Yen weakening materially

The Australian Central Bank, the RBA stated that it had increased sales of the A$ last month to a number of buyers, including foreign central banks. The sales amounted to US$500mn, the most since June 2009. The A$ declined on the news – currently US$1.0337. For full disclosure purposes, I remain short the A$, against the US$;

The Japanese lower house has passed the (US$477bn) budget deficit financing bill, which was necessary to finance 40% of government spending for the fiscal year ending 31st March 2013. The head of the LDP party states that, if elected (likely), they would “work with” (dictate more likely !!!) the BoJ to ease, on an unlimited basis, until deflation is overcome. In addition, Mr Abe added that the BoJ should set interest rates at zero or below zero to enhance lending. The Japanese PM will dissolve Parliament tomorrow and has called a general election for the 16th December. Increased my short Yen, against the US$ to just below my maximum limit, which is currently trading at Yen 80.88 against the US$, a 6 month low – Yen81 next target? – very likely;

The Standing Committee of the Communist Party has indeed been limited to 7 individuals. As expected, Mr Xi Jinping was appointed the head of the Communist Party and, most importantly, Chairman of the Central Military Commission. He will take over as President in March, when the current President, Mr Hu retires. Mr Li Keqiang will become the Premier. The other 5 members of the Standing Committee are deemed conservatives. Don’t expect a significant change in policy and/or economic direction. No surprise, the vested interests in China don’t want to destroy their overfull rice bowl. The big issue is whether the Chinese authorities can continue to keep control, given the massive level of corruption, lack of freedom etc, etc. Too early to tell, but……….The Shanghai index declined by -1.2%, whilst Hong Kong was -1.4% lower – probably the best indication of the views on the new leaders. Having said that, I have no doubt that the new leadership will have to stimulate the economy, which in spite of recent positive “official” data (if you believe Chinese data, which I most certainly do not), suggested an improvement in the economy;

The Indian government raised just US$1.7bn, less than 25% of its target from the auction of wireless spectrum. The extremely poor auction results will prove a major problem for the finance minister, who was hoping for far greater proceeds to reduce the budget deficit to -5.3% of GDP this fiscal year (year to 31st March 2013) – looks highly unlikely. The failure could well result in the Indian credit rating being reduced to junk – quite likely. However, the failure could well force the Indian government to sell state assets, which is a necessity and will prove positive in due course.

The EU economic commissioner Mr Rehn stated that Spain would not be required to implement further austerity measures until the end of 2013, even though he accepted that the country will miss its 2012/13 budget targets materially. The announcement recognises that the current policy of austerity has, in effect, been played out/failed. Mr Rehn reported that the EC will not set budget deficit targets for Spain, on the basis that structural reforms proposed by the Spanish authorities in September, will be implemented. The EC is moving closer to the position of the IMF, though this change in policy must be approved by member states, including Germany !!!!. The move, if approved by member states, will make it easier for the Spanish PM to request a bail out, as he has opposed a bail out to date as it would have required further austerity measures. Austerity measures by themselves are impossible (indeed ludicrous) at this stage. If Mr Rehn’s change of policy is confirmed by member states, this announcement could well be positive for European markets – will watch very, very carefully. Spanish Press reports that Spain will seek a credit line form the IMF, rather than seeking a bail out from the EZ. Such a move will be better for Mrs Merkel, as she will not have to seek approval from an increasingly sceptical Bundestag, though will the IMF provide as much as is necessary? and/or want to go it alone? – unlikely;

Mr Rehn reported that the IMF participation was necessary to provide further funding for Greece. Now how does that work, may I ask. Mrs Lagarde has publicly disagreed with the EZ over the current (ludicrous) proposals by the EZ. Analysts continue to believe that the EZ will push through further aid for Greece – well maybe, but there are questions being raised and it remains no shoe in;

German Q3 GDP rose by +0.2% Q/Q (+0.9% Y/Y), as opposed to +0.1% expected and +0.3% in Q2;

French Q3 GDP rose by +0.2% Q/Q (+0.2% Y/Y), higher than the flat reading expected and -0.1% in Q2;

Spanish Q3 GDP declined by -0.3% (-1.6% Y/Y), in line with expectations and a similar reading in Q2;

Dutch Q3 GDP declined materially to -1.1% (-1.6% Y/Y), much lower than the decline of -0.2% expected and as compared with +0.2% in Q2;

Italian Q3 GDP declined by -0.2% (-2.4% Y/Y), much better than the decline of -0.5% expected and the -0.8% in Q2;

The data was a little more positive for both France and Germany and in particular, France, which seems a little to good to be true. However, GDP is expected to be negative for both countries in the current Q, as will be the case in Spain, which has had 5 Q’s of negative growth and, most likely, will face further declines throughout 2013. The much worse reading for Holland confirms that contagion from the debt crisis is impacting the core EZ countries. Unemployment in Holland rose to +6.8% in September, from +6.6%. Italian GDP was much better, which confirms the better recent economic data;

EZ Q3 GDP (seasonally adjusted) came in at -0.1% Q/Q (-0.6% Y/Y), in line with expectations and -0.2% in Q2;

EZ October CPI came in at +0.2% (+2.5% Y/Y), in line with expectations and +0.7% in September;

The EZ is technically in recession (for the 2nd time in 4 years), which is expected to continue this Q. The only good news is that the EZ inflation numbers are improving;

The head of Spain’s largest bank, Mr Botin, Santander calls for a banking union in the EZ as a matter of urgency. The impassioned plea suggests that Spanish banks are (much?) weaker than generally believed, or as reported by Spanish authorities. No great surprise. However, the German’s in particular, do not want to agree to any deal which could involve themselves being liable for serious potential liabilities (unsurprisingly) and continue to be opposed to a EZ wide deposit guarantee scheme. Furthermore, they are moving cautiously towards banking union;

UK October retail sales (including fuel) collapsed by -0.8% M/M ((+0.6% Y/Y), much lower than the -0.1% expected and the +0.5% in September. A definite Ooops and the largest decline since April. Sterling declined on the news

There are reports (Moody’s) about the UK potentially losing its AAA rating – likely sometime next year;

The Irish finance ministry increased its 2012 GDP forecast to +0.9% from +0.7% previously, though cut their 2013 GDP forecast to +1.5%, from +2.0%. The 2014 estimate was cut to +2.5% from +3.0%. Debt to GDP is expected to peak at 121% next year. The finance ministry affirmed their 2012 budget deficit forecast at -8.3% and 2013 at -7.5%. The forecast unemployment rate was increased. Interestingly, the government will not increase austerity measures and whilst the country has been the poster child of the EZ, it certainly looks like the country is facing austerity fatigue. As I have reported, the current focus on austerity only looks as if its way past its sell by date.

Fitch confirmed Ireland’s BBB+ rating with a stable, rather than negative, outlook – at least some good news;

US business inventories (ex auto’s) rose by +0.7% M/M, higher than the +0.6%. Business sales rose by +1.4%, the largest rise since March 2011 and as compared with +0.6% in August. The US economy, I continue to believe, is and will perform better than expectations, on the assumption that the majority of the contraction, as a result of a deal on the fiscal cliff, is sorted out;

The FED minutes reveal that a “number” of members favoured further QE, following the end of Operation Twist, given the level of unemployment, though several members questioned the effectiveness of QE, or if a moderate growth environment warranted more purchases. Members believed that inflation would remain below 2.0%, with the economy growing at a “moderate pace”. The participants reported that several businesses said that they were delaying hiring and spending due to concerns relating to the fiscal cliff – too true – sorting it out, will result in a material improvement. Finally, the FOMC “generally favoured” the zero-rate outlook tied to quantitative thresholds (suggested by Ms Yellen, amongst others), such as a predetermined level of unemployment, rather than the present policy of setting interest rate policy linked to a calendar date . The US$ declined initially, though recovered shortly thereafter;

President Obama made clear last night that he would not compromise on his policy to let the Bush-era tax cuts expire. He added that he was willing to compromise on other issues, including the need to cut spending. Formal talks are set to start on Friday. The market, on balance, believes that some deal will be done to mitigate most of the impact of the mandatory sequestration programme and the material tax rises, though some analysts suggest that it may take until after 1st January. I continue to believe that a deal will be reached, which will mitigate a majority of the impact of the fiscal cliff;

BP reports that it is in “advanced discussions” with the US Department of Justice and faces a record criminal penalty. An announcement is expected today. The company also faces civil penalties and damages from federal, state and local authorities. However a deal with the DoJ should clear some of the uncertainty – positive, unless the fine is enormous;


US markets closed near their lows yesterday – down -1.4% and at a 3 month low. Traders reported that the reason for the sharp decline was due to (a) concern over the US fiscal cliff issues, together with weaker US retail sales (Hurricane Sandy impacted, I would suggest) (b) rising tensions in the Middle East, following the Israeli attack on a Hamas leader (c) worse economic data from the EZ and (d) concerns about China.

However, I believe that the extremely silly (German inspired) policy of pushing austerity measures as the only policy is beginning to be rethought by the EZ. As you know, I have argued that the austerity by itself is making the situation much worse, in particular, in countries such as Greece, Portugal and Spain, quite possibly others, due to the negative impact of the fiscal multipliers. We have had no comments from Germany, as yet, which suggests that caution is appropriate, especially as member states (in particular Germany) have to approve a change in policy. Furthermore, comments by Mr Rehn that Spain need only continue with its programme of structural reforms, rather than to stick to budget deficit targets (which we all know they will not adhere to) and, today, that the EZ need the participation of the IMF in a Greek bail out is difficult to reconcile, given the very differing views of the Euro group and the IMF, publicly aired earlier this week and the current German inspired policy. The EZ has a history to disappoint, but at the very least a discussion is taking place – about time !!!!!

Asian markets (ex the Nikkei – up nearly 2.0%) closed much lower today, following the much weaker US markets yesterday. European markets are lower, but by less than initially expected. US futures suggest a modestly higher opening.

The Euro, well it continues to rise (currently US$1.2770) , which in my view is equity positive. However, the far more important currency move is that of the Yen – the Yen is weakening materially, currently Yen 81.13 against the US$. The Euro rose by well over 1.0% against the Yen yesterday – less so against the US$, though still higher and has continued to strengthen against the Yen and the US$ today. That suggests to me that the traditional flight to safety Yen trade may well be ending and, furthermore, a rising Euro is generally positive for markets. However, markets do look fragile I must admit, though I would be reluctant to short at these levels (may actually start buying some equities shortly – financials, energy?, in addition to my long US/UK building material stocks and UK – London based – property/building companies) – however, I still far prefer playing the currencies – I’m short Yen/A$/Rand against the US$, for full disclosure purposes.

Gold is trading at US$1723, with December Brent at US$108.50.

Kiron Sarkar

15th November 2012

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