Japanese PM, Mr Noda, yesterday ordered his Cabinet to draw up stimulus plans by November. The authorities are considering using reserves of around US$17bn, in this years budget. However, any greater sums will be politically impossible, given that the opposition (DJP) is blocking such measures and is demanding that the government call general elections. The current administration is pressing the BoJ to adopt a clearer inflation target – pretty dangerous stuff. I continue to be deeply sceptical of Japan’s ability to get out of its crisis and am getting even more bearish, if that is possible. However, today, the Nikkei rose on the much better US housing data, though the Yen is weakening – time to short?. Its been the graveyard trade in the past, but this time around………;

Chinese Q3 GDP came in at 7.4% Y/Y, in line with expectations, though lower than the +7.6% reported in Q2. Industrial production rose by +9.2% in September Y/Y, up from the 3 year low of +8.9% in August, though slightly below the forecast of +9.0%. Retail sales rose by +14.2% Y/Y in September, the most since March this year, above the +13.2% forecast. Fixed asset investment, excluding rural households, rose by +20.5% in the 1st 3 Q’s, slightly higher than the +20.2% forecast. Chinese authorities (Premier Wen) suggest that their economy will pick up in the 4th Q. The numbers suggest some kind of stability, though as Dao Tong of Credit Suisse adds “I do not see China bouncing back quickly”, a sentiment I agree with. (Source Bloomberg)

More importantly, home prices rose in 31 of the 70 cities the government tracks in September, compared with 35 in August. Prices fell in 22 cities, though overall, prices seem to have stabilised and, indeed appear to be rising;

South African GDP growth is expected to decline to +2.3% this year (the governments forecast is +2.6%, but is likely to be revised lower), the lowest since the recession in 2009 and below the previous forecasts of +2.5%, before the recent spate of strikes. Unemployment is around 25% and is expected to increase. For full disclosure purposes, I remain short the Rand;

Rosneft executives are in London and are discussing buying BP’s 50% share of TNK-BP, in exchange for a cash and shares package worth US$28bn. There is also talk about buying the oligarchs 50% stake in TNK-BP- allegedly for US$28bn in cash. The deal is likely to go ahead, though the financing of this deal is going to be an issue. Does this mean that finally BP has achieved at least one reasonable deal – well, miracles can occur. The deal, if concluded, will transform Rosneft into the worlds largest oil companies;

Reports from the Troika suggest that agreement has been reached with Greece on additional austerity measures. Well great, but are the measures credible and/or will be implemented – well, if you believe that, ………No deal on Greece at the EU Heads of State meeting, though;

Spanish bad loans rose to 10.5% of all loans in August, up from an upwardly revised 10.1% in July, 9.86% previously. An additional E9.3bn of loans were classified as in default. A total of E178.6bn of loans are in default.The NPL ratio has risen in the last 17 months and up from just 0.72% in December 2006. Lending declined by -1.1% in August from July, as did deposits, which are -8.7% lower Y/Y. The recent stress tests conducted by Spain’s advisers are well, lets just say, a flight into fantasy, as is Spain’s assertion that its banks will require under E60bn in new capital. Having said that Spanish government bond yields continue to decline (the 10 year yield is down to 5.41% this morning), as the market is focused on the potential of ECB buying and a rescue by the EFSF/ESM. Spain still dithers and a deal on requesting a bail out is unlikely until mid to late November. I continue to believe that Spain will have to restructure its debt in due course. Spanish authorities advise that they have raised 94.4% of its 2012 financing requirements, which will give the Spanish PM, Mr Rajoy, more time to dither – he’s already become the EU champion ditherer – next he goes for the global title;

The EU starts is Heads of State meeting. The French are pushing for a banking union (well they would, given the significant problems with their banks), easier conditions on EZ bail outs and debt mutualisation. Germany on the other hand is emphasizing the need to supervise/verify EZ country budgets, calling for the appointment of an independent monetary commissioner. Don’t expect any real progress at this meeting – basically, yet another fruitless event. However, the really important issue, is that the traditional axis of France and Germany is (has?) broken down, with France becoming more Mediterranean and Germany retaining its Teutonic monetary stance, though, importantly, becoming the sole political leader in the EZ, certainly – the UK, will not play ball. Mrs Merkel as the 1st non elected political head of the EZ – quite possible, boys and girls. In addition, France, like Japan is looking more and more like a total basket case and I believe that Germany’s will, in the future, “loosen” its relationship with France;

S&P cut Cyprus’s rating to B, from BB previously with a negative outlook. The current Communist regime is well. just nuts;

The ECB’s bank supervision plan is illegal, according to a “secret” EU report – come now, there are no secrets within the EU. Its proposed powers go “beyond the powers” permitted under law. Well great, another EU cock up. The “secret” report advises that a treaty change will be required. The legal advice will increase Germany’s reluctance to agree to a speedy approval of banking supervision within the EZ;

UK retail sales rose by +0.6% (ex fuel) in volume terms in September, from August, when they fell by -0.1% and above the +0.4% forecast. Retail sales (ex fuel) rose by +2.5% Y/Y, higher than expectations of +2.1%. Retail sales have risen by +1.0% in the 3rd Q, the most since Q2 2010. Some claw back, post Olympics, may well have flattered the numbers. However, with declining unemployment, overall a better inflation trend, better retail sales etc, etc, the UK should be doing better than official ONS data suggests. I repeat, the official ONS data is notoriously more pessimistic than reality. Sterling rose on the data;

Interestingly, there appeared to be a sell of of US Treasuries yesterday, with the 10 year yield back up to 1.80%. That does not support the equity bears. For you bears out there – Repeat after me – DON’T FIGHT CENTRAL BANKS;

US jobless claims rose by 46k to 388k in the week to 13th October, up from a revised 342k in the previous week and worse than the forecast of 365k. The better 4 week moving average rose to 365.5k, roughly the same as last weeks 364.75k. The data suggests that November NFP data may be weaker.

Outlook

Asian markets responded positively to the Chinese data. European markets are flat to slightly higher. The Euro is trading around US$1.30. Absolutely crazy, though expectations over a deal on Spain is holding it up – cant see a deal in the immediate future. I certainly will look to increase my shorts if the Euro rises further, but am on hold at present. Gold is trading at US$1741, with Brent (December) at US$112.68.

US futures suggest a marginally lower open.

A fiend of mine sent me a copy of a report from CLSA. I have to say, that their research is consistently amongst the best I read. However, on this one occasion, they compare the QE experience in Japan (who invented QE) to the US. Essentially, they have doubts as to whether it will work. I will write a piece on this subject, but to compare a demographically older population, as is the case in Japan, combined with crazy policies employed by the BoJ to date and their stratospheric debt levels, with the more proactive and targeted measures employed by the FED is pretty silly in my view. JAPAN IS DIFFERENT.

Kiron Sarkar

18th October 2012

Category: Think Tank

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