Australian retail sales rose by +0.5% in September M/M, above expectations of a rise of +0.4% and +0.3% in August. The better retail sales data has raised the question as to whether the RBA will cut interest rates tomorrow, as expected.

The Australian trade deficit by A$420mn, to A$1.46bn in September, from August and below the A$1.55bn forecast. Exports declined by -1.0% to A$24.2bn, whilst imports declined by -2.0% to A$25.6bn.

The Australian services sector (the performance of services index) came in at 42.8 in October, as compared with 41.9 in September, though the 9 consecutive monthly contraction;
The head of the LDP party in Japan, Mr Abe has signalled that he may be willing to allow a parliamentary debate on the budget bill, though he did not suggest that he would support it. The opposition LDP party is trying to force the ruling party (DPJ) to call an election this year by blocking debate on the budget bill. The deadline to resolve the budget bill has been set for the end of this month. Without the passage of the budget bill, Japan will not be able to pay its bills;

Chinese official PMI rose to 55.5 in October, up from 53.7 in September. New orders dropped by -0.2 points to 51.6, though the business expectations component rose by +3.4 points to 63.4. I really don’t know why I report this data – I certainly don’t believe it.

Unlike the official data, the HSBC/Markit services index, on the other hand, suggested that PMI fell to 53.5, from 54.3;

The South China Morning Post reports that the new Standing Committee of the Politburo is “packed with conservatives”. Apparently Mr Jiang Zemin (the former head of China) has been able to place one of his people on the Standing Committee (allegedly to be in charge of the economy) and has ensured that 2 other “reformers” have been bypassed. If true, the appointments which will be a problem for the incoming President Mr Xi Xinping and Premier Mr Li Keqiang. It is also going to be bad news and will result in increased tension between China and Japan at the very least. The outcome will be known on the 15th November, with the Congress to meet, starting on 8th November;

Bloomberg reports that the Indian government may consider raising an additional Rupees 250bn (US$4.6bn), after setting a higher budget deficit for the current fiscal year ending 31st March. The finance minister today stated that GDP growth could be +5.5% to +6.0% this fiscal year, rising to 7.0% next fiscal year and that the budget deficit will -5.3% (previously -5.1%) of GDP – still tough to achieve;

The Greek PM Mr Samaras is desperately trying to ensure that coalition members support the E13.5bn of austerity cuts this Wednesday in Parliament. Following that vote, the Greek Parliament has to approve the 2013 budget by this coming weekend. The passage of the measures are preconditions for Greece to get further bail out funds – which will also require the approval of other EZ countries. The EZ finance ministers meet on the 12th November to discuss this matter. Analysts expect that Mr Samaras will be able to push the vote through. Hmmmm. However, Greece will still require an additional E13bn to E18bn to cover its financing requirements to the end of 2014. The current plan is for Greece to issue short term T Bills, which will be bought by Greek banks and then used as collateral to obtain funds from the ECB. This truly is getting surreal. Remember that Greek debt to GDP is expected to rise above 190% in 2014. Other proposals being discussed by EZ finance ministers include cutting interest rates on bail out funds lent to Greece (by 150bps), extending maturities, debt buy backs and possibly the ECB giving up on “profits” on the Greek bonds that it has bought. The IMF has called for EZ countries to accept a haircut on existing loans. Wont happen. In addition, the Germans are trying to force through an “enhanced compliance” scheme in return, which would force automatic and across the board budget cuts if Greece does not meet its targets. Good luck. (Source FT);

The ECB is to check as to whether it has contravened its own rules by lending to Spanish banks on more generous terms than should have been the case. Essentially, German newspapers (Die Welt) allege that the haircut on collateral provided to the ECB by Spanish banks (18 month T bills) was lower than should have been the case. The impact would be that Spanish banks will need to provide an additional E16.6bn of collateral to the ECB to cover the short-fall, as the E80bn of Spanish T Bills provided by the relevant banks were wrongly classified, as top rated securities, whereas they are of a lower quality. What further collateral, may I ask?. Spanish banks borrowed E378bn from the ECB in September, nearly E250bn more than at the start of the year. Oh dear, bad news for Spanish banks. The IBEX is nearly -1.5% lower today;

Spain’s October unemployment rose by +2.7% (+128.2k) in October, much worse than the rise of +110.0k expected and just +79.6k in September, with a total unemployed rising to 4.8mn. The increase was the 3rd consecutive monthly rise. Spain will never hope to meet its targets and the situation is now deteriorating at truly alarming levels. Further austerity cuts will just make the situation much, much worse and I continue to believe that the country will have to restructure its debts in due course. PM Rajoy continues to dither in spite of the clear need for a bail out – however, its politics, especially given the upcoming elections in Catalonia and, in addition, Spain has concluded much of this years funding requirements which allows Rajoy to dither even more – however, Spanish bond yield continue to rise and the ratings agencies must be looking at Spain with a view to cutting its ratings;

The EZ November sentix (investors confidence) index came in at -18.8, better than the -20.0 expected and -22.2 in October;

The UK October services PMI fell to 50.6, much lower than 52.2 in September and well below the forecast of 52.0. It was also the lowest reading since December 2010. The business expectations component declined to 65.3, from 67.0 in September (the lowest since June). The BoE is to decide as to whether to expand its QE programme next Thursday. Most analysts expect the BoE to be on hold. Its going to be a tight decision, but I believe that the BoE may be more cautious and decide to increase its QE programme, though by £25bn only;

The Irish October services PMI came in at 56.1, much better than 53.9 in September and the highest reading since October 2007. The Irish economy is stabilising and, indeed, recovering. However, it is dependent on the UK/EZ;

S&P has lost a case in Australia which involved the ratings agency awarding its highest rating to a derivative product which subsequently collapsed. The Australian judge ruled that S&P was “misleading and deceptive”. This landmark decision will open up the prospect of legal action being taken against ratings agencies, particularly in Europe. In the US, the ratings agencies have been successful in defending themselves against similar cases, though certain cases remain to be heard. S&P is to appeal the decision;

US Presidential elections tomorrow, with Intrade predicting that President Obama will win – his chances of succeeding is currently 67.5%;

US ISM October non-manufacturing index came in at 54.2, slightly lower than the 54.5 expected and 55.1 in September – It was the lowest reading since June. The new orders component came in at 54.8, lower than the 57.7 expected. However, prices paid came in at 65.6, better than the 68.1 expected, with employment up to 54.9, higher than the 51.1 expected and the best reading since March;

The G20 states that there is increasing risk due to the slow movement of policy in the EZ. They remain concerned about the fiscal cliff. the situation in Japan is problematical and suggest that a medium term fiscal consolidation is necessary. Finally, they warn that global growth remains modest and that downside risks prevail. Well, great news for a Monday – thank you G20 !!!!;

Outlook

Asian markets closed mainly lower, with European markets weaker. US markets are somewhat lower. Gold is trading at US$1682, with Brent at US$105.45. The Euro is weaker on worse news from Spain and uncertainty as to the Greek bail out.

The US elections tomorrow, with the betting indicies suggesting a win for Obama, though analysts are predicting a very tight race – I’ll stick with the bookies. The market will focus on the impending “fiscal cliff”. Following that its the ECB meeting (no change expected) and the outcome of the negotiations relating to the Greek bail out. The Chinese Congress meets on the 8th November, with the announcement of the composition of the standing committee of the politburo on the 15th November. Quite a few market moving events. Still believe that it is better to be cautious in respect of equities. Whilst uncertainty over Greece should weigh on the Euro, analyst expectations are that some (totally absurd) deal will be put together, which should be Euro positive. However, thereafter……

The news from France continues to indicate that the French economy is under severe stress, to put it mildly – in fact its looking like a total disaster. It seems increasingly clear that President Hollande will not be able to stem the decline. This is going to be a real biggie when it blows, which, unfortunately, looks more and more likely. Where does the EZ go then?

Any budget deal in Japan will support the Yen, but negotiations are likely to go down to the wire ie the end of the month.

Just picked up a Reuters report which states that the Greek bail out will not be resolved by the 12th November and will be delayed till the end of the month – if that’s true, the Euro is going to be under pressure. Furthermore, the Greeks have been saying that they will run out of cash by mid November – they are the Greeks though !!!!

Kiron Sarkar

5th November

Category: Markets, Think Tank

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