there was no credible policy statement, post the G20/IMF/World bank meeting from anyone.

I moan – basically having been almost perfectly positioned from last Friday, I completely messed it up, by closing the majority of my longs far too early yesterday. Just to give you an idea of volatility yesterday – Deutsche Bank traded between a 15% range yesterday – yes that’s 15%. A number of the major European banks traded within a 10%+ range. Complete madness and very, very difficult. The market is moving violently on speculative and (mostly) silly rumours and comments – not a sensible place to be. Bond sales by Spain and Italy today.

Well placed again this morning – I’m taking my profits and running for the hills – this volatility is too much, even for me.

~~~

Kiron Sarkar is 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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