Good afternoon. The scandal over Rupert Murdoch's media empire is growing — jobs were the price to pay for the connection with it for the Chiefs of Scotland Yard and Metropolitan Police of London, heads of Dow Jones Newswires agency and News Corp holding: the latter — Rebecca Brooks — has been arrested. Journalist Sean Choir, whose confession stirred it all, died in his own home just in time — after what Murdoch visited the Parliament and apologised pathetic, vowing on all that he holds dear, in his ignorance of violations of the law «practiced by individual journalists»: the public, however, was not very touched — for it is well aware that in today's world all non-mischiefs among people of such rank have long been destroyed. Wild heat rages in the United States: temperatures in the eastern states are consistently above 32 degrees against the background of very high humidity; in the central zone (Iowa, Michigan) there already was +55; in July there was beaten more than a thousand temperature records in the country — in general, the picture resembles ours a year ago; although the number of people killed is so far counted in the tens (and not tens of thousands) — but it is not over yet. Perhaps the extreme weather events have affected Greenpeace, who suddenly began to struggle with biofuels — they say, huge tracts of forest are being cut down because of them; the cynics, however, believe that the heat is not to blame — friendly infusions of oil and gas oligarchs rather helped. News of multiculturalism: Romanian gypsies, while hunting for scrap metal, stole... 64 missile warheads — at least they were empty!
Illustration: Artyom Popov, ITinvest
On the unfaithful path of Panikovskiy
Monetary markets. Bank of Canada, as expected, left rates unchanged at 1% per annum — but made ??it clear that sooner or later tightening is inevitable. Minutes of last meeting of the Bank of England showed the status quo: seven are stable interest rate, two (Dale and Weale) for the rate increase, one (Posen) for increased emission. Agencies continues to rage: S&P estimated the probability of reducing the sovereign rating of the USA in the next 3 months at 50%; Moody's warns that the states of Virginia, South Carolina, Tennessee, New Mexico and Maryland will lose their ratings after the federal one — their budgets are too dependent on transfers of central government. Meanwhile, the altercation about debt ceiling have lasted — and it looks like Obama has caved under pressure from the Republicans: the budget deficit is expected to decline by $300-500 billion per year (i.e. by 20-33% of its current level) — the only question is how is this possible. In any case, long-term debt situation is absolutely hopeless in the United States: aggregate debt of the state, corporations and households is at $55 trillion — and although its ratio to GDP is reducing, to reach acceptable levels it should halve; government's obligations on the plans of social and health insurance had already reached $115 trillion (only accounting for the currently living citizens) — and the situation here is rapidly deteriorating, because baby boomers are actively retiring, which is getting harder and harder to pay for for today's much leaner generations.
Source: Bureau of Economic Analysis and the U.S. Federal Reserve
Portuguese Prime Minister Passos Coelho said that the hole in the Treasury left by his predecessors is €2 billion greater than was previously reported — surprise! The Greeks had similar reprimand back in 2009 — so the Portuguese are now like Ostap Bender who has stolen a chicken stating he is now «on the unfaithful path of Panikovskiy». Yields on 10-year treasuries of Italy got over 6% per annum — in response the country simply cancelled trading of government and corporate bonds — that did not add optimism to the markets; Spain's rate has reached 6.5% — placements of new bonds gone under significantly greater yields than recently. EU summit gave Greece mega-benefits: terms of loans were extended, and the rates decreased to ridiculous 3.5% per annum (similar measures have been accepted for Ireland and Portugal); €109 billion were allocated; the stabilization fund now has the right to buy bonds on the market — all this is called «the new Marshall Plan». About providing for these cakes it is said that Greece would give... «something» as a collateral — presumably a nice dinner for the well-worked euro ministers would be fine. Formal default is still denied — but apparently, the rating agencies think differently. According to Credit Suisse, the shortage of capital in the euro-banks is really €82 billion and not 2.5 billion which were reported by stress tests — one just need to assess government securities on the balance sheets of banks at their market price, and the euro-bureaucrats do not want to do that. And that is only flowers: new rules of the Basel Committee will make the banks to find €460 billion of additional capital until 2019 — or drastically reduce their relatively risky assets.
Currency markets. Protracted negotiations on the debt of the United States dropped buck against everything — except the Swiss franc, which has nowhere to grow now really: it is already expensive to the disgrace. Of the news we note the rigid policies of the Japanese authorities: a year ago they cut the maximum amount of leverage on Forex to 50 (turnover of the Tokyo foreign exchange market segment than shrunk by 30%), and now this value is reduced to 25 — apparently with a similar effect.
Stock markets. Leading indices are cautiously optimistic, believing in the resolution of debt crises in the USA and the EU. A lot of reports — and not just in America; Philips has unexpectedly shown loss of €1.4 billion in the second quarter against a background of falling sales — in response the company will reduce costs by 500 million and buy back 2 billion worth of its shares on the market. US financial sector is ambiguous: only Morgan Stanley was glittering; profits of Wells Fargo rose — but revenues fell; recall of money previously allocated for future losses provided a good quarter of American Express profits; Bank of America showed the loss of almost $9 billion q/q due to giant penalties for mortgages; and the biggest outsider (unbelievable but true!) was Goldman Sachs who did not meet the expectations of the market at all — its shares were punished by a fall to an annual minimum. Industrial monsters (United Technologies, AT&T, Honeywell) were decent — and only; not bad is IBM; Intel, AMD, and Verizon have slightly disappointed; Caterpillar is bad. The report of Apple caused a surge of enthusiasm, and shares soared to a record high — but in reality everything is not easy: sells of iPods have fallen, forecast for the current quarter disappointed too — but when it will be surpassed the market will ignite once again. Yahoo saddened by falling sales, and Microsoft — by falling incomes from sales of Windows. In the consumer sector McDonald's and Coca-Cola reported fairly — but PepsiCo did not flashed, citing high inflation and squeezed consumers; indicators of Johnson & Johnson and Altria were perceived neutrally by the market. Epidemic of layoffs continues: Cisco will reduce 6,500 jobs; bankruptcy of Borders retailer will leave 10,700 people without work. And such cases are not only in the US: Australian retailers (David Jones, Woolworths) are also cutting staff due to a general drop in demand.
Commodity markets. Raw materials are still cheerful, looking forward to the inevitable growth of the economy or the new emission. Oil costs between peak and bottom, industrial metals (especially palladium) are expensive — and the precious ones too: gold got to $1610 per ounce, silver got above $40 for a while. Cereal products fell slightly (except for rice), legumes — rose; vegetable oil fell; forage, meat, cocoa and timber are stable; milk and fruits are in irresistible rush to new records; sugar gets more expensive, while coffee and cotton get cheaper.
Asia and Oceania. In Australia business confidence has deteriorated in the second quarter — and the gap between successful and lagging industries has reached a record high; according to the researchers’ estimates, deceleration of the leaders is more likely than the acceleration of outsiders. The main event of the week in the region was the business activity index (PMI) in China from HSBC: it not only declined, but for the first time since July of the last year got into the zone of recession — and its value (48.9 points) was the worst since March 2009, i.e. since the most severe moment of economic downturn. But the Japanese figures please the eye, stating active rehabilitation of the national economy after the earthquake: index of activity in all sectors of the economy added 2.0% m/m in May after rising for 1.5% in April; trade balance unexpectedly went into surplus in June — thanks to sharply higher sales of cars; average salary is in the green — and same with store sales. In the New Zealand in the second quarter, consumer prices jumped by 1.0% against January-March and by 5.3% against April-June of 2010 — and the net value (excluding oil and other volatile components) increased by 5.2% y/y, which has not happen since as much as 1991. This statistic makes the analysts to be careful when assessing the data on demand: for example, in June, the New Zealanders’ spending on credit cards was 4.5% higher than a year ago — looks like a positive, but because prices managed to swell by more than 5% during the period, it appears that the physical volume of purchases has even dropped.
Europe. Eurozone industrial orders jumped in May by 3.6% versus April and by 15.5% against May 2010; April figure was revised down to −0.1%, but still the growth is impressive. But it was in May — in June-July the situation had deteriorated: index of economic sentiment in Germany from ZEW showed a minimum since January 2009, it fell in the eurozone too, and simply collapsed in Switzerland; July business climate index in Germany according to IFO has also dipped thoroughly; business confidence in France fell sharply, and the preliminary indicators of business activity (PMI) in the eurozone reached the worst values since August 2009 (France has barely restrained from going into the zone of recession). Meanwhile, already in May it was not all right there: Italy's industrial turnover shrank by 1.7% against April, while production in the construction sector fell in the eurozone by 1.1% m/m, sending the annual change into the negative (by 1.9%) — and generally the figure is on the minimum of the crisis, with the exception of sharp dips caused by the bitter colds of the last winter. Expensive franc actively worsens the Swiss trade balance. Producer prices of the core countries of the eurozone added 0.1% in June, and the annual growth remained impressive (from +5.6% in Germany to +6.7% in Spain); British inflationary expectations (according to Citi/YouGov) fell slightly in July from the June’s record peak. Consumer sentiment deteriorated in the summer in the eurozone and Britain, while demand throughout the region is still weak: retail sales in Italy fell in May both m/m and y/y; in Britain in June it grew by 0.7% — but recouped only half of May’s fall by 1.4%.
America. Activity index from the Federal Reserve Bank of Philadelphia recovered from a failure in July — but remained weak. leading indicators rose in June by 0.3% m/m — but the reliability of the index is questionable: for example, the less-informative components of M2 and spread of Treasury bonds of different dates yielded +0.7% — i.e. everything else (mostly the real things) gave −0.4%. The influx of foreign money in the long-term US securities continues to slow down — not covering the trade deficit; the demand for treasuries is alive — but that was in May, and now everything is more complicated. In June, the number of construction developments in the United States has skyrocketed thanks to multi-family housing (people do not have money for private homes), construction of which is twice as potent as a year ago; building permits have swollen for the same reason (in the sector of single-family homes there is a fall by 3.8% y/y). Most real indicator of the industry — the number of houses currently being built: it ranges around the lows, being 6.3% lower than a year ago (for single-family — by 12.1%). The sales slump in the secondary market — and the sharp rise of the signed, but later cancelled contracts, whose share rose from 4% in May to 16% in June: National Association of House Builders called this fact a «conundrum». NAHB’sindustry index grew in July — but remained extremely low; the same applies to consumer comfort from Bloomberg; applications for unemployment benefits rose. Canadian manufacturing sales in spring fell for several months in a row — including the values that exclude cars, so you cannot blame everything on Japan; factory orders also dipped substantially in April-May.
Source: U.S. Census Bureau
Russia. Rosstat released a report for June. Industrial production has accelerated: +0.7% m/m and +5.7% y/y (against +0.5% and +4.1% in May); manufacturing sector swelled by 7.1% y/y — half of this was given by cars (+45%). Agriculture grew by 1.0% versus +0.3% in May; however, the production of eggs for the first time in a long time has gone into minus. Logging is in the green — but slows down; as well as construction (+1.0% versus +1.9% in May); in the second quarter of the year introduction of new housing was 4.9% weaker than last year, and for the first half of the year as a whole — by 3.7%. Freight turnover continues to accelerate; loadings on the railways rose by 2.3%, but on imported goods — by 24.3%: they have larger shoulder of carriage — and thus a growing turnover. Consumer prices swelled by 9.4% Y/Y, but a fixed set of goods and services rose by 12.3%; producer prices fell by 2.2% m/m, cutting the annual increase down to 18.6%. Retail swelled by 5.6% (food — by 1.0%, and all the rest — by 10.3%, largely on credit); paid services added only 0.8% — both figures are actually much worse because inflation is underestimated by Rosstat. The same applies to incomes and salaries — in fact they seem to be in a noticeable minus. According to our estimates, GDP both in June and in the second quarter as a whole has added 2-3% versus the same period last year — but, of course, the officialdom will show something like 3.5-4.5%.
In the first half of the year the federal budget surplus has reached 2.7% of GDP; however, the Finance Ministry wants to rob the regions again by cutting their revenues and increasing spending — the treasury, you see, does not have enough money to reform the Interior Ministry. But enough to double Moscow — the capital’s center will be in Vnukovo, which is absurd in itself; and the project is full of such nonsense —indeed all innovative plans of Medved amaze with idiocy. However, the President could not find out the owners of Domodedovo airport — and they are curious people: it is hard to imagine any other institution of its kind and scale in the world, where the air navigation facilities and the whole airport complex is being run on a pirate software — «effective owners» and «effective managers» like to «optimize the costs» but not to such an extent and in such a place! Entertainment of the power-holders is creative: in his micro-blog Chubais re-twitted the Russian national anthem, writing «Russia — the sacred nano-state, Russia — beloved nano-country. Mighty nano, great nano. Nana, nanana, nanana»; head of the famous village of Zavidovo received a land worth $15 million in inheritance from an old disabled lady — however, the rich heir has wisely chose to escape in an unknown direction in the first place; the Central Election Committee Chairman Churov complains that on the moment only a «couple of Empresses and several representatives of the Lord God» want to became the next President of Russia while normal people don’t want to draw in; generally, the political loony house is in all its glory. And finally on the weather: as reported by Phobos, Weather Center has anticipated the current hot weather by setting air-conditioning in the office ahead of time, and now it repairs the boiler — so dear Russians should be ready for a cold winter!
Illustration: Artyom Popov, ITinvest
Have a nice week!