Back to following Greece

Australian consumer confidence rose +0.8% to 95.3, though near the weakest level this year. The wage price index rose by +0.9% last Q, on a Q/Q basis. The A$ remains weak and the RBA is likely to reduce rates further, in particular, as China slows;

Yuan forward rates declined to the weakest level this year. Can’t see much upside for the Yuan, particularly against the US$. Market sources suggest that the Chinese have been buying Euro’s to help their exporters, by stemming it’s decline.

With new elections in Greece scheduled for 17th June, EU politicians/officials are trying to turn next months election into a vote on whether the Greeks want to retain the Euro or not. Over 75% of Greeks want to retain the Euro, but don’t want to stick to the austerity measures. Merkel/Hollande suggested some kind of growth measures could be provided if Greece decided to stay in the Euro and, in addition, comply with previous commitments. However, a huge issue remains the extent of official debt owing to the EU/IMF (the private sector is largely out) and the large Target 2 imbalances, which are rising as Greeks withdraw money from their banks. God only knows how they sort that out in the event of a Greek exit. Seems like the EZ will face huge losses, if Greece exits. If they stay, the Greeks will not comply – not a great scenario. The ECB has stated that it has “temporarily” stopped lending to some Greek banks. Well great, but these banks can get funds from the Bank of Greece, through the Emergency Lending Assistance programme (ELA), the funds being provided mainly by Germany, though also by other EZ countries, including Holland and Finland;

EZ inflation fell to 2.6% in April, from 2.7% in March, in line with initial estimates.
EZ exports declined by -0.9% in March, MoM;

The UK’s Bank of England downgraded growth forecasts in today’s inflation report, though admitted to stickier inflation, as the governor warned of risks from the deteriorating situation in the EZ. The chances of an additional round of QE is increasing, to the extent it will be a certainty if there are additional problems in the EZ. The strength of Sterling was not a major concern – it will help reduce inflationary pressure. Sterling weakened following the release of the inflation report;

US new home starts rose by +2.6% in April MoM, to a seasonally adjusted annual rate of 717k homes, better than the 685k forecast. March’s numbers were revised higher to 699k. April’s starts were 30% higher than the previous year. However, building permits declined 7.0% to 715k in April, from an upwardly revised 3 year high of 769k in March, mainly due to a near 23% drop in multi unit apartment buildings.

In a separate report, mortgage delinquency rates fell to the lowest level since 2008 in the 1st Q. Home loans 30 days or more late declined to 7.4%, from 7.58% Q/Q.The US housing sector sure seems to be improving to me – a must for a sustained US economic recovery;

US industrial production rose by +1.1% in April, the highest growth rate since December 2010, and well above forecasts of a rise by +0.6%. Manufacturing output rose by +0.6% MoM, from a decline of -0.5% in March. Auto sales in the 1st Q wre the highest in 4 years. Capacity utilisation rose to a 4 year high of 79.2%;

“Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough” according to FED minutes released yesterday. Suggests a greater possibility of QE, as previous minutes suggested that only a “couple” of members were contemplating easing – it’s now “several”;


Apologies for not sending out my notes for the last few days – have been totally tied up. Also just a short note today – normal service will resume tomorrow.

Greece will be with us yet again. The uncertainty is clearly bad news for markets. Materially reducing and, in certain cases, closing, my shorts was clearly wrong, especially I was in virtually all the right places. My only large remaining short is, in effect, India, though still have a few other small short positions. However, short Euro/A$/and Rupee, against the US$ is doing well. Reports from Europe, Australia and India suggest to me that the currencies have further to decline.

Outcomes are extremely difficult (indeed probably impossible) to predict at present, but the uncertainty suggests that downside risks prevail.

The meeting between Merkel and Hollande did not reveal much – will have to wait for the EU Heads of State meeting on the 23rd May.

US economic data continues to improve, though Europe (and for that matter China, India and Brazil and S E Asia) looks weak to bad. Can’t see much support from Japan, as post tsunami spending slows as we progress through the year – which will reduce GDP.

Kiron Sarkar

16th May 2012

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