Weaker Chinese PMI

BOJ’s Mr Ishida reports that the BoJ will take “bold steps” where necessary – bold steps, for the Japanese – the guy must have been on the saki. He added that the Japanese economy is developing in line with expectations (positively, though overseas growth was a problem) and could not rule out a July easing. He reiterated the BoJ’s goal of continuing to ease to achieve 1.0% inflation. Other reports suggest to me that the BoJ may, indeed, act this time around. The Yen looks as if it may weaken, against the US$;

The HSBC June flash Chinese PMI fell to 48.1, from 48.4 in May, a 7 month low. Importantly, the new orders component declined to 46.8, fro 48.4, a 3 month low. The exports component fell to 45.9, the lowest since March 2009. The “official” PMI data is released on 1st July. However, the continued weaker data suggests to little old me, that China needs to do more – the Chinese are probably waiting for any announcements following the EU heads of State meeting on the 28/29th June. Credit Suisse report that the real problem is that Chinese manufacturing suffers from overcapacity, increasing costs (including labour) and slowing demand – not a healthy position at all. They suggest opening up the service sector, breaking the monopoly of the banking and utility sectors and to deregulate interest rates and the exchange rate. Totally right, but China will not deliver on these much needed reforms – powerful vested interests will lose influence/control and access to the cash box;

When times are tough, guess what – countries relax their silly restrictions. This time around, China is relaxing its rules so that foreign institutions no longer need a minimum of US$5bn under management, together with a 5 year track record before they can receive a quota to buy Chinese stocks. The minimum size is now just US$500mn combined with a 2 year track record. Chinese stocks declined to a 3 month low today;

The Indian Rupee has slumped to around 56.40 against the US$. Cant see much respite. Indeed, there is a (serious?) potential problem in terms of seeking external financing;

Mr Mikhail Fridman is in London trying to get institutional support for his plan to buy half of BP’s stake in TNK-BP. Good luck. Given his “interesting” reputation, I suspect he is going to have a tough time. In addition, I cant see that BP would want to reduce its stake to just 25%, with Mr Fridman and his colleagues controlling 75%;

German press suggests that Cyprus will request a bail out next week, the 5th EZ country to do so (out of 17). Cypriot banks are bust, insolvent, kaput etc, etc. in particular;

You cant keep a “good” man down. Mr Berlusconi warned that his People of Freedom Party (which he leads) is losing support and, in effect, raised the threat of calling earlier elections. He added that the ECB should start printing money and that Italy should consider exiting the Euro. Stick with the bunga bunga parties, Mr B;

Spain raise E2.22bn today, slightly above its target of E1bn to E2bn. The 2014 bonds yielded 4.706%, from 2.069%, the 2015 at 5.547%, from 4.876% and the 2017 at 6.072%, up from 4.96%. Getting really expensive. Spain is to release results of its stress tests on its banks today. The view is that the report will suggest that Spanish banks will need E65bn in new capital, clearly nonsense, their real needs will be way, way in excess (indeed many multiples of) of E100bn;

Mr Coeure, a member of the ECB executive board, suggested that the EZ bail out funds should buy Spanish and Italian debt on the secondary market, though he dismissed the idea of the ECB buying bonds. He added that interest rate cuts could well be discussed at the next ECB meeting – as you know, I believe the ECB will cut rates on 5th July, by at least 25bps. Mrs Merkel does not seem to be on board though. However, I believe that she will have to come aboard, but will almost certainly demand that recipient countries, stick to certain (budget in particular) targets in return. Under the rules of the EFSF, the ECB must be consulted if they are to buy bonds in the secondary markets. The meeting in Rome tomorrow (including, Germany, Italy, France and Spain) is going to be interesting, but I cant see any meaningful results coming out of it. The 28/28th EU heads of State meeting is going to be much more important, indeed crucial;

Mrs Merkel has reached agreement with her opposition on the fiscal compact. No great surprise. Further growth measures have been proposed , including using structural funds. The ESM is expected to be in pace by 9th July. The Germans have also agreed on a transaction tax. Good luck;

French manufacturing PMI came in at 45.3 in June, up from the final 44.7 in May and better than the forecast of 44.5. Services came in at 47.3, from 45.1 in May, once again better than forecasts of 45.0. Surprising;

German manufacturing PMI came in at 44.7 in June, down from May’s 45.2 and lower than the 45.5 fore cast. Services PMI came in at 50.3, down from 51.8, and lower than 51.5. German data continues to suggest that the economy, especially its production/export machine, is slowing;

EZ June flash composite PMI came in at 46.0, unchanged from May, though better than the 45.5 expected. However, its still the lowest since 2009. EZ June services PMI came in at 46.8, as opposed to 46.4 expected and 46.7 previously. EZ manufacturing PMI was 44.8, as opposed to 44.9 expected and 45.1 previously;

UK May retail sales came in better than expected at +1.4% MoM, higher than the +1.2% expected and the -2.4% in April.
Mortgage lending continues to pick up. It was £12.2bn (gross) in May, as opposed to E9.9bn in April.
The CBI June UK manufacturing order book balance came in -11, though not as bad as the -20 forecast and the -17 in May.
Sterling has picked up on the news;

As expected, the FED extended “Operation Twist” to the year end. They will sell some US$267bn of shorter term securities and buy an equal amount of longer term debt. Mr Bernanke stated that the FED stood ready to take additional steps if appropriate, including additional asset purchases. Finally, the FED reduced its employment (unemployment at least 7.5% by end 2013) and GDP forecast (just +1.9% for 2012) and suggested very little concern about inflation. No great surprise overall, though some analysts were expecting more.
US mortgage refi’s are soaring, given the record low rates;

US August WTI is down again and just above US$80 today (US$80.45), a 9 month low, as stockpiles of crude rose to 2.9mn barrels to 387mn barrels (the highest since 1990), much higher than expectations of a draw of 1.1mn barrels. If WTI crude declines and stays below US$80 (and Brent below US$90) for an extended period, I have to say I will get concerned. Brent is at US$91.60, slightly off its lows

It looks as if JPM is reducing its positions held by its CIO unit in London. Trading activity in certain derivatives surged on Tuesday. JPM is to announce further details of its position on 13th July and will likely want to sell as much as possible ahead of this date. Expect the losses to exceed the US$2bn estimated originally;

Outlook

Asian markets closed lower on weaker Chinese PMI data and the FED’s downgrade of the US economy. European markets are also lower, with the weaker German data, as well. US futures suggest a lower open as well. Oil continues its steep decline. Looks very dodgy. The Euro, well its off its recent highs and currently around US$1.2670. Gold is trading lower at US$1598. German 10 year bund yields are at 1.60%, though Spanish/Italian yields are declining further (6.60% and 5.57% respectively) – expectations of bond buying by the EZ bail out funds, which I believe is likely post the meeting on the 28/29th.

Cant see much out of tomorrow’s big 4 EZ countries meeting. Indeed, I expect that Mrs Merkel will continue with her tough stand. The crucial meeting remains the Heads of State on 28th/29th June. As its the EZ, will certainly get a number of leaks and, as usual, conflicting reports. However, should be in a position to assess the likely outcome before the meeting. Personally, I believe that the EZ will have to deliver as the markets has run out of patience and, as a result, I believe that the EZ will announce some positive statements. However, between now and the 28/29th I can see the markets rising, ex some positive news – indeed, its more likely to drift lower.

Relations between Merkel and Hollande do not seem to have improved – no great surprise.

Fed, Chinese and I suppose weaker German data has impacted the miners and the energy sectors, though the financials are holding up.

Kiron Sarkar

21st June 2012

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