Moody’s cuts France’s AAA rating 1 notch, outlook negative

RBA minutes suggested that “further easing may be appropriate”, as the mining boom slows, though added that “current monetary policy stance is appropriate”. On balance, it sounds like a rate cut is on the cards next month – a nice Christmas present.The RBA added that the slowdown of China was more material than previously expected and that Australia’s terms of trade could fall by 15% next year. Hmmmm. The governor questioned the strength of the A$ – yep, seems illogical. For full disclosure purposes, I remain short the A$.

The IMF is expected to classify the A$ and the CAD as reserve currencies;

Nikkei news reported yesterday that the LDP is considering changing the law to make the BoJ less independent. Well no new news, they have been suggesting the same think for over a week, but the Yen fell on the news. More importantly, the new Japanese Restoration Party established by the Mayor of Osaka, Mr Hashimoto, wants to curb the BoJ’s independence, as well. His party has some support from some 22% of voters, according to recent polls. It is likely that the LDP and the Restoration Party will team up. Japanese policy is also going to get more nationalistic – not good news in respect of dealings with China;

The BoJ kept its monetary policy on hold, as expected, after easing in September and October. The BoJ was pretty dovish in its statement, highlighting the “high degree of uncertainty” of the domestic economy. In addition they acknowledged that output, the export sector and capex remained weak. The statement suggests further easing, possibly as early as December. The FT reports that Mr Abe, the head of the current opposition party ( though expected to become PM in the next government) is expected to revise the Bank of Japan Act to reduce the independence of the BoJ (possibly, inter alia, by setting an inflation target jointly with the BoJ), which will be contained in its election manifesto, to be published tomorrow. The new government is set to chose the candidates for the top 3 posts at the BoJ which, together with 2 private sector candidates on the BoJ board at present, will ensure that 5 out of the 9 members will favour aggressive monetary easing – expect an ocean of money printing in the new year.

The present Governor, Mr Shirkawa states that an inflation target of 3.0% is “unrealistic”. Mr Shirkawa highlighted the importance of Central Bank independence, adding that it would be reckless for the BoJ to underwrite government debt – indeed he added that no major Central Bank pursued such a policy, as it would be tantamount to pure money printing. He warned that money printing would result in an increase in interest rates, which would be a major headwind for the Japanese economy. I totally agree with Mr Sharikawa, but Japanese politicians are clearly of a different mind. The Nikkei closed flat today, ending its recent material rise over the last few days. The Yen rose on the lack of further easing measures, but remains fragile. Unless, the prospects of an LDP win wanes, or has to form a coalition with the DPJ (both unlikely, based on current info), I believe that the Yen will weaken materially. For full disclosure purposes, I remain short the Yen;

FDI into China declined for the 11th time in 12 months in October. FDI was -0.2% lower Y/Y at US$8.31bn. For the 10 months to October this year, FDI has declined by -3.5% to US$91.7bn, whilst outward investment rose by 25.8% to 58.2bn, in that period. With the political problems with Japan, FDI should decline materially in coming months;

The Indian Parliament resumes this week and the PM faces opposition to a number of his proposals to reform the economy. The Trinamool Party, a former member of the ruling coalition, has called for a vote of no confidence over plans to allow foreign supermarket chains to have a majority stake in retailers. The current view is that the government will survive. However, will the government be able to pass all the reform measures proposed – unlikely;

Moody’s cut France’s AAA rating by 1 notch to Aa1, with a negative outlook, following S&P which cut France’s rating in January this year. The rating was reduced due to “multiple challenges, including its gradual sustained loss of competitiveness and the long-standing rigidities of its labour, goods and services markets”. Moody’s also highlighted France’s exposure to the peripheral EZ countries. In addition, they added that France’s fiscal outlook was “uncertain” and is sceptical of the country’s ability to be able to cope with “future Euro area shocks”. Moody’s also questioned the country’s implementation (of structural reforms) record and its economic forecasts for next year, which it believes are “optimistic”. Ominously, Moody’s stated that they would downgrade France further (likely) if it faced substantial economic or financial shocks arising from the EZ. Fitch remains the only agency to rate France AAA. The news should not have come as a surprise, which is why markets have not reacted too negatively. The French government’s response is that France is and will continue to take the measures necessary – based on past history this seems (highly?) unlikely. I have been banging on about France for some time and remain amazed that the country’s bond yields have not moved closer to equivalent Italian yields. One side effect is that the downgrade will negatively impact the rating of the EFSF/ESM;

Well at least Portugal is coming clean. The Portuguese authorities forecasts that its economy will contract by -3.0% (yes that’s -3.0%) next year, and bounce back to growth of +0.8% in 2014. Debt to GDP will rise to 122% in 2013. Still believe that Portugal can avoid having to restructure its debts?;


Asian markets (ex China and Japan) rose today, following yesterdays firm US markets, which closed +2.0% higher and at their days high. However, the Shanghai Composite declined to a near 2 month low. European markets have shaken off the French downgrade, as it was expected and are flat to modestly higher.

The Euro has not been affected by France’s downgrade – currently trading higher at US$1.2812. Gold is up at US$1734, with January Brent at US$111.57. The VIX declined to 15.24, over 7.0% lower yesterday – seems pretty complacent.

The EZ finance ministers meets to try and agree some fudged compromise on Greece today. Lets see what the IMF has to say. I continue to believe that these ludicrous schemes will fail, especially as Greece is unlikely (for whatever reason) to live up to its commitments. Analysts remain pretty sanguine – amazing in my humble view. Interestingly, just read some reports in the German press which confirms a story I reported some time ago – namely that Germany is considering providing Greece with an additional E14bn in aid. How are they going to sell that to their own Parliament, let alone the Finns and Dutch?. Maybe they can get the money from the EU, as it has a huge amount of unspent funds and yet wants a (materially) larger budget !!!.

If the LDP does indeed issue an election manifesto which undermines the BoJ’s independence tomorrow, as speculated, the Yen should decline further.

Whilst I had markets to bounce back from oversold conditions, yesterdays sharp rise was too much too fast in my humble opinion. I will remain on hold. I remain of the view that currencies offer better opportunities.

Kiron Sarkar

20th November 2012

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