EZ remains on hold

It looks as if PM Mr Noda is set to win parliamentary approval in the Upper House (it passed the Lower House) to double the sales tax to 10%, in an attempt to reduce Japan’s soaring debt. The issue has created a split in the ruling party. Moody’s reports that the move will help Japan’s rating, but S&P reaffirms Japan’s negative outlook;

China’s commerce ministry reports that its trade situation was improving and expected exports to rise by 10%. Good that he has confidence, as the evidence suggests a somewhat different outcome;

Gambling revenues in Macau are declining. A number suggest visa restrictions and, in addition, limits on the amount of spending allowed on credit cards. However, it is far more likely to represent the impact of a slowing Chinese economy. If Chinese give up on gambling, watch out, the situation is getting really serious. US gaming stocks declined yesterday;

In addition to increasing the limit on foreign holding in Indian sovereign debt to US$20bn, from US$5bn, the Indian government brought in other measures, including a reduced lock in period on infrastructure investments (down to 1 year from 3 previously), increased the number of investors that could buy debt securities and increased foreign access to some mutual funds. However, the measures are insufficient (particularly given the prior hype) and whilst the Rupee bounced back yesterday, I believe it will continue to weaken and will remain short, against the US$;

Well no great surprise, but Cyprus has become the 5th (out of 17) EZ countries to ask the EZ for a bail out (for its banks) – unknown as to the amount, though estimated to be around E6bn – citing its banks exposure to Greece as the problem. Allegedly they were negotiating with Russia and China !!!, though no announcements from that front – what a surprise, I think not. Amusingly, Cyprus is to take over as the EU’s rotating presidency on 1st July this year. The country has close ties with Russia, which had lent it E2.5bn last year. Fitch estimates that Cypriot banks would need E6bn to address their capital shortfall, or 33% of GDP;

Greece’s finance minister has resigned due to “ill health” Hmmmmm. I listened to a Greek politician on Bloomberg yesterday – they still don’t get it. Its truly amazing. I continue to believe that Greece will be out of the Euro by the year end or the 1st Q 2013 at the latest;

The Portuguese PM reported that Portugal will take all measures necessary to fulfil its fiscal targets, which were imposed as part of its EZ/IMF aid package. He added that it was too early to talk about further austerity measures ie they will have to impose greater austerity, as their current plans are insufficient for Portugal to meet its targets – last years targets were met due to a one off transfer of pension funds – and that Portugal would not restructure its debt. In addition, Portugal needs another bail out (a certainty) in the next few months and wants to remain a “good boy” ahead of those negotiations;

Soros states that Greece will have to exit the Euro – he is clearly right. Patience amongst other EZ countries has been exhausted. Neither the Greek PM, nor the finance minister will attend the EU heads of state meeting on the 28/29th June – they are unwell. He also predicted disaster if there is no positive announcement at the meeting on the 28/29th June. Soros is a particularly informed player and must be taken seriously. At present, it looks bleak as banking/fiscal union, leading up to political union is certainly not possible in the next 3 days. Those woolly words from the EZ/EU following the 28/29th meeting had better be good and global central bank intervention strong !!!! or …….;

Italian retail sales continue to slump. April sales were down -1.6% MoM, as opposed to a -0.6% decline expected and weaker than the revised (downwards) -0.8% in March. On an YoY basis, Italian retail sales declined by -6.8% YoY, versus expectations of a decline of just -0.1% and much lower than the revised (downwards) +1.5% in March
The Italian Government is considering a plan which will allow Italian banks to sell bonds to itself. This is getting surreal;

Moody’s have downgraded a number (28) of Spanish banks, including Santander and BBVA, by between 1 to 4 notches;

The French, having admitted that they will have to seek an additional E7bn to E10bn of savings this year to meet its deficit targets, added today that reaching a +0.5% GDP growth looked as if it was going to be “difficult to reach”. A definite whoops;

German July consumer confidence came in at 5.8, as opposed to a revised 5.7 in June – the German’s keep surprising to the upside;

Good news – Irish property prices have risen for the 1st time since the 2007 collapse, reports the WSJ. The Irish Central Statistics office reported yesterday that prices in May rose by +0.2% MoM, but were down -15.3% YoY. Irish property prices are down 50% apparently. Living in Ireland, I can confirm that prices are down between 50% to 60%, from the peak, though transaction volumes are low. Anyway, a chink of light. However, Ireland is dependent on the EZ economy, even though exports have performed well YTD. However, in an upturn, Ireland will perform much better than other EZ countries;

Yet more leaks from the EZ. Apparently the EU are proposing far reaching powers to rewrite national budgets that breach their debt and deficit rules, a plan that is to be discussed at the EU heads of state meeting on the 28/29th. Basically another step towards fiscal union. The EU proposals also contain plans for a banking and, in effect, a political union. If countries breach their targets, they will be subject to fines and if they breach an “upper limit”, they will be forced to seek approval from other EZ countries;

Well the EU seems to be in “hurry” !!!! – they are preparing to submit a report on EU banking and fiscal union by December, with an interim report in October. Speedy Gonzales, they sure are not. The reality is that a relaxed timetable of this kind is untenable, unless some material steps to stem the problems in the EZ are put in place, which, based on the current situation, does not seem likely/possible;

US May new home sales rose by +7.6% MoM, to 369k on an annual basis, higher than the 347k expected and above April’s 343k. YoY, sales were up +19.8%. The inventory of new homes on the market edged up by +0.7% to 145k units, which based on May sales, suggests that inventories are at a 4.7month level, the lowest since October 2005. Sales picked up in the Northeast and the South, with the West and Midwest slightly lower. The average price increased +4.3% (the median price was up +5.6%) reflecting less pressure from foreclosures and short sales;


It is clear that Germany (Mrs Merkel) is pressing for fiscal/banking union, leading to political union in the EZ. The biggest stumbling block will be France, who will fight to avoid transferring sovereignty. However, economic conditions in France are weakening and Mr Hollande is not known to be an “Iron Man”, whereas Mrs Merkel is taking over the mantle as the “Iron Lady”, previously reserved for Mrs Thatcher. Germany certainly is in a much stronger position, but in my view, its economy (particularly manufacturing and exports) is beginning to deteriorate – how quickly, well the next few months data should provide clues. However, today’s Germany’s forward looking July consumer confidence rose to 5.8 points (5.6 forecast), up from 5.7 in June, as a result of higher income, suggesting that the domestic economy remains healthy. If Germany’s economy does deteriorate (rapidly?), its ability to exert pressure on the EZ diminishes, I would have thought. As a result, better get on with it Germany. Most suggest that political union in the EZ will take some 10 years. Personally, I don’t believe that the EZ has anywhere near that amount of time.

The rush for European banks to recapitalise is as a result of minimum capital thresholds imposed by the European Banking Authority, which come into effect by 30th June – good luck.

Asian and European markets are uncertain today, whilst US futures suggest a higher open. Brent is hovering around US$90, with gold at US$1584. The Euro is weaker, especially against sterling.

Lots of leaks ahead of the 28/29th meeting – I still cant see anything of substance coming out of it as yet. Tomorrow will be of particular interest, especially as Merkel and Hollande meet ahead of the summit, other than that described previously.

Kiron Sarkar

26th June 2012

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