More positive commentary for the US “fiscal cliff”

Australian Q3 business investment rose by +2.8%, Q/Q, higher than the +2.0% expected. However, prospective data is likely to confirm further weakening. I remain short the A$, against the US$ and have increased my short;

Output at Toyota’s Chinese plants slumped by 61% in October, with Honda down 54%. However, sales appear to be picking up this month. The future problem, however, is that Japan (if Abe becomes PM) will become more nationalistic and further confrontation with China is likely. I remain short the Yen, against the US$;

Japanese retail sales declined by -1.2% Y/Y in October, the most in 11 months, well below the -0.8% Y/Y expected and a reversal of the +0.4% rise in September;

Seems like a never ending story – Chinese stocks declined yet again. However, I would be reluctant to short at these levels. If anything, in spite of being bearish on China for some 3 years, I believe a bounce in Chinese equity markets in coming months is more likely. As usual politics in China is the most important factor. The new regime takes over in March and I will be reading their comments, particularly carefully;

The Indian Government is to allow MP’s to vote on plans to allow majority ownership by foreign retailers of multi-brand products. No big deal, most would believe, but it has been a major bone of contention in India. It looks as if allies, including some regional parties, will not vote against the proposals. If they do vote against (deemed unlikely), it will be a major setback for the reform plans announced by the finance minister/PM. The PM had to call a vote as the opposition had stalled Parliament. The Indian equity market has been firm recently (up +1.8% today), suggesting that the measures will be passed. The Rupee, which has been particularly weak, rose the most in 2 months and I would expect the trend to continue, as well as the markets;

Greek Central Bank emergency lending to their banks rose to E122.79bn in October, as opposed to E100.64bn at the end of September;

Moody’s reports that the level of Greek debt will remain unsustainable, even after the most recent “deal” with the EZ/IMF and that a default is likely in due course. Well, of course its unsustainable – simply cannot understand why the EZ, in particular, thinks otherwise.

Greek bankers are objecting to the proposed debt buy back. Greek banks hold some E15bn of Greek debt, with pension funds holding E8bn of bonds. However, the government is likely to use a fair amount of arm twisting to force these banks to accept a debt buy back, details of which are expected to be released next Monday;

German November seasonally adjusted unemployment rose by +5k, to 2.939mn, less than the +16k expected, but the 8th consecutive monthly rise. The unemployment rate was unchanged at 6.9%. Expect unemployment to continue to rise, ex seasonal factors, though to put it into perspective it remains at a near 2 decade low. However, the view that private consumption will take over from exports and production, is misguided, in my humble view. Counter intuitively, rising unemployment may be positive – the German authorities may well back off their “hair shirt” policies, in particular, as general elections are due next September;

EZ November final consumer confidence came in at -26.0 in line with the initial estimate. The economic confidence index came in higher (85.7, as opposed to 84.5), as did industrial confidence (-15.1, as opposed to -17.1) together with the services component (-11.9, as opposed to -12.5) and the business climate indicator (-1.19, as opposed to -1.60);

The Irish unemployment rate declined marginally to 14.8% in Q3, from 14.9 in Q2. Of more significance, the volume and value of mortgage approvals rose by +27% M/M, though a better and more meaningful data point is that mortgage approvals increased +14% Y/Y. However, the increase is off a very low base, lending standards are tightening and short term stimulus measures end at the end of the year. The government is likely to extend these measures in the forthcoming budget, I would have thought. (Source Goodbody);

US October new home sales fell by -0.3% coming in at 368k M/M, lower than 390k expected and a downwardly revised 369k in September. The decline was concentrated in the Northeast (hurricane Sandy effects) and the South. Disappointing, but the median sales price rose by +5.7% Y/Y;

After the negative comments a few days ago, US House speaker Mr Boehner appears willing to agree to revenue increases, as long as their are spending cuts as well. He added that he was optimistic that a deal could be done. A US Senator reports that Republicans and Democrats are just US$23bn apart. Interestingly, the WSJ reports that the White House is flexible on the level of top rate tax. There are reports that the Democrats may propose a 1.5% wealth tax. I continue to believe that this will take time to settle. Having said that President Obama hopes to do a deal before Christmas, stating that more Republicans are willing to agree to a “balanced approach”;

The FED beige book reports that US economic activity expanded at a measured pace in recent weeks. Activity was slower due to Hurricane Sandy. Retailers were more optimistic, though wage and price pressures were subdued. They remain cautious about employment, adding that there was only a “modest improvement in hiring”;

John Hilsenrath, a FED watcher at the WSJ, advises that the FED is likely to continue its bond buying programme into 2013. The FED has been buying some US$40bn of MBS’s per month and this programme is likely to continue. Operation Twist ends in December and many FED officials want to continue the programme;

The 2nd reading of US Q3 GDP came in at +2.7%, slightly lower than the +2.8% expected, though well above the 1st reading of 2.0%. Inventories and trade contributed the most to the rise. One worrying data point – consumption was +1.4% as opposed to +1.9% expected. Business investment came in -2.2%, worse than the -1.3% expected, though election and fiscal cliff concerns impacted – likely to reverse next Q. Core PCE was +1.1% Q/Q, lower than the +1.3% expected;

US initial jobless claims came in at 393k, in line with expectations of 390k, though lower than the revised 416k for the previous week. Continuing claims were 3.287mn, lower than 3.325mn expected and a downwardly revised 3.357mn previously;

US October pending home sales rose by +5.2% better than the +1.0% expected. Y/Y sales rose by 18.0%, as opposed to a revised +8.7% Y/Y in September and +8.9% expected;

The Brazilian finance minister Mr Mantega states that Q3 GDP rose by 4.0% on an annualised basis. The Central bank kept interest rates on hold at 7.25%, an all time low and down from 12.25% in August last year and signalled that they would remain low for quite a while. The Central bank did not cut interest rates for the 1st time in more than 1 year. He believes that GDP will grow by 4.0% in 2013 and 2014, somewhat optimistic, I would have thought.


Asian markets (ex China) closed higher on hopes that Republicans and Democrats will do a deal on the fiscal cliff.

European markets are also higher, in particular Spain and Italy – Spain to request a bail out?. Spanish and Italian bond yields are also declining sharply, suggesting Mr (ditherer) Rajoy, may finally pull his finger out and request a bail out.

The Euro is back close to US$1.30, though has drifted off those levels – I would expect it to rise further, especially if Rajoy moves to request a bail out. I remain wary of the Greeks, but will not short the Euro at present, though itching to do so at higher levels.

Gold has rebounded to US$1725 on news that the FED is likely to continue to buy bonds and January Brent is higher at US$110.99.

US markets have opened higher – around +0.4%.

Will look for a sell off before I increase my positions.

Kiron Sarkar

29th November 2012

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