Nobody in their right mind would consider joing the EU – Swiss Minister

Australia’s services PMI rose to 48.8, up +5.3 points and a 5 month high. The employment component rose +5.1 points to 49.1. The inflation component was lower at 43.1;

Just an idea of the scale of the pollution problems in China.The World Bank estimates that 750k Chinese die prematurely due to pollution-related reasons each year !!!

China Securities Journal press reports suggest that new loan growth for China’s 4 major banks would amount to Yuan 188bn in June, lower than May’s Yuan250bn. The data suggests weaker loan growth overall (around Yuan 600bn – 700bn or lower, as opposed to expectations of Yuan900bn), which, in turn, suggests weaker 2nd Q GDP growth. (Source Credit Suisse);

The FT reports that Japanese investors have withdrawn some US$30bn out of Brazil, following a near 30% decline of Brazilian-Real denominated holdings of Toshin funds, since last July;

There is increasing talk that the Swiss National Bank (the “SNB”) will be forced to give up on its E1.20 peg to the Euro. It certainly is costing the Swiss an awful amount. Cant see any imminent action though;

The ECB yesterday tightened its lending rules. It is to cap, at current levels, the amounts of government guaranteed debt that banks can post as collateral in return for ECB financing. Recently, banks have issued bonds which have been guaranteed by their governments and which has been deemed eligible collateral for ECB refinancing. The move will force EZ countries to recap banks with hard cash. The rules would not include bonds issued by the EFSF. In addition, the new rules limits the ability of the Greeks to refinance with the ECB, using dodgy paper and Dexia, whose rescue last year was effected through the issue of bonds guaranteed by the governments of France, Belgium and Luxembourg. The ECB (by the year end?) is to take over banking supervision and regulation. Finally, this move suggests that the ECB is concerned with the quality of the collateral it receives and, inter alia, does not want a major increase in imbalances in Target 2 arrangements – the Bundesbank had a quite word with Draghi do you think?;

Italy’s budget deficit soared to 8.0% in the 1st Q on a QoQ basis, much higher than the 3.8% expected. Yesterday, Mr Monti suggested than further savings would be necessary – sure looks like it. Indeed, today Mr Monti stated that Italy would reduce public sector jobs and reduce spending on health. Much more will be needed;

Mr Monti is getting it. He stated today that “we need a partial mutualisation of debt, but also more central control of national budgets”. He added “without proper control, it would be irresponsible to burden others with a share of your own debt”. The German’s are (not surprisingly) winning. Mr Rajoy, when he leaves cloud cuckoo land (pretty soon), will also be compliant. Interestingly the German finance ministry reported that a report from the Troika will be necessary before aid could be provided to Spain. That leaves the FRENCH, the crucial country. At the end of the day, France will be isolated and, kicking and screaming, will have to comply to oversight over its budget. Will be tough. The French reaction – well that’s going to be interesting, to say the least;

The head of Mrs Merkel’s coalition and the leading member of the Bavarian CSU (Mr Horst Seehofer), reported that if there was any weakening of conditions for access to EZ aid, the CSU would not support aid to the EZ. He added, that “without the CSU, the coalition has no majority”. Mrs Merkel responded by stating that there had been “misunderstandings” and pledged “strict conditions” for any future aid to EZ banks and countries. On the other hand Mr Rajoy, in particular, continues to state that the EZ aid will be without conditions. Basically Mr Rajoy in living in cloud cuckoo land. In addition, Mrs Merkel is under pressure at home and will respond by having to act tough;

Talking about the Bavarians. The Bavarian Finance Minister today stated that “Greece cannot and will not make it”. He added that “If Greece goes bankrupt today, it would be bad for the country, but for the rest of Europe, the risk would be manageable”. I agree with Mr Markus Soeder on both counts – indeed, I would add that after an initial knee jerk sell off, the EZ would be better off. The Troika will visit Greece in September. The Greeks will say that as there is a new regime, they are now taking action. The Troika will return in December – well nothing material will have changed. Hopefully at that stage, a single supervisor and some kind of EZ banking union will be in place. All of that suggests to little old me that Greece will be forced to exit in the 1st Q 2013, the 2nd Q 2013 at the very latest;

The German finance ministry reported that debt to GDP will rise to 83.5% in 2012, from 81.2% in 2011;

French June services PMI came in at 47.9, higher than the 47.3 expected and the previous 47.3.
Italian June services PMI came in at 43.1, higher than the 42.5 expected, though sharply lower than May’s 48.1.
However, German June services PMI came in at 49.9, lower than the 50.3 expected and below May’s 50.3. Germany’s services sector was expected by some to be capable of holding up. I believe that is a brave assumption as this number shows.
Overall, EZ June services PMI came in at 47.1, slightly higher than the 46.8 expected, though below the 46.8 in May;
Better economic data from Spain though. Spanish June services PMI came in at 43.4, higher than the 41.5 expected and May’s 41.8.
Generally poor numbers and suggests that 2nd Q EZ GDP will be weak;

EZ sales increased +0.6% MoM, above forecasts of unchanged, but -1.7% YoY, sharply lower than the forecasts of -1.0%. April retail sales were revised down sharply to -1.4% MoM and -3.4% YoY, from a previously reported -1.0% MoM and -2.5% YoY. Once again very weak data;

The French PM downgrade 2012 growth to +0.3%, from +0.7% previously. Oops. In its revised budget, the French report that state spending will rise to 56.2% of GDP this year, falling to 56.1%, and 55.4% in 2013 and 2014 respectively. A “one off” (yeah really) wealth tax has been introduced – to raise E2.3bn. Small tweaks elsewhere, including raising the tax on share trading to 0.2%, from 0.1%, raising tax on stock options, introducing a tax payable by companies on dividends – basically raising E7.2bn. No major moves, but will it be enough to keep the deficit to 4.5% of GDP this year?. Next year, the French audit office states that France will have to introduce some E33bn of savings, assuming an optimistic GDP growth rate of 1.0% for 2013 ;

The Irish 1st half budget deficit narrowed to E9.4bn, less than the E10.8bn previously. The Irish finance minister reiterated that the 2012 budget deficit target of 8.6% will be achieved;

Mr Bob Diamond, resigned following calls by the Governor of the BoE (Mr Mervyn King) and the head of the FSA Lord Turner, to the Chairman of Barclay’s requesting his removal. Mr Diamond is to testify at a Parliamentary Committee today, which is going to be closely watched. Mr Diamond allegedly threatened to reveal all, including conversations with the BoE (silly man – you don’t take on the BoE). In addition, allegedly he (and Barclay’s) have evidence of discussions with Mr Tucker, deputy Governor at the BoE (and one of the leading candidates for Mr King’s job on his retirement) in which allegedly Mr Tucker had passed on concerns from the UK government about Barclay’s higher Libor submissions. Mr Diamond wrote (following this conversation) that “it did not always need to be the case that we appeared as high as we have recently”. The day after, Barclay’s submitted much lower Libor rates !!! Further allegations question the role played by the then UK PM, Mr Gordon Brown, Mr Ed Balls (Mr Brown’s confidant and City minister and schools secretary) and Ms Shriti Vadera (a senior adviser to Mr Brown). In an extraordinary interview Lord Myners mentioned a number of names – some would say that he was using this opportunity to settle some scores. This is going to get messy, though fun. (Source FT);

There are numerous reports of vast sums to be paid in compensation by banks in respect of the Libor issue. Personally, whilst clearly banks will face stiff fines and will have to pay compensation, I remain sceptical of the huge amounts allegedly at risk. One issue is that the US$ Libor (or whatever it is called in the future) rate setting may well move to New York, from London, as a result of this scandal;

UK June services PMI came in at 51.3, lower than 53.3 in May and below expectations of 52.9. Adds to the (likely) speculation that the BoE will announce a £50bn QE programme tomorrow;

Irish June consumer confidence rose to 62.3, from 61.0 previously. Should rise further in July given the positive news from the EZ;

US May factory orders came in at +0.7% MoM, as opposed to expectations of just +0.1% and -0.7% (revised) for April. The report revealed gains across a broad range of sectors. Orders for non defence, non aircraft, a better measure, increased by +2.1% in May MoM.Good news, given that the ISM data reported a contraction in the manufacturing sector in June, for the 1st time in nearly 3 years.
Goldman’s has reduced its estimate of 2nd Q US GDP to +1.5%;

Ms Lagarde warned that the US has to deal with the impending “fiscal cliff” problem imminently – too true. The spending cuts, accompanied with tax hikes come into effect on 1st January 2013. She warned that US growth could deteriorate to zero next year, if this issue was not addressed.


Tomorrows ECB and BoE meetings are expected to result in interest rate cuts of 25bps (with a cut in deposit rates to zero?, from 25bps at present) and £50bn of additional QE from the BoE. Some analysts expect the ECB to undertake another LTRO Рpossible, but unlikely in my view.

The BoE buying more gilts seems to be a bit of a waste, given the size of the BoE’s existing holdings – buying other debt securities, particularly MBS’s will be far, far better. However, to date, the BoE has refused to consider such action as it is concerned of the higher credit risk involved. I hope it changes its mind. Unless the ECB and the BoE deliver more than that expected, it may be a sell on the news day tomorrow.

The Euro is weakening again today (currently US$1.2562) – no great surprise. Amusingly, a Swiss Minister Mr Maurer stated that “nobody still in possession of their marbles wants to join the EU”. Really made me chuckle. 82% of Swiss were against accession to the EU – certainly don’t blame them

Having declined materially in recent days, Spanish and Italian yields are rising, though German yields are declining. The German 5 year bond auction was heavily oversubscribed today, with rates effectively unchanged.

Brent (August) oil is marginally below US$100 with gold at US$1616.

Interestingly, Glencore and Xstrata are outperforming today – indications of a likely deal, I suspect.

Bob Diamond testimony is in full flow. Mr Diamond started well, but seems under pressure at present.

For my American friends, may I just take this opportunity to wish you all a great 4th July.

Kiron Sarkar

4th July 2012

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