RBI keeps interest rates on hold

A PBoC adviser reported that China’s economy will bottom this Q, with a rebound in the next Q as stimulus measures enacted to date, take effect. Personally I believe Mr Chen Yulu and, in addition, believe that the authorities may have to introduce other measures in due course, especially if the economy does not pick up by enough in the very near future. A pick up in the global economy will be of enormous help;

Chinese residential home prices fell in 54 of the 70 cities which are tracked by government in May. Wenzhou faced the largest decline – it was down 14% YoY. Having said that, home sales rebounded for the 1st time in a year, rising by 19% in May and totaling US$59bn, according to the Chinese Statistics office. Banks have been offering mortgages to 1st time buyers at as much as a 15% discount below the PBOC’s benchmark rate, which has contributed to the rise in sales;

India’s RBI kept interest rates unchanged today at 8.0%, in spite of growth being the lowest for 9 years – a 25bps cut in interest rate cut was expected. However, with rising inflation, the RBI is right. The SENSEX reversed earlier gains and is now trading lower. Keeping interest rates on hold will increase the credibility of the RBI, which is coming under pressure from the Indian government to cut rates;

The Muslim Brotherhood candidate has claimed victory in Egypts Presidential elections. Still awaiting the military’s response;

The centre right Greek New Democracy party gained 29.7% of the votes, with Syriza on 26.9%. The discredited Pasok party came in a poor third with 12.3% of the votes. New Democracy’s 129 seats, combined with Pasok’s 33, (an aggregate of 162 seats), enables a coalition of the 2 parties to form a majority in the 300 seat Parliament. It is unlikely that Syriza (who have 71 seats) will join the coalition. New Democracy has 72 hours to agree on a coalition, which I suspect they will achieve, though I remind you all, this is Greece. The Troika will release funds to Greece to tide them over (E1bn was withheld), though in due course, Greece will not deliver and will default, in spite of getting minor concessions. However, we may have a few (2 to 3) more months of having to talk about Greece – sorry;

Monsieur Hollande and his allies won around 314 seats out of the 577 seats in the French National Assembly (source French Interior Ministry), giving the Socialists a clean sweep over all the French political institutions. The (sort of) good news is that Monsiur Hollande does not need the support of the Greens and/or the extreme left. Yesterdays victory will result in his supporters demanding delivery on Monsiurs Hollandes rash promises (having said that he is trying to back off them already), which will put France in conflict with Germany – watch this one very, very carefully;

The French proposal to stimulate the EU economy through an E120bn programme (using E55bn of unused EU structural funds, E60bn of loans from the EIB and E4.5bn in bonds issued to finance infrastructure) will be discussed at the EU Heads of State meeting on 28th/29th June, as reported yesterday. The E4.5bn of bonds is interesting – France trying to sneak in the concept of Euro Bonds?;

Much more importantly, a plan prepared by Draghi, together with Barosso and Rompuy will be discussed at the EU Heads of State meeting on the 28th/29th. Neither Barosso, nor Rompuy are taken seriously by Mrs Merkel (indeed, why should they), but Draghi is. The plan will include some kind of Euro Bonds, together with banking union, deposit guarantee scheme, etc etc. Its going to be difficult for Mrs Merkel to totally reject the proposals, though forget the bank deposit guarantee scheme, for example. Greater supervision of EZ banks, by the ECB is being proposed by Mrs Merkel. In addition, some discussion on banking union is certainly possible and dont forget the E120bn French proposal, referred to above. Will report on all these issue over the next few days;

Whilst residential home prices are declining in China, they are rising in London, in particular, as floods of people descend on the UK capital, not only from the EZ, but from numerous countries worldwide. Good news and the restaurants are going to get even better;

Outlook

So no coordinated Central Bank intervention necessary today. However, they stand ready in case of a problem. Based on past history, the G20 will produce yet another (boring) statement about the need for growth, though there may well be some interesting developments at the EU heads of State meeting on the 28th/29th June.

Asian markets rose today, following the Greek election news. The Euro, having risen above US$1.27, is coming off – need to check when US markets open. The Euro may hold up for a bit longer, but I cant see it lasting for long – need to assess developments at the EU Heads of State meeting. However, the ECB is likely to cut interest rates at its next meeting on 5th July, I would guess. Brent is around US$97.50, having been almost US$1 higher.

The situation in Spain is deteriorating rapidly – a full bail out will be needed pretty soon. In addition, the E100bn of funds to recap Spanish banks, is simply not going to be enough. Expect haircuts on Spanish debt in due course, as they are forced to restructure. The Spanish 10 year yield has risen above 7.0% and a spread of over 555bps over comparable German bunds.

European markets have opened much higher, are selling off sharply. The FTSE is -0.3% lower, as are Italy and Spain (both down over 1.0%). Seems like the market is nervous following the rally post the Spain bank bail out news, which lasted just a few hours. The rise in Spanish bond yields does not help. Seems a bit churlish, so will wait for a while longer, before deciding as to what to do, but being pretty fast on your feet remains the name of the game. US futures have also turned around sharply and suggest a weaker open.

Kiron Sarkar

18th June 2012

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