Japanese capital spending (ex software) rose by +3.5% YoY in the 1st Q, slightly lower than the increase of +4.9% in the previous Q. Post tsunami spending is helping, but the economy will face headwinds in the 2nd half of the year;
The official Chinese PMI fell to 50.4, from 53.3 in May, lower than expectations of 52.2. The official data is normally better than the HSBC data, which reported that PMI was 48.4, even lower than the flash number of 48.7, and below last months 49.3. The output component declined 4.3 points to 52.9 and new orders turned negative at 49.8, down 4.7 points. The Chinese continue to report that they will not embark on a large scale stimulus programme – they believe (quite rightly) that the programme in 2008 was a mistake. However, I remain of the view that Credit Suisse’s view that they will announce, in effect, a stimulus programme of between Yuan1tr to Yuan2tr is right and, in addition, also agree with their view that interest rates will be cut by 25bps along with an RRR reduction. Without such a programme, Chinese 2012 GDP growth will be nearer 7.0% this year (or even below), rather than the 8.0%+ forecast by most analysts;
South Korean exports declined by -0.4% in May from a year earlier (-4.8% in April), though better than the decline of -1.1% expected. The weakness reflects a slowing China and Europe. The Korean Won declined over 4.0% in May, The domestic economy seems to be holding up, but Korea is still dependent on exports;
Indian May manufacturing PMI fell to 54.8, slightly below 54.9 in April. Output rose to 56.4, from 56.1 and employment was slightly better at 56.4, from 56.1. Better numbers, but the dreadful 1st Q GDP data suggests that the problems in India will continue for quite some time. The RBI is unlikely to reduce interest rates at the next meeting on 18th June, due to persistently higher inflation and a fast weakening Rupee. The Sensex is off over -1.5% at present;
BP announced that it had received “unsolicited indications of interest” (more than 1 bidder?) for its 50% stake in TNK-BP and seems to be pursuing the idea. BP’s partners in TNK-BP have announced that they are a bidder. It is estimated that BP’s stake is worth around US$30bn – BP was though to have offered to buy out its partners for US$32bn about 1 1/2 years ago. The CEO of TNK-BP Mr Friedman resigned a few days ago. BP paid US$8bn for its stake and has received some US$19bn in dividends since 2003. The relationship with its partners have remained fraught to say the least. It sounds (no info as yet) that Rosneft may also be interested, particularly as Mr Sechin was appointed the Russia oil Czar recently. BP has stated consistently that its shareholding in TNK-BP was a key asset and a potential sale seems strange – however, it is BP after all;
The Russian Rouble continues to depreciate. Its now trading around 33.65 against the US$ and has declined nearly 12% in May. With oil hovering around US$100 (Russia needs around US$117 to balance its budget), the pressure remains on the downside. Some kind of positive announcement in the EZ could help, as oil should pick up – quite frankly the only likely positive prospect on the horizon. Capital flight amounted to (officially) US$42bn in the 1st 4 months of the year (likely to have increased in May), as compared with US$80.5bn in 2011, another negative. Basically, the Rouble trades as a petro currency – just follow the oil price;
Italian unadjusted unemployment rose to 10.2% in April, above the forecast of 9.9% and March’s reading of 10.1%, the highest unemployment rate since January 2004;
Unemployment in the EZ rose to 11.0% in April to 17.4mn (up 1.8mn YoY), basically unchanged from the revised reading in March;
The Bank of Spain reported that E97bn of capital had left the country in the 1st Q (approx 10% of GDP), some E66.2bn in March alone. As the EZ crisis worsened in April and May, capital flight is likely to have risen significantly. The situation in Spain is untenable. Some kind of fix is needed, indeed needed imminently – in my view this month
Spain will be given additional time to reduce its budget deficit to 3.0% – most likely by 1 year to 2014. The German MOF seems to be in agreement.;
A whole string of (mainly bad) EZ manufacturing PMI data was released today – details below.
Spanish May PMI came in at 42, lower than April’s 43.5 and the lowest since May 2009;
Italian May PMI came in at 44.8, better than last months 43.8 and the forecast of 43.5;
French final May PMI fell to 44.7, from the flash 44.4 and as compared with the 46.9 reported in April;
German May final PMI came in at 45.2, slightly higher than the flash reading of 45.0 and lower than April’s 46.2;
Irish PMI rose to 51.2, from 50.1 in April, the highest in 14 months and the 3rd consecutive rise.
Overall, the EZ May final PMI came in at 45.1, marginally higher than the 45.0 initial reading and down from April’s 45.9, though the lowest since June 2009;
UK May manufacturing PMI was down sharply to 45.9, well below forecasts of 49.8 and April’s revised 49.0, the lowest reading since May 2000. Sterling weakened yet again on the news. Its down nearly 10 cents against the US$ from its US$1.62 levels. Indeed, Sterling is even weaker against the Euro. QE4 coming?;
Initial exit polls suggest that Irish will vote Yes in respect of the fiscal compact, as expected. In reality the Irish have very little choice but to vote yes. Turnout looks like being low, reflecting no great enthusiasm however.
July Brent fell below US$100 this morning and is currently trading marginally above.
Outlook
We are near/in panic mode at present. The EZ will have no choice but to act – I believe imminently, though sometime this month at the latest, in my humble view. I presume that EZ politicians will want to know the outcome of the Greek elections on the 17th June, though I’m not at all sure that they can wait that long. The most likely move is for the EZ to agree that the ESM can be used to recap EZ banks. Something on an EZ wide bank deposit scheme is also possible, given the capital flight from peripheral EZ banks. Mr Draghi stated in no uncertain terms that the EZ politicians (German) need to act NOW.
Whilst it looks pretty bleak up there, I continue to believe that to go/remain short at present is dangerous – indeed, I’m looking to go further long. Markets look seriously oversold. Some positive move by EZ politicians (as described above) is likely to result in a sharp rally in equity markets, with a corresponding sell off in bond markets. The DAX is currently down -2.0%, with the IBEX up about +1.2%. Got to be bullish.
US, UK and German bonds are at crazy levels – I would have thought that the 10year+ bonds are at/close to a (major?) shorting opportunity. The only way the EZ (and for that matter the US) is going to get out of this huge debt burden is inflation. Indeed, inflation is currently well over 100bps of bond yields – does not seem sensible to me. Furthermore, even Germany (the Finance Minister) has “accepted” a higher inflation rate. Current bond yields are an end of the world trade.
The key data point remains the US NFP. Expectations have been lowered and the number has to be significantly weaker than the 155k forecast to spark a major sell off.
The Euro is trading at US$1.2322 with Brent (July) around US$100, indeed just below at present.
Kiron Sarkar
1st June 2012
