Japanese investors buying more foreign currency bonds

The Japanese MoF reported that net buying of foreign bonds by Japanese investors rose by 285% to Yen 15.2tr (US$183bn) this year to 17th November. Mr Abe’s, (the likely next Japanese PM), comments to raise inflation to 2.0% and weaken the Yen has resulted in investors buying foreign currency denominated debt. In addition, foreign debt is providing greater income than yields on Japanese JGB’s. This trend should continue, weakening the Yen, especially if Mr Abe becomes the next PM;

The US Treasury has deemed that China is not a currency manipulator, though added that the Yuan is “significantly undervalued” and that the “process of adjustment remains incomplete”. The Treasury stated that the Yuan had risen against the US$ and that the Chinese had reduced intervention and were moving towards a more flexible exchange rate regime. The report which was delayed notes that Chinese forex reserves have declined materially to around US$19bn per quarter, from an average of US$140bn per quarter in 2011. The decision was expected. The Yuan rose to a 19 year high yesterday;

The Chinese Minister of Commerce states that the country will achieve a GDP growth rate of +7.5% in 2012. If he says so, it must be the case;

Chinese markets are down around 16% YTD. However, EPFR, the fund flow research company, reports that money has been flowing into China for the past 10 weeks – not a great deal, just US$3.7bn, though a reversal from the US$2bn outflow between March to August this year. The Chinese authorities have been trying to attract foreign portfolio investment. Personally, I would wait for a bit longer. (Source FT);

Spanish October retail sales declined by -8.4% Y/Y, though better than the forecast of -10.0% in September and -12.6% previously;

The EU has approved the plans submitted by Spanish authorities to restructure 4 of its banks. As a result, Spanish banks will receive E37bn in aid from the ESM, with Bankia being the largest recipient (E18bn). Will it be enough – certainly not. Bondholders will share in losses, amounting to some E10bn;

The German Finance Minister admitted that the EZ would have to provide additional funding for Greece in coming years as long as Greece meets its obligations. A number of German newspapers have been critical of the deal announced yesterday. The Bundestag is expected to vote on the bail out this Friday. The opposition parties are expected to vote in favour of the bail out package, which will ensure its passage.

Interestingly, while the EZ expects the Greek economy to recover in 2014, the OECD expects the country’s economy to shrink by -1.3% that year (-4.5% in 2013), lower than the previous estimate of growth of +0.2%.

It is expected that the Greek government will announce details of the bond buy back on Monday;

German November provisional CPI came in at +1.9%, in line with expectations and +2.0% in October;

With Greece obtaining better terms, the Portuguese and Irish are clearly demanding similar treatment – cant see how the EZ can say no to a reduction in interest rates, at least, though clearly more will be expected;

The French President. Monsieur Hollande has threatened to nationalise ArcelorMittal, the 1st time the French have proposed nationalisation in 30 years. French politicians have voiced severe criticism of ArcelorMittal’s proposals to shut down steel plants in the country, with resulting job losses. Indeed, the rhetoric has been extraordinary;

The Senate majority leader, Mr Reid, stated that there was little progress on the US “fiscal cliff”. Here we go. Its back to the politics. Having said that, I continue to believe that a deal will be done, at, or more likely, just after the year end. US markets sold off on the report;

Outlook

Asian markets closed lower following last nights down market in the US. European markets are trading at lower levels as well. US markets have opened about -0.5% weaker, with US bond yields declining. Gold seems to have sold off sharply – currently US$ 1709, with January Brent at 108.67, off but still remarkably high.

The Euro declined below US$1.29 today – currently US$1.2892, off its lows.

Spanish bond yields continue to decline – they are at 5.47%, the lowest in a month. The market expects Spain to request a bail out, now that the regional elections in Catalonia are over. Should be Euro positive.

Pretty dull day today.

Still see no reason to buy the market, though will not reduce holdings.

Kiron Sarkar

28th November 20