Draghi’s comments particularly positive for markets

Unemployment declined in Australia in August, by 8k to a 3 month low of 5.1%, better than expectations of 5.3%, though mainly through the creation of part time jobs. In addition, the participation rate declined to 65%, the lowest since 2007, as people stopped looking for jobs, which helped the headline unemployment rate decline to 5.1%. The A$ rose on the better headline unemployment rate – currently US$1.1240.  However, with a slowing China, GS downgraded their forecast today, the A$ looks vulnerable;

The Troika is to report on Greece on 8th October. Some E31.5bn of funds has been withheld pending the Troika’s report. The report has been deliberately delayed. Unemployment rose to 24.4% in June, as compared with 23.5% expected and 23.1% in May. The coalition government is trying to push through a further E11.5bn of austerity cuts, which is facing stiff public opposition. I cant see how Greece can remain in the Euro;


The head of Portugal’s opposition party states that the country will not meet its budget deficit forecast of 4.5% this year – not really a secret. The Troika, who are conducting a review at present, are likely to report that this years budget deficit will come in around 5.3% to 5.5% – report due this month.  However, Portugal has implemented structural reforms and introduced austerity measures and, in addition, has tried to meet its targets. Furthermore Schaeuble has, in the past, suggested that the EZ would help the country and the IMF has been supportive. Portugal will need and will get a 2nd bail out pretty soon. The country is in the worst recession since the 1970’s, with record levels of unemployment. However, I believe, quite firmly, that Portuguese debt will have to be restructured – the current debt load (increasing) is unsustainable;

Spain is expected to request a bail out for the country in October, apparently if no new conditions are imposed. The charade continues. “If no new conditions are imposed”,  what a joke – Spain needs a bail out, plain and simple. The Spanish authorities announced today that the country had financed 76.8% of its funding requirements for the current year. Draghi comments today suggest that the Spanish PM will have to deal with the Troika – no ifs or buts;;

Following a TV debate in Holland, the PM stated that no more money should be provided to Greece. The head of the lefter leaning Socialist Party was though to have lost the debate and polling data suggests that SP support has slipped in favour of the Labour party – still left leaning. However, the PM’s party, the Liberals have picked up some ground recently. About 1/3rd of the electorate are undecided. The election, due on12th September, will result in a coalition of a number of parties, at least 3. CNBC reports that a poll taken by Maurice de Holland, reported that the Socialist and Labour party would each have 27 seats, with the current PM’s party, the Liberals, in the lead with 34 seats. The austerity measures imposed on the Dutch are coming in for serious criticism. Going to be tough on Germany as Holland has, in the past, supported strict fiscal austerity and , in addition, remains just 1 of the 4 EZ countries with a AAA rating;

The French unemployment rate is creeping up. It rose to 10.2% in Q2, higher than expectations of 10.0% and 10.0% in Q1. The rate is likely to rise further (ex government hiring), given President Hollande’s policies. A number of French are simply leaving the country for Switzerland and the UK, in particular;


Forget EZ banking union at the start of 2013, says Mr Schaeuble. Personally, with just 3 months to go, I have to say he’s right;

Merkel and Schaeuble state that they support both Weidmann and Draghi. Apparently both are carrying out their mandate and there is no contradiction in dual support – you really have to be a politician and try and get away with that line !!!! Mrs Merkel stated yesterday, that she opposes unlimited bond buying by the ECB, though could accept a “temporary programme”, involving short term debt. Any journalist want to ask her what temporary means – 1 year, 2 years, 5 years …….;

Draghi announced today that the ECB would buy an unlimited amount of shorter term (1 to 3 years) of peripheral sovereign debt on a sterilised basis in the secondary markets. The Outright Monetary Transaction (“OMT”) programme would not target a specific yield and the ECB would reveal comprehensive details. Purchases would be conditional on governments signing up to the EFSF/ESM programme, or having received an EU/IMF bailout.  The IMF would be involved in establishing conditionality (together with the EU) and, in addition, in monitoring the relevant governments commitments. Bond buying would cease if countries did not meet their commitments. In addition, the ECB will give up its senior creditor status on any bonds purchased under the OMT programme (though not under the previous SMP programme) and the bonds it purchases will rank parri passu, with bonds held by other investors, in the event of a default. The SMP programme is terminated. The details were essentially those leaked yesterday. Sterilised purchases is for the benefit of Germany, the Bundesbank and the impending decision of the German Constitutional Court. I believe that the ECB will move to unsterilised purchases in due course. The Bundesbank (Mr Weidmann) is the only member of the ECB to oppose the bond buying plan. The ECB kept interest rates on hold at 0.75%. The ECB also relaxed collateral rules, which will enable EZ banks to refi from the ECB directly – extremely positive for the financial sector. The ECB has lowered its forecasts for economic growth, though raised inflation expectations. Interest rates were kept on hold;

German July factory orders increased by +0.5% M/M, higher than +0.3% expected and much better than the -1.7% decline in June;

As expected the BoE kept interest rates on hold at 0.5% and maintained its asset purchase programme at £375bn. However, it is likely that the asset purchase programme will be increased in October/November by at least £25bn;

US productivity rose by +2.2% annualised in the 2nd Q, a much better performance than the -0.5% decline in the 1st Q and better than the +1.8% forecast. Output rose by +2.4%, slightly lower than the +2.7% in the 1st Q. Hours worked increased by +0.1%, the smallest rise in 3 years. Compensation per worker (in nominal terms) rose by +3.7% annualised or +2.9% in real terms, lower than the +3.3% real gain in the 1st Q;

US initial jobless claims for the week ended 1st September came in lower at 365k, as opposed to 370k expected and 374k previously. Continuing claims rose to 3.322mn, from 3.315mn previously;

US ISM non manufacturing came in at 53.7, better than the 52.5 expected and the 52.6 in July;

Brazilian inflation is creeping up. IPCA inflation rose to 5.24% Y/Y in August, from 5.20% Y/Y in July. OK, only slightly, but it is heading upwards and towards the top end of the Central Banks target of 4.5% +/- 2.0%. The Central bank is expected to cut rates further, in the Q4, by at least 25bps, down from the current historic low of 7.50%, though the last statement was far less dovish than previously, suggesting that interest rates may have to rise next year;


Markets liked  Draghi comments and are up significantly. Spain is up over 4.5%, whilst Germany is 2.9% higher. The S%P is +1.7% higher. The Euro, however, is off – currently US$1.2587. Gold has risen to US$1703, with Brent higher at US$114.70. Peripheral EZ bond yields are sharply lower. European financials are up materially. Basically, a risk on day.

The critical issue remains next weeks decision by the German Constitutional Court (12th September).

Kiron Sarkar

6th September 2012

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