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BoJ increases its asset purchase programme

Posted By Kiron Sarkar On September 19, 2012 @ 9:34 am In Think Tank | Comments Disabled

The BoJ unexpectedly expanded its asset purchase programme by Yen 10 tr (US127bn) to Yen 80tr, made up of Yen 5tr of government bonds and Yen 5 tr of Treasury bills and, in addition, has removed the minimum yield at which they will buy bonds. The programme has been extended until the end of 2013, with the decision unanimous. The benchmark interest rate was kept at between zero and 0.1%. The BoJ stated that growth in Japan has “come to a pause” and added that overseas economies have moved “somewhat deeper into a deceleration phase”. Quite frankly, the BoJ needs to act far more decisively – the announcement today, whilst unexpected, was pretty anemic, given the economic downturn in Japan and its continued deflationary problems. The governor and some of his deputies will be replaced in March/April next year, which could result in a more positive policy. The Yen moved lower, though the Nikkei rose. Whilst positive, the BoJ is going to have to do much, much more;

FDI into China declined marginally in August, though it is the 9th decline in 10 months. FDI amounted to US$8.33bn in August and US$ 75bn YTD. The recent spat with Japan will result in FDI declining, quite possibly materially in coming months. Interestingly, Japanese investment into China increased by 16.2% in the 1st 8 months of this year;

The Trinamool Congress (“TC”) of West Bengal, is threatening to leave the Indian coalition government . Headed up by the hot head (I could use a difference phrase to describe the lady) Ms Mamata Banerjee, announced that it is to leave the governments coalition in protest of the Indian governments decision to allow foreign multi brand retailers into India. The TC has 19 Parliamentary seats and in theory could bring down the government (if it leaves – Indian politics is characterised by threats and gestures) as the United Progressive Alliance (“UPA”) needs those votes to have an overall Parliamentary majority. However, Parliament is not in session until December. The Central Government had allowed State to opt out of the measures and, to date, only 9 States (out of 29), have agreed to go along with the measures. In the past the Samajwadi Party, which is not a member of the UPA, has supported the government and presumably the government will seek to ensure its continued support and/or bring it into the coalition. However, they are not keen on allowing foreign multi brand retailers into the market;

Mineworkers in South Africa have agreed a 11% to 22% wage increase to end the 5 week strike at Lonmin’s platinum mine. The violent dispute at the Lonmin mine had spread to other mines. With, inter alia, declining commodity prices, the South African economy looks fragile and, personally, I believe that the Rand looks vulnerable;

Will BP finally sort out its Russian business. There are initial indications that BP is in talks with Rosneft to sell its 50% holding in TNK-BP, for US$25bn, made up of US$15bn in cash and US$10bn of shares in a joint exploration company (with Rosneft) to explore reserves in the Arctic, a key priority for President Putin. Clearly BP has to deal with its existing partners, who are pretty adept at playing the game in Russia. However, the situation has changed and whilst its early days, BP may, for once, come up with a sensible deal. (Source Bloomberg);

German members of the ruling coalition are to propose that the ECB’s proposed supervision of EZ banks be limited to just the systemically important banks and those with cross border operations. In addition, the German Parliamentary members do not want a harmonised deposit guarantee scheme. For political reasons and, in addition, as Germany’s regional banks are significantly under capitalised, the German’s do not want the ECB to have oversight of these banks. Cant see that the EU’s proposal to supervise all 6000 banks going anywhere soon.

Interestingly, German 2 year bond yields were positive for the 1st time since June, following an auction today where 2 year bonds were priced at 6 bps. Demand of E8.5bn far exceeded the E5bn targeted – yields, I believe will rise further, across the curve.

A number of German businesses have viewed China as a major export market – indeed, they have been conspicuously successful. However, as Chinese growth declines, even German manufacturers will face headwinds. Recent forecasts have reduced German GDP growth this year to below 1.0% – may well be optimistic;

Mr Weidmann, head of the Bundesbank, states that printing money is, effectively, a “Faustian pact”. I thought that the ECB, admittedly so far, is to sterilise the proceeds of its proposed bond purchases of short term peripheral debt, Mr Weidmann. I wonder what the FED, BoE, BoJ, SNB will have to say to Mr Weidmann?;

The BoE minutes reveal that all 9 members of the MPC voted to keep the asset purchase programme, together with interest rates, unchanged. However, it is likely that the BoE will increase its asset purchase programme in October/November this year – the minutes reported that some members suggested that the asset purchase programme may need to be increased above the £375bn currently planned;

Mr Romney, the Republican candidate, seems accident prone. His most recent gaffe, condemned by Republicans, as well as Democrats, is sure to lose him votes. Some polls however suggest that the race is still pretty tight, which seems strange. He really needs to get his act together;

US housing starts rose by +2.3% M/M in August to a 750k pace on an annual basis, though slightly lower than the 767k expected and 733k in July. Building permits were better than forecast at 803k, as opposed to 796k expected, though lower than the 811k previously;

Saudi Arabia has offered to supply extra oil through to the year end. The Saudis believe that a US$100 per barrel price is more appropriate, given the weakness of the global economy. Maybe someone knew about this move ahead of the announcement, given the sharp decline of oil on Monday. Reducing oil prices ahead of the US Presidential elections will clearly help Obama – any connection do you think?;

BHP reported that the pace of iron ore demand from China has slowed by more than half and, as a result, has cut its forecast for iron ore prices for this and next year. The company has cut back on its capex programme recently. Copper is more resilient they added;

Outlook

Asian markets were higher, though Europe is flat to marginally lower. The Euro is coming off – currently US$1.3015, though looks as if it will weaken further. Brent (November) is off at US$110.72, with Gold at US$1772. US futures suggest a higher open.

I must say, I had expected European markets to perform better today.

 

Kiron Sarkar

 

19th September


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