Spain to request a full scale bail out, finally?

The Australian central bank, the RBA, cut interest rates by 25bps to 3.25%, as I had expected – the lowest since 2009. The news, which was not forecast by the majority of analysts, has weakened the A$, currently US$1.0307. The RBA added that they wanted to stimulate demand outside of the mining sector and, in addition, that “The peak in resource investment is likely to occur next year and may be at a lower level than earlier expected”. Australia’s economy is materially dependent on China (roughly a quarter of its exports go to China) and with a slowing China…….Mr Stevens, the RBA governor reported that “Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago”. The RBA may well cut rates further this year, quite possibly as early as next month, though most likely in December;

The Japanese economy minister Mr Maehara is threatening to buy foreign bonds to weaken the Yen and to create inflation of 1.0%, the target set by the BoJ. He added that the government will be more vigilant of the BoJ’s actions. At present its just talk, but the Japanese will be forced to act soon. I keep watching the Yen, but will not short at present. However, in due course……;

South Korean inflation rose to +2.0% Y/Y in September (+0.7% M/M), from +1.2% in August, higher than estimates of +1.8%, due to higher food costs as a result of typhoons, but is at the banks minimum target of +2.0%, suggesting that central bank will cut rates this month. With a country dependent on exports – which are tanking, the authorities have little choice, other than to ease. September PMI fell to 45.71, from 47.5 in August, confirming the severe downturn facing the economy;

Negotiations between the Troika and Cyprus have broken down. The Cypriots, who are lead by a Communist Party, are seeking a bail out from the EZ and are threatening to leave the Euro if the terms are too tough.They are also talking to the Russians to provide aid on suitable terms – good luck. Basically, its those Greeks again;

Talks continue between the Troika and the Greek authorities to resolve further austerity cuts deemed necessary. Apparently, the Troika has requested “clarification” on certain issues (some E2bn of alleged savings proposed by the Greeks) – basically diplomatic language for get real and stop the playing games. Well, no surprise – after all, it is Greece. More comments from German’s that Greece will need more aid – looks like the German’s are going to try and help. That’s going to be interesting, given the reluctance of the Dutch and the Finns to continue to bail out the country;

Moody’s report that Spanish banks need E70bn to E105bn in new capital to maintain the capital ratios of its banks above the targets it set last year. The Spanish believe that E53.7bn will be sufficient, a figure reported by their advisers Oliver Wyman. Whether even E105bn will be sufficient is questionable – what’s clear however is that Spanish banks need a lot more than E53.7bn though. Messers Wyman used a core capital ratio of just 6.0% under stressed conditions, rather than the 8% to 10% used. Ireland, for example, used a 9% core capital ratio. The Spanish are unwilling to seek additional funds as they do not want their debt to GDP ratio to increase even further. However, the bottom line is that the current debt load is unsustainable and Spain will need to restructure its debts in due course, most likely;

The French bank Credit Agricole’s foray into Greece has cost it E9bn. Credit Agricole is to sell its its Greek bank Emporiki for E1, yep that’s E1 – no typo. In addition, they are to inject E550mn of capital ahead of the sale and will subscribe to E150bn in convertible bonds to be issued by the purchaser, Alpha bank;

It looks as if the Spanish authorities have finally come to their senses are are to request a bail out from the EZ in the near future. However, Germany has asked the Spanish to hold off, preferring to deal with all of the countries that require a bail out at one time (Greece, Cyprus and Spain), rather than one at a time, due to possible problems with the Bundestag. In addition, the Germans are conscious that they have just agreed to a E100bn bank bail out facility for Spain. Not at all sure that Spain can wait, though. Spanish unemployment rose by +1.7% M/M in September, increasing the total unemployed to 4.7mn – Spanish unemployment is around 25%. Mr Rajoy is testing sentiment in the 17 regions before deciding on how to proceed;

EZ August PPI rose to +2.7% Y/Y` (+0.9% M/M), above +1.8% Y/Y in July and forecasts of +2.6% – higher commodity costs and tax increases, basically;

German newspapers allege that Mr Draghi’s/ECB’s plans to buy short term peripheral debt could be illegal – a view expressed by Mr Weidmann or Mr Weirdmann, as I prefer to call him – who is seeking a legal view. I understand the arguments, but (I stress I’m no lawyer) I don’t believe that they will be upheld;

The US ISM factory index unexpectedly rose to 51.5 in September, from 49.6 in August and well above the forecast of 49.7. The new orders component rose to 52.3, from 47.1 in August, a 4 month high. The employment component also increased materially to 54.7, from 51.6. However, prices paid rose to 58,.0 from 54.0. The better US numbers are in stark contrast with equivalent data in Asia and Europe and also are much better than weaker recent US economic data;

Mr Bernanke reiterated that the FED would hold rates at low levels into mid 2015, though stated that he did not expect the economy to be weak up to that date. He emphasized that inflation had not risen and that expectations of future inflation levels “remain quite stable”. He reminded politicians that they had responsibility for fiscal issues ie deal with the fiscal cliff problem, boys and girls. Mr Paul Volcker confirmed that he did not see inflationary problems, as yet;

Bloomberg reports that the lack of interest in buying derivatives to protect against possible inflation has not materialised, suggesting that a material rise in US inflation is not expected over the next 6 months at the very least. I very much believe that alarmist comments of rising inflation in the US, following the easier policies by the FED, is unwarranted. Longer term bond yields have also declined, not what you would expect if investors fear impending inflation;

US construction spending declined by -0.6% in August, the 2nd consecutive monthly decline. August’s data was revised higher though. The decline was due to lower non residential spending;

J P Morgan has been sued for allegedly defrauding investors who have allegedly lost more than US$20bn on MBS’s issued by Bear Sterns. The New York attorney-general stated that Bear Sterns “had committed multiple fraudulent and deceptive acts in promoting and selling” MBS’s. Together with J P Morgan, Goldman’s and Wells Fargo have also received notices from the SEC, warning them that they may face civil charges for alleged failure to provide information to investors on the quality of the loans, including delinquency rates and defaults;


A number of Asian markets were closed today. The rest closed flat to marginally higher. European markets are trading somewhat higher. US futures suggest a higher opening. November Brent is trading around US$112.31, with gold at US$1781. The Euro is up above US$1.29 today – cant understand why. I remain short. The A$, though is weakening – I remain short.

EZ peripheral bond yields are lower on expectations that Spain will seek a bail out shortly, which will enable the ECB to buy short term Spanish debt.

Whilst central bank policy action is supportive, markets are likely to drift and don’t look terribly exciting, ex, as usual, geo political risks. Yes, the US earnings season is just around the corner, but markets are really moving on Central Bank and government policy action, rather on fundamentals. Closed my mining shorts, though retain my European (mainly UK) financials.

Cant see China doing anything ahead of the confirmation of the leadership at the Congress commencing on 8th November. However, the Chinese will want stability ahead of the Congress and have the tools/firepower to play their markets – they have control of significant funds, which they could use. Subsequently, I continue to believe that the Chinese authorities will have to embark on some kind of stimulus programme – their economy is declining, I believe, far faster than most think. However, I remain increasingly bearish on China, in particular, in the medium to longer term.

Kiron Sarkar

2nd October 2012

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