Mrs Gu commuted death sentence raises uproar in China – social media suggests privalege

Australia will weather the global slowdown, reports the RBA. Minutes released by Australia’s Central Bank, the RBA, indicates that the central bank believes that Australia will weather the impact of a global slowdown (though they do raise concerns about Europe, yet again, hence its decision to keep interest rates on hold (at 3.5%) last month. The RBA cites stronger consumer spending, capital investment and an increase in jobs. The A$ rose against the US$ and other currencies in response, even though the minutes hinted that the A$ remained at a “relatively high level”;

Chinese authorities are expected to introduce measures to boost consumption and increase fixed asset expenditure according to the Economics Information Daily, in addition to easing monetary policy. The Chinese keep ratcheting up stimulus measures though markets remain sceptical, with the market at near lows, (though marginally higher today). The PBoC ratcheted up its reverse repo operations today to ease a cash crunch, injecting Yuan 220bn (US$35bn) into the system;

Yuan use in trade is declining. Some months ago, people feared that the use of the Yuan in trade would increase and, in addition, possibly usurp the US$. Well, the WSJ reports that direct Yen/Yuan trading, which started on 1st June, is the equivalent of US$63mn daily. However, US$/Yen trading in Tokyo averages US$145.4bn. Time for a reality check boys (Source WSJ);

The commuted death sentence imposed on Gu Kailai, the wife of Bo Xilai, has provoked uproar in China. The FT reports that social media is outraged that Mrs Gu has avoided the death penalty, alleging privilege and special treatment, as she is a member of the political elite. Mrs Gu is a “princeling” ie the daughter of a top revolutionary general, as is her husband. The trial of Mrs Gu also revealed details of high level corruption. All in all not good news for the Chinese leadership;

Consumer price inflation in India remains high at 9.89% in July, though marginally lower than the revised 9.93% in June and the lowest in 4 months. Lower fuel prices helped. The RBI has been hawkish on inflation and expectations are that interest rates will not decline until inflation drops materially. The Rupee increased marginally on the news;

Free floating Rouble positive. Bruce Bower, a Hedge Fund manager with Verno Capital, which operates in Russia has a very interesting piece in Today’s FT. He emphasizes that the Russian has moved towards a freely floating Rouble, which has and will continue to act as a “shock absorber to offset volatile movements in the price of oil and international capital flows”. Whilst exchange rate volatility will be higher, short term deposits have not reacted in recent months to short term exchange rate movements. “More stable interest rates, should lead to steadier bank lending and overall economic growth”. Russia is cheap – the market is trading at 5.65 times 2012 forecast earnings. In addition, Russian markets are less correlated to the oil price, something investors have ignored.

Finally, most Russians agree with the jail sentences imposed on the 3 members of the Russian punk rock group – interesting;

The ECB has denied? that is has plans to cap rates of peripheral country debt, following a story in Der Spiegel. Essentially Der Spiegel reported that the ECB would cap yield spreads between the relevant EZ country and equivalent German debt. Listening to Mr Draghi’s comments during the last press conference, I had speculated that the ECB would buy as many bonds as was necessary to reduce yields down to a certain level, though not on the basis of reducing yields to a predefined spread to equivalent German bonds. Draghi’s statement could not have been construed any other way. The ECB alleges that the Der Spiegel report was “misleading” and that “no such plan was discussed by the ECB’s governing council. However, I believe that they are, indeed, looking at precisely such a policy. “Monetary policy is independent and undertaken strictly within the ECB’s mandate” the ECB stated. The proposed plan has been criticised by Germany’s Bundesbank, who suggest that it entails “considerable risks to stability”. Spanish and Italian bond yields (particularly at the short end) have and, indeed continue to decline materially – what happens next though?. Personally, I believe that the ECB will go ahead with its plans to cap peripheral EZ country bond yields in respect of short term debt, through the unlimited purchase of short term bonds, subject to that country meeting predetermined fiscal targets and, in addition, agreeing to oversight. However, will this speculation impact the decision by the German Constitutional Court? – quite possibly – risks are increasing;

Fitch threatens to downgrade a number of EZ countries (Spain and Italy) by the year end, if there is no progress in the ongoing political/policy decisions in the region;

Outlook

Whilst the Bundesbank remains opposed to Draghi’s/ECB efforts, the other German at the ECB (Mr Jorg Asmussen – appointed by Mrs Merkel and part of her inner circle, according to the UK’s Daily Telegraph) – indeed one of the 6 members of the ECB’s executive council, has backed the ECB’s plans. He states that “A currency can only be stable if its future existence is not in doubt”. Mr Asmussen has been careful to back Draghi/the ECB, based on the need to avoid an EMU break up. In addition, Mrs Merkel has expressed her support for the ECB/Mr Draghi. Mr Asmussen confirmed that ECB purchases of peripheral EZ country debt could be “unlimited”. Its high time that Germany finally decides as to what it wants to do and then get its act together. However, with Mrs Merkel/Asmussen on board, it looks as if Draghi has enough German support to proceed, which he will. However, at the end of the day, the decision by the German Constitutional Courts remains the key.

Mr Asmussen’s comments have helped the Euro/European markets today – the Euro is well above US$1.24 at present.EZ peripheral bond yields continue to decline – the Spanish 10 year bond yield is 12bps lower at 6.22%, for example

More positive news from the EZ, as stated above, has helped European markets. US markets have opened higher.

Kiron Sarkar

21st August 2012

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