Pussy Riot Jailed

Chinese new home prices rose in 49 out of 70 major cities in July, which is the most in 14 months, according to the Chinese National Bureau of Statistics. The authorities have been trying to curb property prices. However, given the economic slowdown in China, I believe they have no option but to relax on their measures to limit/reduce property prices. Analysts report that demand by 1st time buyers was strong, with a cut in interest rates and discounts on mortgage lending rates helping;

Yet more talk that China wants to devalue the Yuan, or as they say, “change the mechanism for setting the Yuan/US$ rate”. The continuing kite flying is designed to assess international reaction, though countries have failed to pick up on these “suggestions” as yet – far to subtle. When the boys and girls wake up…..Capital flight/withdrawal will continue;

China has seen a proliferation of “Wealth management products”, sold to people who want higher yields. The vast majority of these schemes look pretty close to Ponzi schemes and can only survive if funds “invested” in these schemes continues to increase. When that stops (which I suspect is only a matter of time), well….;

Further tensions between China and Japan (and other S E Asian countries) in respect of the certain islands in the South China seas. This problem will not go away;

Mrs Gu Kailai, wife of the disgraced Mr Bo Xilai was found guilty of the murder of Mr Neil Heywood and has been sentenced to death, but the sentence has been suspended. It is expected that the sentence will be commuted to life imprisonment, in due course. However, a number of participants in the trial remain deeply sceptical of the Chinese version of events. The bottom line is that the authorities are concerned about stories relating to the accumulation of wealth by senior Chinese politicians/officials and are anxious to avoid speculation on the matter;

Yet more corruption in India. A final report by the Indian Comptroller &Auditor General states that the government lost US$33bn of revenues through the sale of coal assets without an auction. Yet another example of the widespread corruption that has plagued India;

The RBI remains hawkish. My friends at Brown Bothers Harriman report that the Indian Central Bank, the RBI remains hawkish and will only reduce interest rates when inflation starts to show “very sustainable signs of moving down”. The hawkish comments should support the Indian Rupee, which has been Asia’s worst performing major currency YTD;

Pussy riot jailed. 3 members of a Russian punk rock group, Pussy Riot, were jailed for 2 years, allegedly for hooliganism. The group protested against Mr Putin in a Russian cathedral, singing “Mother of God, Drive Putin out”. The stiff sentence confirms Mr Putin’s increasing crackdown on political dissent. Foreign leaders, including from the US and the EU, have stated that the sentences imposed are, in effect, an abuse of power. The increasingly tougher measures, to crackdown on opposition to Mr Putin’s leadership, will just encourage further opposition. In addition, Mr Putin has had to rely on supporters, who, surprise, surprise, are demanding more, lets just say “favours”. Capital flight continues to increase, a sure sign that all is not well in Russia;

Some analysts have flipped and now believe that Greece will remain in the EZ, I continue to believe that Greece will have to exit. The German Finance Minister, Mr Schaeuble, has effectively ruled out another aid programme for Greece. He states “we cant have yet another programme………there are limits”, adding that “It is not responsible to throw money into a bottomless pit”. Greece faces a financing gap of E14bn for the next 2 years, according to De Spiegel, higher than the E11.5bn previously reported The Greek PM, Mr Samaras will meet Mrs Merkel on the 24th August, followed by a visit to France to meet Mr Hollande the next day. The Troika is preparing a report on Greece which will be discussed by the EZ in mid to late September. Mr Schaeuble states that while speculation that the Euro would fail was “nonsensical”, he added that it would be stupid not to make contingency plans in case of an exit of an individual country does not work. The bottom line is that politically, it is increasingly difficult, if not neigh on impossible, for countries such as Germany, Holland, Finland etc, etc to continue to bail out countries, in particular Greece. It is clear that Greece will default, yet again and this time official sector participation (“OSI”) is certain – try and sell that to your voters at the same time as increasing aid – personally, I don’t believe in impossible missions (Source Bloomberg). A Grexit will be costly – estimates suggest some 4% – 5.0% of GDP for Germany, for example.

The former Greek Finance Minister calls for OSI. He had previously stated that Greece would meet its targets, not default etc, etc !!!. Having said that, OSI will be necessary though;

Another bail out for Portugal likely. Portugal will, I believe, both need and will receive a further bail out shortly;

Spanish Finance Minister wants “unlimited” purchases of Spanish bonds by the ECB. In addition, he does not want any new conditions to be imposed. Well, we all have wish lists, but………It is widely expected that Spain will seek a full scale bail out at the Euro Group meeting in mid September. However, is Spain’s current, let alone it’s increasing debt load sustainable – personally, I’m dubious. Having said that, yields on Spanish debt declined last week – the 10 year down 46 bps to 6.44% and the 2 year down 43bps to 3.77%, whilst 10 year bund yields rose by 11bps to 1.50%, though off their highs;

The ECB is expected to cap debt yields of peripheral EZ countries, which request assistance, reports De Spiegel. Essentially, the ECB would buy as many short term bonds as is necessary to reduce/keep yields down to a predetermined rate(s). I had speculated on precisely such a policy, following Draghi’s press conference and, if true, it would suggest that the amount to be purchased by the ECB would not be quantifiable, in advance. However, the threat that the ECB would buy as much as is necessary should do a large part of the heavy lifting. The Bundesbank, well they are getting quite excited about this policy, stating that any scheme, as set out above, threatens stability – as if the Euro/EZ is stable at present?. Markets are bullish on speculation that the ECB will act, but personally, I remain much more cautious. The ECB has stated that no decision has been taken and that the ECB will act within it’s mandate;

Spain remains in denial – they insist (some hope) that the ECB should buy bonds ahead of their request for a bail out. They clearly are going Greek The Spanish region of Murcia is likely to request E700mn of aid from Central authorities to finance its deficit and redeem bonds;

US July LEI’s rose by +0.4%, more than the rise of +0.2% expected and the decline of -0.4% in June. An improving housing market, coupled with fewer job losses helped the forward looking (3 to 6 months) indicator. 7 out of the 10 components that make up the index increased. The coincident index, a measure of the current situation, increased to +0.3%, higher than the +0.2% increase in June;

The University of Michigan July consumer sentiment index increased to 73.6, from 72.3 in July and above expectations of 72.2. However, whilst the current component index rose to 87.6, from 82.7 in the prior month, the more important consumer expectations component (tracking expectations 6 months ahead), fell to 64.5, an 8 month low, from 65.6. Finally, Bloomberg adds that the average reading for the 5 years before the 18 month recession which ended in June 2009, was 89 and 64.2 during the recession;

The Chicago Fed July national activity index came in at -0.13 M/M, lower than the -0.05 expected and June’s -0.34;

Outlook

Having opened higher, European markets are on hold today. US futures suggest a lower open.

However, it is likely that increased concern that Bernanke will not, in effect, announce QE3 at Jackson Hole is likely to weigh on markets – over the next week or so. Personally, I do not believe that Bernanke will announce QE3 at Jackson Hole, preferring to keep its options open. The FED meets following the announcement by the German Constitutional Court on 12th September. If the Court’s decision is negative, I believe that the FED will be forced to announce QE3. If the Court’s decision is positive, I believe that the FED will pass on QE3 in September.

The Euro is trading higher at around US$1.23, off its highs of around E1.2360 this morning, as the Bundesbank’s comments, in particular, outweighs optimism of ECB intervention. I continue to believe that the real issue for the Euro remain the decision by the German Constitutional Court on the 12th September, which will impact (materially) -both markets/Euro.

I remain cautious.

Too much Central Bank policy action, particularly by the ECB, though also from the FED which, whilst possible, (but not sufficiently certain, in my view), has been priced in. For the 1st time for many days,the IBEX and the MIB are off today, having opened up higher in the morning. Brent above US$114 is still far too high – geo political reasons mainly.

Source:

Kiron Sarkar
20th August 2012

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