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Buy Italy and Sell France?

Posted By Kiron Sarkar On October 23, 2012 @ 10:30 am In Think Tank | Comments Disabled

Japanese inflation data to be released this week should confirm that core consumer prices declined in September, for the 5th consecutive month. The BoJ’s goal is to raise inflation to 1.0% – no chance, based on current policies. Next week (30th), the BoJ will announce its decision. There is speculation that the BoJ will revise down its economic projections for 2012 and 2013. It will also announce its forecast for 2014. Given the pressure it is under, speculation mounts that the BoJ will increase its asset purchase programme and, in addition, announce other measures to ease monetary policy. If the above proves true, the Yen should continue to decline. For full disclosure purposes, I am short the Yen;

Bloomberg reports that Chinese industrial companies profits have declined by -6.2% in August Y/Y, the largest decline this year and the 5th consecutive monthly drop. Excess capacity is the main problem, with little being cut to date.
HSBC flash PMI data to be released tomorrow;

Investors have treated the Rosneft deal for TNK-BP with a great deal of suspicion, mostly because of their aversion to anything Russian. BP shares continue to decline. Personally, I believe that Russia, given its problems, will have to be more accommodating to foreign investors (at least for the moment) and that the deal concluded by BP may actually be better than currently perceived;

Numerous negative comments on Italy by analysts – in my view misplaced. Yes there is political uncertainty, but if anyone seriously believes that the Italian population will vote for a comedian (who polls suggest has 25% of the votes) in a real poll, well…………Monti is doing better and Berlusconi is fading – his chances of staying in his job are getting better. Sure things could change, but Italy is progressing, unlike France which is going the other way. Italy will not side with France – Monti knows he needs to get closer to Merkel/Germany. Buy Italian bonds and sell equivalent French? – radical idea, I know, but………;

The Bank of Spain reports that Spanish Q3 GDP contracted by -0.4% (-0.7% forecast), similar to Q2, or -1.7% Y/Y, the 5th consecutive Q’rly decline.  The BoS added that demand had risen ahead of a sales tax increase in September, though expects demand to decline further in Q4. Employment fell by -4.5% in Q3 Y/Y. They added that taxation revenues were declining and that the government would need to make more cuts. They estimate that the 2012 budget deficit will be -7.3%, as opposed to the -6.3% target. The BoS added that the governments 2013 GDP estimate was “very ambitious” - diplomatic terminology for its compete rubbish
Moody’s downgrade a number of Spanish regions – so far 8 of the 17 regions have requested a bail out. The Central authorities have established an E18bn fund for the regions who have, to date, requested E17bn. Oops;

French business confidence indicator came in at 85 in October, as opposed to 90 expected and 90 in September. The production outlook indicator came in at -56, as opposed to -50 expected and -52 in September. France’s woes continues;

UK mortgage approvals rose in September, to 31.175k, from 30.683 in August. In addition, mortgage lending rose materially to £347mn. Unsecured credit rose to £346mn in September, from £133mn in August. The data suggests that the UK economy is improving;

President Obama won the TV debate last night. A CNN post reports that the President won by 48% to 40%. The striking issue was Governor Romney’s  agreement on most of the Presidents foreign policy strategy. In addition, the Governor, seemed to change his mind on a number of issues – quite extraordinary and I would have thought dangerous, as he lays himself open to being charged as a flip flopper. Having said that, intrade has marginally reduced its forecast for President Obama to win to 61%;

Outlook

Asian markets closed lower, with European markets weaker. US futures suggest a weaker open, though surprisingly, US markets bounced back to flat/slightly higher yesterday having been much lower – could not understand why.

December Brent is weaker at US$109.10 – needs to be below US$100. Gold is also weaker at US$1712, and copper continues to decline.

The Euro, well hallelujah, its weaker at US$1.3030, with the Yen under pressure, as well.

Pretty boring day. I continue to remain deeply concerned about the lack of urgency in recapping European banks, though markets seem to have shrugged this off !!!. In addition, there are no real positive developments to buy the market – as a result, downside risks prevail. US earnings and, in particular, revenues together with forecasts/forward looking statements continue to disappoint.

I remain particularly cautious.

Kiron Sarkar

23rd October 2012


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