Spain delays publishing the results of the audit on their banks – reach for the helmets

The Chinese Commerce Minister reports that growth will pick up in June. Analysts suggest that this Q will be the low for the year, with growth picking up in the 3rd Q. Personally, I go along with this view and I continue to remain positive on the miners;

A number of emerging economies have increased their contributions to the IMF by more than US$90bn, with China contributing US$40bn and Brazil, India, Mexico and Russia about US$10bn each, raising total commitments to the IMF fund from US$430bn to US$456bn, which doubles the IMF capacity;

Fitch joined S&P and cut their outlook on India from stable to negative, whilst affirming the lowest investment grade, BBB-. The monsoon sure has come. Fitch cited a lack of government action, in terms of a lack of structural reforms, inability to create an environment for private sector investment and to take measures to reduce the country’s budget deficit – clearly right;

Not good news for the disgraced Mr Bo Xilai. His successor (Mr Zang Dejiang and a prospective member of the 9 member State Council – the guys who run China) states that Mr Bo has brought “great damage”, not just “damage”, but “great damage”, mark you. He added that Mr Bo committed “serious disciplinary violations”. Even more “The party insists that everyone is equal in front of law and won’t allow anyone to be above the law”. Well, Mr Zang can say that – presumably with a straight face, but……(Source Bloomberg)

Seems like the Greeks (New Democracy and Pasok) will form a coalition – they say by the end of the day. However, if they believe that they will get major concessions, well I would suggest they lay off the ouzo. An extension in the repayment period to possibly even 50 years may be possible, though;

Looks like Cyprus is going to be visiting the EFSF/ESM imminently. They have been talking to the Russians, who, in the past, have provided funding – they may do this time around, but I remain sceptical in the medium/longer term;

The Bank of Spain reports that 8.72% of loans held by Spanish banks (E152.7bn) were more than 3 months overdue in May, up from 8.37% in April, the highest percentage since 1994. A Spanish newspaper reports that the Bank of Spain has delayed the publication of an auditors report on their banks until September, a sure sign of really bad news (not unexpected though), if true. The Spanish Economy Minister refused to comment – definitely a very bad sign. These guys really are a bunch of ……….Spain managed to sell E3bn of 12 and 18 months bonds today. However, yields were (unsurprisingly) higher ;

The ZEW economic sentiment index collapsed to -16.9 in June, as opposed to +2.3 expected and May’s +10.8. The current situations component was +33.2, lower than the +39.0 expected and May’s +44.1. Whilst less important than the IFO index, the collapse (which is what it is) just reconfirms my view that German economic data is likely to deteriorate materially in coming months, something most Germans will not have expected. This suggests to little old me that the Germans may well become more amenable;

The French national audit office reports that they expect to release their audit of public finances between the 2nd to 4th July. The results should confirm to Monsieur Hollande that his rather rash promises will have to be toned down, indeed reversed. I remain deeply concerned about France;

The EZ will debate whether there is a need to issue Euro Bills, ie debt with a maturity of less than 1 year. In addition, the concept of an European Redemption Fund (“ERF”) will be discussed, especially as it is a German idea. Most importantly, neither Euro bills, nor a ERF are likely to require treaty changes and may be acceptable to the German Constitutional Court. Euro Bills can be issued with a joint and several guarantee as well, crucially important for the Germans. The interest rate is likely to be between 50bps to 80 bps, far below the current rate being paid by Italy and Spain, in particular for short term debt. Mutualising debt will increase German bond yields, by the way. Some scheme along these lines, accompanied with a requirement for EZ countries to meet their (will have to be revised, as the current targets are impossible) targets seems a very interesting plan and I will certainly follow developments. However, there are a number of issues which seem contradictory – need to check (Source FT);

UK May CPI came in at +2.8%, as opposed to +3.0% expected. RPI was +3.1%, lower than the +3.3% expected. Confirms that UK inflation is and will continue to decline further. In September, base effects will reduce UK inflation even further. Inflation levels look as if they will undershoot the BoE’s targets, suggesting that they have more flexibility to ease further. Additional QE is not really that effective, credit easing policies are more likely. Sterling weakened on the news;

What chances of FED action tomorrow?. Normally, the FED gets cautious ahead a Presidential election, but this time around….. I believe that the FED will have to say/do something tomorrow – staying pat will result in a major sell off;

The NAHB housing market index rose to 29 in June, from 28 in May, the highest level since May 2007. Data has been mixed, though I believe suggests a continued recovery. The current sales component rose 2 points to 32, the highest level since April 2007, whilst expectations (in the next 6 months) remained at 34. Having said that a neutral NAHB number is, off course, 50, so a long way to go. I remain long the building materials sector;

A leaked draft of the G20 communique states “The Euro area member states that the G20 will take all necessary policy measures to safeguard the integrity and stability of the Euro area, including the functioning of financial markets and breaking the feedback loop between sovereigns and banks”. Well, at least they understand that there is a link between the sovereign and the banks. The communique does not propose a banking union, though it supports the creation of such an union in the EZ. However, as expected the G20 was yet another waste of time;

Outlook

The sell off in Europe yesterday, following a strong open, is a clear indication that markets will no longer allow EZ policy makers more time. Spanish and Italian markets closed nearly 3.0% lower yesterday and, worryingly, France was 0.7% lower. Spanish 10 year bond yields are around 7.05% at present (down over 10 bps this morning), having risen to a high of 7.28% yesterday, clearly an impossible and unsustainable rate. Rumours of ECB buying, as usual, though I would have thought unlikely. German yields are at 1.46% and I remain bearish.

To date EZ politicians have singularly failed to deliver. Whilst I have avoided being sucked into the gloom and doom camp, I have to say that they better come up with something by the heads of state meeting on the 28th/29th or……There is no more time left. Personally, I believe that they will cobble together something and that the real back stop is coordinated Central Bank action. Furthermore, the FED is likely to do something tomorrow, quite possibly along “operation twist”. In addition, I continue to believe that the ECB will cut rates at its next meeting. As a result, I continue to believe that, on a risk/reward basis, being short remains dangerous.

Discussions on EZ bills is particularly interesting and potentially (seriously?) bullish.

There is clearly a week between the FED and the EU heads of State meeting, which could be a problem, I must admit.

Whilst the energy and materials sectors closed higher/held up well yesterday (and are performing today), the financials (UK) certainly were weak, I must admit and are under performing today, as well. Having said that I remain positive, inter alia, on the mining, energy and financials.

Asian markets (ex India) are lower and European markets flat to lower, though picking up. I must admit, I would have expected Spanish markets to be much further down, given reports of a delay in publishing the bank audits. Indeed, Spanish markets have turned and are now higher.

Brent is around US$95 (off its lows), with Gold flat at US$1629.

The Euro is around US$1.2603.

Listened to a bunch of Greeks bleating on this morning on Bloomberg. I must say, if you believe any one of them, I have Brooklyn Bridge to sell to you. Great talkers, but unfortunately ……

Sorry, got to rush off.

Kiron Sarkar

19th June 2012

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