Japanese GDP grew by 1.0% in the 1st Q (+4.1% on an annualised basis), slightly higher than forecast and as compared with unchanged in the 4th Q of 2011. Whilst the economy should continue to grow for a while yet, I expect it to slow down from now on and, in particular, later this year as tsunami related spending decreases and, in addition, as the global economy slows down. Will be watching the Yen, which remains a basket case in my opinion, but will not short at present. At some stage though…..;
The FT reports on a report by Lombard Street research. Essentially, they analyse which countries would suffer the most assuming a slowdown in China. The worst off (of the Asia Pac countries) are Hong Kong, followed by Taiwan, Korea, Australia, Japan, with Indonesia and India the least affected. In terms of non Asia Pac countries, Brazil tops the list, followed by the US, Germany, interestingly Sweden and then France, the UK and Italy;
The Indian Rupee continues to fall to record lows – it declined to more than Rs54.50 this morning. With the government quite frankly paralysed and with no meaningful action likely, the chances of a balance of payments crisis (due to a widening trade and current account, though also, a budget deficit) remains high. Some analysts suggest a target of Rs57/Rs58 against the US$ – personally, there is a high risk of the Rs collapsing to even worse levels. The RBI has been supporting the Rupee, but is unlikely to be able to stem the decline. The RBI currently holds some US$260bn in forex reserves. Inflation is likely to rise further in response to the weaker Rupee. I remain as bearish of India as I do of China. I remain short India and the Rupee. A friend of mine wrote to me some 2 weeks ago to say he could not find any major bearish analysts on India. Hmmmm. Basically do your own research;
Greece’s Central Bank’s liabilities to other EZ Central banks stands at around E100bn and increasing as Greeks withdraw funds from their banks and these banks seek funding from the ELA. This is going to pose a huge problem for the EZ/ECB. Other PIIGS countries (Spain in particular) are increasing borrowing under Target 2 arrangements. If Greece exits, Germany (the Bundesbank) will face the greatest loss (over 27% of losses). If the ECB stops the Greek Central Bank from lending to it’s banks (which they can do with a 2/3rd majority), Greece will have to exit the Euro and print it’s own money. There lies the dilemma. Basically a huge mess;
Spain is appoint advisers, including Blackrock to assess the potential losses on property loans held by banks, in an effort to gain market credibility. They are also to force every bank to set up a “bad bank” to take over the impaired loans at the marked down valuations, with a view of selling them off. Going to be a large write off. I continue to believe that this time around bank shareholders and bold holders will be forced to take the 1st hits – there’s not enough money around and politically it’s impossible to do otherwise;
Spain managed to sell E2.494bn of 3 and 4 year bonds today, the top end of it’s E1.5bn to E2.5bn range and an aggregate bid to cover ratio of near 3 times. The July 2015 bond was auctioned at a yield of 4.876%, from 4.037% previously (3rd May), whilst the 2016 bonds yielded 5.106% from 3.374% previously (15th March). Yields just keeps rising – Spain will have to get bailed out pretty soon. In particular, funding will be necessary to recap it’s banks;
Investors continue to withdraw funds from the BRIC’s – US$251mn was withdrawn from Russia, the most of all the BRIC’s, whilst Brazil, China and India recorded outflows of US167mn, US$127bn and US$148mn respectively in the week ending 9th May, according to EPFR Global. Can’t see that changing at present. The Russian market (the RTS) is some 20% lower from 19th March ie technically in a bear market. Russia is also facing political tensions, given rising protests following Putin’s reelection. He is to avoid traveling to this weekends G8 meeting. Hmmmm. Capital flight will continue in Russia – it is estimated at US$42bn in the 1st 4 months of this year, more than half last years estimate of US$80.5bn, which was the 2nd highest on record. The real numbers are likely to be even higher
Fitch has issued a report which suggests that 29 of the largest global banks will need to raise an additional US$566bn in new capital or reduce their balance sheets by US$5.5tr by 2018 to meet Basel 111 capital standards. Well, the markets are not going to be responsive in these markets, which suggests to me that Governments will have to cough up and/or the deadline to implement the rules is going to be extended. However, this cloud over the sector suggests to humble old me that the sector is set to under perform for quite a while;
JPM’s open position at it’s CIO office in London seems to be incurring further losses. The reality seems to be that the position is so large that it is difficult (near impossible?) to close. Expect further bad news on this front. Whilst a number of analysts suggest buying JPM on the current weakness, I must say, I wont play. Mr Dimon looks as if he is going to face far more flak;
Outlook
Asian markets closed mainly higher. European markets are lower and US futures suggest a flat open.
With markets having sold off for days, some kind of bounce (probably next week – likely short covering mainly, with some bottom fishing) is likely. However, with continued uncertainty, I see no reason to buy the market and will remain excessively cashed up. Will just stick to currency plays.
Something may come out following the EU’s Heads of State meeting on the 23rd May, but don’t hold your breadth. I expect we have to wait for the outcome of the Greek election on 17th June. Further QE in the US and the UK is back on the table, but this time around, I have to question whether it will have much of an impact. The ECB is resisting, but interest rate cuts, QE (though unlikely to be through another round of LTRO’s) and a restart of a bond purchase programme (SMP) is pretty likely. Will be positive for markets, but still a while away in my humble opinion, unless there is some kind of really negative event(s).
Still bearish the financial sector, miners and EM’s. I remain convinced that governments will have to recap banks – there is no solution until this happens – indeed, funds will continue to flow out of peripheral banks. However, I remain convinced that existing shareholders/bondholders will have to take the 1st hits.
The Euro is trading around 1.2702 against the US$ – still ludicrously overvalued. Spot Brent is trading at US$110.63. Oil has declined to around US$110, but seems reluctant to decline below – quite like the energy sector, I must say and, in addition, the UK large cap property sector (particularly London based) as investors flood out of the EZ and into the UK.
Kiron Sarkar
17th May 2012
