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Kiron Sarkar
January 9, 2012
Hi there,
Lending by Chinese banks rose to US$101bn in December, higher than
expected. M2 also rose at a faster pace, +13.6% as opposed to forecasts
of +12.9%. The Chinese authorities are clearly relaxing the recent tough
monetary policy measures and a cut in RRR is expected imminently.
Imports in December rose by just +11.8% (a 26 month low and well below
the +17.0% forecast), whilst exports increased by +13.4% (in line with
forecasts), resulting in a trade surplus of US$16.5bn, well above
forecasts of US$9bn. The 2011 trade surplus amounted to US$155bn, the
lowest since 2005, with imports rising by +24.9% and exports by
+20.3%. However, the trade surplus has declined for the last 3 years
and is expected to be even lower this year, reflecting the weaker global
economy. Do not expect the Yuan to appreciate much further this year -
indeed, there are convincing arguments that suggest the Yuan may weaken
against the US$, in particular.
The PBoC remains concerned about inflation and does not want to relax
monetary policy too early. However, the politicians are scared of the
possibility of a hard landing (a real possibility) and will relax
monetary policy, even if opposed by the PBoC.
Any relaxation of monetary policy will be followed by a rise in "risk
assets" - commodities/A$, in particular. However, fixed asset
expenditure in China cannot be maintained at previous levels, which does
not bode well for "risk assets". Talk of investment in subsidised
housing and social spending will be the flavour of the year, but
previous efforts have failed - cant see why the latest will fare any
better. The Chinese markets have been dreadful for the last 2 years and
whilst a loosening of monetary policy and talk of Government spending
will result in (brief) market rallies, I remain bearish. A collapse of
property prices, serious financial problems of the regional governments,
a large increase in bad loans are all real possibilities. Not a rosy
scenario;
The IMF believe that the proposed "voluntary" 50% haircut, to be imposed
on private sector bond holders of Greek Sovereign debt will be
insufficient. Well, what a surprise - I think not. The final haircut
will need to be 75%+. In addition, Euro Zone countries and the ECB will
suffer losses on their bail out funds and Greek Sovereign debt
respectively. A "credit event", triggering CDS's, is becoming more
likely. The Greeks have not and will not meet their commitments - that's
the bottom line. There is a serious risk that Euro Zone countries and
the IMF, in particular, will be reluctant to provide additional aid. The
game is to play for time as the Euro Zone are concerned about contagion
effects if Greece is forced to exit the Euro. However, I simply cannot
understand how, politically, the Euro Zone can provide additional
funding and the IMF will face serious internal constraints in respect of
further lending. This issue will come to a head within a month or 2, at
the most;
Over the Christmas/New Year holidays, the Spanish authorities released
more bad news, in particular in respect of the 2011 budget deficit (now
expected to be 8.0% - will be even more) and that Spanish banks face an
additional E50bn of losses - the real number is likely to be higher. How
are these banks going to meet the 9.0% Tier 1 targets imposed by the
EBA? Expect more bad news. The incoming administration has inherited a
can of worms;
The collapse of Unicredit's share price, following the announcement of
the rights issue suggests that European banks are going to find it
extremely difficult to raise funds from the markets. The EBA requires
that European banks have a minimum Tier 1 ratio of 9.0% (E115bn) by 30th
June 2012 - indeed banks have to submit their capital raising plans by
20th Jan. OK, so selling more assets to reduce the balance sheet is an
alternative, but is impractical in the size required, particularly in
current market conditions. Certainly seems like the banks will be coming
cap in hand to their respective Governments - who just happen to be
tapped out/bust and then to the EFSF, whose funds are limited. Oops;
To add to Italy's woes, Fitch suggested that there is significant chance
of ratings downgrade once they have completed heir review;
The ECB is not expected to reduce interest rates this Thursday (12th
Jan), following the two 25bps cuts in November and December. I believe
that the ECB will cut rates by at least 50bps in the 1st half of the
year, though Draghi is likely to delay the announcement of the next cut
to Feb/March. I remain of the view that the ECB will implement its own
QE programme (dressed up as an anti deflation measure), especially if
Euro Zone members can agree a "fiscal compact", which is due to be
agreed by March this year.
No change is expected by the BoE, though an increase of its current QE
programme is a certainty - expected in February/March;
The FED seems to be unimpressed by the recent resilience/"strength" of
the US economy. Dovish statements by FED officials recently suggest that
it would not take much, in terms of negative news, for the FED to
trigger QE3.
Equity markets are on the rise today, following optimism that China will
ease monetary policy. Sure China will - it has no choice, but the gross
imbalances within the Chinese economy does not suggest that China is
going to be the Global saviour. Another crisis in the Euro Zone is a
near certainty and whilst the US economy has proved to be resilient, I
very much doubt the recent (optimistic, in my view) GDP forecasts,
issued by analysts. I continue to believe that the 1st Q
2012 will be particularly difficult for equity markets and that rallies
should be sold into/shorted.
Apologies for being off line for the last few weeks - took some time
off. Currently in Goa with the same old internet problems.
As a result, a short blog today - in any event, I need to get back into
the flow.
May I just take this opportunity of wishing you all a very happy New
Year.
Best
Kiron
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