Good afternoon. The G20 met at the end of last week — and as the G7 limited itself to bening absurdities. Major earthquake occurred in northern India — the British embassy building collapsed in neighbouring Nepal. Political news are all the more amusing: sensational success was achieved by the Pirate Party in Berlin parliamentary elections — it got almost 9% of the votes, surpassing the Greens and the Free Democrats (the latter simply failed); if it goes on, the recipients of copyrights rents will soon be in tears. And in the meanwhile we are in danger — the scientists discovered three (!) alien battleships flying to the Earth: according to WikiLeaks, they were found by a navigation system in Alaska — invasion is coming. Guardian advised to behave sensibly with the invaders, that is, friendly; but if the humanoids will start eating people, you would have to fight them, and all that only in 2 months time: hurry to see!
Illustration: Artyom Popov, ITinvest
Benny the Helicopter
Monetary markets. Regular meeting of the Fed took place — the memorandum was published with an almost 10 minutes delay: the debates were hot — even two days were not enough. Assessment of the economy remained the same — deterioration was noticed in August, and now the preservation of weakness is stated. Inflation is seen easy — despite a three-year peak of annual growth in consumer prices achieved in August. New incentive program «Operation Twist» is initiated: by the end of June 2012 the Fed will buy up to $400 billion of long (6 to 30 years) treasuries — and will sell short ones (up to 3 years) for the same amount; the aim is to reduce the long-term rates on market. In addition, the Fed will reinvest the money from the redeemable bonds of mortgage agencies back to the same agencies — which it yet did not: apparently the cases here are very bad too. As in August, three dissident (Fisher, Plosser and Kocherlakota) were against new plans for monetary easing — the other 7 members of the Open Market Committee supported the innovation. Markets expected that Bernanke would suddenly arrive in a blue helicopter and bestow free loot — it didn’t happen and the stocks fell down firmly: as we predicted in the previous review. Yields of short securities soared, and of long ones — fell, breaking the previous lows: in general, everything is just about how it should be.
Illustration: Artyom Popov, ITinvest
Norges Bankhas kept interest rates at 2.25%; minutes of the meeting of the Bank of England on September 7-8 showed the consensus to maintain the previous rate and figures (8 voted for, Posen was against) for the volume of the quantitative easing program — however, some members of the Monetary Policy Committee are ready to expand emissions. US President Obama wants to cut the deficit by lowering spending and raising taxes on wealthy individuals and corporations: the latter idea is greeted with hostility by the Republicans; and in any case it is ridiculous — an ambitious plan will at best reduce the hole in the treasury by 20%. The Europeans have their own ideas — help to Greece is «suspended» until mid-October: Greeks have money for exactly up to this time — and if help does not arrive than the default will follow. In retaliation, the cunning Hellenes broke out a rumour that they not only intend to declare insolvency, but to leave the eurozone too — although the government has publicly rejected the idea, it would definitely get up in the agenda in a few months. Three months weren’t enough for Moody's to study the rating of Italy — apparently because the Roman police initiated searches at the agency’s office; S&P was braver — and cut the rating of Italy, being cursed immediately by Berlusconi in person; Fitch affirmed the highest rating of Germany. The Portuguese have discovered an unaccounted debt of the Madeira region (again, surprise!) — All is usual in the EU.
The banking system is short in liquidity — and the retribution has came at once: S&P cut the ratings of seven Italian banks and downgraded forecasts for another eight — the biggest lenders suffered (Mediobanca, Intesa Sanpaolo and UniCredit).Moody's downgraded the ratings of one Irish and eight Greek banks — and then grew bolder and encroached on the sacred: ratings are cut for Bank of America (by 2 points at once), Wells Fargo and Citigroup — the motive was not the deterioration of their business, but the fact that the US administration, it seems, no longer wants to save them at all costs. But the Holy of Holies (J.P.Morgan Chase and Goldman Sachs) is untouched — for how long? Problems of the European banks caused an expected reply: according to the Financial Times, 2 weeks ago the German industrial monster Siemens has withdrawn over half a billion euros from its accounts in a French bank and posted them on deposit with the ECB — away from trouble; Bank of China broke forward contracts and currency swaps with BNP Paribas, Societe Generale, Credit Agricole and several other institutions — it is thought that the Greek default will hit French the most. Funny innovation was created by the Hungarian Parliament — now the residents who took an imprudent mortgage in Swiss francs will be able to repay loans in local currency, and at a clearly overvalued exchange rate: banks, including foreign ones, are to lose hundreds of millions (if not billions) of euros — UniCredit will be hit particularly hard. A landmark event: the politicians relegate the banks in favour of their citizens — soon this will happen everywhere.
Currency markets. Dollar went wild on FOREX — liquidity deficit in the financial system and the collapse of the speculative markets have generated rapid growth in bucks: euro fell below 1.34, franc — to 0.92, pound — 1.53; and only the yen has even managed to rise against dollar. The rumour that the Swiss National Bank is going to raise the target threshold for the euro-franc cross rate from 1.20 to 1.25 caused another surge, but confirmation had not come and the rate stood at around 1.22. Particularly rapid was the fall of commodity currencies — the Australian and Canadian dollars fell below parity with the bucks: market participants decided that the recession in the global economy would strongly undermine the health of the export-oriented economies. The rouble didn’t escape this cup and collapsed vertically — despite massive interventions of the Bank of Russia, because of which the gold and currency reserves lost $6.8 billion last week. USD/RUR has struck the tops of last year and returned to the levels of 2009: 31.5-32.30 zone (peaks and closures of the previous corrections, as well as the upper limit of the channel drawn on the closing prices) is almost broken through — and if so, the next goal will be the neighbourhood of 33.5, after which no serious obstacles could be seen up to 36.
Stock markets. As we expected, the Fed has failed to please the market — and after a modest up-bounce the major indexes went down aggressively again: in a couple of days the Dow lost 900 points and fell below the summer lows. French figure clearly struck the summer low — and the Hong Kong Stock Exchange still felt even worse: bad sign for all speculative markets; RTS fell the strongest of all (by 10% only on Thursday). Of the corporate news we note the expulsion of Hewlett-Packard CEO Leo Apotheker from his post after only 11 months since the appointment — he will be replaced by Meg Whitman, former head of eBay and governor candidate for California; as we remember, in the midst of the crisis about 10 years ago HP already had experience of appointing a lady for the important job — and it ended rather sadly.
Commodity markets continued to decline — in some places the decline has even accelerated. Oil, gas and petrol have fallen substantially (WTI is below $80); industrial metals tumbled — nickel has already lost 40% of the spring highs; precious metal became cheaper too — the silver collapsed to $30, while gold fell to $1,600. Agricultural products sat down noticeably — except for rice (crop prospects are grim) and meat; of other commodities, coffee and cocoa declined most actively.
Panikovsky in Sochi
Asia and Oceania. The IMF has released a new report on the state of global economy — the tone is pessimistic, forecasts are lowered. Expectation of the US GDP gain in 2011 is cut by 1.7 times, and in 2012 — halved; the eurozone was cut by 1.25 and 1.5 times; Russia — by 1.1 times. Of course, in practice it will be a lot worse — and already now there is no growth, but a recession: but to see it, one needs to clear the statistics from the gross distortions — the easiest way is to keep in mind that the levels of consumer price inflation in all major countries of the world economy are underestimated by 3-5% per year, and GDP deflators — by 2-4%. For example, GDP of the New Zealand in the second quarter has allegedly grown by 0.1% against the first quarter (a five times bigger increase was expected) and by 1.5% against April-June 2010 — taking into account the foregoing, we can conclude that in reality we have something like −0.5% and −1.0% respectively: feel the difference! — And it is like that everywhere nowadays. Activity in the Japanese economy has slowed down obviously in the summer; in September, the index of business activity in the manufacturing sector of China's economy remained in recession zone — for the third consecutive month. Leading indicators are optimistic everywhere — alas, these are the July data which are not very relevant today. Current account balance of the New Zealand has deteriorated in the second quarter — exports, constituting about 30% of GDP, has let down; in Japan, the trade balance returned to deficit in August (and much stronger than was expected) — the reason was the rapid growth in imports against a background of extremely expensive yen.
Europe. Production in the construction sector of the euro zone rose in July by 1.4% after the June’s decline of 1.3%; quarterly dynamics is similar — as a whole over the last 9 months the figure stayed unchanged, fluctuating near multi-year lows; optimism in the industry was observed only in Germany. July’s manufacturing orders grew only in Italy — but even her surge of 1.8% didn’t recoup the collapse of May and June amounting to 8.2%; for the euro zone as a whole, orders have slipped by 2.1% after declining by 1.2% a month earlier; in the UK this figure for September is in the red — especially bad are export orders. Indicator of economic expectations in Germany from ZEW fell in September — it recouped almost the entire growth from the bottom of 2008; the dynamics of this index in the euro zone and Switzerland is similar — but the numbers there are even worse; the French business confidence collapses. The September indices of business activity (PMI) of the euro zone are bad — indicator went into a zone of recession for the first time since the summer of 2009: both for the manufacturing sector and the service industry. Trade surplus of Switzerland shrunk in August by 3.5 times versus July. Producer prices of Germany sat down in August; the British realty cheapens slightly — except for London; the British mortgage showed a 2-year high before the latest wave of the crisis. Consumer sentiments tumbled across Europe — particularly grim was the September dynamics in the Netherlands, France and Britain; as a consequence, demand is falling everywhere — the Italian retail sector fell again, while its annual decline has reached already 2.4%. Tax receipts have slowed down in Germany; in Britain, after the July pause there again was a sharp surge of deficit in August — so the London’s Cabinet has clearly overstated when spoke about «asylum-country».
America. The US index of leading indicators grew in August by 0.3%, and has not changed in Canada — but this figure is of little connection with the realities, for the main positive is brought there by a rapid growth in money supply (and what is at all good in itself?). Consumer prices in Canada suddenly grew in August by 0.3% m/m and 3.1% y/y — net prices have also swollen noticeably (excluding fuel and food). In August, there was 5% less construction developments in the USA, including 1.4% less single-family houses; building permits rose by 3.2%, but in a growing number of cases permits are not embodying into real construction; factually, there is less housing being built (by another −1.2 % overall and −1.7% for single-family houses) — record lows again. Secondary market sales surged by 7.7% — after much litigation on the faulty-made mortgages banks again began to foreclose houses (here is a monthly growth by the same 7%) and re-sell them. Housing market index from the National Association of Home Builders managed to fall in September even from the ridiculous level of July. Indicator of consumer comfort from Bloomberg has punched the spring bottoms in mid-September — and immediately found itself at the bottom of 2008/09. Mass layoffs rise; the employment index of the Association of Recruitment is on the weak levels; initial applications for unemployment benefits are high; repeated are 28 thousand «down» — but the past two weeks were revised upwards for the sum of 31 thousand; Canadian retail sales fell in July by 0.6% at nominal values — but when you consider inflation (officially +0.2%, +0.5% real), it will be almost a 1% drop m/m.
Source: U.S. Census Bureau
Russia. New report of Rosstat does not please. In January-July, the birth rate was 29 thousand lower than last year — the reduction is steady; mortality fell by 56 thousand — but half of that was in July, which saw a sharp rise in deaths last year. Foreign trade surplus in July was the lowest since January. Other data for August — and they are supposed to be mighty: a year ago there was the heat and smoke (gone in the second half of the month, but still) which undermined many sectors of industry, agriculture and construction; in addition, in the last month there was one working day more than a year ago. Increase in industry is 6.2%, manufacturing sector — 7.1%: adjusted for calendar factor, it is only 2.0-2.5% and 3.5-4.0% respectively. Investments grew by 12.7% y/y, construction — by 12.4% (but versus July there is a reduction of 1.2% with the exception of seasonal factors); agriculture — by 13.3%; all this is clear, what is difficult to understand is the decline in logging, weak housing introduction (+ 3.6% instead of +19.0% in July) and freight transport (+1.8% after +4.6%). Retail has soared by 7.8%, without food — by 12.0%: this is a peak since October 2008 which is due to rise in borrowing by 28.5% y/y. Unemployment fell, incomes have grew up (but did not taking into account real inflation); producer prices jumped by 4.6% m/m. According to our estimates, GDP grew by 3.0-3.5% y/y (MED showed +5.2%), and adjusted for the extra working day — by 1.0-1.5%; as a whole for January-August the increase is 1.5%.
Epizooty of the swine fever happened to be stronger than the government: Minister of Agriculture Skrynnik capitulated, offering to overcome the spread danger to the key Belgorod region by reducing the number of pigs — encouraging at the same to shoot wild boars. Head of the government continues a series of voyages — this time he visited Sochi forum: accidentally or intentionally failing to recognize the honourable sex-spy Chapman, Putin walked through the stands of different regions and companies — where he was treacherously attacked by the CEO of Russian Railways Yakunin whom with the passion of Panikovski demanded the prime minister to issue him with 40 billion roubles; Putin had to escape with the active help of Economic Minister Nabiullina. General Trutnev, recently appointed as the Head of Internal Affairs for the Northern District of Moscow, is already fired — the cause is the Minister Nurgaliyev’s visit to the Ministry’s Management Academy: despite careful preparations, a scribble abusive to the Minister was written in front of the building; it was wiped, some operative employee detained — but it was too late: angry Minister expelled the police chief into retirement. The election campaign shines: checkist-banker Lebedev kicked in face the construction businessman Polonsky on air — the latter, for some reason, had his pants torn, and in general he was attacked by the blues, which he shared with the president, prime minister and the patriarch. And yes, those stupid fighters with aliens, which seem to land here in the middle of November: they should not be fought with, but invited to join EdRo or the ONF! — Then we will only have to stock up the popcorn and enjoy the spectacle.
Have a nice week!