EZ Fudge on Banking Union

An adviser to the PBoC forecasts that inflation in China will fall to just 1.0% in Q1 next year. Does not suggest a robust economy if that’s the case, boys and girls. I continue to believe that a stimulus programme is coming, most likely in Q1 next year;

FDI into China fell the 10th time in 11 months reports Bloomberg. FDI amounted to US$83.4bn for the period to September this year, some -3.8% lower than the comparable period last year. FDI should decline far more sharply in coming months;

Spanish home prices declined by -2.4% in Q3 Q/Q, slightly better than the -2.8% expected and the -2.5% in the previous Q and nearly 10% lower Y/Y. I really don’t understand why anyone bothers about this nonsensical data. Actual prices are at least 25%+ lower;

The Spanish PM, Mr “ditherer” Rajoy stated that Spain may not need a bail out. 2 year yields rose 8bps on the statement. With the ECB backstop, Spain has more time and, in addition, has financed most of this years requirements. However, with no recap of Spanish banks imminent, its going to be tough in coming months. The IBEX is down about -1.7% today. The Baleric Islands is the latest regional administration which has asked for a bail out from the Spanish central authorities;

The EU Heads of State meeting agreed that the EZ would agree to a framework for banking union by the year end – more likely early 2013. However, the details will need to be sorted out next year, which suggests that it will be 2014, before this is in place. France and other countries were pressing for a more rapid solution, but Germany wants a more considered (ie delayed) process. It looks as if the ECB will supervise the more systemically important banks, rather than all 6000 banks – yet another win for the Germans. However, the ECB would have the power to intervene in any bank if necessary. The really important issue is that bank recaps will not happen until the supervision is in place ie Spanish banks will not get their money until late 2013 – conveniently after the next German general election?. Pure coincidence off course – yeah, just spotted a flying pig;

President Hollande of France states that France and Germany have a collective responsibility to help the EZ exit the crisis. What he really means is that France is bust and Germany please can you open up your cheque book, before markets realise how bad France really is. The relationship between Mrs Merkel and Mr Hollande seems to be worsening – the body language says it all;

UK public sector finances improved in September. The public sector net borrowing was £12.8bn in September, £0.7bn lower than the same month last year and the lowest since 2008. Total borrowing for the current fiscal year is £2.7bn higher than the corresponding period last year, totalling £65.1bn. However, the UK government is unlikely to meet its target for borrowings to be a max of £119.9bn for the current fiscal year, though income flows have started to accelerate recently. The details of the tax revenues suggests that employment is picking up, confirming the recent data and, once again, questioning the more bearish ONS data;

US leading indicators came in +0.6% higher M/M in September, higher than the +0.2% expected and -0.1% in the previous month. The reading rose the most in 7 months. The Conference Board’s outlook for the next 3 to 6 months rose by +0.6%, much better than the decline of -0.4% in August. Improving markets and home prices were probability the reason for the recovery;

The Philly FED index came in at +5.7, as opposed to +1.0 expected and a prior reading of -1.9. However, new orders were -0.6, as opposed to +1.0 and employment -10.7, versus -7.3 previously. Shipments and inventories were much better. The important 6 month capital expenditure outlook was -1.9, as opposed to +4.8 expected. The detail of the data suggests a much weaker picture than the headline number. In addition, the employment index suggests a weaker October NFP number;

US September existing home sales came in at 4.75mn on an annualised basis, in line with expectations, though below the 4.83mn rate in August.


Asian, European and US markets are lower. The Euro is weaker at US$1.3043, following the lack of progress at the EU Summit – cant see much support for the currency. Gold is trading around US$1733, with Brent (December) at US$112.54.

The lack of progress on recapping European banks is a concern and are weighing on financials today. Disappointing earnings by Google, McDonald’s and GE are not helping either.

Just listened to an interview by Ms Edith Cooper who is an HR person at Goldman’s – defending GS against statements by Mr Greg Smith – remember he was the GS guy who suggested that GS executives called their clients “Muppet’s” and has written a book. She makes Goldman’s sound like a cuddly teddy bear !!!!. However, her description of an investment bank is somewhat (OK, completely different) from reality. Interesting to see Goldman’s defending itself in public – must be getting more self conscious.

Have a great weekend.

Kiron Sarkar
19th October 2012

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