Giulio let Sylvio down

Искандер Луцко

Good afternoon. New earthquake of a magnitude 7.0 happened in the north-east of Japan — without serious consequences. The scandal over Murdoch’s media empire rages in Britain — News of the World newspaper has bugged phones of countless individuals for many years, while Sun and Sunday Times have even tried to get access to the mobile phone of ex-Prime Minister Brown: when it all floated out, the first newspaper had to be closed swiftly, the others are under a threat — but Murdoch has a replacement ready (new domains were bought); however, the purchase of satellite operator British Sky Broadcasting Group had to be given up — legal battles are on the agenda. A scandal in Italy — in the spotlight is the Finance Minister Tremonti, whose adviser Milanese is accused of corruption and other sins; Tremonti has aggravated his position, by calling his colleague Minister an «idiot» at a press conference — at this point he was overheard by La Repubblica newspaper; Prime Minister Berlusconi said Tremonti «thinks he’s a genius, and all others are idiots» — and only a couple of months ago it was the energetic Giulio whom the old lady’s man Silvio saw as his successor. In Japan, the current Cabinet’s approval rating fell to ??phantasmagorical 12.5% — everyone waits when the Prime Minister Kan will finally retire from the office.


Illustration: Artyom Popov, ITinvest

Grab the money: default is in sight

Monetary markets. Bank of Japan did not change the key parameters of its monetary policy — but downgraded forecast for GDP in the current fiscal year; however, the current assessment of the economy has been increased. Minutes of the last Fed meeting showed that its members were discussing seriously the launch of a new round of quantitative easing, just as the previous one has ended — hawks, of course, opposed, but the question remained there. Head of the Fed Bernanke made ??a controversial semi-annual report to the Congress: on the one hand, he confirmed the possibility of a new round of emission, despite the apparent failure of the QE2 — and at the same time he did not rule out the inflationary scenario, in which, in contrast, the existing measures of monetary stimulation are to be curtailed (i.e., rates to be raised and previously bought securities to be sold). Meanwhile, the wrangling on the lifting of US debt threshold continues — with the same success; all of which has fed up Moody's — and it included the rating of the country's sovereign debt in the list for a review to negative forecast. The logic is clear: if the talks end with nothing, then the subsequent default will surely be a cause for punishment; but even if a last-minute agreement would be reached, it will be of a poor quality, as one can hardly develop a smart strategy in a hurry — and the strategy is necessary (and urgently!) to redress the plight of public debt, whose size is growing rapidly, threatening a real global default in the future. S&P also made ??it clear that the rating’s cut will necessarily follow if the threshold would not be raised.

Europe forgot about Greece — it looks like she will not have the money: according to Handelsblatt, the ECB Head Trichet sought advice of private experts for the survival scenarios in the case of bankruptcy of «one of the eurozone’s countries». And the Greeks continue to taunt — in the first half of the year their budget deficit was «suddenly» above 23% the plan; Fitch agency cut the country’s rating to «Grab the money: default is in sight» level. Moody's has brought the ratings of Ireland and her leading banks to «junk» level — and the yields of 10-year bonds of the country exceeded 14%. In general, the public debt market was in panic: 10-year Italian papers flew above 6.0% per annum, while Spanish — above 6.3% (both values ??are highest since autumn of 1997). Decent placements of new bonds calmed down the market, but the problem is obvious: in August-September, Italy will refinance a debt for €69 billion, and by the end of 2013 — for €500 billion; her total public debt is €1.84 trillion, and its largest holders are the French banks (18% of the amount). By the way, the peaks (even if only since the autumn of last year) were also shown by the yields of German bunds — everyone understands that if the eurozone will see a series of defaults, the Germans would not be good. Results of banks’ stress-tests were published — they are of little interest: the possibility of sovereign default was not considered, and the approach was a liberal one — German bank Helaba, when it could not fulfil the requirements for capital, was simply excluded from the test list; Spanish banks disgraced themselves — officials explained that it was because of contributions to cover future losses: what a nonsense — everyone knows that the losses don’t happen!

Currency markets. Panic in the markets has caused another surge of long positions for yen and the Swiss franc — which caused great dissatisfaction of the monetary authorities of Japan and Switzerland. The corporation grumbled too: Head of Toyota Toyoda said that with the current exchange rate it makes no sense to keep any production within the country. On Thursday there was a mini-intervention — but it hadn’t helped for long. Concerns about the expensive franc were expressed by the members of the Swiss National Bank management Roth and Jordan — but the Suisse did not listen them: besides being the asylum currency it also occasionally plays a role of a cheap credit currency — 53% of mortgage loans in Poland (700 thousand) are nominated in francs, and in Hungary the figure is 64% (plus 54% of all corporate loans); in general, everyone needs francs — so they are becoming expensive. Dollar falls due to concerns about the US debt and budget — euro declined even more actively, killing the spring lows and reaching $1.38; but then it rebounded to $1.43. It is clear that under such conditions the cross-rate of euro-franc again became the main hero collapsing to a new historic minimum below 1.15.


Source: SmartTrade

Stock markets. Leading indices twitched nervously, as the overall situation has become quite uncertain: whether it will be a new crisis, or more money will be thrown in — you do not know whether to laugh or to cry! Very eloquent are the companies' plans for staff: JP Morgan Chase has already cut 10 thousand jobs since the beginning of the year; UBS, Credit Suisse, Barclays, Morgan Stanley, Goldman Sachs, Nomura and other monsters are doing the same; in August, Cisco Systems may fire 5 thousand people. Reports for April-June are being published. JP Morgan Chase is not bad — thanks to the QE2: growth of stocks it caused made the investment division’s profits to soar by 49% — at the same time, retail banking profits brought almost half as much profits as a year ago; the bank has also withdrew the money previously allocated to cover for losses — these funds are also considered as profits; exactly the same has helped Citigroup. Alcoa is modest — it does not have investment banking: profits are up, but have not reached the forecasts; revenues, by contrast, have exceeded expectations — the whole situation is difficult, for the demand is weak and raw materials are expensive. All firms of the real sector are complaining about this — for the same reason, the profits of China's Angang Steel in the first six months of the year shrank by 13 times. This is not a problem for Internet-business — Google’s report is splendid, surpassing the analysts’ expectations on all fronts; and the market has decorated the company’s shares with an immediate take-off by 12%.

Commodity markets. Hints of another present from helicopter-Bennie had usual effect: food ran up high, and the grains sped to the north at such a rate that the figure even managed to show a new high — Bernanke would, of course, say that he has nothing to do with this and would blame some Chinese demand, but everyone understands that the inflation is caused by the Fed’semission. Meat adjusted slightly — but the milk continues to climb. Fruit and sugar are becoming more expensive rapidly; coffee, cocoa and timber are stable — and only cotton has fallen again. Oil is clearly tempted to growth — especially since its inventories declined in the USA stronger of expectations; industrial metals are stable near the recently reached peaks; silver and platinum rose substantially. But all were smashed by gold which showed a new maximum near $1600 per ounce — and this is not the end, especially in the long run: history of the last millennium suggests that, in terms of current purchasing power of the bucks, the main precious metal cost $4500 at one point — and if we consider an even earlier times (as far as the information is available) an ounce of gold was quoted between $2500 and $3000 in modern values. Take-off of 1980 has set the direction (the peak was nearly at today’s $3500) — most likely prices will again go in those regions at some point in the next few years, even, perhaps, challenging the peaks of the 15th century. However, a correction would have been logical before this — let’s say by 1.5 times; the only question is from what tops it will happen — in the meanwhile, Bernanke gives market no respite.


Source: MeasuringWorth, independent estimates

Doubling of Moscow

Asia and Oceania. OECD has finally saw the reality — May leading indicators fell by 0.3% against April: they sank most in Brazil and India (-0.7%); France and Italy fell by 0.6%, Germany, Japan and China — by 0.4%, UK — by 0.2%, Russia — by 0.1%, zero change in the USA. However, data from the last week is not so bad. GDP of the New Zealand grew stronger than forecasts; the Japanese production was revised upwards, the service sector continued to recover, and consumers have cheered up; in July, business conditions in Australia were a little better. However, Australian consumers are in a gloomy mood, while inflationary expectations rise; New Zealand's real estate rapidly becomes more expensive — in the key region of the country (Auckland) it has already surpassed the peak of 2007. Reverse pattern in South Korea, where M2 grows at the lowest rate since 2004. China’s GDP in the second quarter grew slightly better than expectations, but slightly worse than in the previous quarter (+9.5% y/y after +9.7%); capital investments also slowed down slightly (+25.6% in the first half of the year against +25.8% in January-May). However, industrial production and retail sales considerably exceeded the forecasts in June (+15.1% and +17.7% y/y); new loans and M2 money supply have accelerated too; trade surplus showed a 7-month maximum — in short, China is optimistic. However, slowing foreign investments and high inflation spoil the picture: consumer prices in June are at the 3-year peak of +6.4% y/y (14% for food, including 57% for pork); producer prices added 7.1% — we expect further acts of monetary tightening.

Europe. Industrial production in the eurozone rose in May by 0.1% after +0.2% in April; orders in the UK manufacturing industry slowed down in the second quarter. In may, the trade deficit soared in England to a record value, and the picture without oil is even murkier (imports are 7% m/m, maximum since April 1997); current account balance worsened in France — but the trade balances of Italy and the eurozone have improved. Inflation pressure weakens — but something is disturbing: M1 money supply and demand deposits tumbled down aggressively in France and Italy — usually this is followed (with a lag of 6-12 months) with an economic slowdown. Wholesale prices in Germany fell in June by 0.6% but remained 8.5% higher than last year; consumer prices in the eurozone have either compressed slightly (Spain) or slightly grew (Italy and France), or left in place (Germany) — annual gains are big, giving 2.7% on average for the region. Similar pattern in Britain: versus June 2010, consumer price inflation reached 4.2%, and of retail prices — 5.0%; the only exception is Switzerland, where the expensive franc has caused a deflation (producer prices are 0.4% lower than last year). French retail swelled in June by 1% — not much after the collapse of consumer spending by 4% in February-May. Unemployment in the UK has accelerated in June: recipients of benefits added 24.5 thousand after +22.5 thousand in May; British Chamber of Commerce said sales fell in June — weakness is in no small part due to budget tightening — but soon all the leading countries will have to do the same, so the overall decline in global demand will be inevitable.

America. Industrial production in the United States grew up a bit in June — but May was revised downwards. Optimism of the economy from IBD/TIPP fell as did the activity in New York City (orders and employment are bad). Canada’s trade balance is passive (import prices grow); the US deficit has soared to $50.2 billion, a peak since October 2008 — i.e. rumours about the emission’s benefits for exports are greatly exaggerated. But its damage for inflation is obvious — prices of imports rose in June by 0.5%, bringing the annual increase to 13.9% (a peak since the summer of 2008). Producer prices for final goods fell by 0.4% due to cheapened oil, but the annual growth rate (+7.0% officially, +8.4% without hedonic distortion) is maximum since autumn 2008 — as well as for the full spectrum of products in general (+11.2% and + 12.6%); basic goods, even without food and oil, rose in price by 25.6% y/y, and manufactured goods — by 9.3% (without hedonism — by 12.2%), i.e. the inflation has spread throughout the economy. CPI fell by 0.2% m/m and rose by 3.6% y/y (peak since the autumn of 2008) — actually by 6.5-7.0%. In early July, the index of consumer comfort from Bloomberg has cheered up, but the assessment of the economy became worse; the same indicator from the University of Michigan has simply collapsed in the first half of July; primary applications for unemployment benefits went down — but remained above 400 thousand; the total number of beneficiaries has increased by 15 thousand, the previous week was revised by 30 thousand on top more. Commercial inventories rebounded in May, while sales declined; retail sales rose in June by 0.1% after −0.1% in May — and if we consider the real inflation, we find that real sales per capita are stagnating in the last 2 years at the levels of the 1960s’. Treasury deficit in June was less than last year — because of the refusal to lift the debt ceiling: characteristically, however, that the revenues went back into negative versus the same period of 2010.


Source: US Census Bureau, independent evaluations

Russia. Producer prices fell in June by 2.2% against May due to the cheapened raw materials; annual gain, however, is high (18.6%). The growth of monetary base as of July 1 has reached 2.3% y/y — minimum since the autumn of 2009: how in such circumstances one can think of a monetary tightening is unclear — but the Bank of Russia has no time for common sense. Like the rest of the superiors too — Surkov’s idea that Putin and Kadyrov-senior were sent down by God as the saviours of Russia counts for something! Putin continues to gush with ideas: he made the ministers to club together for a monument to Stolypin (well, at least not for Witte) — and to double the GDP is his constant desire. He is envied by Medvedev — and the latter wants to double Moscow, extending it to the south-west: the capital will now be twice as close to the writer of this lines — who has hoped in vain that in the foreseeable future he will not see anything more idiotic from the window of his train than the Vostryakovo platform (sorry, already Skolkovo) desecrated by innovators. In St. Petersburg authorities have seized 90% of the Vlast’ magazine circulation because of a critical article about Matvienko. Guys from Duma are also nobody’s fools — deputy head of the Committee on Budget and Taxes Tikhonkov was arrested for a street robbery. The opposition is not far behind: the leader of homosexuals Alekseev perpetrated an unauthorized rally in the capital of France, for which he was arrested and has angrily proclaimed «Paris is dead for me»; Khimki activist Chirikova saw an airport in Nantes «totally unnecessary and disturbing for the environment» airport suspected Sarkozy of corruption. Moscow Arbitration Tribunal found that McDonald's is not a network of restaurants, but of shops and so it may pay VAT at 10% instead of 18%: the fairest court in the world had forgotten to explain why, if so, there are no labels on hamburgers indicating the composition, shelf-life and other attributes of goods in stores — what a nonsense, isn’t it!


Illustration: Artyom Popov, ITinvest

Have a nice week!

Dynamics of prices over the past week


Sergei Egishyants, mailto:,

Chief Economist at JSC «IC „ITinvest“»

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Искандер Луцко
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