Yuan lower YTD – PBoC talk about a “more balanced” rate

Hi there,

Japanese January core machinery sales rose by +3.4%, much higher than the +1.6% forecast and a turnaround from the decline by -7.1% in December. Overseas orders rose by +20.1% MoM, much higher than the +5.6% in December. A lower Yen will help further;

The Chinese PBoC lowered its daily fix for the Yuan (the trading band has been increased to +/-0.5% either side of the fix) by the most since August 2010 (to 6.3282 against the US$), following the worst trade deficit (-US$31.5bn) in 22 years in February – . The Yuan, which is -0.5% lower YTD (up +4.7% last year), fell the most in 7 weeks. Interestingly, the Central Bank stated that it would use interest rates and its currency to manage its economy. Mr Zhou, the Governor of the PboC, stated that whether the Yuan’s advance is ending depends on market forces of supply and demand. He added that fluctuations in the exchange rate are decided by the country’s balance of payments. Finally, he stated that the PBoC’s intervention would end, once the Yuan’s exchange rate is “more balanced”. Hmmmm, me thinks that means LOWER. ( Source Bloomberg);

The most likely Republican candidate for the Presidency, Mr Romney, has been keen on pursuing a China bashing policy – this is going to get really interesting, especially as we get nearer the November elections;

China’s rail system, including its high speed rail network, seem to be plagued with problems. A section of track in Hubei province collapsed – fortunately it was unopened. China’s rail system (a senior German politician told me that it was a Siemens design about 1 year ago – clearly not as well built) is one of its larger “white elephant” projects, which will lose money and, furthermore, is considered dangerous;

The PBoC stated that it would come up with “new ideas” in respect of its US$3.18tr of forex reserves. “New ideas”, sounds like less US$ assets and more direct purchases of utility, property and other equities, as it is beginning to do recently. The Vice Governor Yi Gang reported that China will increase its investments in Europe. The Central Bank repeated that it would maintain a prudent monetary policy, whilst fine tuning and taking preemptive measures as appropriate. Mr Zhou reported that, “in theory”, the PBoC had significant room to reduce RRR’s materially ie THEY WILL;

The Chinese National Statistics Office reported that residential sales declined by 25% in January/February (UP 26% in the same period last year). This is a definite Oops;

Chinese lending remained extremely weak in February. Lending was just Yuan 711 bn, some 5% lower than market expectations. Lending for the 1st 2 months was 8% lower than the comparable period last year. Lending is forecast to be between Yuan 8tr – to Yuan 8.5tr this year – optimistic, in my view, unless Chinese authorities undertake a major U turn. Retail lending collapsed to just Yuan65bn, less than half January’s and December lending of Yuan 153bn and Yuan 146bn respectively. Corporate lending was higher at Yuan 643.5bn (Yuan 584bn in January and Yuan 497bn in December), though most of this was short term trade finance – around 70% of lending, according to BarCap. However, deposits at banks increased reflecting the fact that deposit rates (3.5) are higher than current inflation (3.2%), but for how much longer !!!!;

India’s Industrial Production rose by +6.8% YoY, the highest for 7 months and by well above forecasts for a rise of just +2.1%. However, this data set is highly volatile and this looks a grossly distorted/rogue number. For example the food and drink component soared by an inexplicable +92.6% – essentially impossible.
GDP was up +6.1% Q/Q last Q (the slowest pace for 2 years), with inflation (wholesale price index) forecast at +6.7% YoY in February (+6.55% in January). The February inflation data is released on Wednesday. However, I expect inflation to rise in coming months, in particular, given the sharp rise in energy and food prices, the major components of the inflation basket. The RBI is expected to keep interest rates (repo rate) on hold at 8.5% this week (March 15th). The Indian Rupee, which had been a star performer in the 1st 2 months of the year, is down nearly 2.0% MTD. I would expect the Rupee to decline (materially?) as the year progresses. The Indian Government will release its budget for 2012/13 on Friday. In my humble view the Indian market has risen too far, too fast and I expect it to drift lower in coming months – I’m short India, for full disclosure purposes;

India reversed its ban on cotton exports, in response to pressure from farmers (politically have clout), traders and China – last weeks ban was pretty silly in the 1st place;

EZ finance Ministers meet today to sign off on the E130bn 2nd bail out package. “Nobody can now exclude for a single moment that Greece may need a 3rd bail out”, states the German Finance Minister Mr Schaeuble. That sums it up, though I would disagree with the “may” in Mr Schaeuble’s statement – he should have said “will”.
Another issue which is sure to come up is Spain’s unilateral increase of its 2012 budget deficit to -5.8% this year, from the previously agreed -4.4%. Sure they have agreed to reduce the deficit to -3.0%, in 2013, but that’s just hot air and way in the future;

Italy’s 2011 4th Q GDP was confirmed at -0.7% Q/Q, though the YoY was revised modestly higher at -0.4%, rather than the initial -0.5%. The forecast for the current year varies, but is between -0.9% to -1.2%. Personally, I believe that the Italian economy may well perform better as long as Monti continues with his reform package – confidence has certainly risen;

The Irish Finance Minister Mr Noonan, confirmed that Ireland is in negotiations with the EU on a “major restructuring of the country’s banking debts”. He added that if the discussions were successful, they “would be in the medium term, rather than immediately”. As you are aware, Ireland has to have a referendum to ratify the recently agreed “fiscal compact”, though the fiscal compact will go ahead if just 12 (out of 17) EZ countries support the process. A sweetener to encourage the pretty fed up Irish to vote in favour? – well, off course it is;

Whilst Sarkozy is just 2 points below Hollande (first round) in the most recent poll, he is 10 points behind in the 2nd round – basically a long way to go. Merkel/Cameron support for Sarkozy could well backfire, as the French are increasingly fed up of the Germans and have always hated the Brits – “the olde enemy”;

Banks deposited E797.9bn with the ECB on Friday, down from the over E800bn recently. Personally, I believe that the lower the number the better for European, in particular, equity markets;

Results from the US bank stress tests (conducted by the FED) are to be released – the market has certainly improved in anticipation. However, the FED may be more cautious about loan loss provisions than banks and, as a result, may well limit dividends/buy backs. Can’t see a pop on the news – indeed, the downside risk is greater;

Global non financial companies have issued an enormous (indeed record) amount of bonds YTD reports the FT. The reason – better market conditions, with record low yields and a limitation of bank lending (still some 70% of total lending) in Europe. Corporate bond issues have soared to US$386bn YTD. Sensible stuff;

Goldman’s equity strategist (Mr Kostin) is bearish, particularly in the 2nd half of the year. Very sensible stuff and, I must say, I could not disagree with anything he said, though I’m a little more bullish (short term) in anticipation of a larger EFSF/ESM. However, Goldman’s bearish – wow, things are a changing;

Outlook

Asian markets were taken aback by the Chinese trade deficit and closed lower (ex India), though off their lows. European markets are flat to slightly lower. Oil, well it’s just below US$125 (US$124.45), in response to the China news, though still far, far too high. Gold is also off (over US$11), as is copper (down -0.7%), no surprise.

Remain bearish, though I expect a pop up following an increase in the size of the EFSF/ESM (likely in my view) towards the end of the month/early April.

Fund flows into EM’s have slowed down/reversed. The recent run up was silly, in my humble view. I will remain short, and look to increase shorts, post news re EFSF/ESM, in particular.

Best

Kiron

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