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Kiron Sarkar
September 22, 2011
Hi there,
HSBC reports that Chinese preliminary PMI was 49.4 for September, lower than the 49.9 in August and 49.3 in July - the HSBC survey suggests that manufacturing has contracted for 3 straight months;
Chinese property developers slumped today as regulators asked trust companies to report dealings with a large builder - Greentown China Holdings;
The Norwegian Central Bank Norges Bank has kept rates on hold at 2.25%, as expected. The Bank stated that the global economy was slowing, market turmoil was affecting their domestic economy which has weakened. Finally, they suggest that interest rates would be kept low for a longer period than they had previously expected (in June);
The ECB had to provide US$500mn in emergency funding to 1 Euro Zone bank. Last week, the ECB provided US$575mn to 2 Euro Zone banks;
The ECB has changed collateral rules. It no longer requires collateral which is traded on a regulated market, with the exception of covered bonds. The previous "toilet paper" that the ECB has been accepting as collateral will be deemed AAA compared to what they will now take. The move clearly means that a number of European banks had run out of eligible collateral and were facing severe liquidity problems. Markets seemed to like the move, but, in reality, it just highlights the serious problems affecting European banks. In addition, the ECB continues to expose itself to serious losses. This move helps the liquidity issue, but not the SOLVENCY issue of European banks;
Having been beaten up once and backtracked, Christine Lagarde is trying again. She warns of losses by European banks (E300bn was mentioned - far too low - Goldman's estimate is E1tr) and a lack of capital. She is totally right and should not back track again. As former Finance Minister of France she, above all, knows that French banks are grossly under capitalised, and are sitting on large unrealised losses, with a thin layer of capital. French banks also depend on wholesale markets - not a good idea in these markets and, in addition, have far too large a balance sheet. They will be forced to reduce their balance sheet size materially. That, off course, will have a very material impact on the French economy. Once again she is advocating public sector capital to recapitalise the banks. Her former boss, President Sarkozy and the idiots at the EU/ECB;
Euro Zone September flash manufacturing PMI came in at 48.4, down from
49.0 in August, though very much in line with the forecast of 48.5; The Euro Zone services PMI fell to 49.1, from 51.5 in August, more than forecast.
The Euro Zone composite (services and manufacturing) index declined to
49.2 in September, from 50.7 in August, below forecasts of 49.8.
German flash September manufacturing PMI came in at 50.0, down from
50.9 in August, though just marginally lower than forecasts of 50.1;
The Greek Government has announced new austerity measures, including cuts to pensions and pubic sector salaries. They are desperate to get the E8bn of bail out funds (very likely). As usual, you will get the riots etc;
There are reports circulating that the French Government will force mandatory recapitalisation's of French banks + Middle East (Qatar) interest in the likes of BNP;
Mrs Lagarde also warns about EM banks - is she thinking about Chinese banks, by any chance - Yep, I think so;
The BoE minutes were as expected with 9 to 0 voting to keep interest rates on hold. The exception was a very, very strong signal that they will expand the size of the current £200bn QE programme - probably by £50bn imminently, even though they voted 8 to 1 to keep QE on hold last time around. Sterling was weaker on the news - cant really understand, because it was an odds on certainty;
UK public sector borrowings were at a record level. August net borrowings came in at £13.161bn (£11.25 exp) and way higher than the £11.852bn in August 2010. Public sector net cash requirements came in at £11.834bn, much worse than £7.0bn. However, the ONS reduced its forecast for public borrowing in 2011/12 by £5bn;
Huge pressure on the UK Government to relax its austerity measures.
Their coalition partners are pressing for a relaxation. I don't believe the Government will change its policy materially, though lower borrowing forecasts does provide some flexibility for infrastructure spending for example. Markets, to date, have approved of the UK Governments actions, which have kept interest rates at record lows.
Any material loosening of fiscal policy risks undermining this sentiment, which will have a material negative impact, particularly for individuals, who are highly leveraged, mainly due to mortgages;
UK consumer confidence declined marginally to a 4 month low of 48, from 49 in July. A gauge of future expectations(6 months ahead) also declined 1 point to 65. Whilst lower, the fact that consumer confidence held up in spite of the August riots must be seen as a positive;
Canadian August core CPI rose by +0.4% MoM (July +0.2%) or +1.9% YoY.
Consumer prices rose by +0.3% MoM (July +0.2%), or +3.1% YoY;
Operation Twist - the Fed announced a US$400bn programme, larger than expected. In addition, they are to buy even longer term debt and reinvest funds from maturing MBS's back into these securities.
However, the FED reported a very downbeat assessment of the US economy. 3 dissenters disagreed with the policy. Basically, more than was expected, with the FED taking on more risk, but the bleak assessment of the US economy, is hard to ignore. The reduction of longer term yields is dreadful for the banks, but great for mortgage holders. 10 year treasuries are at 1.81%, yes that's 1.81%. Expect a huge amount of mortgage refi's.
Is this package enough, I don't think so. I'm of the view that QE3 is next. The (ultimate) FED policy is clearly to increase inflation;
A number of US banks have been downgraded by Moody's - BoA and Wells, suggesting future US bail outs were less likey - too true mate;
US existing home sales rose by +7.7% in August, much, much higher than forecasts of +1.4%. On an annualised basis, sales are 5.03mn. However, the median sales price was down -5.1% YoY. 31% of sales were in respect of distressed homes. Good news;
Rio has warned that some of its customers were asking for delays in shipments of ore. This is a major change in just 6 weeks, when the miners expressed bullish views. The CEO of Rio did however say that the China was not showing any signs of a slowdown.
Copper is in bear territory - its down over 20% The A$ is taking a real beating today, against the US$ - its below par at A$0.99 to the US$;
Summary
The FED's gloomy assessment of the US economy is having a real impact.
US markets slumped towards the close. Asian and European markets are following - European markets continue downwards. The US$ strengthens in a flight to safety pay. Brent is below US$108 (still too high) and the "alleged" safety play Gold is down significantly at US$1760.
Miners and high beta stocks are being trashed.
The G20 meets this weekend at the IMF/World bank meeting. Some kind of a statement, suggesting global coordination, is a real possibility. I may well go slightly long ahead of the weekend - indeed, I may even take a small (very small) position in some beaten up European/UK financials.
Amazingly, Mrs Merkel is not turning up to the G20/IMF meeting - must be working on her knitting.
Have fun.
Best
Kiron
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