"A strong and coordinated response"

Искандер Луцко

Good afternoon. Another gathering of the G7 monetary authorities, held last weekend in Marseille, habitually ended in nothing: noting the slowdown in global growth, the powers that be have promised to give the matter «a strong and coordinated response», which would provide «growth enhancing fiscal consolidation» — that is, of course, impossible so no details of such a wonderful «response» were given. In Japan, the Minister of Trade Hachiro was kicked out — not only he ventured to careless expressions (for example, he described the evacuation zone around Fukushima nuclear power plant as «a town of death»), but also joked with journalists about radiation: it was so «appropriate and timely» that the new PM Noda immediately expelled the humorist from the Cabinet and apologized for the latter’s outbursts. Meanwhile, Obama’s ratings are falling: a poll of CNN/ORC showed that already 55% are dissatisfied, while only 48% of Americans believe that the President is a strong leader — both figures are the worst for the whole Barack’s term in the White House. According to the survey of Bloomberg, 72% of Americans believe the path chose by the country is wrong — and only 9% expect the double-dip recession not to happen.

Even the taxmen are on strike

Monetary markets. The last week had two memorable anniversaries: ​​of the Lehman Brothers bankruptcy on September 15, 2008, which triggered the collapse of world markets, and of the withdrawal of pound from the European exchange rate mechanism on Black Wednesday of September 16, 1992, after Soros’s funds’ speculations in pound-deutschmark. Nothing comparable to these dramatic events has happened — but the situation continues to deteriorate quite rapidly. This forces central banks to fall into a coma with no due attention to inflation — «no change» policy was revealed by the Swiss National Bank and the Reserve Bank of New Zealand. The US regulators are quietly sabotaging the Dodd-Frank legislation in terms of tighter regulations for the financial sector — by mid-October new rules should be prepared, but for the present time there is even a rough proposal to this effect: it looks like Wall Street have well indulged the right people in regulatory structures in recent months — but things are bad in the markets today, so this can easily backfire the oligarchs themselves if some of them again, as in 2008, will have to be saved (at public expense, of course). Let’s see what the Fed will have to say next Tuesday — we think that to run QE3 right now would be almost impossible.

Jurgen Stark’s demonstrative leave of the Chief Economist job at the ECB as a protest against purchases of the euro-periphery’s bonds alarmed the markets — however, the Germans soon found a replacement: the post will be taken by the Deputy Finance Minister Jorg Asmussen — one of the key figures in all Germany’s major actions since the beginning of the crisis, including Greek bailout. The latter has stalled again — the Austrian Parliament spoke out against the extension of the EU stabilization fund; Free Democrats (junior partners in the German ruling coalition) want to hold a party referendum to block any new plans for foreign aid, etc. Greek budget deficit in January-August rose by 22% versus the same period last year; the authorities’ attempts to further cut spending run into the fury of population — sometimes a comical one: this time... the tax collectors went on strike. Greek authorities said resentfully that they are helped by the whole world, while Russia and China are shying away from this sacred duty: how could they not be ashamed! The market has already decided about Hellas: yields of her 10-year bonds reached 25% per annum, 2-year-olds — 70%, and yearly — 110%; these values ​​are roughly equal to the Russian numbers of the summer of 1998; the probability of Greek default is estimated at 98% — in general, everything is clear here.


Illustration: Artyom Popov, ITinvest

It is also clear to the key players in the euro zone: although Merkel and Sarkozy have once again denied the possibility of Greece leaving the euro zone, on practice the German government is already preparing a plan to help its banks in case of Athens’ bankruptcy — commenting the leaks saying that «we must prepare for all possible scenarios». But Greece is not as terrible as the larger euro zone countries — those are not brilliant, despite ECB buys their bonds. Rates on 10-year bonds of Italy reached a new peak at 5.70% per annum; powerful repayments and coupon clearance (more than €21 billion last Thursday) yet made yet the Roman government to enter the market and place fresh bonds for an additional 18 billion: the results of auctions are bad — even at record yields the demand was very weak. Italy ran for help to China — and was politely sent astray: Chinese official newspaper said that it is «more important for Italy to help itself» — which is logical. Spanish yields are significantly lower than Italian — but Fitch warns of rating cut here too.


Source: TradingEconomics.com

Moody'scut the ratings of the French banks Societe Generale and Credit Agricole; the market has even rejoiced with the news — for it was rumored that the same fate would also befall BNP Paribas. But the latter’s things are bad nevertheless — anonymous top manager has gave to understand that the bank is not given dollar loans, and has to seek a way out frantically, «otherwise it’s all over»; officials denied such information — but nobody believed them. As did no one believed the head of the Bank of France Noyen, who spoke of the outstanding strength of the French banks — they have great ratings and no need for additional capital; while the shares’ fall on stock exchanges «can’t be explained logically». However, this is propaganda — and the reality was expressed by the ECB, which of course knows well the plight of the euro zone’s banks: on Thursday it has urgently introduced an additional program for supplying liquidity to banks — especially the dollar one. From now there will be more fixed rate cash auctions — the 7-days loans will be joined by 30-days ones; swap lines are open with the US Fed, the Bank of England, the Bank of Japan and the Swiss National Bank. Officials once sang praises to the wisdom of the central bankers of all of Europe — but independent experts are gloomy: for example, the former leader of Singapore Lee Kuan Yew openly stated that the euro zone cannot be saved — quite probably he’s right.

Currency markets. Swiss National Bank, while maintaining a zero target rate, has again pledged to defend the previously marked lower boundary of the euro-franc cross-rate at 1.20 — for which it is prepared to buy an unlimited amount of European currency; evil tongues have not failed to prophesize SNB a speedy accumulation of a trillion foreign currency resources. Dollar and pound became cheaper on FOREX last week — though not much; the buck’s decline was contributed by the above-mentioned new program of liquidity supply in the euro zone. Euro-dollar, falling below 1.35, then jumped above 1.39; it is curious that the course has best tracked the dynamics of credit default swaps — and not even the Greek, but the Italian ones: very characteristic. Euro-yen showed a minimum since the summer of 2001; Australian and Canadian dollars are not far from parity with their American counterpart; the pound felt badly against everything around.


Source: SmartTrade

Stock markets. Leading exchanges adjusted fall, hoping for fresh infusions of liquidity — this is not for long, one should think. The results of August are disappointing: in Japan, investment funds have received a total loss of ¥3.1 trillion ($40.8 billion) — more than 5% of their assets. Goldman Sachs closes its largest fund Global Alpha, which received major losses during the market fall in August. Unexpected problems happened at the Swiss UBS bank — its trader with a promising name Kweku Adoboli traded for a loss of $2 billion: it seems he speculated unluckily with complex derivatives. Outside the financial sector there are difficulties too: demand falls, causing corporations to cut staff and lower forecasts — for example, Cisco Systems has reduced the revenue forecast for the next 3 years; most likely we will see these warnings in many corporations’ reports for the third quarter around the world.

Commodity markets. Oil rose — in no small part due to the fall of its inventories in the USA. Industrial metals stood still — while the precious ones flew strongly: gold did not storm the old highs, and instead dived to $1760 per ounce; silver fell below $40. Cereals, legumes, forage and vegetable oil cheapened actively (with the exception of rice, which stood at the top) — it has suddenly became clear that the global demand for these goods is quite actively reducing; however, climatic factors doo undermine the supply — so the fall is unlikely to be too deep. Reverse pattern is with meat, which has taken on an aggressive price hike; milk froze in the middle of its range over the last 4-5 months. Other agricultural products are mostly standing — except for much cheapened cocoa.

Fools and louts

Asia and Oceania. OECD leading indicators fall down for 4 months in a row — in July they lost another 0.5%; slowdown in the USA and Russia has became more pronounced; deterioration in Britain, Germany, France, Italy, Canada, China, India and Brazil has accelerated. Japanese production in July was revised downwards — annual decline is now 3.0%. Foreign direct investments in China have slowed down in August — but the annual increase of 11.1% would have pleased any country. The mood of large firms in Japan in the third quarter has improved — but only a third of the collapse of the second quarter was recouped; forecasts are optimistic, although the rating agencies are noting lags with the planned pace of economic recovery after the earthquake. It can be seen — already in the middle of summer salaries, activity in the service sector and the price of corporate goods left into a minus. In the New Zealand business activity, consumer sentiments and sales in the manufacturing industry are declining; business confidence in Australia in August was the worst since April 2009. Australia’s trade surplus remained in place; in China it has almost halved in August — but remained solid, though imports soared to a historic peak. Inflation in the second quarter was revised down in Australia, while construction developments in the Green continent decreased by 4.7%; loans of the Chinese banks have grown up — but the monetary aggregates are already slowing down.

Europe. Industrial production in Switzerland increased by 3.6% in the second quarter — but after the collapse by 9.6% in January-March this is not very impressive. Italian production fell in July by 0.7% m/m and 4.6% y/y, with consumer goods slipping down by 7.0% against June; and in June, production fell by 0.8% against May. In general over the euro zone there recorded an increase by 1.0% m/m — only because of Germany’s rise of 4.1%: other prominent countries gave a decline. Current account balance of France has shown a marked deterioration in July against June — the same thing happened in the euro zone as a whole; the trade balances of the euro zone and Britain remained the same — for the latter this is, by the way, the historical maximum for deficit. Producer and import prices in Switzerland have fallen in August by 1.2% m/m and 1.9% y/y — expensive franc leads to deflation: that is exactly what has scared the SNB. Consumer prices of Spain in August were at the level of July and rose by 2.7% y/y; in Italy there was a growth of 0.4% and 2.3%; in France — by 0.6% and 2.4% (the latter value is maximum since October 2008); and overall for the euro zone the inflation increase was equal to 0.2% versus July and 2.5% versus August 2010. Britain CPI jumped by 0.6% m/m and by 4.5% y/y, more adequate retail price index already swelled by 5.2% against August last year.

In Britain the housing market is weak — prices are in the red, while the number of sales per estate agent is minimal since June 2009. Employment in the euro zone has yet grown in April-June (+0.3% against January-April and 0.4% versus the second quarter of 2010) — but this correction has only recouped little more than a fifth of the fall of the years 2008-2009: 900 thousand jobs from nearly 4 million lost. The number of unemployed in Britain rose in July at the fastest pace since 2009; and in August the number of recipients of unemployment benefits has increased — but in these times an extra 20.3 thousand per month rather rejoice than grieve (for example, a month before, the increase was 33.7 thousand). Nominal wages of Britons, excluding volatile premiums, were on average 2.1% higher in May-July than last year — but even the official inflation rate, as mentioned above, is much higher, while the real figure is somewhere around 7.5%. According to the British division of a global recruitment firm Manpower, tendency of the British companies to employ staff drops for four quarters in a row — and has already reached the historical minimum for the survey since 2005; the banks, which only six months ago have been at the forefront of recruitment, are now more active than others in firing their employees. Hence the fall of demand: retail sales in August fell by 0.2% versus July down to the level of last year’s August — and taking into account the real inflation, of course, there is a significant drawback.

America. In August, industrial production in the USA grew by 0.2% against July; figure of June was dropped down by 0.3% against the previous estimate. Optimism of the small businesses from the NFIB has shown the sixth consecutive monthly deterioration; economic optimism from IBD/TIPP only just re-bounced in September from the record low of August. Business activity in the Philadelphia Fed region fell less actively than in August — but, as was sarcastically noted by analysts, the growth from −30.7 to −17.5 has not caused mass flight of corks from champagne bottles; index of the New York Fed has declined — employment component collapsed, while new orders already felt bad in August. Import prices fell by 0.4%, export — rose by 0.5%: apparently, the trade deficit fell in August. Producer prices remained at the level of July, consumer prices soared by 0.4% m/m and 3.8% y/y (a peak since September 2008) — real annual increase reached 7.0%; without food and fuel it is +0.2% and +2.0% (actually +5.2%) — maximum since November 2008. According to RealtyTrac, in August foreclosures have stepped up: +7% m/m, including +55% in California. Consumer sentiments from Bloomberg remained near the lowest level since 2009 at the end of August while a similar index of the University of Michigan in the first half of September has only crawled up from a multi-year August low. Primary applications for unemployment benefits jumped by 11 thousand, while consecutive fell by 12 thousand — the only problem is that the previous number was revised up by 21 thousand: and this bad story repeats every week.

Real hourly wages shrank in August by 0.6% m/m (the worst figure since July 2008) and 1.9% y/y — if we take into account the statistical aberrations the figures are −1% and −5%: not a small fall in demand, don’t you think? It was at once reflected in spending: retail has not changed, July figure was revised down by 0.2% — these are nominal numbers — spending in dollars unadjusted for inflation, which, as mentioned above, is quite feasible. If you take sales per capita and adjust for real inflation — the figure would fall by 0.5% after declining by 0.1% in July; annual dynamics is in the negative (by 0.2%); local peak of correction happened already in February — from there the sales fell by 2.7% and have already reached a minimum since July of last year; global high was in December 1999 — from there the real per capita purchases have already fallen by more than 30%, i.e. almost by 1.5 times. This is the real reduction in demand — and the US Census Bureau has reported that the number of people living below the poverty level has reached a record 15.1% of the population in the end of 2010. In July there again happened an outflow of foreign money from the US bonds; inflow into long papers is low (however China has again expanded the portfolio) — all the blame is on the games around the public debt ceiling, which was refused to lift by the Congress. But when all this has been done, the US deficit soared — and in August it reached $134.2 billion (one and a half times more than last year); treasury incomes increased y/y by 3.2% (i.e. less than inflation — in other words the real income is in the red), while spending grew by 19.2%.


Source: U.S. Census Bureau

Russia. Industrial output grew in August by 0.2% m/m and 6.2% y/y — rather weak in view of the last year’s heat wave, which created a low base; manufacturing sector swelled by 7.1% against August 2010 — half of that is due to cars (+46.4% y/y). By the late summer, there was harvested 44% more grain than in 2010 — but fewer than in the not too successful 2009. Expensive oil still not helps the treasury too much — its surplus in August was a miserable 0.1% of GDP. The rouble is falling — officials blame for the deterioration of the balance of payments. Monetary base as of September 1 showed an annual decline of 1.3% — worst dynamics since the autumn of 2009: Bank of Russia is to be congratulated with its brilliant success! In view of the annual (and now even less) lag between prices and the base, the inflation would be crashed a bit by the election — but then what? And then there will be another increase in utility tariffs: the authorities decided to postpone this act until the middle of the year — and then indignantly rejected the idea that this was done deliberately because of the elections. Congress of the Pravoe Delo (Right Cause) party became a loud communal quarrel — as it always happens with the local false-right; eventually oligarch Prokhorov demanded to return the money he invested in the party earlier — which is also quite familiar to the Courchevel bottled patrons.

Russian bosses became worried about harmfulness of social networks, and decided to enter them to infiltrate the CIA machinations. Everyone congratulated Medvedev on his birthday — telling the president of his nothingness; the last greeting came from Cyprus, where the beloved Zenith football club has spectacularly disgraced in the first match of the Champions League. And the top of authoritative senility was Putin’s meeting with the contestants of EdRo primaries: a retired Bazhenov shocked the Prime Minister by bequeathing him his apartment in half with the President (for the budget to drop the load); an activist of Molodaya Gvardiya (Young Guard) Arshinova told about the furniture in the dorms — and in a burst of admiration even told that she was born in the same city of Dresden where Putin was on duty at that time (he barely strayed from the suspicion of paternity of the passionate lady); turner Trapeznikov told about the salaries in «envelope» — whereupon he took the dispute with the prime minister on the subject whether the recipients of such salaries are fools or louts; and in conclusion Putin told how useful is to communicate with people — for without it «the foresight slips». Presidential nomination of a clown Okhlobystin has only completed the picture of magical insanity quickly growing before the elections.


Illustration: Artyom Popov, ITinvest

Have a nice week!

Искандер Луцко
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