Russian exports – oil, money and people

Bloomberg reports that the BoJ may increase its asset purchase programme, by Yen 20bn (have seen much higher numbers) at the next meeting on 30th October – the government has discussed the issue with the BoJ. In the past the BoJ has been staunchly independent and, in addition, it would be rare for the BoJ to be accommodative twice consecutively. Whatever, if the BoJ starts to stimulate the economy, the sums necessary will be much much larger than Yen20bn. Furthermore, reports circulate that the Japanese cabinet are to endorse a major stimulus package tomorrow – possible but how is it going to be financed?.

The Yen is weaker on the news, but if the BoJ does indeed pursue such a programme, the Yen is liken to weaken much further and faster. I remain short the Yen, against the US$ (indeed increased the position), currently 80.14, a 4 month low. On the other hand, the Nikkei is at a 4 week high. A weaker Yen is going to have a profound effect in South East Asia, in particular. The BoJ has started communicating in English. Mizhuo suggests that the BoJ may change the wording of its inflation commitment, from an inflation “target”, to an inflation “goal”, emphasizing its “commitment” to increasing inflation. There is a story running around that inflation will remain below 1.0% in 2014.


Japan will face its own fiscal cliff, reports the FT. The Japanese MOF is to hold crisis talks with bond dealers tomorrow as concerns run high over the oppositions refusal to allow the government to finance its budget deficit, unless elections are called. The government needs to borrow US$479bn to finance this years deficit. Unless the bill to allow the government to raise the finances is passed in 33 days, beginning next Monday, bond auctions will have to be scrapped for the 1st time in decades. The Japanese bond market is twice the size of the economy. The yield curve is rising, with the 10’s – 20’s rising to the highest since July 1999, according to Bloomberg. Political concerns, unless sorted out, will be a major problem for Japan and the Yen;

The Indian Central Bank, the RBI meets on 30th October and analysts speculate that the RBI will cut rates, possibly by 25bps to 7.75%. Recent government action to reduce subsidies on diesel, for example may well provide some opportunity to cut rates – however, its quite a finely balanced decision, though if not this time around, quite likely pretty soon.

I have been pretty negative on India for some time – however, if the government continues with its proposed reforms, I believe that India will prove to be the best of the BRIC’s;

South Africa has increased its 2012 GDP growth rate to 2.5% from +2.3% previously, though reduced 2013 to +3.0%, from +3.6% in February;

Russia is exporting oil, money and people, reports the FT. At the Valdai Discussion Club, a club where Russian President invites foreign economists and journalists, the discussion was centered on the decline of the Russian economy. With the economy growing by just half of the 7.0% previously, Russia has lost its attractions. Oil prices are unlikely to rise, oil output is expected to decline and consumer spending has slowed. Russia badly needs investment, but the prospects are poor and investors remain uncertain. Capital flight is increasing – ten’s of billions of US$’s each year. Worse still, the declining political support for President Putin, has forced him to grant “additional favours” to certain individuals, who are using the opportunity to rape and pillage even more. The number of better placed people wanting to exit the country is rising – just have a look at London – seems like little Moscow. Cant see any likely improvement in Russia unfortunately;

EZ plans to fix Greece have failed, reports Der Spiegel. The IMF believes that Greece will require an additional E20bn of funds – no chance. The Greeks have stated that the EZ will give it an additional 2 years. The EU/Germans have (sort of) denied that any decision has been taken, though not emphatically enough, which suggests that they have caved in. There is no way that Merkel can ask the Bundetag for more money for Greece, so I guess the 2 year extension is on. I do rate Mrs Merkel, but if she thinks that Greece will go away (by trying to push through the 2 year extension for Greece to meet its targets) until after her general elections in September next year, well…..Greece will never repay its debts and a haircut will be necessary, not only on private sector debt, but on the bail out funds, ex the IMF. In addition, the Greeks continue to change their mind on the austerity measures – they better grab what is currently offered, or……..;

Italian August retail sales (seasonally adjusted) were flat M/M, better than the -0.2% expected and the -0.3% reading in July. Italian economic data recently has been modestly better;

The Spanish head of Treasury reports that Spain is almost fully funded for this year and will start to fund its 2013 requirements. That suggests that Mr “ditherer” Rajoy will delay seeking a bail out for even longer – bad news. The bottom line is that Spain cannot survive even at these levels of interest rates. I continue to believe that Spain will, in due course, have to restructure its debts, which are rising rapidly to 100% sometime next year. Previous debt to GDP levels have been increased to deal with “creative accounting”, by the former administration.

There was some good news from Spain – bank deposits have increased for the 1st time in 6 months – bank deposits are also up in Greece (up by +1.0% in September at E154.33bn, as opposed to E153.39bn in August);

The IMF has warned that the downside risk to Portugal’s economic and fiscal risk is significant. It is clear that further austerity measures are having a negative impact, due to the fiscal multiplier being above 1.0 – someone please tell the German’s;

President Hollande wants to change the corporation tax system in France. Well, I’m sure he’s right, but can he implement the necessary changes – highly unlikely;


EZ September M3 (broad money) annual growth slowed to just +2.7%, a 5 month low, and below expectations of +3.0%. Loans to the private sector declined by -0.8% M/M, worse than the -0.6% expected. Y/Y annual growth of credit declined by -1.3%, worse than the -1.2% in August. Loans to non financials declined by -1.4%. The only sector where lending has risen is government – confirms that the EZ will continue to contract. The numbers support Draghi’s view which he expressed to Bundestag members yesterday, namely that deflation was a real threat for some EZ countries, as opposed to inflation;

UK GDP rose by +1.0% in the 3rd Q, on a Q/Q basis, much higher than the rise of +0.6% expected and the decline of -0.4% in Q2 – the fastest rate of growth since 2007. The services sector, which accounts for nearly 80% of the UK’s economy, rebounded strongly – by +1.3% in Q3 – all 5 sectors within services rose. The UK is out of recession. Y/Y, the UK economy was unchanged, much better than the -0.5% expected. However, the numbers were flattered by the Olympics and additional holidays in Q2. Having said that UK unemployment has been better than expected and, whilst the Olympics and additional holidays, the economic data supplied by the ONS seemed much worse than other data.

Analysts will question (indeed have) whether the BoE will increase its QE programme, but like the FED, I believe that the BOE will want to cement any recovery, in particular given the problems in the EZ. As a result, whilst they may be on hold in November, I continue to believe that they will increase their QE programme from £375bn at present. Sterling rose on the news Рcurrently US$1.6113 Рshould improve, especially against the Euro;

The Irish government reports that it has passed the quarterly bailout review by the Troika. In addition, they reported that they were confident to attain the deficit target of 8.6% for 2012. However, the Irish finance ministry suggests that its 2013 growth forecast will have to be lowered – the Troika suggests it will be +1.1% (+1.4% previously), and +0.5% in 2012, citing the external trading environment as the reason for the downgrade;

Intrade shows a sharp rise in the chances of President Obama returning as President – his chances have risen to just under 60.0%, from a low of just over 55% yesterday. Interesting. David Zervos of Jefferies, a highly rated analyst, states that a Romney win will be bad for US markets – I agree;

US initial jobless claims for the week ending 20th October came in at 369k, slightly lower than the 370k expected, though better than the revised 392k, the previous week. Continuing claims for the week ended 13th October were 3.254mn, slightly better than the 3.26mn expected and 3.256k the previous week;

US September durable goods orders came in +9.9%, higher than the +7.5% expected and the revised -13.1% in August. The more important durable goods, ex defence and aircraft came in flat, weaker than the +0.8% expected and the revised +0.2% in August. The weaker number suggests that US Q3 GDP will be lower;

US pending home sales came in a disappointing +0.3% higher M/M, much lower than the +2.5% expected, though better than the -2.6% in August. Y/Y, pending home sales were up +8.5%, as opposed to expectations of double that number;

80 CEO’s of large US companies have issued a statement urging Congress to find a compromise on the budget deficit. They state that tax increases are inevitable, whichever party succeeds at the polls and that neither can you tax your way out of the problem, nor cut entitlements by enough to fix the deficit. Quite a punchy statement, but clearly right.



Asian markets (ex China) closed higher, with the Nikkei up over 1.0% following speculation that the BoJ will expend its asset purchase programme. European markets closed flat on the day, with US markets lower. A rumour that Fitch would downgrade the US impacted markets, though Fitch have reported that they will review the rating in late 2013 ie denied.

The Euro is weaker at US$1.2959, with gold at US$1712 and December Brent at US$108.28.

I continue to believe that the Yen will weaken further, though am nervous as to whether the BoJ will ease policy for 2 consecutive months. However, the political situation is even worse than in Europe and the US – indeed, very similar to Greece !!!!.

USA 3rd Q GDP tomorrow.

I continue to believe that the currency markets offer better opportunities – still dislike, the Yen and Euro, in particular, and remain short. Sterling looks as if it has more to run in the short term.

Kiron Sarkar

25th October 2012

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