Mrs Merkel expected to receive a warm !!! welcome in Athens tomorrow

Chinese services PMI rose to 54.3 in September, from 52 in August, according to HSBC/Markit. The official services PMI data came in at 53.7, lower than August’s 56.3. The HSBC data suggested that new orders rose at the fastest pace in 4 months, with employment rising. However, input price inflation also increased. Bloomberg reports that the services sector accounts for 43% of the Chinese economy, as opposed to 90% in the US, which the Chinese authorities want to raise to 47% by 2015, according to the Xinhua news agency;

The World Bank has reduced E Asian growth to +7.2% this year ( down from +7.6% in May), from +8.3% in 2011 – still too optimistic. The IMF is likely to reduce its growth forecast at its annual meeting in Tokyo tomorrow.

Reports of industrial strife at Foxconn’s plants in China. A number of businesses are thinking of relocating their operations out of China – the country is no longer the lowest cost producer.

Chinese home prices are rising, albeit marginally, though for 3/4 months. However, inventory in the Tier 1 cities seem to be reducing and local governments are benefiting from increasing sales of land;

Japanese auto sales in China are collapsing, following the dispute over certain islands in the South China seas. Korean manufacturers have gained materially – Hyundai’s sales rose by +9.5% Y/Y. Nissan’s sales, on the other hand, collapsed by 35% in September, as did Mazda’s;

It looks as if Iran’s currency, the Rial is collapsing, with inflation soaring in the country. The sanctions are really having an impact. Cant see the Iranian economy improving, though Iran has significant forex and Gold reserves (US$70bn usable and 900 tons of gold), which will forestall an imminent collapse. The urban population, where most of the opponents to the current regime are based, are suffering, though the rural populations (supporters of the current regime) receive subsidies and are unaffected, at least for now. However, the effect of the sanctions may well stay possible military action by Israel, at least for a while;

The Bundesbank has taken a swipe at the IMF, stating that the fund should not overstep its responsibility by suggesting proposals to deal with the economic challenges. I don’t think Mrs Lagarde will pay any attention;


The Euro Group finance ministers meet today. Still no solution on Greece, though Mrs Merkel is flying to Athens. Its clear that Mrs Merkel wants to help out Greece (certainly ahead of general elections in Germany in autumn next year), whilst her Finance Minister remains sceptical. I suppose Mrs Merkel does not want to explain to the Bundestag/a number within her own coalition, as to why funds provided by EZ countries needs to be restructured ie are unrecoverable. Having said that the risks continue to rise. Will Greece agree and then stick to its commitments – if you believe that, well……The opposition party (Syriza) is proposing that Greece default etc and is waiting in the wings. This situation will not hold, as the EU/Germany believe. Mrs Merkel will find it difficult, if not impossible, to provide further assistance for Greece, which they will need. Indeed, Mr Kauder, head of Mrs Merkel’s CDU has stated that there will be no Parliamentary majority for further aid to Greece. Finland and Holland will not play ball either. Going to be interesting.

Still no deal on Spain either. PM Rajoy wants to wait for the impending regional elections at least and Germany wants all countries who need a bail out to be dealt at the same time, to avoid further problems with her Parliament. Mr Schaeuble stated that Spain does not need a bail out programme – really !!!!!!;

Credit Suisse reports that there has been a sharp fall in Spanish Target 2 libailities in September. The ECB’s OMT seems to be having a positive impact, with material capital inflows into Spain last month – the 1st time that’s happened for a very long while. In addition, a number of funds are believed to have been buying Spanish, Italian and Portuguese debt, in particular. This is, indeed, good news if it continues;

EZ sentix investor confidence index came in at -22.2 in October, better than -23.2 in September, though weaker than the -20.8, forecast by Reuters;

The head of the ESM Mr Regling reports that the fund is up and running with a capacity of E200bn at present – the eventual size is expected to increase to E500bn, though likely more as the ESM leverages itself. He also talked about first loss guarantees – seems that they are looking at “guaranteeing” the return of principal of applicable EZ peripheral debt;

German August industry output declined by -0.5% in August M/M (+1.2% in July), though better than the forecast of -0.6%. Y/Y, production declined by -1.2%. The current forecasts for Germany remains somewhat optimistic and further downgrades are likely. The German economy minister reported that factory orders declined by -1.3%, though exports rose by +2.4% in August, the 2nd consecutive monthly rise, well above the -0.6% decline expected. The German economy is likely to stagnate, at best, for the 2nd half of the year;

A crisis between the UK, in particular, and the rest of the EU looks as if it will escalate. The British PM has threatened to veto the proposed increases. The EU is looking to increase its budget – well the price of caviar and Champagne gas gone up after all !!!. The EU is isolated given the politics in the EU. A 2 tier system is likely, with those in the Euro contributing more, whilst those outside, such as the UK, less. Given domestic politics and increasing EU scepticism in the UK, Mr Cameron cannot agree to a higher budget;

The UK’s Office for Budget responsibility (“OBR”) looks as if it will advise the UK government that it will need to plug quite a large gap in public finances – some Sterling 15bn. As a result, the current austerity measures will need to be in place till 2018. Whoops – not going to go down well. (Source FT);

The initiative by the Chinese telecoms equipment manufacturer, Huawei, for US authorities to review their business looks as if its backfired. The US House Committee on Intelligence stated that risks associated with Huawei and a smaller company ZTE “could undermine core US national security interests”. A definite whoops;

President Hugo Chavez won the Presidential election in Venezuela – no great surprise, but he remains President for 6 more years – oh dear. However, Mr Chavez is ill and had to undertake extensive surgery recently. His opponent took only 45% of the vote. Polls prior to the elections, suggested that his opponent, Mr Capriles was neck and neck with Chavez. Whatever, the Venezuelan economy is tanking and change will happen, sooner rather than later;


Gloomy day today as Asian markets turned lower on a weaker economic outlook and European markets sold off on recurring concerns with the EZ peripheral debt crisis. US markets are weaker. The Euro is weaker at US$1.2984. Gold is trading at US$1775, with oil at US$111.62, off as well, though still far too high.

Negative news around. No real impetus to buy the markets. Complacency remains, with the VIX at 15.31, though nearly 100bps up from Fridays close.

I just don’t believe that the current calm in the EZ will hold – yes winter is coming which suggests fewer demonstrations, but by next spring…..There are some positive aspects in the EZ it must be said – the current a/c’s of countries such as Greece and Spain are improving dramatically, though mainly due to lower demand. However, their debt positions remain unsustainable. Playing for time is the name of the game, though without some growth, this policy looks as if it is past its sell by date. However, with the major Central banks pumping liquidity into the system and ready to act further if necessary, its difficult to short.

Much better to play the currencies – still don’t like the A$, Rand and Euro. Continue to watch (even more closely) the Yen.

A very good friend of mine, Vicky Pryce, who was one of the chief economists for the UK government, amongst numerous other achievements, has written a book on the Greek crisis. The title is “Greekonomics The Euro crisis and why politicians don’t get it”. Vicky and I, it must be said, do not necessarily agree on Greece (we normally agree on most issues), but she makes compelling arguments to support her case. In addition, I nearly always read the views of people who differ from mine – far better in my view. Its a great read and I certainly would recommend it highly.

Still in New York – will be her for another week at least. The US remains the best dirty shirt around, as Mr Gross of PIMCO puts it. Personally, I believe that the US, assuming the fiscal cliff issues are dealt with, is doing (much?) better than people think. The residential housing market remains the key.

Kiron Sarkar

8th October 2012

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