Forthcoming IMF report may question whether the Yuan is materially undervalued

Australian home loan approvals declined for the 2nd month – the number of approvals was down -2.5% in February MoM (or -1.3% on an A$ basis) and the largest decline since March 2011. It looks as if the RBA will cut interest rates next month. Consumer confidence dropped 1.6 to 94.5 in April;

Japanese February core machinery orders increased by +4.8% MoM (+3.4% in January), the most since last November and significantly better than -0.8% decline expected.

Bo Xilai has been suspended from the 25 member Politburo, the 2nd highest decision making body in China. In addition, he has also been suspended from the Central Committee of the Communist Party. His wife Gu Kailai has been “transferred to judicial authorities” on suspicion of having murdered an UK citizen, Mr Neil Heywood. The Communist Party is to carry out an investigation of Mr Bo. Basically, follow the party rules, especially stick to the consensus politics/policies or else;

The WSJ reports that the IMF will reduce sharply it’s long term forecast of Chinese current account surplus in a report to be issued on the 17th April. Last September, the IMF reported that the surplus would amount to 7.0% of GDP. Speculation is that the IMF will reduce China’s forecast surplus to 5.0% or even lower which, if true, weakens the case that the Yuan is materially undervalued. Chinese authorities repeat that the Yuan is near “equilibrium”. The IMF is in the process of revising the basis by which it assesses currencies, with the new methodology to be revealed in June. As a result, the IMF is unlikely to comment on the Yuan at this stage;

The FT reports on the major discrepancies in Chinese data. Some examples are:
HSBC March PMI came in at 48.3, though the official number was 53.1;
Industrial enterprise profit declined by -5.2% and SOE’s by -20%, though corporate tax rose by +29%;
Copper and Iron ore imports rose by 76% and 29% respectively – however, prices declined;
Industrial production grew, but inventories rose;
Retail sales growth fell though household consumption rose;
Inflation declined as did GDP, though overall tax revenue rose +35%.

The Indian Rupee fell to its lowest level against the US$ in 3 months today – trading around 51.63. The Central Bank is torn between stubbornly high inflation and weakening growth. The current account deficit remains a serious problem. The Rupee could well weaken further;

Reports circulate that the next elections in Greece is scheduled for 6th May. No party will gain a majority – indeed, a coalition of more than 3+ parties is likely. That’s going to add to the chaos;

Spanish 10 year Sovereign bond yields have hit 6.0%. Deutsche Bank suggest that Spanish banks who have been buying Spanish Sovereign bonds with LTRO money have stopped doing so as they have run out of funds. It is thought that Spanish banks have bought some E70bn of (mainly Spanish) Sovereign bonds since last November. With yields rising, the negative impact on their balance sheets (and P&L’s if they sell) will be noticeable;

Spain’s economy keeps tanking. February industrial output was down -5.1% YoY, slightly weaker than the -5.0% expected;

German March wholesale price index rose by +0.9% MoM or +2.2% YoY (February +2.6% YoY);

UK retail sales (stores open for more than 12 months) rose by +1.3% in March YoY (-0.3% in Jan/Feb). Warmer weather most likely resulted in higher sales;

Mr Santorum’s suspension of his campaign has left the way clear for Romney to become the Republican candidate. The news should enable Romney to concentrate on the November Presidential elections;


Asian markets (ex China and India) closed lower, following on the decline of European and US markets yesterday. Spot Brent having been below US$120 earlier today is currently trading at US$120.30, with Gold at US$1657.

A major sell off in European equity markets yesterday – the MIB was down 4.98% (down 15% since mid March), the IBEX 2.96% (lowest since March 2009), the CAC 3.08%, the DAX 2.49% and the FTSE 2.24%. However, European markets are higher today, with the MIB and IBEX up around 1.5%. US markets closed at their lows, though the better news from Alcoa, after the close of markets, should help today – futures suggest that the markets will open some +0.6%/0.7% higher.

Having touched 6.0%, Spanish 10 year bonds are currently yielding 5.86%, whilst comparable Italian bonds are yielding 5.52%. Is the ECB in the markets?

A bit of a reprieve today and next weeks IMF/G20 meetings should result in more funds being provided for the EZ bail out programme (from EM’s in particular) – clearly positive. However, the crisis in Spain is far from being resolved, Chinese growth is suspect and impending elections in France (the Socialist candidate Mr Hollande remains the clear favourite in the 2nd round, with Mr Sarkozy’s campaign stalling) suggests caution. Yes the US economy continues to improve, but other factors remain problematical.

I remain bearish.

Kiron Sarkar

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