Now China announces a major stimulus programme – another risk on signal

Here comes the increased Chinese fixed asset spending/ stimulus programme. The authorities have approved 30 infrastructure projects (road building, sewage plants, ports warehouses and upgrades to waterways), adding to the 25 rail projects already approved, with an estimated capex spend of US$157bn -though well below the stimulus of US$586n in 2008/9. The Shanghai Composite Index rose by +4.5% today, the most since October 2009. Finally, the Chinese are beginning to act – they had no choice. President Hu is to speak at the APEC conference (7th to 9th September). The title of his speech is “Promote infrastructure investment, achieve sustainable growth”. You still want to be sceptical? – in the short term, certainly dangerous in my humble view – Time to look at the miners, me thinks? – they have been badly mauled recently. Also, with the A$ appreciating, (for a while?) time to close shorts ?, though I still believe its seriouly overvalued;

The Australian building construction index fell to 32.2 in August, from 32.6 in July, the fastest pace in 11 months. Construction of apartments collapsed (to 22.1, from 32.9), and engineering declined (to 35.7, from 39.5), though house building rose (by 3.5 points to 31.5) as did commercial construction (by 7.9 points to 34). New orders declined by 5.8 points to 28.1, though employment rose by 3 points to 35.4. (Source Bloomberg);

Australian July trade balance came in at -A$556, much higher than the deficit of -A$300mn expected. The June trade deficit was revised higher to -A$227, from  a surplus of +A$9mn previously. Exports were -3.0% lower to A$25.757bn, while imports declined by -1.0% to A$26.313bn;

Spanish officials state that Spain will not be forced into a bail out, until the conditions are clear. Well, they must have a fair inkling of the conditions following Mr Draghi’s comments today.  Adherence to targets/conditions, established by the IMF (Troika?), together with on going verification, looks certain. Interestingly, Spain will miss their (increased) budget deficit target this year – of that there is no doubt. The charade will continue, but President Hollande is pushing Spain to request a bail out in October (or earlier), at the EU heads of State meeting. In any event Spain, has a major fund raising programme in October and will need funding. Mr Rajoy pledged, prior to being elected, that he would ensure that Spain avoided the fate of Greece, Portugal and Ireland – errr, maybe not. During Mr Rajoy meeting with Mrs Merke yesterday, Mrs M expressed support for Draghi, saying that the ECB’s decision fell “within the framework of its mandate” – not what the Head of the Bundesbank, Mr Weidmann believes – he was the sole dissenter at the ECB yesterday. However, Mrs Merkel continues to support both Mr Draghi and Mr Mr Weidmann, including their views – yep, I don’t get it either – it must be a German thing !!!!. She added, that the ECB could “not replace political action”, including the need to press ahead with structural reforms. Mr Asmussen, te German on the 6peson ECB executive board, stated that countries will have to agree to “hard reforms” if they wanted the ECB o buy bonds – so there Mr Rajoy !!!!;

Spanish industrial output declined by -5.4%, worse than the -5.2% expected though better than the -6.1% in June;

The OECD forecast for the Germany, France and Italy for the current year has been cut to +0.8%, +0.1% and -2.4% respectively, down from +1.2%, +0.6% and -1.7% previously. Yesterday, the ECB reduced its GDP forecast to between -0.2% and -0.6% for the current year and -0.4% and +1.4% (pretty wide range) for 2013;

The OECD forecasts that the UK economy will contract by -0.7% this year, well below the +0.5% increase expected in its May forecast. Pretty pessimistic stuff and unlikely to be so bad in my view;

Germany’s July current account and trade surplus exceed expectations. The current account surplus came in at E12.8bn M/M, though lower than the (upwardly revised) E18.5bn in June. The trade surplus came in at E16.9bn, higher than the E15.3bn expected, though lower than the E18.0bn in June. German exports unexpectedly rose by +0.5% in July M/M, as opposed to the -0.5% decline expected. Imports rose by +0.9%;

German Industrial production soared in July by +1.3% M/M, as opposed a flat reading expected and the (upwardly revised) -0.4% in June. Its those Germans again- the rest of the world must be jealous;

Interestingly, a poll reported in the German magazine Stern, reveals that 42% of Germans have little or no confidence in ECB President, Mr Draghi. Only 18% trusted him, whilst 31% said that they did not know him and 9% had no opinion. Hmmmm – not very flattering;

Set out below a string of UK economic data – pretty positive:
July Industrial production +2.9% M/M, much better than the +1.5% expected and June’s decline of -2.4%:
July Manufacturing production +3.2% M/M, much better than the +1.8% expected and the decline of -2.9% in June:
August Output PPI +0.5% M/M, higher than the +0.2% expected and the flat reading in July and +2.2% higher Y/Y – impact of higher petroleum products:
August Input PPI +2.0% M/M as opposed to the +1.7% expected and July’s +1.3% and +1.4% higher Y/Y:
UK construction orders rose by +0.2% in Q2, or +11.1% Y/Y:
The ONS reports that the Olympics boosted UK GDP by +0.2%
The much better data, reflects the weaker June data due to the pubic holiday for the Queens Jubilee, it must be said;

ADP reported yesterday that 201k private sector jobs were created in August, much higher than the 140k expected. The services sector increased employment by 185k, most of which were from small and medium sized businesses. However, The ADP report does not normally tally with the NFP data to be released today – estimates are that the NFP data will reveal that 130k jobs were created, though the whisper number is higher – in the 150k range;

Glencore conceded and has improved its offer for Xstrata –  no great surprise, in spite of all the huffing and puffing by Glencore – its initial offer was too low. The offer does not meet the demands of the Qataris – await expectations;


Asian markets reacted positively to the ECB statement, the Chinese capex programme and the better US data yesterday. The MSCI apex 50 index closed +3.20% higher. Data released by EPFR (w/e 6th September) reports that EM bond funds are attracting more inflows than EM equity funds – indeed, equity funds suffered a modest outflow – likely to change in coming weeks.

European markets are materially higher, though the FTSE is lagging. Italy is up over +2.25%, though Spain is less than +1.0% higher – down from its morning highs. The Spanish reluctance to accept the inevitable, I expect, being the reason. US futures suggest a modestly higher open – waiting for the US NFP data – however, would have thought it would have been better.

Gold is down to US$1694 (ECB sterilising bond purchases ?), with Brent (Oct) at US$113.84, in spite of a weaker US$ – currently US$1.2693 against Euro.
I don’t want to be party pooper, but we still face the German Constitutional Court decision next week though, for the moment, its RISK ON.

Have a great weekend.

Kiron Sarkar

7th September 2012

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