|
Kiron Sarkar
November 16, 2011
Hi there,
Great fiscal austerity by the Greeks - their 2011 budget deficit
increased to just over E20bn, as compared with E18.1bn, for the 1st 10
months last year. Remember the Greek Finance Minister stated that Greece
would produce budget surplus next year !!!!!!;
Good old Junker, the head of the EU's EcoFin. He is quoted in a German
newspaper as saying German debt levels are a problem. You will recall
that he is also the man who stated that people should lie in certain
cases;
The Troika, the ECB, EU and the IMF have given Portugal a green card,
which will enable the next tranche of bail out funds to be paid.
However, they did warn of downside risks in 2012 and, in addition, the
problems which Portuguese banks will face in raising capital. More
austerity next year = certain (deep) recession, followed by a need for a
haircut on Sovereign debt;
France is getting ever more desperate. The French PM (Baroin) has added
to the French clamour for the ECB to intervene and for the EFSF to be
granted banking license ie to increase its leverage. Just confirms that
the EFSF is as dead as a dodo. Hmmmm, this stuff was discussed and the
French agreed recently, did they not !!!. A serious French rethink,
basically, from a point of desperation. Euro Zone tensions (particularly
between France and Germany) are set to rise to fever pitch. France can
see its getting in deep doo doo and with the impending 2012 French
Presidential elections, together with the threat to their AAA
rating.......Finally remember that France needs to maintain its AAA
rating for the EFSF to have even the slimmest chance;
The Economist reports that the ECB bought as much as E2bn of Italian
bonds today. Given that they buggered it up by only buying E4.5bn of
PIIGS (probably mainly Italian, but also Spanish and possibly Portuguese
bonds) last week (less than half the previous weeks amount), they are
now going to have to ramp up purchases significantly
- far more than would have been the case - to keep Italian bond yields
from exploding. Another great example of EU/ECB financial management -
me thinks not. Italian bond yields closed unchanged from yesterday, in
spite of he alleged buying.
Italian banks represented 19% of total borrowings from the ECB, as at
the end of October;
Well finally - Mrs Salgado, the Spanish Finance Minister admitted that
Spain will not meet its growth target this year - must be trying to
salvage some credibility in anticipation of being kicked out of
Government this weekend. However she still cant get away from her used
car sales persons comments - she adds that the Spanish Central
Governments budget deficit is on target (not difficult when you don't
pay your bills), but that she does not have data for the semi autonomous
regions - those same regions who were near their 2011 deficit targets at
the half year you will recall. Mrs S ruled out the need for bail out -
oops, an "official denial" - dangerous. However, there's not enough
money available anyway;
Moody's downgraded several Landesbanken - Germany would not have the
funds necessary if it had to rescue Italy - now this is really getting
to be nuts;
The BoE report states that inflation will be below it's 2.0% target in
2 years, which together with the statement that economic activity will
be "broadly flat" for the 1st half of next year (below 1.0%, though the
picking up in the 2nd half for a 1.0% GDP growth forecast for
2012) is yet more confirmation of upcoming QE3 - the bank concludes its
most recent Sterling 75bn bond buying programme by February 2012 -
however, I would not be surprised if the Sterling 75bn programme is
increased and/or a new round announced - my target for the final
aggregate amount remains at Sterling 500bn, from the current Sterling
275bn;
US industrial production rose by +0.7% in October, with capacity
utilisation rising to 77.8%, the highest since July 2008.
The US NAHB survey rose to 20, from 17 in October.
Mortgage applications/Refi's? are rising;
Apparently, the rise in WTI today (at one stage around US$103) is
because of a pipeline deal which will involve the glut of Oil at Cushing
(where WTI is priced) to be redirected to the Houston area.
Rising Oil prices is certainly bad news and will increase US headline
inflation (and disposable income), though the FED follows core
inflation. Whilst I accept that increase in Oil prices are a depressant
to economic activity, I don't know anyone whose day to day living
expenses are based on core inflation;
Today's late afternoon swoon in US markets was apparently due to a Fitch
report which stated that US banks faced increased risk to their credit
ratings due to the Euro Zone woes - that's supposed to be news; oh come
on now. Just proves this is now getting (sorry has got to) cloud cuckoo
land stuff. Any more of this and QE3 will be brought forward from the
likely date of end of 1st Q 2012. In addition, watch out for more
strident Obama/Geithner d even Bernanke rhetoric. US markets did close
at very near their lows of the day today - not good news at all;
Summary
Euro Zone tensions are rising - approaching capitulation levels - Euro
Zone bonds (ex Germany in the main) took one hell of beating today.
If there is no Euro Zone "temporary" QE/Serious ECB bond buying soon,
I'm going to have to eat humble pie, buy a container full of baked beans
and book my local cave, before others. However, this increased tension
just raises the pressure to introduce serious bond buying/QE by the ECB,
I have to believe - maybe I should try crossing my fingers as well,
before any of you suggest it. Germany will have to get its way and Euro
Zone countries will have to concede to central fiscal oversight -
sensible in my view. The French, in particular, may object, but look
where they are - 10 year French OAT's are approaching 200bps over
equivalent bunds and rising. Most importantly, Mr Bofinger (a German
economic "Wiseman" - does that mean everyone else is stupid
!!!!!) and, importantly, Schaeuble (yesterday) contradicted the head of
the Bundesbank Weidmann (pretty important, as Germans love consensus and
never question the Bundesbank). Mr W reiterated the same old claptrap
FYI.
Euro continues to weaken (US$1.35, though off its lows) in spite of
European banks liquidating foreign assets and remitting funds back to
the homeland - or Dunceland as some would say. Must be a great time to
be buying distressed assets on fire sale by Euro Zone banks.
Apparently, some Sovereign Wealth Euro buying from the Middle East (why
I ask) is taking place as well, according to the experts. Having said
that, any positive news from the Euro Zone will result in a savage short
covering rally - me thinks I want to be square - just too risky, given
that imminent action is necessary.
The 3 month Euro-US$ cross currency basis swap (indication of tension)
is moving towards 2008 crisis levels (a post Lehman high) - basically
very expensive to swap Euro's for much needed US$, reports the WSJ.
However, the ECB has a swap line with the FED and banks requirements
should be met - however, it's a sign of weakness, if banks have to
utilise the ECB facility though. A number have no choice.
Chinese markets were "difficult today - concerns over property
companies. Relaxation of monetary policy imminent.
Looks like a tough day for equity markets tomorrow, unless there are
some Euro Zone positive developments (quite possible) imminently -
further delays are no longer feasible. However, have crossed fingers and
toes - the best investment technique in my war chest, as one of my
friends would say.
Best
Kiron
|
