Kiron Sarkar
September 07, 2011
Hi,
Australian 2nd Q GDP rose by +1.2% QoQ (-0.9% in the 1st Q, revised up
from -1.2% previously), and above expectations of +1.0%. Growth came
entirely from the domestic side - net imports was a negative -0.5%.
Inventories (+0.8%) and personal consumption (+0.7%) were the main
contributors. However, the next move by the RBA will be to lower
rates, though given today's data, may well be further down the road.
The A$ clearly picked up on the news. The only worrying issue is
inflation. Real gross domestic income rose by +6.5%, the most since
1987. More importantly, average compensation per employee rose by +1.2
in the Q. However, my biggest concern is Australia's dependency on
China in particular;
Are the Chinese about to U Turn on monetary tightening. the Chinese
Securities Journal reports that the Central Bank may ease policy. The
journal suggested that the Central Bank may either reduce reserve
ratio requirements and/or buy bills from banks ie QE. The key is
inflation - the August report is due this Friday and expectations are
for a drop to +6.2% YoY. Chinese equity markets reacted positively to
the Journals comments. However, my view is that Chinese economy will
contract by much more than current forecasts, particularly given a
global slowdown and very little evidence of an increase in domestic
consumption. I remain bearish, and indeed increasingly so, on the
Chinese economy;
Yesterdays move by the SNB is even more amazing when the ultimate
impact is that the SNB has chosen inflation to devalue its currency,
in effect. However, inflation in Switzerland is not a problem at
present. If the Swiss go for inflationary policies, when will the Euro
Zone - OK, for different reasons. The removal of a safe haven suggests
that there will be more focus on the Yen and Gold, I suppose, but the
Japanese will likely intervene, a la SNB;
The Swedish Riksbank kept interest rates on hold, as expected - the
benchmark repo rate was held at 2.0%. They are concerned about the
situation in the Euro Zone - Sweden is not a member of the Euro Zone -
sensible people;
The Italian Senate is to hold a confidence vote (which is part of the
legislation to force through measures which will increase revenues)
today, having been approved by the Italian cabinet yesterday. Italian
bond yields continue to decline - currently 5.36%;
As expected, the German Constitutional Court has rejected the
plaintiffs challenge to the Euro Zone bail outs, funded to a large
extent (approx 30%) by Germany. However, they stated that the German
Parliament must be involved in decisions that involve the budget and
that the Government must get approval of the parliamentary budget
committee before granting aid. The decision was as expected - however,
it looks as if further aid to Greece will be a problem, if
Parliamentary approval is required. The head of the Constitutional
court stated that it was a "close decision" and that it should not be
interpreted which would allow for a "blank cheque". Good news, as
Greece has totally ignored its commitments and its time for the
country to get real. However, in reality Greece will now certainly
default - over 70% haircut.
The EFSF may not be as neutered, given that decisions need to be
cleared by the German Parliamentary Committee (rather than Parliament)
which is helpful. However, the focus of any market intervention
remains with the ECB and they want to get out of this role - however,
one interpretation of the Court ruing is that the ECB (effectively the
Euro Zone national banks) purchases of Italian and Spanish bonds could
be impacted by this Court ruling - need to check ie does it need prior
approval of the German Parliamentary budget committee. In addition, in
a key concession, Mrs Merkel has allowed the German Parliament to
define its own powers in respect of decisions relating to Euro Zone
bail outs - once again bad for Greece;
Talks between German, Dutch and the Finnish finance minister re the
Finns demand for collateral in exchange for providing further aid
failed to resolve the issue. However, the fact that Greece is not
complying with its commitments may make the collateral issue
irrelevant. I really cant see how the Euro Zone can continue to
provide funding for Greece, when they clearly are not committed to
meeting their targets - certainly a view expressed recently by the
Germans and now the Dutch. The hardening of views of Euro Zone members
(now facing domestic voter dissatisfaction) can be seen quite clearly
in the losses suffered by Mrs Merkel in all 6 regional elections this
year. In addition, the Finnish PM made it quite clear today - bail
outs ONLY in exceptional circumstances - bye, bye Greece, though quite
frankly, no great loss. However, can the Euro Zone deal with the under
capitalised banks and, in addition, stop contagion spreading -
difficult, given recent anemic measures and policy differences, etc,
etc;
UK house prices fell for the 1st time in 4 months in August - down
-1.2% from July (source Halifax Building Society). However, luxury
home prices in London show no sign of declining;
UK July manufacturing output was up +0.1% MoM or +1.9% YoY. UK data
been all over the place recently, so its very difficult to assess the
true state of the economy. In my view, the official data paints a more
bearish picture of the UK economy than is the case, a view the BoE is
also coming to. The UK Government statistic office needs to be
improved;
Testimony by former News International executives, totally contradicts
testimony given by James Murdoch at the Parliamentary Select
Committee. I cant see him surviving. He is likely to be recalled by
the Select Committee. Their bid for BSkyB looks impossible;
Brazilian inflation rose for the 12th month in a row - now at its
fastest pace since 2005. The recent 50bps cut by the Central Bank was
clearly premature. Consumer prices rose by +0.37% in August MoM or
7.23% YoY, up from +6.87% in July.
Summary
US markets were down, but we off their lows yesterday. Asian markets
took up the baton as are European markets. However, whats changed. I
remain bearish.
The Euro is slightly firmer (for how much longer) and Gold is off.
Brent is back above US$113. Government bonds still well bid.
US futures indicate a positive start. Personally, I would sell into
any strength.
Best
Kiron
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