China Residential Property Policy

Premier Wen reiterated that China will continue with its policy of curbing residential property

Australian consumer confidence continues to decline – it fell by 5 points, the most in 4 months in March – to 96.1. Mortgage interest rates continue to rise and the overblown property market is facing serious headwinds. The mining sector has been strong, as opposed to other sectors of the economy – however, with mining slowing………Cant see the situation improving, especially with a slowing China and inflationary and economic pressures in S E Asia, its biggest market;

During a speech at the Chinese National Peoples Congress Premier Wen reiterated that home prices remained at far too high levels and, as a result, existing curbs were necessary to avoid “chaos”. “We must not slacken our efforts in regulating the housing sector” he added. In a further sign that the Chinese authorities want to stop the Yuan from rising, the Premier repeated that the Yuan’s “may possibly have reached an equilibrium level”. He added, that they would allow “wider two way fluctuation”. Boys and girls, unless the Chinese have to respond to serious political backlash from the US, in particular, the increase in the Yuan is over – the Yuan is lower by some -0.7% against the US$, YTD. Chinese markets closed down by the most in 3 months – down over 2.0%;

Chinese authorities are easing restrictions on lending capacity at 3 of the 4 major Chinese banks – new loans fell to a 4 year low recently;

The FED released details of the Stress Test yesterday with 15 out of the major 19 banks passing. The criteria used were uber stressful – they included, an unemployment rate of 13%, a 50% decline in stock markets and a 21% decline in home prices. The President and CEO of the American Bankers Association stated that he objected “to testing bank capital under theoretical conditions that are far more severe than even those seen during the Great Recession”. Citi, Sun Trust, Ally Financial and MetLife failed to meet at least one of the many criteria. On the other hand JPM, and Wells Fargo announced that they were to raise dividends and undertake stock buy backs. Citi just failed to meet the minimum Tier 1 capital ratio of 5.0% (they came in at 4.9%), under the stressful criteria – it is to resubmit plans. Stress Tests are to be an annual event. The results were rushed out by the FED, following JPM’s announcement that they would rise dividends by 20%, which forced Wells and others to announce their plans. Miscommunication between the FED and JPM was the reason cited. JPM and Wells and other banks rose sharply yesterday;

Inflation (the wholesale price index) in India rose by +6.95% in February, higher than both the 6.55% reported in January and forecasts for a rise to +6.7%. The data reconfirms my view that inflation in S E Asia is on the rise in response, in particular, to higher energy prices, with food likely to rise, as well. Forget an interest rate cut. Personally, I would avoid EM’s – indeed, I’m short, including India. I would also expect the Rupee to depreciate. The forthcoming budget (this Friday) will be watched, in particular – they need to reduce spending, but….;

What is it about Russian Oligarchs. The latest is a spat between Deripaska and his 3rd largest shareholder Mr Vekselberg, who resigned as Chairman. Mr Velselberg and the other major (2nd largest) shareholder, Mr Prokhorov have teamed up to demand asset sales and a change in dividend policy – Rusal is also heavily in debt. however, the bottom line remains that the oligarchs are trying to shed their Russian based assets and park money abroad – capital flight will continue;

Whilst everyone focuses on the PIIGS, Holland looks as if it is facing problems – it remains 1 of the 4 AAA EZ countries. The budget deficit targets for this and next year look as if they will be breached and internal political tensions are increasing. Oops;

The FED’s FOMC retained the flexibility to ease further, whilst acknowledging that the US economy was improving – they reported that they expected “moderate economic growth”.. The FED did highlight the the unemployment rate remained “elevated”, though acknowledged that they “have improved”. However, they reiterated the traditional “significant downside risks remained”. Interestingly the FED repeated that the inflation outlook remained “subdued”. Hmmmm. Treasury bond yields continued to rise in anticipation of interest rate rises before late 2014, the 10 year yield rose from around 1.8% at the end of Jan, to around 2.13%. Personally, this rapid rise in rates seems premature in my humble view;

Existing single homes sales came in at an annualised rate of 4.1mn in January, according to the National Association of Realtors. It has picked up since mid 2011. Anecdotal evidence – sales of home furnishings and building improvements businesses, suggest better demand overall. A pick up in residential home sales is a key component in the US recovery – I continue to believe that there are signs that it is picking up and will remain long the building materials sector;

Mr Santorum won the race in Mississippi and Alabama. Mr Gingrich, the person with the closest ties to the South, was the biggest loser – Romney was a close 3rd – though he has vowed to fight on. Santorum remaining in the race is bad news for Romney. President Obama, on the other hand, must be happy;

The US (in coordination with the EU and Japan) has filed a complaint with the WTO against Chinese policy to restrict exports of rare earths. The move seems to be in response to Romney’s China bashing statements;

The IEA warns that spare capacity in the OIl sector has declined to 2008 levels. The agency retained its demand outlook growth at 800k bpd this year. Looks like oil is not going to decline. Decided to buy oil services companies Amec (ticker AMEC) and Petrofac (ticker PFC).

Outlook

Asian markets (ex China) rose for the 2nd day, following the better US bank stress test results and more up beat comments by the FED in respect of the US economy. However, the miners are not participating, following Premier Wen’s comments as to the continuation of curbs on property in China. I remain short the miners – just cant the see the upside at present, though a number of analysts continue to push the sector (Deutsche, being the latest). At the same time Asian bond yields are rising – inflation will rear its ugly head in the region and I remain bearish. Essentially, I remain bearish the EM’s and far prefer the DM’s – the US, in particular

The A$ and the Yen continues to weaken, though the less said about taking profits on my Euro short (against the US$) yesterday, the better – the Euro declined by just over 1c. Oh well. Will certainly look to reenter the trade – likely after news that the EFSF/ESM will be increased, which I believe will be the case.

Yesterday’s better US stress test results and more positive commentary by the FED is spurring markets. US markets (the DOW) closed above 13,000 – should suck in more participants. European markets are higher (DAX up 1.0%), though the FTSE is lagging. The current rally looks as if it will continue.

Best

Kiron

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