The Australian Central Bank, the RBA held rates at 3.5%, citing a stronger domestic economy, though was dovish on inflation. The A$ is at a 4+ month high and looks as if it has further to go;
India will miss its 5.1% budget deficit target this year (down from 5.75% last), as a result of having to provide more subsidies to farmers and in respect of diesel. No great surprise, the forecast was never going to be met anyway (Source WSJ);
Italian June industrial production (seasonally adjusted) came in at -1.4% M/M as opposed to expectations of -1.0% and much worse than the revised +1.0% for May. Y/Y, production was down -8.2%, much lower than the -6.5% expected and the revised -6.7% in May;
Italian 2nd Q GDP declined by -0.7% Q/Q as opposed to -0.8% expected and the previous -0.8%. Y/Y GDP was -2.5% lower in line with expectations and the -1.4% previously; UK June industrial production came in at -2.5% M/M, as opposed to expectations of -3.5% and +1.0% in May. Y/Y production was -4.3% lower, better than the -5.3% expected and the previous -1.8% in May; UK June manufacturing production came in better at -2.9% as opposed to the -4.3% expected and May’s +1.2%. Y/Y, production was -4.3% better than the -5.7% expected and the previous -1.7%;
The better than expected UK data suggests that 2nd Q GDP will be revised higher.
Mrs Merkel must believe that all her Christmas’s are coming all at once. First, Draghi announcement last Thursday (her spokesperson has stated that Merkel’s government has “no doubts whatsoever” that everything the ECB does is within its mandate) has helped to push her structural/labour/competitiveness agenda, (combined with adherence to fiscal targets) and now her opposition, the Social Democrats, have called for a change in the German Constitution, by means of a referendum, to clear the way for the issue of Euro Bonds – clearly politically unpopular in Germany. She really is a lucky lady; German June factory orders declined by -1.7% M/M (-7.8% Y/Y), much worse than the -0.8% expected and the increase of +0.7% in May. The sharp drop confirms that Germany is not immune from the global downturn, which should also feed through negatively to the domestic economy.
Counter intuitively, this should help Mrs Merkel to “sell” the idea that Germany’s fate is tied to the EZ. The much weaker numbers suggest that 2nd half EZ GDP will be even weaker than expected;
Accusations that Stand Chart has acted on behalf of Iran, drug dealers, terrorists etc, etc to the tune of US$250bn (pretty strong allegations by the New York regulator) is grabbing the headlines over here in Europe. Stan Chart admits to US$14mn of improper transactions re Iran – a bit of a difference !!!! Whatever, the shares are down near 25% on fears that they will lose their US licence. Whilst the loss of an US banking licence is clearly serious, the reaction looks way overdone, according to most analysts;
Outlook
Italian GDP has declined for 4 consecutive Q’s. The government forecast for the current year of a decline in GDP of just -1.2% looks highly optimistic – the employers lobby Confindustria suggests that GDP will decline by -2.4%. Declines of this size will, of course, have a major negative impact on the country’s debt to GDP ratio. No wonder Mr Monti is urging the EZ to reduce short term debt asap. However, amazingly, he suggested that the German authorities ignore their Parliament and act. Mama Mia. Unfortunately, this nonsense is going to take time. All of this suggests to me that the EZ will, finally, go for QE, possibly even later this year.
Even worse was the sharp decline in German factory orders, though the weakness will help Mrs Merkel to persuade her public that Germany is not immune from the global slowdown and the crisis in the EZ – should help to moderate hawkish views.
The current European game is that France is urging Italy and Spain to seek a bail out, to avoid pressure on itself. Italy is trying to push Spain into a bail out. Complete nonsense, once again, and my guess is that Italy and Spain will, in due course, both request a bail out from the EFSF/ESM simultaneously.
The Euro remains stable to a bit firmer and I suppose may have a bit more to go in the short term. However, I remain bearish in the medium/longer term.
Brent continues to rise, currently around US$110.
Markets continue higher, with US futures suggesting a higher open. The recent rise in markets looks more like short covering rather than outright buying.
I continue to believe that Draghi’s recent statement and, the very likely follow through, will prove to be bullish, though markets are wary.
Kiron Sarkar
