Moody’s downgrades 16 Spanish banks

Home prices fell in a record number of Chinese cities in April (46 out of 70) according to the National Bureau of Statistics, with Wenzhou prices down -12.3% YoY, being the worst. There does not seem to be any respite. Nationwide prices are -1.2% lower YoY in April – in reality much, much lower.
Car dealers have reduced prices, following the ending of tax incentives by the government, which were introduced in 2009 and as a result of sharply rising inventories. Chinese total vehicle sales declined by -1.3% in the January to April period, the worst since 1998.
Analysts (Goldman’s, JPM UBS, and CITI) have reduced Chinese GDP forecasts for the current year – Goldman’s has cut this year’s GDP to 8.1%, from 8.6% previously – still too high in my humble view. Goldman’s suggest that the PBoC will cut interest rates if inflation falls below 3.0%. The recent decline in Oil prices helps materially;

The Japanese government has raised its assessment (reporting “recovery at a moderate pace”) of it’s economy, due to reconstruction, following the tsunami. The Cabinet office raised its forecasts of consumer spending, exports, corporate profits and employment in their report. However they did state that “difficulties will prevail”. Essentially, the Japanese economy looks as if it will peak pretty soon, though slow down as the year progresses, as tsunami related spending reduces. Interestingly, the Japanese report lowered its evaluation of the Chinese economy for the 1st time in 3 months, citing moderate growth;

No respite for the Indian Rupee which declines to another record low. The RBI is concerned, but at the end of the day cannot materially impact the weakening Rupee for an extended period of time. The chances of a balance of payments crisis this year is increasing. The RBI holds approx US$260bn, enough to cover about 6 months of imports. The RBI is considering selling US$’s to oil importers, in exchange for bonds. All great, but at the end of the day, the budget deficit is too high, subsidies too large, the trade and current account deficit are widening and the government is a shambles;

Interestingly, recent polls suggest that those Greek parties who are to stick to (well sort of stick to) the austerity plans are gaining ground. New Democracy is around 26%, with the anti bail out party at just below 24% and Pasok at 13% – a complete reversal from last week, where Syriza was clearly in the lead. The reality is that the Greeks fear losing the Euro – please vote no and get lost. Mr Tsipras, the head of Syriza, the party that is opposed to the bail out terms, states that the EZ will not cut off funding to Greece, though if they do, Greece will default on its debts !!!. Even worse, Mr Venizelos suggests that there will be a further election to follow the one on the 17th June, as agreement to form a coalition government will prove unlikely. Oh God, please no. All the time, losses for the ECB/EZ Central banks/EZ mount, as Greeks continue to withdraw funds from their banks.
The EZ is sort of caving in – they now state that if Greece does not reject the austerity measures “in their entirety”, the austerity measures could be extended and, in addition, the Greeks could be provided with further assistance. The comments are clearly designed to cut the legs of the Syriza party.
Fitch reduced Greece’s rating to CCC on fears of an exit from the EU;

Moody’s downgraded 16 Spanish banks by 1 to 3 notches, including Santander and BBVA (down to A3, the same as the government’s rating). The reasons cited for the downgrade were an increase in bad loans, the recession in Spain, (really worryingly) restricted market access and (also worryingly) the reduced ability of the government to support banks as it’s own creditworthiness deteriorates. Moody’s stated “Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness”. Spanish bank stocks are recovering today, though more likely due to calls for a ban on short selling. However, with increasing bad loans, lower lending and continued withdrawals of deposits, I can see why anyone would touch this sector;

Bankia, the Spanish bank that was partially nationalised last week had some E1bn of deposits withdrawn last week, according to Spanish newspapers. The share price collapsed by over 25% on the news. Bankia will require a significant amount of funds to be recapitalised as it was and remains insolvent. It’s auditors have not approved the 2011 results as yet !!!, though it published it’s 1st Q 2012 results !!!!. The only issue is who provides the necessary capital that the bank clearly needs – my view is that the Spanish government will find it difficult, if not impossible. Still believe that there is much further downside in the share price;

Italian March industrial orders rose by +3.5% MoM, though on an unadjusted basis -14.3% YoY. Orders fell by -2.6% in February. Slightly better news;

Mr Schaeuble states that the market crisis will be shaky for a further 12 to 24 months !!! – I kid you not. Thank you Mr Schaeuble.
Mr Hollande wants ideas to sort out the mess !!!.
Welcome to Europe.

German April PPI came in at +0.2% MoM, or +2.4% YoY, lower than the +0.3% MoM and +2.6% YoY expected;

US weekly jobless claims were unchanged at 370k in the week ended 12th May, slightly worse than the 365k expected. The less volatile 4 week moving average fell to 375k last week, from 380k. The number of people receiving unemployment benefits rose by 18k in the week to 5th May to 3.27mn. The number collecting emergency and extended payments decreased by 6k to 2.97mn;

The Philly Fed general economic index came in much, much weaker at -5.8 in May, the lowest reading since last September, as opposed to a forecast of 10 in April and +8.5 in April. The Philly Fed is closely correlated to the ISM, so bad news. More talk of the FED introducing another QE programme is certain – personally, I believe the FED will. However, overall, the US economy continues to grow;

The JPM unit which racked up US$2bn of trading losses has open positions amounting to more than US$100bn in asset backed securities and structured bonds – the same kind of securities that caused all those problems in 2008. These holdings are in addition to credit derivatives which lead to the recent losses. (Source FT). Unwinding this lot is going to be interesting !!!. Me thinks that this issue is going to pop up again and again….;

This weekend’s G8 Summit is likely to focus on the crisis in the EZ, with pressure exerted on Merkel to help stimulate the region. However, I cant really see much coming out of the summit. I suppose further talk of increasing the capital of the EIB to invest in infrastructure projects is likely, but that’s not going to make a great difference;


The MSCI Asia Pacific index was down -2.5% today and has wiped out its 2012 gains, as Asian markets declined sharply today. European markets are only about -0.6% to -0.7% lower (the FTSE is -1.2% lower), though Italy and Spain are marginally higher.

The Euro is trading at US$1.2689. The Aussie continue to drift lower, currently US$0.9843. Sterling has come off sharply from above US$1.60 recently to US$1.5793

Spot Brent is trading at US$107.67, following yesterdays sharp sell off. Gold is at US$1585.

German 10 year yields are trading around 1.4%, though the equivalent Spanish yields are approximately 500 bps higher.

Whilst I don’t believe that there will be any meaningful development following this weekend’s G8 conference, I think it’s time to close equity shorts. The EZ is offering goodies to the Greeks to avoid Syriza winning the next elections. Could result in some kind of relief rally. In addition, short covering may well be the name of the game. Still too early to aggressively buy the market in my humble view, but may nibble a bit in the energy and UK property sector, but really want to remain cashed up.

Have a great weekend.

Kiron Sarkar

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