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Kiron Sarkar
December 16, 2011
Hi there,
The RBI, India's Central Bank, has imposed curbs on Rupee forward
trading to try to halt the sharp decline in the currency. They also
reduced the size of positions that could be held by dealers overnight.
Whilst helpful in the short term, these type of measures rarely succeed,
other than in the short term. Foreign investors are withdrawing capital
which will add to the pressure on the Rupee.
Furthermore the RBI will be cutting interest rates in the New Year
(though, as expected, they kept repo rates on hold today at 8.5%),
another negative for the Rupee;
The EFSF is considering the inclusion of explicit warnings to investors
that the euro could break up or even cease to become a "lawful
currency".
Interesting data on the Bundesbank's exposure to other (mainly
peripheral) Euro Zone countries. The Buba has lent E495bn (64% of BUBA's
assets) to the ECB via Target2. Those funds have been taken up from
Target2 by central banks in (guess where) the PIIGS. Oops, Oops and
Oops. Even if you ignore the credit risk (though the ECB can just print
money to cover the exposure, I suppose), this level of funding/exposure
highlights the increasing strains in Euro Zone financial markets;
Fitch reviewed repossessed properties in Spanish RMBS's that they rated.
The summary - average sales prices are not only 43% lower than
valuations at the time of the original purchase, but also 32% lower than
the valuation conducted at the time of repossession. Some banks are
selling the underlying collateral at inflated prices to intra-group
entities !!!!! - surely accountants should have spotted this as inter
group profits should be ignored in compiling the P&L.
For those banks that have achieved the highest sales of such properties
in the lowest time, the average discount is a massive 58%, though even
this strategy took an average 11 months (source FT) This is a definite
"prized Oops";
Ms Lagarde warns that the Euro Zone crisis is escalating. In addition,
she confirmed the weakness of the global economy, which would impact
every country - hint to Germany? and which could lead to a 1930's type
of depression;
The French national statistics office reported that France is in
recession as the economy contracts in this Q (-0.2%) and next (-0.1%).
Domestic demand and corporate spending is declining. The French
Government has forecast that their economy will grow by +0.5% - 1.0%
next year - complete pie in the sky. A deteriorating French economy,
combined with the (very likely) loss of its AAA rating suggests
Sarkozy's Presidential aspirations are effectively "French toast". The
only good news is that Insee is forecasting inflation to decline to
+1.4% by June 2012 (source Bloomberg);
The UK is to be granted observer status at meetings to discuss the
bilateral agreements to enshrine the "fiscal compact" agreed at last
week's EU Summit. A number of countries will welcome that move.
Mr Noyer's comments yesterday (followed up by Mr Fillon - the French
PM) have had the opposite impact - the political pressure on Cameron
(following his veto of a new treaty at last weeks EU Summit) has eased.
However, today the French Finance Minister Mr Baroin added to tensions
by, in effect, repeating Mr Noyer's comments. The French have clearly
been drinking too much absinthe. However, all of this suggests that
France may well be downgraded in days.
A French downgrade (by 2 notches?) reduces the headline size of the EFSF
from the current E440bn, to less than E300bn, as the French guarantee
was worth E158bn - a definite Oops. On that basis and after taking into
account commitments for bail outs of Greece, Portugal and Ireland, the
EFSF would have roughly E150bn left - as I keep saying, the EFSF and for
that matter the ESM are "dead ducks" as currently constituted. The EFSF
currently has a AAA rating - though is "under review" by S&P ie it will
be downgraded;
Expect a lot of talk about something which is likely to be called (by
the FT) "the Sarko" trade, as it is being promoted by none other than Mr
Sarkozy - that well known financial Guru - I think not.
Essentially, European banks borrow 3 year money from the ECB at cheap
rates and then invest in Euro Zone bonds, thereby enabling Governments
to finance themselves and for banks (credit risk aside) making a very
nice turn on the interest rate differential. Indeed, the much better
recent (particularly the 5 year) Spanish bond auction was due to this.
The longer dated auction of Spanish bonds on the same day did not do as
well. The media has hailed the Spanish bond auction as a success.
They should think again.
Draghi has suggested that the funds borrowed from the ECB be lent to the
private sector, but it is debatable whether this will happen. The
problem is that if analysts see that European banks have increased their
holdings of Sovereign bonds (they now have to disclose the data), they
may well raise their eyebrows and/or do more;
Rumours that the SNB would weaken the Swissy against the Euro proved
unfounded. However, the SNB continued the verbal rhetoric and, in
addition, forecast deflation in Switzerland for next year;
Irish 3rd Q GDP came in at -1.9% Q/Q or -0.1% YoY, much weaker than the
-0.5% and +1.5% respectively expected. In addition Q2 GDP has been
revised lower to +1.4% Q/Q from the previous +1.6% and to -0.7% YoY from
the previous +1.1% YoY. Need to follow up as to why the data was so
materially weaker;
Republicans and Democrats finally reached an agreement to avert a
shutdown of the US. Both parties agreed a US$1tr spending bill that will
finance government spending for the fiscal year ending 30th September
2012. The agreement paves the way for a deal on extending payroll tax
cuts, though no doubt there will be intense debate on Democrat proposals
to extend jobless benefits.
Summary
US markets closed higher, but well off their highs.
Asian markets closed higher. European markets are up - the Euro is
recovering somewhat.
Should be quite large volume in the US today, given option expiry and re
weighting.
Underlying problems vastly outweigh today's modest rise in the markets,
in my humble view. A French downgrade looks as if its imminent, given
all the French rhetoric - I still find it hard to believe their comments
re the UK. Other Euro Zone countries will also be downgraded, including
Germany most likely.
I will remain short the market and the Euro.
Best
Kiron
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