"Deal" on Greece inches forward
Kiron Sarkar
November 23, 2012

Fitch slashed the ratings of Sony (now BB-, down 3 notches) and Panasonic to junk (now BB, down 2 notches). The woes of Japanese consumer electronics companies continue;

It looks as if China has stopped increasing the size of its strategic petroleum reserve. The IEA estimates that in Q1 this year, China increased its reserve by 650k bpd, which decreased to 510k bpd in Q2 and just 100k bpd in July. However, the IEA states that China did not increase its reserve in August and September. (Source FT);

India's budget deficit for the fiscal year ending 31st March 2013 is expected to come in above the recently raised estimate of 5.3%, to around 5.6%. The threat of a credit downgrade to junk is looming. Much lower than expected proceeds from the sale of wireless spectrum has impacted the ability of the government to keep the budget deficit at the previous estimated levels. The Rupee looks vulnerable;

South Africa's Reserve Bank held interest rates at 5.0% as expected. The governor stated that inflation risks were increasing, though growth prospects had diminished. 2012 GDP was forecast at +2.5%, marginally lower than the +2.6% previously, increasing to +2.9% in 2013, from +3.4% previously. With continued political problems and possible disagreement at the forthcoming ANC Conference, combined with rising inflation, the Rand looks as if it will weaken further - currently Rand 8.9218 against the US$. I would expect the Rand to weaken to above Rand 9.0 against the US$ in coming months. For full disclosure purposes, I remain short the Rand against the US$;

Recent comments from Greece/EZ suggests that the IMF is caving in on its insistence that debt to GDP should not exceed 120% by 2020. A figure of 124% is now deemed viable by the IMF. The EZ needs to agree on measures to provide Greece with a further E10bn to keep Greece going until 2014, for the IMF to participate in disbursing the next tranche of aid - the Germans have suggested using the EFSF to provide the funding necessary. Some aspects of the likely agreement have leaked out. The ECB is to hand over most (75% is the number being discussed) of "profits" on its holdings of Greek bonds, whilst EZ lenders will reduce interest charges, which will save a further E8mn and provide an interest payment moratorium, combined with extending the maturities of existing loans. Debt buy backs from private sector bondholders at between 30 and 35 cents of par are likely, which could reduce Greece's overall debt by some E10bn, though prices have risen in anticipation. EZ finance ministers are to hold a teleconference on Saturday, ahead of the meeting next Monday, where a deal looks likely - positive for the Euro. Having said that the likely can kicking/fudge has a limited life expectancy and in addition must be approved by the Parliaments of Holland Finland and Germany;

Elections are due in the Spanish region of Catalonia this weekend. The leader of Catalonia has pledged to hold a referendum on independence from Spain, if he wins the election, as is expected. However, only the Central government can authorise such a referendum. The bigger issues are that the EU will not recognise an independent Catalonia and, in addition, the regions trade is mainly with Spain. Furthermore, an independent Catalonia will not be able to fund itself. Secessionist talk (cant see it happening) however, adds to Spain's troubles;

German final Q3 GDP was confirmed at +0.2% Q/Q (+0.9% Y/Y), in line with expectations. Exports, together with construction activity were the main drivers, whilst domestic consumption and capex spending weakened. However, with the EZ slowing and weakness generally (ex the US), exports will come under pressure. GDP may well decline in Q4;

The important German IFO November business climate indicator came in at 101.4, better than the 99.5 expected and 100.0 in October. The current assessment component came in at 108.1, better than 106.3 expected and 107.3 in October, whilst the expectations component was also better at 95.2, higher than both expectations of 93.0 and 93.2 in October. The Institute reports that exports to the US and Asia are "going well", and industrial orders are stabilising. However, they add that Q4 Germany GDP will be lower than Q3 and may well decline into negative territory. In addition, they admitted that German industry is wary of increasing capex;

The Bundestag has passed the 2013 budget bill, which foresees that the federal net new borrowing declining to E17.1bn, down from E28.1bn previously. The upper house, the Bundesrat is expected to pass the bill next month;

Negotiations over the EU's 2014/20 budget look as if they will fail. Mrs Merkel repeated that a further meeting in the New Year would prove necessary;

An US court has judged that Argentina must pay US$1.3bn to certain investors, who had previously not accepted a severe debt swap imposed by Argentina. Mrs Fernandez, President of Argentina has reacted angrily to the decision. Another sovereign default is likely. The ruling could well improve investor rights and, pose a problem for organisations such as the World Bank and the IMF, which have preferential creditor status;

Outlook

Asian markets closed mainly higher, with European markets up modestly. US equity markets are open until 1.00pm. The Euro is hovering just above US$1.29, though should pick up on better German IFO data and expectations of a "deal" on Greece. Gold is hovering around US$1730, with January Brent at 110.50.

Cant see much action, other than on currencies, given the half day in the US.

Have a great weekend.

Kiron Sarkar