EZ confidence declines further

Japanese retail sales fell by -0.8% Y/Y in July (-1.5% M/M) , more than the -0.1% decline expected and the 1st decline in 8 months. With production/exports much weaker and now domestic consumption declining, the prospects for the Japanese economy remains weak, to say the last. However, the Yen remains strong, a mystery which has confused most of us, in particular, given the country’s disastrous fiscal position and, recently, political instability;

A love in between Mrs Merkel and the Chinese leadership. The Chinese have expressed “confidence”? in the EZ/Euro (including reiterating that they would buy more EZ bonds !!!) and Mrs Merkel has agreed to use the Yuan to settle more trade. A number of German companies have raised problems relating to alleged theft of intellectual property, though that has not spoilt the party. Relations between China and Germany are good and both sides are keen on developing the relationship much further. The Chinese believe quite rightly that the EZ will be lead by Germany, with France playing 2nd fiddle and that the UK will be marginalised;

Mrs Merkel also opposes anti-China trade action, reports the FT. Apparently, she will not support a move by European solar-panel manufacturers for trade action against Chinese manufacturers. The EU has been pretty touch on this issue in the past and German solar panel manufacturers (SolarWorld) have complained to the EU about alleged Chinese dumping. However, the far more important point is that Mrs Merkel is ignoring the bureaucrats in Brussels (Yippee) and pursuing her own foreign policy initiatives. I have previously reported that Germany is becoming less Brussels friendly – at long last – they really are a bunch of ……….It is clear that both China and Germany want to develop “special relationship”. Hmmm. Maybe OK/possible for a while, but the significant differences on a wide range of issues make such a relationship problematical;

There is some debate as to whether a new Chinese Premier will be announced at the 17th Chinese National People’s Congress (“NPC”) later this year. One of my clued up friends advises that it will not happen. In addition, he believes that the standing committee of the Politburo will be cut to 7 members, from 9 at present and that the names (but not the positions) of the 7 members will be announced at the NPC, though rather in March next year. If true, it will create more uncertainty, which given the current situation, is unhelpful;

53% of Russians supported the 2 year sentences imposed on 3 member of the Russian pop group Pussy Riot who urged Putin to go in a Russian Church. 27% stated that it was not fair. However, other polls report that the ratings of President Putin and his PM, Mr Medvedev have slumped to the lowest levels since mass protests erupted in Russia in December (Source Boomberg);

Norwegian deputy Central banker, Mr Qvigstad was that Norway will cut interest rates if the Krone continues to strengthen. However, Norway kept interest rates on hold at 1.5% yesterday and, in effect, has “accepted” that the Krone will remain strong;

Murcia requested a bailout from central authorities, with Andalusia looking to be the next Spanish region to request a bail out. To add to Spanish woes, the WSJ reports that the ratings agencies could cut Spain’s debt rating to junk in September – likely in my view. Finally, Spanish banks have borrowed E415bn from the Euro system (Target 2 balances), which is triple the amount at the start of the year. In addition, Spanish banks are reducing their holdings of Spanish sovereign debt – by E8bn in July, as compared with an increase of over E75bn in the 1st four months of the year – following the ECB’s LTRO’s;

The EU and Spain have agreed  a framework to establish bad bank in which toxic assets, currently owned by banks, will be dumped, reports the Spanish economy minister. The Spanish government will approve the regulatory framework tomorrow. Establishing a bad bank is one of the preconditions attached to Spain’s request for an E100bn facility to recapitalise its banks;

French August industrial confidence near its 2 year lows. The sentiment index came in at 90, slightly higher than the 89 in July. An index which captures more businesses slumped to 7, a 3 year low;

Draghi dismissed German (Bundesbank) criticism of his proposals to deal with the EZ debt crisis. He stated that the ECB was entitled to use exceptional measures, as “fulfilling our mandate requires us to go beyond standard monetary policy tools”. To date, Mr Draghi’s plans have been supported by Mrs Merkel;

German unemployment rose by just 9k in August, though the 5th consecutive monthly rise. Analysts had expected that the number unemployed would rise by 7k. With 2.90mn unemployed, the German unemployment rate remains at just 6.8%, though I believe that unemployment will continue to rise;

EZ August consumer confidence came in at -24.6, in line with expectations, though sharply lower than July’s -21.5. It was the 5th consecutive monthly decline and the lowest reading (combined with business sentiment) since 2009.
EZ August economic confidence was 86.1, versus expectations of 87.5 and 87.9 in July.
EZ August Industrial confidence came in at -15.3, versus expectations of -15.5 and -15.0 previously.
EZ August services confidence came in at -10.8, versus expectations of -9.0 and -8.5 previously;

Barclays have a new CEO, the former head of retail baking, Mr Jenkins. However, yet more bad news for the bank. The UK’s Serious Fraud Office is conducting a new investigation into allegations of illegal payments in respect of banks capital raising efforts in 2008 from the Qataris.;

US July pending home sales were up +2.4% M/M, above expectations of a rise of +1.0% and -1.4% previously and +12.4% higher Y/Y. The index is now at the highest level since April 2010, just before the homeowner tax credit ended. However, credit remains tight, which is holding back a stronger rise;

The FED beige book reported that overall economic activity “continued to expand gradually in July and early August”, as compared with modest to moderate pace in June an early July. In addition, the report stated that:
Whilst manufacturing has slowed, in particular due to weaker sales overseas, auto and retail sales improved;
Few manufacturers reported any major lay offs or hirings;
Employment is holding steady and wage pressure remains very contained;
Credit conditions had improved, as has housing in all districts, with sales and construction rising;
“6 districts (out of 12) expanded at a modest pace”;

A great deal of comments about Bernanke and his Jackson Hole speech. Personally, I do not believe that he will announce QE3 at the conference, but just repeat the alternatives available to the FED. Having said that, I continue to believe that the FED will announce QE3 in September;

US initial jobless claims for the 25th August came in at 374k, slightly higher than expectations of 370k and 374k previously.
July personal income came in at +0.3% M/M, in line with expectations and previously.
July personal spending came in +0.4% M/M, lower than the +0.5% expected and the previous flat reading.
The PCE deflator came in flat M/M, as opposed to  +0.1% expected and +0.1% in June.

The Brazilian central bank cut interest rates by 50 bps to 7.5%, a historic low. In addition the bank suggested that rates could be cut yet again. The Brazilian economy has declined from GDP growth of 7.5% to around 2.0% this year;

Iron ore prices continue to fall. They declined by just under 5.0% today, to its lowest price since November 2009. Copper prices are also lower, with demand expectations from China continuing to be reduced to the lowest in 15 years. Cant see much respite in the near future. The miners continue to decline, with Rio nearly 2.0% lower at the open in London;

Ambrose Evans-Pritchard wrote a great article in the UK’s Daily Telegraph, which debunked the idea of reintroducing a gold standard, proposed by some in the Republican party. I have never understood the merits of gold in today’s economy, so am totally biased, I must admit;


Asian markets closed lower, with the Chinese Composite Index lower for the 4th straight month and heading towards the lowest close since February 2009 . I have to say that I am more than a little bit confused by the inaction of Chinese policy makers, but I cannot believe that they will let this drift much longer. However much better to wait, rather than try and preempt some positive? news.

European markets are weaker. The Euro is trading at US1.2540. Whilst the Euro may pop on any positive announcement by Draghi (likely), I  still believe its below US$1.20, at least, by the year end. Gold is off a bit at US$1658, though Brent (Oct) is up above US$113.

US 10 year bond yields are flat at 1.65%, though German and UK yields are lower at 1.33% and 1.47% respectively

The VIX is rising – currently 17.06 and up over 200 bps in the last week, though still to low in my opinion.

Kiron Sarkar

30th August 2012

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