No major decisions from EZ finance ministers meeting

Japanese machinery orders declined -14.8% in May, MoM, the largest decline since 2001. In addition, Japan’s current account surplus declined to just US$2.7bn, down 63% YoY and the smallest May surplus since 1985 – over 50% below forecasts. A Japanese current account deficit soon – certainly a (likely) possibility – what happens to the Yen?. The Nikkei closed -1.37% lower;

The Japanese government is considering buying a number of uninhabited islands owned by a Japanese private investor. The problem, well China claims these islands (so does Taiwan), as it does effectively the whole of the South China seas. Going to be interesting if Japan goes ahead;

Chinese June CPI came in at +2.2% YoY (a 29 month low), slightly less than the +2.3% forecast and well below May’s 3.0%. Lower food and energy prices were the main reason for the sharp decline. PPI was -2.1% YoY, lower than the -2.0% expected and May’s -1.4%. Premier Wen warned that there were “relatively large” downward pressures on the Chinese economy and, in addition, that more aggressive measures were necessary to stimulate the economy. Expect more interest rate and RRR cuts pretty soon and, in spite of the denials, further stimulus measures;

The Chinese have threatened retaliation if the EU goes ahead with an investigation into government subsidies to 2 Chinese telecoms companies. Mr Karel De Gucht, the EU Trade Commissioner is keen to pursue these charges. However, it looks as if the EU is backing off. Can’t understand, as China exports more to Europe and, in addition, Europe represents over 20% of Chinese exports;

The OECD forecasts a greater slowdown in China and India. For China, their indicator slipped to 99.2, from 99.4 in April. India fell to 97.8, from 98. The long term average is 100;

The EZ Sentix index (investor confidence) came in lower (for the 4th consecutive month) at -29.6 MoM in July, lower than the -26.6 expected and -28.9 in June. Basically the lowest for 3 years. The decline in Germany was amongst the worst, down to 2.2 in July, from 9.1 in June, with expectations component slumping to -21.8, from -14.0. A definite oops;

The EZ is finally accepting reality. A draft EU report suggests that the EU will ease Spain’s budget deficit targets, to 6.3% this year, 4.5% next and 2.8% in 2014. Still tough for Spain, as this years deficit looks closer to 7.0% (without further austerity measures) this year. It is expected that the EZ’s ECOFIN Council will sign off on these revised targets tomorrow;

The Spanish government reported that they expect that the terms of the banking bail out will be signed by the 20th of this month and could involve a 15 year loan (guaranteed by the Spanish government, though the guarantee may fall off, once the ECB takes over supervision, some suggest), with interest rates around 3.0% to 4.0%. In addition, there will be 1 bad bank and a minimum core tier 1 ratio of 9.0% for Spanish banks. All with just E100bn !!!!. Spanish 10 year bond yields are up at around 7.07% at present. Mr Rajoy is expected to announce further austerity measures. Unfortunately tax revenues are declining;

France’s business morale declined in June to 91 from 92 for the industrial sector and to 90 from 92 for the services sector;

Germany’s deputy finance minister expects the German Constitutional Court to enable the ESM to come into effect, with the decision to be taken next week. I certainly hope so. The Court is to hear from objectors tomorrow. Mrs Merkel and a number of German politician’s are getting fed up (to say the least) with the Constitutional Court. No surprise, but she has no alternative, given the German Constitution. Furthermore, Mrs Merkel complains that the Court is forcing her to disclose her negotiating position ahead of key meetings with the EZ. For your information, it is alleged that a number of anti EZ/Euro individuals have set up Mr Sinn to query whether the passage of the ESM legislation and the fiscal compact is constitutionally valid. The German president has stated that he will not sign off on the legislation to create the ESM, which was passed by the German Parliament, until he hears from the Constitutional Court;

Germany’s May trade balance rose to a surplus of +E15.3bn, as opposed to expectations of +E14.0bn and higher than April’s +E14.4bn.
The current account came in at +E9.0bn, lower than the +E10bn expected and the +E11.2bn in April. Exports were up +3.9% MoM, with imports up +6.3%, both higher than expectations of +0.2% and +0.8% respectively and April’s -1.7% and -4.8%;

ZeroHedge has some interesting polling results re Germany.
69% of German’s are worried about inflation;
64% were worried about their jobs or the jobs of family members;
74% would want a strong centralised EZ wide authority to impose fiscal discipline ie suggests that they will support political union, as if you give up the purse strings, well….;

Interestingly, Draghi, at the EU Parliament, stated today that he would watch data, prior to deciding whether ECB interest rates needed to be cut further – read, the ECB will cut interest rates further. He reiterated that last Thursdays decision was unanimous and that downside risks had increased. definitely more rate cuts;

The EZ finance ministers meeting today and tomorrow. Clearly they will have to agree on the terms (and conditions) of the Spanish bank bail out. In addition, they need to decide on the next head of the Euro group. France wants Junker to be reappointed – basically someone whose a total waste of space. It is likely that the Euro group will ease Spain’s budget deficit targets. The question as to who is appointed to the ECB’s executive board will also need to be agreed. The Spanish want their representative, though Mr Mersh is the most likely. Some kind of deal re Ireland’s debt in respect of the country’s bail out of its banks is also a possibility. The Irish want the debt off their government’s balance sheet – very likely, though may take a little longer than tomorrow;

President Obama is expected to call for a 1 year extension of Bush’s tax cuts for families earning up to US$250k today. The tax concession was due to expire on 1st January. However, those earning over US$250k will lose the tax concessions. Republicans, who control the House of Representatives state that they will extend the tax concessions for everyone by the end of July. However, the Senate is controlled by the Democrats and Democrats state that even if passed in the House, the Senate will not approve the measures. Well, it is a Presidential election year, after all. More uncertainty – not good news;


Asian markets closed lower, with Europe and the US following. Brent is trading around US$98.90 (impacted by the possibility of a strike in the oil industry in Norway), with gold around US$1585. The Euro is flat around US$1.2283, though touched a 2 year low this morning.

Alcoa, as usual, starts off with its earnings announcement today. Earnings are unlikely to be as positive as in prior Q’s, this time around – indeed, could well be under pressure.

The Deputy Governor of the BoE is set to testify at the UK’s Parliamentary Treasury Committee today. Yet more grilling, especially by Tory members who want to extract a “confession” that it was politically motivated by the former Labour administration. It’s unlikely that Tucker will reveal much, but they will grill him on who in the former administration (could have possibly) instructed him to talk to Barclay’s about allegedly lowering its LIBOR submissions. More drama than substance I would guess.

Certainly have been trimming back on my equity positions today.

Kiron Sarkar

9th July 2012

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