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Kiron Sarkar
September 12, 2011
Hi there,
I cant help but believe that I got a reprieve on Friday - the markets
action was inexplicable - I would have thought it would have been
sharply lower, as did all my friends. Yes the Euro Zone is moving
towards fiscal union (currently called a "fiscal compact"), but they
have not bitten the political bullet as yet. The ECB interest rate cut
of 25bps was well signalled, but was agreed only after German lead
dissent. I expect the ECB to continue to cut rates - quite possibly by
another 50bps - 2 further 25bps cuts?. The provision of 3 year financing
for European banks will be of significant help in terms of liquidity,
but European banks will still contract their highly leveraged balance
sheets, particularly of non Euro assets. Draghi's comments on Thursday
were a mistake - he tried to correct the situation on Friday and praised
the Euro Zone compact - well, he had to. The Euro continues to decline,
in spite of European banks repatriating proceeds from the liquidation of
foreign assets.
Personally, I believe that the Euro will weaken far further against the
US$.
The focus of last weeks EU Summit was on the UK's refusal to sign up to
a new agreement - however, Cameron had no other choice and his position
was well signalled in advance. The winner (politically) was France, but
that victory will be short lived - a credit downgrade is very likely
pretty soon. The real outcome of last week's meeting was that the Euro
Zone did not do enough.
Moody's today reported that last weeks Euro Zone deal was insufficient
- downgrades of Euro Zone countries are inevitable, including France I
suspect, together with Italy and Spain. S&P has threatened 15 Euro Zone
countries, including Germany. This situation will not turn until Merkel
brings the German public with her - she has started, but needs to do
much, much more and quickly.
Weaker Chinese exports confirms my view that they will have to ease
significantly, though don't expect a capex lead boom - there will be
talk of social spending, but most of the spending will be directed
elsewhere. I continue to believe that the options available for China
are bad (at best) or a collapse (quite possible). Social tensions are
rising - not a good sign. Chinese woes are bad news for A$ and miners
- ex thermal coal.
The sharp decline of Indian industrial production confirms that the
country is slowing sharply.
The political risk in Russia is increasing, though my friends on the
ground are more sanguine - in addition it is winter and dreadful weather
will limit protests. However, expect a sharp rise in capital flight and
a weaker Ruble. The Russian equity markets are cheap, but I really
cannot see investors buying in. The authorities will announce all sorts
of goodies, including increased spending, which suggests that Russia
will face a budget deficit next year.
I know I sound like a record stuck on the same track, but the ECB will
have to buy significant amounts of Euro Zone bonds and, in addition,
embark on QE - that's when I will pile into the markets. The EFSF/ESM is
unfunded - cant see it any other way. Finland is balking about providing
additional financing for the ESM. With a very likely credit downgrade of
a number of Euro Zone countries, the situation for these funds becomes
impossible. The EU's view that the next Summit can wait till March is so
ludicrous as to be farcical. Another crisis meeting is coming soon. The
only good point is that the IMF is and will get involved.
Cant see great support for peripheral bond - will dump my 10 year
Italian bonds - good trade anyway.
Cant see any reason to be long. Will just play the indices (short) and
short Euro against US$, I suspect. However, I continue to believe we are
coming to the end game with ECB bond buying/QE as the inevitable
outcome. The current max of E20bn per week is just not enough, even
though over a year its big bucks - they need the bazooka and do what the
SNB did. Arguably, if the ECB announced unlimited bond buying, they may
not have to buy as much as they will have to with the current ludicrous
policy - they are buying peripheral debt yet again today.
Gold seems to be in the dog house today - weakening around 1.5% -
stronger US$ trade?
Best
Kiron
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