StanChart: “Rogue institution” or guilty of “small clerical errors”

China likely to reduce RRR’s soon. Given lower inflation, rumours, together with press speculation suggests that the PBoC will reduce RRR’s further;

Japan’s H1 trade deficit soars to US$31.8bn, 5 times higher than that posted in the same period last year due to higher imports of oil (due to the closure of nuclear power stations) and lower exports. The current account surplus (US$5.51bn) fell -19.6% in June YoY, though less than the -23.0% expected. Japan has restarted some (just 2) of its nuclear power stations, though public opinion is much opposed. The stronger Yen does not help either. The political situation is fragile, with the opposition seeking to force early general elections, if they support the proposed sales tax, though a report suggests that an agreement (details unknown) has been reached. At some stage, investors are finally going to short the Yen, though to date, those who have tried have been wheeled out in their coffins. I will sit impatiently and watch;

StanChart “Rogue institution” or “guilty of small clerical errors“. The head of the newly created New York bank regulator, Mr Lawsky, charged that StanChart bank was a “rogue institution” and “schemed with the government of Iran” to process some US$250bn of transactions. He added that StanChart aided terrorists and drug dealers. StanChart, on the other hand, state that there were “small clerical errors” involving US$14mn of transactions in respect of Iran. Whatever the truth of the matter, the attack, which does not appear to have been co-ordinated with the US Treasury and/or the FED (who apparently were blindsided and angered by the NY banking regulators comments – Source Reuters), has resulted in much anger by UK politicians, the press, regulators and markets, who accuse the US regulator of “freelancing” and being “politically motivated”. Mr Lawsky’s statement was extraordinary, it has to be said. StanChart’s shares declined by 24% yesterday, but rebounded to close 16% lower. StanChart shares continue to rise and are currently nearly 9.0% higher, in spite of being ex div;

Spanish short term debt rose by 35bps yesterday, reversing a major decline (well over 200bps) since Draghi’s statement. Reports circulate that Spain will not accept further conditionality if imposed by the EFSF/ESM. There is a fear that Spain will just borrow short term, taking advantage of Drahi’s statements, which has reduced short term rates. This nonsense has a sell by date written all over it and for Spain to continue to live in denial is a ludicrous policy;

Spanish June industrial output declines -6.3% YoY, the 10th consecutive monthly fall, though in line with expectations (-6.2%).

In addition, Spanish authorities raised the central government’s budget deficit to 4.5% for the current year, from 3.5% previously;

Italian’s urge Monti to reject bailout. As is the case, in Spain, Mr Monti is facing significant opposition to any action which is perceived as bowing to pressure from the EU, ECB and/or Germany. Whilst impractical, the response will be politically difficult for Monti to ignore. However, the good news is that the focus is now to reduce Italy’s E2tr of borrowings. At the end of the day, Italy is a rich country with significant businesses and high savings and is in a much better position than Spain. However, to carry on without support from the ECB/EZ looks highly improbable, to say the least;

Mrs Merkel must act “more courageously“, suggests Mr Bofinger, one of Mrs Merkel’s “wise men”. He added that existing austerity measures being undertaken by Spain and Italy were excessive and that the EZ was heading for a severe recession. In addition, he suggested that the ECB should act unilaterally to reduce yields of peripheral debt. Further delays are likely to result in German’s becoming more Euro sceptic, even though a recent poll suggests that the majority of German’s want to retain the Euro;

German exports decline more than forecast in June. They were down -1.5% MoM (+4.2% in May), worse than the -1.3% expected. Imports declined by 3.0% MoM, reflecting lower energy prices. To date, Germany has relied on a stronger domestic economy – is this credible – the odds are against;

German June industrial production declined -0.9% MoM, slightly weaker than the -0.8% expected and +1.6% in May. Yet more data confirming the sharp decline in Germany and the EZ;

Germany will not provide more aid to Greece, reports CDU representative Mr Meister, though suggested that there could be some flexibility on Greek fiscal targets. He added, that Mr Draghi’s statement “isn’t problematic”. Isolating Mr Weidmann further, he stated that the Merkel government and Mr Weidmann had “different roles”, though there was no rift in Germany over Mr Weidmann’s stance;

French are planning to exit the country if President Hollande’s proposal to raise tax on income over E1mn is ratified. Most are thought to move to Switzerland and/or London. France is looking even more fragile as every day goes by. The Bank of France lowered 3rd Q French GDP to -0.1%;

BoE slashes UK GDP forecast to zero, whilst forecasting lower inflation. In addition, the Governor, Mr King, clearly fed up with the continuing “circus” in the EZ, stated, rather pointedly, that the EZ “saga goes on and on and…”, a view that, I expect, we all share. Interestingly, he dismissed calls for an UK interest rate cut, which has strengthened Sterling. Mr King’s comments suggest a further QE programme in November – another £50bn to £425bn? – will it make a difference, if they continue to buy Gilts only;

Rosengren urges FED to boost monetary stimulus (QE). Boston Fed President, Mr Rosengren, a non voting member of the FED calls for “open ended” QE, in response to a sluggish US economy in the 2nd half of the year and high unemployment. Mr Fisher stated that inflation was not a risk, though believes that the FED is being overburdened with risk. He believes that the FED has done enough and that there is a danger of “over-prescribing”;



Asian markets closed mainly higher, though European markets are lower. Peripheral EZ bond yields are rising, given Spanish/Italian apparent reluctance to seek aid, which is also negatively impacting the Euro, as is the weaker German export picture. US futures suggest a modestly weaker open.

The dithering by the EZ will, unfortunately, continue in the near term (until German Constitutional Court decision on the 12th September at least), though I believe we are fast coming to a time when some fundamental solutions are necessary, or the future of the EZ is fundamentally threatened – which, in spite of all the procrastination/problems etc, etc to date, is not the case at present, in my view.

Interesting Chinese data out tomorrow.


Kiron Sarkar


8th August 2012


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