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Kiron Sarkar
March 21, 2012
Apologies for any misunderstanding. The Russian budget deficit for the 1st 2 months of the year is 4% of 2 months GDP and not double the 2% budget deficit forecast for the full year.
Hi there,
The Australian Government (the Bureau of Resources and Energy Economics) is forecasting a -8.5% decline in iron ore prices, as supply increases and Asian (China) slows. (Source Bloomberg). The miners have more downside, in my humble opinion - I remain short;
The Australian State, Queensland, is set to vote on the 24th March - Ms Gilllard's Labour party is expected to lose (they have been in power since 1989, with the exception of 2 years), putting more pressure on her Government, which has to rely on independents to stay in power. The next Federal elections are due in 20 months time, but look as if they may come earlier;
Saudi Arabia announced that it would raise its exports to the US and, in addition, work with countries individually to "return prices to fair levels" - they recently suggested a US$100 per barrel target. Saudi Arabia's spare capacity, which Mr Naimi (the Saudi Oil Minister claims is 2.5mn bpd) has been subject to increasing scepticism. Current production has risen to nearly 10mn bpd. Iraq is to increase production by 300k bpd on top of the 2.1mn bpd current production and it is thought that Kuwait and the UAE may also increase production (Source FT);
To ease criticism of his regime, Mr Putin has embarked on a spending splurge. The result is a budget deficit which is nearly double the full years target after just 2 months. Gosh, even Greece's performance was better (Source Andy Lees of AML Macro);
I have read a number of alarming reports on Spain over the last few days. Essentially, the argument is that debt to GDP is in fact much higher (85%) than the 68.5% at the end of 2011, reported by the Bank of Spain last Friday. The higher % includes debt in respect of unpaid and overdue bills, Spanish sovereign debt held by a social security reserve fund and other items. I have raised a number of issues in the past and unfortunately believe that the reports are, in the main, accurate. I feel sorry for Mr Rajoy, who has inherited a can of worms from the previous administration and is facing extremely serious economic problems. I have been banging on about Spain for well over a year, but the market is finally focusing on the country far more - I suppose Greece was the primary focus previously.
Even now, the market is concentrating on Portugal. As you know, I have argued for well over a year that Portuguese debt levels are unsustainable and a 40%+ haircut is necessary. However, the key issue is that Portugal can and will be rescued - its small enough to sort out. However, the same cannot be said for Spain. Expect far more focus re Spain in due course. Once again, Spain is too big to fail, though too big to bail out. Private sector debt is also exceedingly high - it's impact is even worse, as just 25% of Spanish homeowners have mortgages ie excessive and concentrated debt.
Whilst there may be a short term pop if the EZ does indeed increase the size of the EFSF/ESM and, in addition, gets additional funds from the IMF for it's bail out funds as I expect, the market looks very likely to focus on Spain far, far more in due course. However, the speed of deterioration of Spain's economy and its finances is truly alarming and unemployment, currently around 23%, looks almost certain to rise to 27%/28%, by the year end !!!!. Essentially, beware of investing in Spanish financials (in particular) and, in my humble view, Spain as well - for full disclosure purposes, I'm short Spain. However, the bottom line is that the potential contagion effects re Spain are serious;
E768bn was parked at the ECB last night, slightly less than the recent peak of over E800bn;
The BoE minutes reveal that all 9 members of the UK MPC voted for QE3, though 2 members wanted it increased to a total of £350bn ie £25bn more than the £325bn agreed. The MPC did not change its growth and/or inflation outlook, though did add that increased unemployment did not appear to be reducing inflation. They expressed concern about the increasing oil price, together with the EZ crisis and increasing bank funding costs, in spite of the ECB's LTRO. The BoE's chief economist warns that UK inflation may not decline by as much as expected - he cites rising oil prices - unfortunately my view as well.;
UK's February PSNB (ex support for banks) came in at £15.183bn (£8.9bn the previous year), much higher than the £8.0bn forecast and the highest for any February on record. Not good news. Tax revenues declined by 2.7% (lower bonus payments in the financial services sector? and self assessed income), whilst spending rose by +8.3%. Net debt rose to £995bn or 63.1% of GDP, up from 58.8% a year ago. (Source Bloomberg) ;
US housing starts fell by -1.1% in February from January or 698k starts on an annual basis and whilst slightly lower than the forecast of 700k, are up nearly 35% on a YoY basis. January starts were revised higher to a 706k annual pace, the highest since October 2008. However, building permits, a better forward looking indicator, rose to an annual pace of 717k, above the 686k forecast and 682k in the previous month. For comparison purposes, at the peak in 2005, housing starts reached a peak of 2.07mn homes annually. The N E and the West were lower, whilst the South and the Mid West higher. The main reason for the slightly lower starts was a 9.9% decline in single family homes - to 457k (though up 24% on a YoY basis) - the largest decline in a year and may reflect a claw back from stronger January starts due to much milder weather in that month. Multi family home starts rose by 21% to 241k at an annual pace and are up over 85% on a YoY basis.
The market was disappointed by the headline news - personally I thought that the details came in better than expect.
US existing home sales data - much more important than new home sales - is released later today;
Mitt Romney won by a significant margin (near 12% points) in the Illinois primary. Indications are that Mr Santorum will persevere, but I for one cant see why he should;
Outlook
Speculation circulated that Chinese State controlled funds were buying today - likely. However, the main Asian markets (ex China and India) closed lower.
European markets are slightly higher - in the UK, its budget day.
US futures indicate a higher open. Spot Brent has crept back to near US$125, and copper and gold are higher.
Best
Kiron
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