Rumours of a Chinese stimulus programme, though denied by the Xinhua News Agency

Australian new home sales rose 6.9% MoM, in anticipation of lower mortgage rates. The RBA cut rates by 0.5% to 3.75% and further cuts are expected. Australian home prices declined in the 1st Q and are expected to remain under pressure;

Japanese unemployment rose unexpectedly to 4.6% in April, from 4.5% in March, the 1st rise in 3 months and slightly higher than the unchanged expected.
Japanese retail sales fell by -0.3% in April MoM;

Rumours continue to circulate that China will announce a stimulus programme of around Yuan 1tr (US$158bn) to Yuan 2tr (US$315bn), half of the 2008 programme. The Chinese authorities are expected to continue to provide incentives to buy new cars, essentially a cash for clunkers scheme. Interest rates and reductions in RRR’s are also expected. However, the Chinese news agency Xinhua denied the rumours. Personally, I believe that there is an element of truth in the rumours, given that China will want stability ahead of the major change in leadership later this year. In addition, the country is being impacted by the crisis in the EZ.
The mining sector and the A$, together with markets in Hong Kong, Korea and Japan should benefit, if indeed the Chinese authorities push through a stimulus programme. Credit Suisse believe that the Chinese economy will grow by around 7.0% in the 2nd Q, rising to between 8.0% to 8.5% in the 2nd half, with around 8.0% for the year. Chinese markets closed some +1.2% higher today;

India is due to report on it’s GDP for the 1st 3 months of the year and for the fiscal year ending 31st March 2012. Forecasts suggest that GDP rose by 6.0% in the last fiscal year. The forecast for the current year is around 6.8% (though a number of analysts have cut their forecasts to between 6.3% to 6.6% very recently – still too high), is far too high in my humble view. With a trade deficit nearing 10% (9.9%), inflation at 7.23%, a 4.0% current account deficit and a fiscal deficit of 5.8%, India is facing serious economic problems. Industrial production is declining rapidly – it was down -3.5% in March MoM (+4.1% in February and +1.1% in January). The weakness is expected to have continued into the current Q. Furthermore the weak Rupee, which will keep inflation at high levels, is a constraint on the RBI cutting interest rates – the RBI cut rates by 50 bps in April. The economic problems in India are compounded by serious issues of corruption and the inability of politicians to implement much needed political reforms. Unfortunately, I really don’t see a solution at present. Data should confirm that investors will continue to withdraw funds, compounding the problems even more;

The resignation of the combative Mikhail Friedman as CEO of TNK-BP suggests that the partnership faces further turmoil. Rumours circulate that the resignation of Mr Friedman is due to the appointment of Mr Sechin as, effectively, the oil Czar in Russia and that Mr Sechin wants to buy out the Alpha group shareholders, which include Mr Friedman. Whatever the truth, the news confirms the problems of doing business in Russia, though many would not be too disappointed with the departure of Mr Friedman;

Spanish April retail sales declined by -9.8% YoY, the largest decline since 2003 and much worse than the -6.3% expected. The Government confirmed that the economy would decline yet again in this Q. Spanish 10 year bonds are trading at yields of 6.49%, whilst the equivalent German bunds are down to around 1.35%, a spread of near 515bps. I would expect Spain and Spanish banks to be requesting EZ funding within 3 to 6 months – this game cannot continue much longer. The problem is that the EFSF/ESM does not have the funds necessary. As a result, I would not be surprised if the ESM is granted a banking licence – Germany will have to concede, as there is no alternative;

The Spanish authorities are yet to agree as to how they recapitalise Bankia. The original plan was to issue sovereign bonds in exchange for nationalising the bank. The bonds would then be used by Bankia to seek finance from the ECB. However, this cunning plan seem to be having problems – ECB objections, very likely. The government is now thinking about using the FROB, the bank restructuring fund (well not quite a fund, as it needs to raise the money necessary – it has funds of just E5bn) and other government sources. The Spanish economy minister (recently) stated that Spanish banks would need just E15bn. With E19bn for just Bankia, the scale of denial in Spain continues to amaze. Bloomberg reported that Ireland had to finance it’s banks to the tune of E63bn, some 43% of GDP, whilst Spain to date has provided just E33bn or 3% of GDP. It is impossible to assess the extent of the funds required, but it will be several 10’s of billions – E100bn?. Spanish debt to GDP looks set to rise to unsustainable levels, suggesting that a sovereign debt restructuring is a serious (likely?) possibility in due course;

Spain also announced that it would help the provinces raise finance. Good luck.
a report states that foreign investors hold 37% of Spanish sovereign debt in April, down from 50%^ at the end of 2011. Spanish banks have increased their holdings to 29%, from 17% previously;

German preliminary CPI declined -0.2% MoM in May, slightly more than the -0.1% expected. CPI rose by +1.9% YoY. The news allows the ECB more flexibility;

The UK’s Confederation of British Industry (“CBI”) reported that retail sales surged in May. The index rose to 21, the highest reading since April 2011, from -6 in April, which was affected by particularly bad weather. The orders component rose to 7 from -7 in April and the volume of stocks rose to 23, from 5. However, overall, retail sales are lower than May last year;

The Case-Schiller March home price index declined -2.6% YoY, in line with expectations, though much lower than the decline of -3.5% in February. The decline was the lowest since December 2010. The data continues to suggest that US housing is recovering;

US May consumer confidence came in at 64.9, much weaker than the 70.0 expected and the (downwardly revised) 68.7 in April. The present situations component was 45.9, down from 51.2. Expectations declined to 77.6, from 80.4;


Asian markets closed higher today, following rumours (later denied) of an impending Chinese stimulus programme. European markets are higher, except Spain which is over -1.5% lower. US markets are up around +0.7%, though were knocked by the weaker US consumer confidence numbers.

The Euro is at US$1.2534 and should weaken further.

Brent oil is trading around US$107.50.

I remain convinced that China will both ease monetary policy and introduce some sort of stimulus programme.

With the Greek anti bail out parties losing support, the markets have regained somewhat, which actually will delay any necessary policy action by the ECB/EZ unfortunately. However, even if a coalition can be formed around New Democracy (likely), the Greeks will not perform and will have to exit at some stage. Whilst the initial market reaction is likely to be negative, the ECB/EZ will have to pull out all the stops (to avoid contagion), which I believe will more than counteract the impact of a Grexit. However, it looks as if it’s not going to happen imminently.

The situation in Spain is deteriorating rapidly and will require Spain to seek a bail out of it’s banks, at the very least, though a bail out for the country as well, most likely. The funds available in the EFSF/ESM are insufficient which suggests to me that the ESM will have to be granted a banking licence, irrespective of German views. Such a move may well be positive for markets but not for shareholders and bondholders of, in particular, domestic Spanish banks, who will have to take the 1st hits. Other European banks must also be suspect.

Kiron Sarkar

29th May 2012

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