BOJ kept policy rates on hold at between zero to 0.1%. The Central Bank kept it’s asset purchase programme at Yen 45tr (US$570bn) and lending facility at Yen 25tr. It look as if the BoJ will not ease further, unless the Yen strengthens further;

Japanese July Consumer Confidence hits 7 month low. The index came in at 39.7, from 40.4 in June as fears of lower income and unemployment in the coming 6 months rose. All 4 components, which make up the index, fell;

Chinese inflation at 30 month low of 1.8% and weaker July data will allow authorities to increase monetary and fiscal stimulus, which is what I expect. GDP growth declined to +7.6% in the 2nd Q, the slowest rate since 2009. Industrial production dropped to +9.2% in July, from +9.5% in June and expectations of +9.5%. July retail sales fell to +13.1% from 13.5% in June (+13.7% expected) and fixed asset investment held steady at 20.4%. PPI declined by -2.9% Y/Y, worse than expectations of -2.5% and -2.1% in June. Chinese markets rose for the 5th consecutive day and whilst I believe that Chinese related investments will outperform in the short term, I’m getting even more bearish in the medium to longer term. Finally, it is clear that the Chinese authorities will continue to depreciate the Yuan, suggesting more capital flight. The weaker Yuan will be a problem for Asian economies;

Indian industrial production fell -1.8% in June Y/Y, well below the +0.4% rise expected. With a weak monsoon and higher commodity prices, pushing inflation higher, the RBI is in a bind, even though the economy is weaker and would benefit from a further interest rate cut. Analysts have been reducing GDP forecasts – Goldman’s is now at +5.7% (previously +6.6%) for the fiscal year to March 2013 (Citi is below 5.0%), whilst it expects wholesale prices to rise by +7.2%, up from +6.5% previously. The budget deficit is expected to come in around 6.0%, higher than the the Governments forecast. I remain bearish on India. S&P and Fitch have warned that they may remove India’s investment grade credit status. (Source Bloomberg);

More German support for Draghi. Whilst Mrs Merkel is on holiday, a number of members of her party continue to support Draghi’s proposals. To date the German authorities have remained relatively silent for domestic political reasons (they fear a voter backlash), a totally ludicrous position, given the current crisis and the risks involved. It looks as if they are finally learning;

Decision on further aid for Greece delayed till October. EU officials stated that the Troika would spend the whole of September in Greece and present their report to the October Eurogroup meeting. Basically, they want to buy more time. Further aid, unless Greece complies looks near impossible and I remain of the view that Grexit will occur, possibly even this year;

ECB monthly report reduces 2012 GDP to -0.3%, from -0.2% previously. 2013 was cut to +0.6%, from +1.0%. Inflation expectations remain at +2.3% this year, though lower in 2013 (+1.7%, as opposed to +1.8%);

The UK’s BoE (and US authorities) are furious over allegations by NY regulator in respect of StanChart. Whilst the governor of the BoE Mr Mervyn King was relatively subdued publicly over the statements by Mr Benjamin Lawsky (who has refused to comment further), the FT reports that the BoE is apoplectic. Apparently the parties responsible for deciding as to whether criminal actions are warranted (FBI, DoJ,Treasury, FED etc) were not aware that Mr Lawsky’s would be making the explosive remarks he made – they, apparently, are equally furious as it could complicate their case. The important issue is that regulators, particularly in the US and the UK, should cooperate with each other and these kind of spats don’t help. On reflection, markets seem to be ignoring Mr Lawsky’s remarks – StanChart closed over 7% higher yesterday and are up a further 3.5% at present. Today’s FT states that StanChart may sue – unlikely;

UK June trade deficit widens more than expected – to £4.308bn M/M, the highest since 1997. Expectations were that the trade deficit would come in at £3.1bn, higher than May’s £2.719bn. The visible trade deficit came in at £10.119bn, higher than expectations of £8.725bn and £8.363 in May. Exports declined by -4.9%, whilst imports were -0.5% lower;

Will Ireland be upgraded?. My friends at Goodbody stockbrokers suggest that it is a serious possibility. Ireland has met its targets and will likely receive assistance in due course from the EZ. Personally, I agree with Goodbody’s. The economy has stabilised and exports continue to perform. The main risk remains slowing economies in the UK and the EZ, in particular.

Irish July CPI came in at +1.6% Y/Y, though declined by -0.1% M/M

Irish July consumer confidence came in much higher at 67.7, as opposed to 62.3 in June;

US non farm productivity rose by +1.6%, more than expected in 2nd Q and greater than the +1.3% expected. Productivity was revised upwards, to +0.7% in 2011, from +0.4% previously. Unit labour costs rose by +1.7%, faster than the +0.6% expected;

US mortgage delinquency rates are improving. The 2nd Q delinquency rate (more than 60 days late) declined to 5.49%, the lowest level since 1st Q 2009 and below 5.78% in the 1st Q 2012. The worst states in respect of foreclosures (California and Arizona) saw the best improvement. In addition, RealtyTrac reports that foreclosure filings fell 10% in July Y/Y or 3.0% M/M, though the improvement may well reflect legislative changes, I accept;

US unemployment claims unexpectedly fell to 361k, a decline of 6k, in the week ended 4th August, below the 370k expected. The 4 week moving average rose to 368k, from 366k. continuing claims rose by 53k to 3.33mn and those claiming emergency and extended benefits decreased by 127k to 2.42mn;

US June trade deficit lower than expected. The deficit declined by 11% to US$42.9bn, the smallest since December 2010 and below the forecast of US$47.5bn. A material decline in oil prices contributed to the decline. However, oil prices are some US$20 higher at present;

Outlook

The Euro has come off its very recent highs and is testing US$1.23. A minimum of a month’s delay (German Constitutional Court decision on 12th Sept), in effect, will not help.

Brent continues to creep up – currently US$112.50. Subject to geo political risks, it looks overdone.

Earnings, both in the US and Europe have been lackluster to say the least. However, China will continue to ramp up its stimulus programme, focusing on fixed asset expenditure – it has no choice. The ECB will act, as suggested by Draghi. The FED has indicated that it will introduce QE3 in September. Importantly, US housing continues to recover. Investors may have covered a majority of their shorts given the recent market rise, but are far from being long.

A move away from defensives and into higher beta trades is taking place, which I would argue is not surprising. Personally, I believe that this trade has further to go. However, investors remain cautious to negative.

The above suggests to me that it is (much?) better to be long at this stage.

Kiron Sarkar

9th August 2012

Category: Think Tank

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