IMF seeks to raise resources

Employment in Australia declined for the 2nd consecutive month in December. Unemployment remained at 5.2%. The RBA is expected to cut interest rates next month;

In 2011, real estate investment accounted for 13% of Chinese GDP. A Chinese watcher Mr Chovanec reports that zero growth in Chinese construction in 2012 (with the rest of the economy unaffected) will result in Chinese GDP declining to +6.6% for the current year – in Chinese terms a HARD LANDING. Lex of the FT however makes a very good point – rural income in China is rising faster than Urban income – a rise in spending by the rural population (just under 50% of China’s population) can make a material positive impact on Chinese GDP;

Bloomberg reports that the Chinese authorities (the PBOC) will allow banks to raise lending by 5.0% above the equivalent 2011 levels. 30% of 2012 lending is to be completed in the 1st Q, with an equivalent percentage in the 2nd Q and 20% in each of the 3rd and 4th Q’s. The Chinese Banking Regulatory Commission has warned against banks lending to provinces, other than for uncompleted projects.

Fitch reported that it is to complete its review for the Euro Zone by end Jan – it also warned about a 2 notch downgrade for Italy. However, as they have confirmed France’s rating, I don’t believe that any changes will be that important for the markets;

Further reports that a deal on PSI will be reached between Greece and private sector bondholders. A deal where private sector bondholders get 32c on the Euro in a mixture of cash (15c) and the balance in a long term bond is being reported. The FT reports that the new bonds to be will carry a coupon which starts at 3.0% and rises to 4.5% as the bond reaches maturity, with an average coupon over its lifetime of 4.25%. The deal implies an NPV loss for bondholders of 68%;

UK unemployment rose by 118k to a 17 year high of 2.68mn in the 3 months to November. The jobless rate increased to +8.4%, above the +8.3% forecast. However, there are some signs of stabilisation, with employment increasing by a net 18k in December – though mostly part time jobs. Wages grew by just +1.9% YoY, which will help the BoE to go ahead with its QE in Feb/March;

US December PPI came in at -0.1% (+4.8% YoY), with core at +0.3% (+3.0% YoY). Whilst high, PPI is expected to decline during the course of the year.

US manufacturing output rose by +0.9% in December (-0.4% in November), the largest rise in 2011. The only area of decline was utilities, reflecting the warmer winter this year. Interestingly construction supply output rose by 1.0% – possibly weather related, but recent data suggests an improvement. The improvement was supported by better NAHB confidence data (present conditions improved 3 points to 25 in Jan and future outlook up 3 points to 29) to the best level in over 4 years, though still a long way below the flat level of 50. Capacity utilisation returned to 78.1%, following a small decline in November. Interestingly, in the auto sector, capacity utilisation continues to climb, suggesting better consumer demand in months to come.

Net foreign purchases of US long term securities rose by +US$59.8bn in November, following a modest +US$8.3bn rise in October. Interestingly, foreign governments who were net sellers in October (-US$6.0bn), were net buyers in November (+US$23.7bn). Chinese holdings of Treasuries declined by US$1.5bn, to US$1.13bn, though UK holdings (very likely to include the Chinese) rose by +4.4% to a record US$429.4bn. However, (most likely) lower forex reserves in the future suggests that Chinese purchases will decline in coming months. Japanese holdings rose by nearly US$60bn, to US$1.04tr. Foreigners held a total of 48% of total outstanding (ex FED) US debt of US$9.88tr. Given the woes affecting the Euro, I would not be surprised if December’s net purchases is even stronger;

President Obama rejected the construction of the Keystone pipeline yesterday – really cant understand this decision. TransCanada intends to reapply;

Brazil’s Central bank reduced interest rates by 50 bps to 10.5% and, in addition, signalled that further rate cuts were likely. Inflation remains a significant problem and I would not be surprised if it starts to rise in coming months;

The IMF board has suggested that its resources be increased by US$500bn, with a further US$100bn as a reserve. At present, the IMF has approx US$390bn of resources available. They are seeking to reach agreement at the next G20 meeting on 25/26th Feb, with a plea for significant contributions from the BRIC’s, Japan and oil exporters. The UK, having initially been reticent, is very likely to contribute to the fund. However, the US has stated that it will not contribute and EM’s want more voting power as a quid pro quo for additional capital commitments. Not a done deal in my view. The IMF talks about “other options” – do they mean leverage. My friends at BBH also suggest that Central Banks may be tapped, as an alternative to Governments. The Euro strengthened on the news reports, though you could argue than a desire to increases its resources suggests that the IMF is expecting trouble;

The IEA reports that global oil demand declined by 300k bpd in the 4th Q of 2011, due to the economic slowdown, a mild winter and high prices. Over the last decade, oil demand has dropped only once and that’s during the 2008/9 financial crisis. Global oil demand in 2011 was 89.5mn bpd. The IEA has also cut its forecast for growth in oil demand from +1.3mn bpd to +1.1mn bpd. As you know, I believe that the current Oil price is INSANE, though my far more clued up friends reiterate that geo politics will keep Oil prices high;


Reports of additional IMF funding turned around European and US markets and today, Asian markets are up on the news. European markets should open higher. Brent is trading just below US$111. The Euro, well its up to US$1.2859. A deal on Greece should help, but close to US$1.30 seems another great shorting opportunity to me.

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