Euro below US$1.30

Bank lending in China slowed to Yuan562.2bn, as compared with Yuan587bn in October. In addition, M2 rose by just +12.7%, the slowest since May 2001 (source Bloomberg). There is no doubt that the Chinese authorities will ease further, though I remain sceptical as to whether it will be enough, given the structure and serious imbalances of the economy;

Inflation in India (the wholesale price index) declined to +9.11% in November as compared with +9.73% in October, though slightly higher than the consensus of +9.02%. However, lower inflation (which is expected to continue) will enable the RBI to ease monetary policy in the New Year (the last of the major S/S E Asian countries to do so).
Analysts expect the RBI to be on hold this week (16th December), following recent statements by the RBI. Bond yields continue to decline and the Rupee (down 16% against the US$ YTD) weakens further – a trend I expect to continue;

Putin may dump Medvedev in an attempt to bolster his Presidential aspirations – he remains the favourite to regain the post. Russian’s have been critical of the proposed job swap. The move may help Putin a bit, but his position, in particular in dealings internally and with foreign countries will be weaker. Currently Russia needs a US$100bpd oil price. With the expected increase in spending ahead of the Presidential elections, that will increase to maintain a balanced budget. Expect a weaker Ruble, uncertain equity markets and continued capital flight It is widely believed that Russian Oligarch Mr Prokhorov’s bid for the Russian Presidency has been sanctioned by Putin, who wants to allege competition for the role – children’s games basically;

Continued problems in Hungary are affecting Austrian and Italian banks
– basically Hungarian homeowners borrowed in Swiss Francs, rather than HUF’s to get lower interest rates, forgetting the currency mismatch – Oops. Other CEE homeowners did the same eg in Poland. CEE will remain a HUGE risk for Euro Zone banks and the EU. Watch this one;

There is continued speculation that the SNB will raise the effective Euro/CHF peg. Swiss investor confidence results were negative and, in addition, exporters are really feeling the pressure. However, these rumours have been around for some time now, I accept;

The German investor confidence index (the ZEW) came in at -53.8 in December, slightly higher than November’s 55.2, though well below the average of around 25. The construction, component was particularly strong, though private domestic consumption is holding up well. The ZEW economist suggested that Germany GDP may contract in the 1st Q next year, but recover thereafter, with GDP of +0.9% forecast for 2012. Exports are expected to decline modestly. Basically a better than expected report, particularly given recent events, though I remain sceptical;

The Bundesbank has agreed to providing funds to the IMF, as long as other countries (France, the UK, US and China) do so as well. Whilst these funds cannot be earmarked for Euro Zone countries, they certainly will be heading that way;

Mrs Merkel has stated that the size of the ESM would be capped at E500bn, with no leverage. Her comments came ahead of a key speech to the German Parliament in respect of the bail out funds, so not unexpected. However, the funds available to the EFSF/ESM is simply not enough. The proposed E200bn to be provided to the IMF by EU countries,to be on lent to Euro Zone countries, is fraught with difficulties – basically where will the money come from;

One key issue – German officials are now stating that (both) the size of the EFSF/ESM will not be increased and that Euro Bonds are not on the cards “AT THIS STAGE”. At this stage is the key message. Merkel has to bring her people around – that’s the issue. How long will it take – too long. As a result, another Euro Zone crisis is very likely, which will force Euro Zone politicians to ultimately move towards enabling the ECB to buy bonds aggressively and, in addition, employ QE. I remain convinced as there is no other alternative;

The German cabinet has reactivated its bank rescue fund (created post
Lehman’s) and, indeed, has agreed to increase its size to E480bn, from 360bn previously. The EBA has mandated that German banks must raise E13.1bn by June next year – still, far, far too little;

The WSJ quotes the European Council’s President Mr Rumpoy who expressed concern that last week’s political deal amongst the Euro Zone countries may be difficult to implement into a “watertight legal pact”. In addition, as the deal involves bilateral agreements, which was the fall back position, given the UK’s veto to a new treaty, the role that the European Commission can play must be suspect;

Italy sold E3bn (the maximum) of 5 year bonds today at a rate of 6.47%, as opposed to 6.29% on 14th November – however, the highest rate since 1997. Bid to cover was 1.42, as opposed to 1.47 previously.
Markets remain concerned as to PIIGS debt, though the auction results were close to expectations, possibly marginally worse;

Emails suggest that James Murdoch may have been “economical with the truth”. The content of the emails sent to Mr Murdoch reveal that there was widespread phone hacking at the News of the World. Mr Murdoch denies having read the emails !!!!!. Whatever, News International’s position will be under pressure, both in the UK and the US;

UK unemployment rose to a 17 year high. With a weakening economy, the situation will deteriorate further. Average earnings in the 3 months to October declined to 2.0%, from 2.3% in the previous 3 months, which will enable the BoE to increase its QE programme (a further ¬£100bn –
£125bn) in Feb/March;

US retail sales rose by only +0.2% in November, lower than the +0.6% forecast. However, October’s data was revised upwards to +0.6%, from
+0.5% previously reported. Car and truck sales rose by +0.5% to an
annual rate of 13.6mn, the best since August 2009. Sales of electronics increased by +2.1% and on line retailers were up +1.5%.
Lower petrol prices reduce petrol station sales by -0.1%, though clearly will help in terms of disposable income;

The FED reported that the US economy “has been expanding moderately”, though expressed concern about slowing global growth, which “continue to pose significant downside risks”. Bernanke added that unemployment would decline “only gradually”. He did not announce any new measures, which was taken negatively by markets, though the message contained in his statement suggests that the FED has a bias to easing further, in some way. Still believe that further QE is likely.
The market reacted negatively – traders expected further moves towards easing – totally unrealistic at this stage;

The race for the Republican nomination to contest for the Presidency is in shambles. Allegedly Ron Paul is ahead in Iowa, Gingrich is gaining support, whilst Romney’s support is weakening. The only winner out of this is clearly Obama;

CME’s Mr Duffy’s testimony to the Senate Committee implies that MF Global were effectively “cooking the books”. He also challenged Mr Corzine’s testimony. This is going to get really messy. It remains staggering that the senior management of MF Global continue to allege that they do not know where client money went;


Markets reversed early gains on a much weaker Euro yesterday and disappointment that the FED did not announce further easing measures yesterday – they remain weak today. Personally, I believe the FED said more than enough, though am not surprised by the Euro’s weakness.

Germany continues to block measures re the Euro Zone, though the rhetoric is changing – officials are using the line “at this stage”.
This slowly, slowly process towards (the inevitable) QE/ECB bond buying will cost Germany far, far more ultimately. Another crisis looks more and more certain.

Next year, the composition of the ECB changes, with the appointment of the Frenchman Mr Coeure. These representatives will be pushing for more aggressive bond buying/QE by the ECB. To put the issue in context, the FED has bought US$2tr of bonds, the ECB only approx US$325bn and the BoE (once the current programme has been completed US$420bn, with a further increase of US$150bn – US$185bn+ certain).
Furthermore the ECB continues to sterilise proceeds. Complete and utter madness.

The Euro is trading below E1.30. Further weakness is very likely. Cant see any reason to buy the markets at present – indeed, short Euro against the US$, and short the indicies seem to be the right move.

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