ECB and BOE day today

Unnamed officials at the Chinese CBRC (banking regulator) suggest that China may reduce the current 75% loan-to-deposit ratio for banks in accordance with new supervision standards which are to be introduced – all a bit wishy washy;

Chinese stocks of coal have risen to their highest levels since the 2008 financial crisis. Domestic prices have declined by some 20%. China is the worlds largest consumer of thermal coal, which provides some 70% of its electricity produced. The increase in stockpiles is further evidence that China is slowing down, far faster than economists are forecasting, suggesting to little old me that the government better take some action pretty soon. If not, well……(Source FT). The Shanghai composite was down -1.2% today;

The BoJ’s Shirakawa stated today that the Japanese economy had started to pick up moderately, but was concerned about the global, in particular the EZ, economy. SDame old, same old;

Indian equities have been battered. However, a number of leading investment banks (UBS, JPM and Deutsche) have upgraded Indian stocks recently. The decline in the oil price has certainly helped. However, the Indian government remains in total chaos, as usual. I continue to be bearish the Indian Rupee, given the likely reduction in interest rates, in spite of high inflation, but will certainly not short Indian stocks at these levels. Go long, well, maybe slowly, but on a currency hedged basis;

Mrs Merkel’s meeting with Mr Monti ended with both making supporting statements of each other. Mr Monti has accepted that EZ countries need to be more fiscally responsible and Mrs Merkel stated that she was determined to work with Mr Monti. It is clear that Mrs Merkel does not want to destabilise Mr Monti – he was under pressure to resign prior to the recent EU Summit and, perhaps, separate Mr Monti from Mr Hollande and Mr Rajoy. Mr Monti is to press his cabinet to agree to further spending cuts this week, to reduce Italy’s budget deficit to 2.0% of GDP this year – Mr Monti’s latest forecast – the previous target was for a deficit of just -1.3% of GDP. Finally, Mr Monti denied that Italy would need a bail out;

Unofficial reports circulate that Spain will be asked to cut its budget deficit further. In addition, the EU is thought to be prepared to give Spain an extra year to meet its existing budget targets, which are certainly going to prove impossible to meet;

Spain’s high court has opened a probe into Rodrigo Rato, formerly with the IMF and (a former deputy PM) and until recently chairman of Bankia. Another 32 of other senior executives at Bankia are to be questioned, as well. The high court is investigating as to whether Mr Rato and other executives were responsible for falsifying accounts and misleading investors, though no specific charges have been made. Wow. Embarrassingly, Mr Rato together with other senior Bankia executives who are to be questioned, are close to Spain’s current ruling party, the Popular Party. Other individuals, including a minister, ex head of the Bank of Spain, the auditor, and the Spanish stock market regulator are also to be questioned. Bankia raised some E3.1bn, mainly from 300k of its own depositors which has gone down the drain;

Whilst Italy almost doubled its budget deficit forecast to 2.0% for the current year, from 1.3% of GDP yesterday, the German finance ministry announced yesterday that it expects its 2012 budget deficit would decline to just 0.5% of GDP this year, lower than the 1.0% previous estimate – its those German’s again;

With income tax rates of 75% (starting next year), which rise to a 90% marginal rate, a number of French are exiting the country. Clearly Switzerland is one destination, but the UK (London) is as well. Estate agents report a surge of interest from French seeking to buy property in London;

Barclay’s outlook was cut to negative by Moody’s following Mr Diamond’s testimony to the the Parliamentary committee yesterday. Moody’s adds that the resignation of senior management and the consequent uncertainty surrounding the firm are negative.
It was clear that the UK MP’s wanted Mr Diamond’s blood yesterday. He started well, but the intensity and aggressiveness of the questioning was severe and Mr Diamond did make a few mistakes. For example, he stated that he was only aware of the LIBOR issue recently, but also added that Bloomberg in 2008 and certain other organisations had highlighted the problem several years ago. There was also the issue that the UK’s FSA had concerns about the corporate culture at Barclay’s. Importantly, yesterday the potential problems relating to Mr Tucker’s (deputy governor of the BoE) telephone call to Barclay’s seemed resolved in Mr Tuckers favour;

Ireland is set to launch its E500mn 3 month bill auction today. Should be interesting;


Really all about the ECB, in particular, though the BoE is expected to announce a further £50bn QE programme today. The ECB is expected to reduce rates by 25bps (50bps?) and possibly reduce its deposit rate to zero. A rate cut of at least 25bps is very likely, though a cut in the deposit rate (from 25bps to zero) does send mixed signals.

The BoE is near certain to announce a QE programme of £50bn, some suggest £75, but I think that the higher number is unlikely. However, QE is not having that great an impact and the BoE should get creative.

It would be silly if the ECB disappoints, given the relative calm in the EZ at present. In addition, EZ inflation is declining and will be below the 2.0% threshold at the end of the year/beginning of the next. As a result, I believe an ECB rate cut of (at least) 25bps is very likely.

Euro is declining to closer to US$1.25 (currently US$1.2523). Still believe it has further to drop.

Brent is trading around US$99.50, marginally lower on the day, with spot gold at US$1616.

Asian markets were mixed, with China weak. European markets are trading flat to marginally lower at present. US futures (very early) suggest a lower open. I will hang on to my long equity positions, as the ECB/BoE are unlikely to disappoint. Tomorrow’s US NFP data is going to be important.

Kiron Sarkar

5th July 2012

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