Mrs Merkel’s supportive comments of Draghi/ECB are no new news

Chinese press reports suggest that the PBoC may cut rates ahead of further RRR cuts. The Chinese are getting like the EZ, too much talk and dithering about and not enough action.
In addition, the Chinese Development Research Centre (reports to the State Council, so important) suggests that China should devalue the Yuan against the US$ by more than the -1.0% YTD. The real concern is the Yuan’s decline against the Euro, as Europe is Chin’s main trading partner. Basically kite flying to gauge reactions, but just emphasises the increasing concern of the Chinese authorities. The Yuan is looking more fragile, but to devalue the Yuan in an US Presidential year, with Mr Romney’s previous comments, well the noodles are going to hit the fan;

Spanish bank bad loans rise to 9.42% in June, from 8.95% in May, according to the Bank of Spain. Will increase further;

German July producer prices came in flat, lower than the expected +0.3%, though higher than -0.4% in June. Y/Y, prices rose by 0.9%, lower than the +1.2% expected and the previous +1.6%;

Mrs Merkel supported Draghi’s statement that the ECB would do everything to defend the Euro/EZ which, she emphasised was “completely in line” with her views and that of fellow EZ leaders. She approved of the conditionality imposed by Draghi. Great, but her comments are no new news – she has said the same thing following Mr Draghi’s statement a week or so ago. However, markets took her statements as a positive signal for some reason !!!!!. The crucial issue remains the German Constitutional Court issue, which clearly she does not control;

EZ June current account and trade balance much better. The current account balance came in at +E15.7bn M/M, from -E3.2bn in May. The June trade balance (seasonally adjusted) improved to +E10.5bn, much better than expectations of +E5.0bn and May’s +E6.8bn. However, the problem is the wide difference between the out performance of Germany and that of Spain, for example. However, overall, the EZ’s debt position is better than that of the UK’s/US;

US initial jobless claims came in at 366k, essentially in line with expectations of 365k and 364k previously. The less volatile 4 week moving average declined to 364k, the fewest since 31st March. Continuing claims came in at 3.305mn, as opposed to 3.30mn expected and 3.336 previously;

US housing starts were slightly lower than expected, though, more importantly, permits rose. Housing starts in July M/M came in at 746k (-1.1%) on an annualised basis, lower than the 756k expected (-0.5%) and June’s 754k. However, more importantly, building permits rose to an annual pace of 812k (up +6.8%), the most since August 2008 and higher than the rise to 769k expected (+1.2%) and 760k in June. Mortgage rates continue to decline to record lows, though this weeks back up in 10 year yields will raise rates in coming weeks. Finally, my friends from Aviate point out that lumber prices have increased materially – reflecting better US home construction?;

US August Philly FED came in lower at -7.1, as opposed to -5.0 expected, though better than July’s -12.9. The index has declined for the 4th consecutive month. The new orders component came in at -5.5, as opposed to -6.9 previously and shipments declined to -11.3, from -8.6. Prices paid increased to 11.2, versus 3.7, whilst prices received rose to 2.8, from 1.6. Employment came in at -8.6, from -8.4, the lowest level since September 2009. The regions manufacturers were less optimistic over the next 6 months – the index declined to 12.5 from 19.3 in July, the lowest level in a year;


Mrs Merkels comments have been taken positively by markets. However, she said nothing new. The Constitutional Court issue (which clearly she does not control) remains the threat. If the Court allows the authorities to sign off on the ESM (without conditions), markets, particularly peripheral EZ markets will rise materially. However,…..I remind you that the German authorities appear nervous that the Court will impose some conditions and if they are nervous, well……

Spain’s IBEX has risen well over 15% since Draghi’s comments and the MIB has also outperformed. In addition, Spanish bond yields continue to decline – the 5 year is off a further 20bps today to 5.40%, the 10 year 10bps to 6.69%. The IBEX will rise further if the Court’s decision is favourable. However…..

The Euro has risen on Mrs Merkel’s comments – don’t believe in the move.

Used todays rise to get myself to the levels I wanted ie majority cash (US$), with defensive equities and a smallish position in higher beta stocks, together with some energy stocks.

Kiron Sarkar

17th August 2012

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