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Markets positive today
Kiron Sarkar
September 20, 2011

Hi there,

Interesting move in Latvia. A party controlled by Oligarchs (accused of corruption) lost more than half the seats that they had held previously in the recent election. The Harmony party, polled the most seats - it has support from mainly ethnic Russians, who represent 40% of the 2.2mn population;

A leading Greek newspaper suggests that the Greek PM will call a referendum as to whether Greece should remain in the Euro. The Greeks have denied the report, but believe in official Greek reports at your peril. Personally, it sounds like a great idea. It will focus the public mind on what they want to do and provide some policy certainty/impetus. If a referendum is called, one would hope they say "get out", but I fear they will vote the opposite way ie to stay in.

Reuters reports that representatives of the Troika (IMF, ECB, EU) are heading back to Greece. Looks as if a deal will be done. However, I expect further EU "noise" on the EFSF legislation/Finnish collateral issues;

Spain auctioned 12/18 month T bills today. The E3.587bn 12 month was priced at 3.591%, with a bid to cover ratio of 2.78 times, as opposed to 3.335% previously (bid to cover 2.14 times) and the 18 month bills were priced at 3.807% versus 3.592%. The bid to cover ratio was 2.74 times as compared with 3.23 previously - not bad in the circumstances;

Strikes in Spain are starting, in anticipation of the prospective change in the Government following the November general election - its the teachers this time. The Socialists are expected to be kicked out and the right wing party, the Peoples Party, expected to take over. Polls suggest that they will attract almost 45% of voters, with the Socialists around 30%.The Peoples party has announced that it intends to impose further austerity measures. Still believe that Spain will have serious problems, though any real news will probably start coming out a few months after the expected win of the Peoples Party, when all the fiddles etc, employed by the current administration, are brought to light;

The German September ZEW investor confidence index came in at -43.3, well below the August reading of -37.6, but not as bad as the forecast of -45.0. However, the index is at its lowest since December 2008. The current conditions component was down to 43.6 (the lowest since July last year) from 53.5 in August, though slightly better than the forecast of 40.0.

Interestingly, German politicians and the Bundesbank are repeating that economic growth will be better than private sector forecasts, citing stronger consumer demand. You have to take them seriously, as they are not prone to delusions, though I must say, I'm not sure how that can be the case. The EU forecast that GDP would be +0.2% QoQ in the 3rd Q and just +0.1% in the 4th Q, a few days ago. Maybe we will get some good news. Consumption in Germany has not been particularly strong in the past, though recent data suggests that the Germans are spending more

Fitch reaffirmed Germany's AAA rating, with a stable outlook. Just wait till they get to bail out the Greeks et all ;

Bloomberg reports that Siemens withdrew the E0.5bn from the French bank Soc Gen and deposited it with the ECB. Soc Gen have been in the wars recently. In total Siemens is reported to have deposited some E4bn - E6bn at the ECB. Last year, Siemens created its own bank, which allows it to access ECB funding and deposit money with the ECB. I expect a number of other companies will follow Siemens lead. The resultant loss of deposits from existing banks will hurt. In addition, these new banks will have none of the legacy problems and could well pose serious competitors to existing banks, particularly on corporate lending. Those who are plugging banks at present are loopy, in my humble view. They had better get their financial controls in place though;

US August housing starts declined by -5.0% to a 3 month low of 571k, on an annualised basis and lower than forecasts of 590k. Hurricane Irene could have impacted housing starts. July was revised down to 601k, from 604k previously. Permits rose by +3.2% to an annual pace of 620k in August. The West showed the largest increases in building permits;

More speculation re "Operation Twist" following the FED's 2 day meeting starting today. Goldman's et all also suggest that the FED may reduce the interest paid on deposits with the FED. Personally, I feel that Operation Twist has been priced in - not sure whether the markets will react if just that is announced - really need more for a positive reaction;

Summary

European markets continue to rise - clearly in anticipation of the FED announcement tomorrow - it had better be good news. The Euro reversed and is now up +0.2% against the US$, in spite of the S&P downgrade of Italy. US markets opened higher and have just continued to rise. The market is now beginning to believe that an imminent Greek default will be averted - it's my view, but I'm not sure whether it will last for long. In addition, expectations for tomorrows FED announcement are sky high, which worries me I must admit.

By flattening the yield curve due to FED expected to implement Operation Twist, the financials will take another hit in terms of profits - yet another reason to avoid them. They picked up somewhat today on hope that Greece will not default. All short term stuff.

Brent rose to US$110.73, still do not understand why it is so strong. Gold also (surprisingly) rose - its currently trading around US$1809.

All waiting for the FED and the Troika's view on Greece.

Best
Kiron

 

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