Markets continue to rise

Australia’s RBA kept rates on hold at 3.5% today, as expected.
Home building approvals in May rose (including in the less mining related areas of the country), reflecting an improvement following the recent decline in interest rates. Other anecdotal evidence suggests that the economy has stabilised and looks to be improving. Early days, but the A$ certainly looks interesting, particularly if China improves as well;

Chinese non manufacturing PMI rose to a 3 month high of 56.7 in June, up from 55.2 in May. The property sector has picked up and new orders are improving. A bit too early to suggest a rebound, though………Chinese markets rose for the 3rd day today – the property sector is picking up. Personally I believe that Chinese markets have further to run (speculation of further RRR cuts continues – likely), but in the medium to longer term, I remain bearish on China, as usual. The Yuan rose on the better than expected manufacturing PMI data yesterday and the increase in non manufacturing data today;

The loopy Iranian regime has threatened to close the Straits of Hormuz. Essentially, the decline in the oil price, together with the impact of sanctions, is seriously hurting the regime. In these circumstances, Iran always makes belligerent threats to force oil prices higher. Diplomatic talks look as if they have failed, though there is private session between Iran’s technical experts and representatives of the major powers today, in Istanbul. The reality is that they really cant close the Straights, other than for a limited period of time. However, Brent is back up to US$98.50, good for my energy shares, but the global economy will sure appreciate a lower oil price;

Inflation continues to decline in the EZ. May producer prices declined by -0.5% MoM (-0.3% expected) or +2.3% YoY as opposed to unchanged MoM in April. Yet more data for Mr Draghi to cut interest rates by at least 25bps on Thursday and, in addition, to cut deposit rates to zero, from the current 25 bps;

What’s with the Spanish – their economy minister reports that neither Holland, nor Finland can stop the ESM dispersing funds – well check your facts sir – they can (other than in an emergency, which then requires approval by an 85% majority, which is possible without Finland and Holland – though Austria and Germany’s position Senior?) and, indeed will, unless Spain starts getting real. In addition, Finland is demanding collateral in exchange for allowing loans to be provided to Spanish banks, though the collateral they received in respect of aid to Greece previously, was effectively “corrupted” toilet paper
Spain, like Italy, announced that they will introduce further austerity measures. However, the target budget deficit of 5.3% looks impossible to achieve
The only good piece of news (but don’t hold your breadth) is that Spanish unemployment declined by 98.9 in June MoM, more than the decline of -51.6 expected and better than May’s -30.1. Essentially, temporary workers being hired to meet demand from holiday makers ;

The WSJ reports on an increasing difference of views between Mrs Merkel/Mr Schaeuble and her coalition partners the FDP. The bottom line is that both Mrs M and her finance minister are (irrespective of Mrs M “not in my lifetime” comments relating to Euro bonds recently) pushing Germany towards Euro Bonds at some time in the (not too?) distant future, if other EZ countries agree to strict fiscal targets, banking union, fiscal union and, of course, political union. Essentially, Mrs M is promising some help/aid in return for a political union – the famous “carrot and stick approach”. The FDP have caught wind of this and are expressing serious concerns. The opposition SPD and the Greens are far more pro the EZ and supported Mrs M last Friday in respect of the passage of the fiscal compact and the ESM. In my view, the FDP are a spent force, though Mrs Merkel will have to think of an alternative coalition partner – difficult;

Yet more evidence of a slowdown in German manufacturing. May’s machinery orders declined by -6.0% MoM. They were down -11% in April and -4.0% in March. Domestic orders were -8.0% lower YoY, with foreign orders weaker by -4.0%

Speculation (effectively confirmed) mounts that Ireland may test capital markets with an auction of E500mn of 3 month T Bills imminently (on 5th July), which, if true, will be the 1st time since September 2010. Good news. Time for a few (more) glasses of the black stuff. Mr Rompuy states that the EU are to further improve Ireland’s package – I would prefer if someone, other than Mr Rompuy, made such a statement, but I believe he is right. Yet more glasses of the black stuff;

As expected, the CEO of Barclay’s Mr Bob Diamond over the LIBOR scandal. The Chairman of Barclay’s has done a U turn and is remaining. I certainly believed that Mr Diamond would have no option but to resign. However, he has threatened to “reveal all”. Could well be quite amusing as speculation is focusing on regulators and the former (ghastly UK PM Mr Gordon Brown and his odious colleague Ed Balls). The markets are taking Mr Diamond’s resignation with little consternation – Barclay’s is up near 4. at present and rising;

Worse UK construction PMI data today. June came in at 48.2, as opposed to 52.9 expected and 54.4 previously.
Mortgage approval came in at 51.1k in May, versus 50.0 expected and a revised 51.6 in April.
UK net consumer credit in May rose by +£0.7bn, higher than the +£0.2bn expected and the previous (revised) +£0.4bn.
Generally mixed data, but it looks as if the UK economy is stabilising. If it was not for the EZ, we could be having some fun;


Asian markets closed higher, ex Australia, in spite of better housing data. European markets continue to rise and US futures suggest a flattish open. Brent is up strongly to near US$100, over a 10% rise in a week or so. Gold is trading around US$1610. The Euro tried to strengthen, but failed – what a surprise – I think not.

Sentiment has improved and investors await ECB and BoE of possible interest rate cuts and QE respectively. Need to watch expectations against likely Central bank action. I continue to remain bullish in anticipation of ECB, in particular easing, though the situation in the EZ is far from resolved. Negotiations over the coming months are going to be fraught and volatility the name of the game. Remain bullish and keener on the UK, Europe and some emerging markets, as opposed to the US for the moment. Still like the energy, miners and (some, though fewer financials) together with London property and building materials. Do not like longer term (10 year) German and French bonds.

Still awaiting (positive) news from China – better get some soon.

Kiron Sarkar

3rd July 2012

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