Yet more can kicking on Greece

The RBA reduced its 2013 growth forecast to between +2.25% to 3.25%, from a previous forecast of 2.75% to 3.25%. CPI is expected to come in at 2.0% next year, in line with previous estimates. The A$ declined below US$1.04 – currently US$1.0368. Waited too long to increase my short;

Japan is seeking to strengthen military ties with the US, in response to the spat with China over the ownership of certain disputed islands in the South China seas. The Defence Minister, Mr Satoshi Morimoto has called for changes in the guidelines of its military co-operation agreement with the US. The US is not keen to get too closely involved in the dispute over the islands, but it does have a military pact with Japan. Mrs Clinton stated that whilst the US takes no position over the sovereignty of the islands, they do fall under the US-Japan mutual defence treaty. The Chinese actions are resulting in Japan becoming more nationalistic, which is not what China wants. Indeed Chinese actions have alarmed all its neighbours, who are seeking closer cooperation with the US;

A string of positive Chinese economic data today, as was hinted at by Chinese officials yesterday:
Industrial output rose by +9.6% Y/Y in October, up from +9.2% in September and better than the +9.4% expected;
Retail sales increased to +14.5% in October, up from +14.2% in September and slightly better than the +14.4% expected;
CPI declined to +1.7% Y/Y in October (the lowest in 33 months), down from +1.9% in September and better than the unchanged expected;
Producer prices declined by 2.8% Y/Y;
Rural fixed asset investment increased by +20.7% in the 1st 10 months of this year, by comparison to 2011, slightly higher than the +20.6% expected;
Central government investment spending rose sharply in October – it is up +5.1% in the 10 months to October this year and more than double the January to September pace.
Clearly better economic data, but the Chinese leadership signalled quite clearly yesterday that they were unwilling to entertain either political reforms or the state driven economic model. As a result, I believe, that China will not achieve anywhere near the growth rates it has in the past this decade. The Shanghai Composite closed marginally lower today, having initially been higher – down -0.2%;

It does not look as if the EZ finance ministers will agree to provide Greece with the additional tranche of bail out funds, amounting to E31.5bn on the 12th November. Mr Schaeuble stated “I do not see how we can take the decision already next week”. However, some E5bn of Greek bills are due for repayment on the 16th November and the ECB is resisting pressure to roll this over. The most likely outcome is that funds will be provided to meet this repayment, as the EZ wants to avoid a technical default. With the IMF proposing a haircut on bail out funds already provided to Greece by EZ countries (strongly resisted by the EZ countries) and, in addition warning that the existing debt burden is unsustainable, the EZ are trying to fudge the issue by alleging that the maximum debt to GDP sustainability percentage is 125% of GDP, rather than the previous maximum of 120%. Indeed, the previous maximum of 120% was set as it was the debt to GDP percentage of Italy, rather than for any other rational reason. This comedy/tragedy continues. The ECB has volunteered to hand over any “profits” it makes on Greek bonds owned by it which will have some impact on overall debt (but not enough), but yesterday Draghi made it quite clear he “was done” with Greece. As a result, its over to the EZ politico’s and we all know what that means – yet more chaos. The bottom line is that Greece will have to restructure its debts ie default, even if interest rates are cut and they are given a 2 year extension to meet their targets. Furthermore, even though Greece passed the E13.5bn of further austerity measures yesterday, it will never meet these targets. The Bundestag must vote on the new measures once agreed, which could well be a problem for Mrs Merkel. Her cunning plan is to kick this particular can down the road, or at least until after the German general election in September 2013 – not going to happen, Mrs M. The EZ is now floating the idea that a resolution of Greece will take until the year end !!!!!
Moodys stated today that the proposed actions by EZ countries was just buying time and that Grexit remains a risk. Too true Moody’s.
Greek September industrial output declined by -7.3% Y//Y, down sharply from a revised +2.7% in August;

Comments by Fitch suggest that they are considering downgrading Spain to below investment grade – its going to happen pretty soon, by Fitch or the other agencies. However, the Spanish PM continues to dither. Spanish bond yields are rising Mr Rajoy;

French September industrial output declined by -2.7% M/M, much worse than the -1.0% expected and +1.5% previously.
French September manufacturing production was even worse, coming in at -3.2%, much lower than -1.3% expected and +2.1% previously.
The Bank of France business sentiment remained unchanged in October, at 92, slightly better than the 90 expected.
Moody’s will express their opinion on France in a few weeks – a downgrade?. Fitch reports that they will make a decision sometime in 2013 – great help !!!;

The UK September trade deficit came in at -£2.70bn, better than the -£3.20bn expected and -£4.31bn in August. Should help revise 3rd Q UK GDP marginally higher, as was the case with yesterdays better US trade data;

The UK’s BoE is to transfer income from gilts bought under its QE programme, to the UK Treasury. The UK Treasury will use the proceeds to reduce the stock of outstanding debt, increasing the amount of money in the economy. The amount of income involved is expected to be £35bn by March next year. The BoE did not increase its QE programme yesterday, but these measures are nothing but QE. The BoE will retain the principle on maturing bonds, the 1st of the maturities coming in March 2013. Gilt yields declined on the news. However, this is pure money printing;

Mrs Merkel and Mr Cameron failed to agree on the EU budget. Italian press suggest that the meeting which is due on the 22/23rd November to discuss the budget will be cancelled. Mr Cameron will face severe criticism from his own party and the opposition if he agrees to anything more than a freeze of the EU’s budget. This one is not going to be easy, to say the least;


Asian markets closed lower following weaker US markets yesterday. European markets opened modestly weaker, though have sold off through the day. Futures suggest that US markets will open lower.
The Euro is trading at US$1.2713, having been below US$1.27. I continue to believe it will weaken further, especially as a “deal” on Greece is not agreed. Gold is trading at US$1736, with December Brent at US$106.93 – still remains quite resilient in spite of the poor/bad economic data globally.

I remain negative on equity markets – just too much uncertainty out there. Having said that, I do believe that a deal will be reached on the fiscal cliff in the US, at least with respect to the majority of the potential downside. Cant see any respite for the Euro in particular and remain short against the US$. Too early to short the Yen, in my view, but will be watching carefully in coming weeks.

Kiron Sarkar

9th November

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