The Australian Central Bank, the RBA, maintained interest rates on hold at 4.25%, as expected. However, the Governor reiterated that the RBA had scope to cut interest rates. Cant understand the RBA at all – they are dovish, but have not cut rates. However, the continued dovishness resulted in a weaker A$, against the US$. In addition, as concerns about China continue, I remain of the view that the A$ will weaken, given the country’s significant dependence on the country;
Yet more reports that the Chinese Central Bank, the PBOC (including by Governor Zhou), are considering widening the US$/CNY trading band – currently 0.5% on either side of the PBoC fix. The Xinhua News Agency quotes Governor Zhou – the Yuan is now “very close” to a “balanced level”. Whilst some will argue that such a move is progress towards a more freely traded Yuan (some hope), personally I believe that it is much more likely that the Chinese are trying to stem the rise of the CNY. Whilst a number of you remain of the view that the Yuan is grossly undervalued – and I accept that the weight of evidence is on your side, trust me on this – the Yuan is not going to move much higher against the US$, particularly as the Chinese authorities do not want a major appreciation against the Euro. Some moves nearer the US Presidential election are possible, but the Chinese remain concerned and certainly don’t want a stronger Yuan;
Credit Suisse’s Dong Tao issued an interestingly report yesterday. I summarise:
China’s golden of infrastructure investment is over; and, as a result.
China’s demand for commodities will not return.
Chinese steel production is something to watch very carefully. Nomura states that it peaked in 2011 and February’s steel industry PMI (42.8) suggests a significant decline. Inventories exceed new orders. Bank loans, of around US$500bn, are associated with the Chinese steel industry, by the way. Whoops (Source FT);
UK February retail sales (for stores open more than 12 months) declined by -0.3% YoY, following a -0.3% decline in January. Retail sales are under pressure as consumers become more cautious, but overall, I still believe that the UK economy has stabilised and ticking up marginally – possibly +0.2%/+0.3% QoQ for the 1st Q this year;
UK regulators are considering overhauling the way that LIBOR has been set. A number of dealers have been suspended and/or fired following allegations of abuse. Currently not regulated (very likely to change), the changes are likely to impose compliance requirements, as well. Not before time. (Source FT);
The British Chamber of Commerce reports that the UK will avoid a technical recession and, in addition, does not need further QE. However, they added that growth would be muted. I agree that the BoE is unlikely to increase the size of its QE programme, based on current economic data. Should be positive for sterling, particularly against the Euro;
Just a breakdown of the components that make up February ISM non manufacturing, which unexpectedly rose to 57.3, from 56.8 in January and higher than the forecast was 56.
New orders increased to 61.2 from 59.4, a 1 year high:
Business activity increased to 62.6 from 59.5, also a 1 year high:
Prices paid rose materially to 68.4, from 63.5:
However, the employment component declined to 55.7, from 57.4.
It was also the 3rd straight monthly increase of the ISM and the highest in a year. However, just look at the increase in the prices component and, employment seems to be stalling;
Interesting view by Morgan Stanley, namely that the FED will announce a QE3 programme. Bernanke avoided any such reference at his recent presentation to legislators last week. Whilst inflation appears to be stickier than expected (mainly oil related), personally, I believe that Morgan Stanley are right. Tough in an election year, but…..;
Outlook
Really can see anything to change my bearish view – indeed getting more bearish. Basically increased my existing shorts and, in addition, added a short on India – the recent run up has been fuelled by foreign buying, rather than local participants, by the way. In addition, political issues are ever increasing and the country’s fiscal position looks as if it will get worse.
A number of you have asked why I have not, in effect, shorted China, given my views. I really play China, through the miners – much safer and effective, in my humble view. In addition, the Chinese authorities are know to intervene in markets through a number of State controlled funds.
Short note today, as I’m off to meetings for the rest of the day.
