Continued Speculation Of Monetary Easing By The Chinese

Lending by Chinese banks rose to US$101bn in December, higher than expected. M2 also rose at a faster pace, +13.6% as opposed to forecasts of +12.9%. The Chinese authorities are clearly relaxing the recent tough monetary policy measures and a cut in RRR is expected imminently.

Imports in December rose by just +11.8% (a 26 month low and well below the +17.0% forecast), whilst exports increased by +13.4% (in line with forecasts), resulting in a trade surplus of US$16.5bn, well above forecasts of US$9bn. The 2011 trade surplus amounted to US$155bn, the lowest since 2005, with imports rising by +24.9% and exports by +20.3%. However, the trade surplus has declined for the last 3 years and is expected to be even lower this year, reflecting the weaker global economy. Do not expect the Yuan to appreciate much further this year – indeed, there are convincing arguments that suggest the Yuan may weaken against the US$, in particular.

The PBoC remains concerned about inflation and does not want to relax monetary policy too early. However, the politicians are scared of the possibility of a hard landing (a real possibility) and will relax monetary policy, even if opposed by the PBoC.

Any relaxation of monetary policy will be followed by a rise in “risk assets” – commodities/A$, in particular. However, fixed asset expenditure in China cannot be maintained at previous levels, which does not bode well for “risk assets”. Talk of investment in subsidised housing and social spending will be the flavour of the year, but previous efforts have failed – cant see why the latest will fare any better. The Chinese markets have been dreadful for the last 2 years and whilst a loosening of monetary policy and talk of Government spending will result in (brief) market rallies, I remain bearish. A collapse of property prices, serious financial problems of the
regional governments, a large increase in bad loans are all real possibilities. Not a rosy scenario;

The IMF believe that the proposed “voluntary” 50% haircut, to be imposed on private sector bond holders of Greek Sovereign debt will be insufficient. Well, what a surprise – I think not. The final haircut will need to be 75%+. In addition, Euro Zone countries and the ECB will suffer losses on their bail out funds and Greek Sovereign debt respectively. A “credit event”, triggering CDS’s, is becoming more likely. The Greeks have not and will not meet their commitments – that’s the bottom line. There is a serious risk that Euro Zone countries and the IMF, in particular, will be reluctant to provide additional aid. The game is to play for time as the Euro Zone are concerned about contagion effects if Greece is forced to exit the Euro. However, I simply cannot understand how, politically, the Euro Zone can provide additional funding and the IMF will face serious internal constraints in respect of further lending. This issue will come to a head within a month or 2, at the most;

Over the Christmas/New Year holidays, the Spanish authorities released more bad news, in particular in respect of the 2011 budget deficit (now expected to be 8.0% – will be even more) and that Spanish banks face an additional E50bn of losses – the real number is likely to be higher. How are these banks going to meet the 9.0% Tier 1 targets imposed by the EBA? Expect more bad news. The incoming administration has inherited a can of worms;

The collapse of Unicredit’s share price, following the announcement of the rights issue suggests that European banks are going to find itextremely difficult to raise funds from the markets. The EBA requires that European banks have a minimum Tier 1 ratio of 9.0% (E115bn) by 30th June 2012 – indeed banks have to submit their capital raising plans by 20th Jan. OK, so selling more assets to reduce the balance sheet is an alternative, but is impractical in the size required, particularly in current market conditions. Certainly seems like the banks will be coming cap in hand to their respective Governments – who just happen to be tapped out/bust and then to the EFSF, whose funds are limited. Oops;

To add to Italy’s woes, Fitch suggested that there is significant chance of ratings downgrade once they have completed heir review;

The ECB is not expected to reduce interest rates this Thursday (12th Jan), following the two 25bps cuts in November and December. I believe that the ECB will cut rates by at least 50bps in the 1st half of the year, though Draghi is likely to delay the announcement of the next cut to Feb/March. I remain of the view that the ECB will implement its own QE programme (dressed up as an anti deflation measure), especially if Euro Zone members can agree a “fiscal compact”, which is due to be agreed by March this year.

No change is expected by the BoE, though an increase of its current QE programme is a certainty – expected in February/March;

The FED seems to be unimpressed by the recent resilience/”strength” of the US economy. Dovish statements by FED officials recently suggest that it would not take much, in terms of negative news, for the FED to trigger QE3.

Equity markets are on the rise today, following optimism that China will ease monetary policy. Sure China will – it has no choice, but the gross imbalances within the Chinese economy does not suggest that China is going to be the Global saviour. Another crisis in the Euro Zone is a near certainty and whilst the US economy has proved to be resilient, I very much doubt the recent (optimistic, in my view) GDP forecasts, issued by analysts. I continue to believe that the 1st Q 2012 will be particularly difficult for equity markets and that rallies should be sold into/shorted.

Apologies for being off line for the last few weeks – took some time off. Currently in Goa with the same old internet problems.

As a result, a short blog today – in any event, I need to get back into the flow.

May I just take this opportunity of wishing you all a very happy New Year.



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