EZ manufacturing and services data disappoints

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The Japanese PM, Mr Abe, is visiting the US and is to meet President Obama. Clearly, the tensions with China and the nuclear test by N Korea will be on the agenda, as will Japan’s economic policy and the proposed Trans-Pacific Partnership. Interesting comment by Mr Abe. He stated that the Chinese have a “deeply ingrained” need to promote conflict with Japan and other Asian countries, as a way to bolster the Chinese Communist party and to distract the population from other issues. Clearly he’s right, but its punchy stuff.

Also of interest is the fact that PM Abe will take along Mr Takehiko Nakao, according to Bloomberg. Who’s he you ask – well he’s Japan’s currency chief. A bit of explaining to be done, do you think?;

Chinese authorities have told local authorities to “decisively” curb real estate speculation. Chinese markets tanked on the news (see below);

Chinese equity markets (the Shanghai Composite) closed nearly 3.0% lower today (the largest decline since November 2011) on fears that the PBoC will embark on a tightening cycle and, in addition, on reports that the Chinese government had instructed local authorities to implement measures to curb speculation in the residential property sector. The PBoC have hinted recently that inflation was becoming a problem. In addition, Chinese authorities are thinking about limiting credit to the residential property market and, in addition, tax 2nd and 3rd homes etc. Uncertainty = Lower equity markets. In addition, inflation in China looks likely to accelerate – materially?. While a number of the “property restrictions” are a rehash of previous policies, I do think that the recent rally of the Chinese equity markets looks “fragile” – for a while, at least.

S&P warn that over investment in China could lead to an economic contraction in due course. However, S&P have raised its outlook for Chinese residential developers to stable from negative. Different interpretations of S&P’s comments are floating around.

Reuters reports that the PBoC Central Bank Governor Mr Zhou may stay on and, in particular, help to make the Chinese financial system more market-orientated, together with transforming the Yuan into a global currency – good news, if true, but the Yuan has a long way to go;

The P5+1 nations are expected to make another approach to Iran, according to Bloomberg, quoting unidentified sources. Probably explains the weaker oil market. Talks are scheduled to resume on the 26th February. Negotiations with Iran over its nuclear programme have gone on and on and….;

The Russian Central Bank Governor, Mr Sergey Ignatyev, stated that nearly US$50bn was transferred out of Russia illegally in 2012, more than half of which may have been controlled by a single group of people. Wow. If its from a single group of well organised people, the authorities must have known about it. The remarkable admission, given his position (though he is to retire in June), will create “waves” in Moscow.The near US$49bn that Mr Ignatyev speaks about is roughly 2.5% of Russia’s GDP. Brave man Mr Ignatyev:

S&P warns that the risk of Cyprus defaulting is “material and rising”. There is a political game being played in respect of Cyprus. The EU/Germans clearly do not like the former Communist regime (who are crazy) and want a regime change, which, in all probability, they will get this weekend following the 2nd round of the Presidential elections. In addition, the German’s do not want to be accused of aiding and abetting alleged money laundering/tax evasion by Russians using Cypriot banks – Cypriot banks, by the way, are BUST. Mrs Merkel needs the opposition to help push through legislation re a number of issues concerning the EZ. A number in her party and her coalition partners oppose bailouts, in particular. The Russian authorities are looking to help out Cyprus – the big issue is how the Russian authorities explain that to their public, as it will help alleged money launderers, tax evaders etc. Some kind of temporary fix to bide Cyprus over, until after the September German general elections seems the most likely political option, though if there is a threat of a debt restructuring (to make Cypriot debt sustainable, as demanded by the IMF), the threat of contagion spreading across the EZ becomes real. Tricky, indeed, very tricky situation. In my opinion, its always the small countries, which are ignored, which come and bite you in the ….;

EZ February manufacturing and services PMI declined by more than expected. The EZ February composite index (both manufacturing and services) declined to 47.3, from 48.6 in January and well below the reading of 49.0 expected. The EZ services PMI declined to 47.3 in February, from 48.6 in January, the fastest decline in 10 months. The EZ manufacturing index fell marginally to 47.8, from 47.9 in January and lower than the 48.5 expected. The composite index for both Germany and France came in lower than expected. Germany’s services PMI declined to 54.1 in February, from 55.7 in January and below the 55.5 expected, the fastest decline since August. The manufacturing index did rise to a positive 50.1 however, from 49.8 in January, though was below the 50.5 expected.

The real culprit for the overall material decline was (you guessed it) France. The French services index fell to 42.7 in February, from 43.6 in January and lower than the 44.5 expected, though the manufacturing index did rise to 43.6, from 42.9 in January, though below the 43.8 expected. However, consumption is the major driver of the French economy and, as a result, the French services index is more important;

Dutch data was also poor, with consumer confidence (seasonally adjusted) coming in at -44, in February, worse than the -35 in January. The January unemployment rate rose to 7.5% M/M, higher than December’s 7.2%. The Dutch house price index declined by -9.6% Y/Y in January, worse than the -6.3% in December. I continue to believe that Holland, like the UK, will be downgraded this year. Holland is, for the moment, rated AAA;

The FOMC minutes raises the issue as to whether the FED will reduce, possibly even end, its QE programme. Previous statements suggested that the FED would continue with its asset purchase programme until there was a “substantial improvement in the labour market” – the minutes released yesterday casts some doubt on that. “Many participants expressed concern about the potential costs and risks arising from further asset purchases”. Hmmmm, many !!!!. The minutes also report that a review of the asset purchase programme will take place at the 19/20th March FED meeting, which suggests that the subsequent minutes will be uber important. My friends at Brown Brothers Harriman remind me that Bernanke (who clearly is in favour of more QE) has never been outvoted and is unlikely to be. Whatever, the issue is that uncertainty has now crept in, which is negative for markets – indeed, US markets declined yesterday, following the release of the minutes and the US$ strengthened;

Interesting announcement by the US. The White House has threatened to use “diplomatic measures”, together with trade policies, to target countries allegedly involved in hacking. Whilst China was not mentioned, the statement was clearly directed towards the country. These policies are clearly needed given the mounting computer attacks originating from a number of countries around the world. Congress is putting increasing pressure on President Obama to act on this matter, as well. This looks as if it will get serious. Clearly if the EU followed (as is likely, in due course), it will become more effective;

US January CPI came in unchanged (+1.6% Y/Y), as opposed to the +0.1% expected and unchanged in December. Core CPI (ex food and energy) came in at +0.3% (+1.9% Y/Y), slightly higher than the +0.2% expected. Nothing to get worried about, for the moment.

US initial jobless claims came in at +362k, slightly higher than the +355k expected. The less volatile 4 week moving average came in at +361k, as opposed to +353k before. Continuing claims came in at +3.148mn, slightly lower than the 3.150mn expected;


Asian markets closed materially weaker, following the prospect that the FED may refrain from its asset purchase programme earlier than expected and the prospect that China would place curbs on their residential property sector. European markets are also sharply lower, with the Italian MIB down over -2.5% . US markets, having closed at their lows yesterday, look to open up lower, though not by as much as I had expected.

The Euro is being beaten up – currently US$1.3203, having been over US$1.34 yesterday.

The Yen, well its strengthening and is currently at Yen 93.27 against the US$. Some are asking whether the bout of Yen weakness is over – I believe that we need to wait for the appointment of the new BoJ governor and gain an understanding of the fiscal and monetary policies that the BoJ/government will employ, but……………In any event, I’m glad I’ve closed my major Yen short.

Sterling, though, is stronger against the US$ and is at US$1.5252 – better government borrowings numbers, though this reflects the inclusion of “profits” on the BoE’s holdings of gilts bought as part of the Sterling 375bn QE programme and just too much of a selloff recently.

Spot gold is up marginally at US$1570, with April Brent at US$113.91 and whilst over US3 lower than its previous highs, its still too high for a number of struggling economies. Commodities generally were sold off yesterday and are sharply lower.

US existing home sales data and the Philly Fed come out later today.

Basically a risk off day, with bonds doing better (the US 10 year is below 2.0%), equities worse and the US$ better – the US$ index hit a 5 month high.

I continue to be cautious to negative of equity markets, in particular in the short term.

Kiron Sarkar

21st February 2013


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