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Kiron Sarkar
September 05, 2011
Hi there,
As expected, the RBA kept Australian interest rates on hold (the
overnight cash rate target is 4.75%), citing unstable financial
markets and weaker growth prospects both domestic and overseas.
Analysts expect rate cuts in the near future;
The ECB stepped up its purchases of PIIGS bonds, presumably Italian
and Spanish bonds last week - it acquired E13.305bn of bonds, up from
E6.651bn the previous week. In total the ECB will have to sterilise
some E129bn, if it follows its normal practice;
Unnamed Italian Government sources state that Italy will fail to meet
its 2011/2012 GDP forecasts of +1.1% and +1.3% respectively - well,
what a surprise - I think not. Puts more pressure on them to fix the
some E7bn - E10bn budget black hole - given the likely lower actual
GDP. However, concern over the rise in its bond yields and concerns
expressed by the ECB/EU has forced the Italian Government to rethink.
It has announced a last minute strengthening of its austerity
measures. VAT is to be increased to 21% (currently 20%), a 3% wealth
tax on incomes over E500k until the budget is balanced and increasing
the retirement age of women to 65, from 2014. The measures require
Parliamentary approval and have been attached to a confidence vote, to
put pressure to both pass it and, in addition, to do it fast - by the
end of the week. Italian 10 year bond yields fell, though still yield
5.48%, having been up at 5.55% yesterday;
The SNB came though with its threat to peg the Swissy to the Euro - it
stated that it would "no longer tolerate a Euro-franc exchange rate
below the minimum of 1.20 francs, suggesting, in theory, unlimited
intervention. Indeed, the SNB stated that it "is prepared to but
foreign currency in unlimited quantities". The Swissy declined by over
8.0% against the Euro and by 9.0% against the US$. It appears that the
SNB is buying German and French Government bonds. Last years currency
intervention by the SNB resulted in US$21bn of losses - however, this
move is particularly aggressive, though I suspected will be tested in
time to come. However, the Swiss look determined;
German Finance Minister Mr Schaeuble stated that Greece will not get
its next tranche of bail out funds unless it meets its austerity
targets. Well, if he sticks to that and given public opinion in
Germany its difficult to see how he cannot, Greece will have to
default as it will not and, indeed, has no intention, of meeting its
targets. Haircuts of 70%+, at least. The Greek Finance Minister
promised to accelerate austerity measures - yeah right. The situation
is getting increasingly serious. The yield on 2 year Greek bonds rose
to 52%. In addition, he ruled out the issue of Euro bonds and urged
Euro Zone countries to reduce debt further;
German July manufacturing orders were -2.8% MoM, lower than forecasts of -1.5%
Euro Zone Q2 GDP was +0.2% QoQ and +1.6% YoY, slightly lower than the
+1.7% initially announced;
The British Retail Consortium reported that store sales declined by
-0.6% YoY in August;
Unexpectedly, US ISM (services) increased to 53.3 in August from 52.7
in July and was much higher than the forecast of 51. The new orders
component rose to 52.8, from 51.7 in July. Business activity fell to
55.6, from 56.1 and prices paid increased to 64.2 from 56.6.
Employment declined to 51.6, from 52.5, the lowest since September
2010.
Summary
Asian markets were a weak today. Europe cosed well above their
lows.The US$ continues to strengthen and the Euro/£ weaker. Brent rose
by +2.5% today - it is back above US$112 (US$112.75 currently). Gold
has been all over the place - initially around US$1900, then declined
significantly , though now rising. I would have thought that the SNB
news would be positive for gold.
Looks like the US$ will strengthen further (due to the Euro's woes).
Decision by the German Constitutional court tomorrow will be important.
Best
Kiron
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