Good afternoon. The war in Libya has ended with an outrage on Gaddafi’s corpse — but has it ended? The NTC does not please a large chunk of the people — it threatens to start a resistance; the idea of introducing Sharia law also found a dim response of people who were expecting to joyfully meet their freedom. In Tunisia, the Islamists have already won — apparently, the same fate awaits other countries in the region. And a reversal process goes on in Europe — in Switzerland the center-right won the elections: they missed the experts’ expectations a bit, but their shortfall was more than covered by the extreme right — see what happens next! And what exactly happens next is seen in Norway — while the tolerant crowd cursed Breivik, his fans waged a new attack. Another «Russian spies» were uncovered: a married couple was arrested in Germany, while some American woman maliciously tried to smuggle sniper sights into Russia. Pilots of the Ryanair budget airline innocently taped a crack in the windscreen of their Boeing with a sticky tape — after takeoff the repair peeled off with a big bang and the ill-fated visionaries had to go back to the airport. The elements didn’t nap either: earthquake in Turkey and floods in Thailand have killed hundreds if not thousands of people.
Illustration: Artem Popov, ITinvest
Let Cameron at the summit...
Monetary markets. Reserve Bank of India raised the rate to 8.5% per annum, but made clear it will take a pause after that. Bank of Japan left the interest on the spot, but has expanded the program of buying up assets to ¥5 trillion. Central banks have not changed anything in Canada, New Zealand, Sweden and Hungary. Amid the European mess the American has been somewhat forgotten — and yet it is still there, as was reminded by the Bank of America: it is unlikely that the Congress and Obama will come up with something sensible to reduce the Treasury deficit — and therefore, in November-December, the downgrade of the USA by all agencies and not only the S&P becomes quite possible. In the meantime, everyone was interested in the EU summit, which decided to increase the stabilization fund to €1 trillion through the machinations such as margin loans — the currently available €250 billion will secure bonds placed for a trillion which will then be sold at the market with the revenues used to buy up bonds of the euro-periphery: this is what was suggested by Geithner — and in the United States his innovative ideas were rejected. In general, the EU plan is akin the sticky tape on that plane’s windscreen — soon it will come off with a bang. Europeans want two trillion rather than one: their eyes are turned to the BRIC countries — the Chinese have promised to help (according to rumours, they will invest 50-100 billion). Capital requirements for large banks were increased up to 9% of assets — hence, by mid-2012 they will have to find more than €100 billion, of which over half is in the credit institutions of Greece and Spain. S&P cut the rating of Cyprus, whose banks are happy holders of Greek securities valued at 165% of the country’s GDP.
The new plan for Greece will be made up by the end of the year — and in the meanwhile the holders of her bonds were made consent to lose half of their investments; the negotiations has not been completed yet, for the victims were offered an exchange for new papers — unfortunately the question «What are the guarantees on them?» has not been answered; sufferers reasonably suspect that they will in this case lose 100% of the invested money, rather than the promised 50%. Nevertheless, this hype it is not considered to be a default — since the investors have agreed to these losses «voluntarily»: of course this is nonsense — but now the holders of credit default swaps for Greece can’t have these paid, for there is no formal default. The line was drawn by the French President Sarkozy — he publicly regretted that Greece was once admitted to the eurozone. EU urges Italy to pass the pension reform — she persists, but probably not for long: Berlusconi resigned to the inevitable and even secured the support of the Northern League — in exchange, he agreed to resign already in January (elections will be held in March). Meanwhile, British Prime Minister Cameron stormed into the eurozone summit, on the pretext that the crisis touches everyone, including him, and again began to excite the fears — and Sarkozy lost his temper: «You have lost a good opportunity to shut up. We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.» Cameron proudly withdrew himself, without answering the colleague.
Currency markets. The yen showed another maximum — prompting a new wave of dissatisfaction of the Japanese authorities; but so far no concrete action has followed. Euro rejoiced about the «historic summit» — and soared, reaching $1.4250. The rouble has grown too — the buck struck down 30; the Australian dollar has almost got back to the former highs.
Stock markets. The leading indexes were fuelled with optimism after the EU Sabbath — the Dow galloped back to as far as 12300, i.e. almost returned to the peaks of spring-summer. Such enthusiasm is very delusional — but this is the crowd psychology of the speculators. Of the reports we note UBS which despite the big loss due to its trader is still in a good profit. The oil industry (Exxon Mobil, Chevron, etc.) has sizable profits — but production and sales fell. Of chemists, DuPont pleased, while Dow Chemical was not so bright; Merck is good; International Paper outperformed the profit forecasts — but saddened with weak revenues. Impressive were the reports and forecasts of Caterpillar and Boeing — however, the latter has surprised with a drop in the number of civil aircrafts sold this year. At the other extreme there are military monster Raytheon and the industrial conglomerate 3M — profits declined, and the first company has even saw the sales falling; forecasts for the year were cut too. AMD gladdened — but Amazon.com is quite awful — in a few minutes after the publication of figures (profit fell four-fold) its shares collapsed by 15%. The consumer sector is slack: the market took Procter & Gamble and Altria Group cold — but nothing more. MF Global broker, of which we wrote last week, hasn’t coped with the challenges brought with its Goldmans’ bosses — and was put up for sale. And these bosses were noted not only here: the former top manager of Goldman Sachs Gupta was arrested on charges of leaking inside-info to the already-incarcerated billionaire Rajaratnam. A similar story in China, where two officials were sentenced for 5 and 6 years — they made a good use out of their access to the macroeconomic statistics: they traded on the exchange themselves, and also leaked the data to third parties — the grateful recipients compensated them with payments for alleged lectures.
Illustration: Artem Popov, ITinvest
Commodity markets. Oil sped up — especially WTI, while Brent lags behind; natural gas continues to cheapen to Gazprom’s sorrow. Industrial metals soared — copper has already recouped half of its fall from the February maximums. Precious metals also went north — gold got to $1750 per ounce, while silver surpassed $35. Cereals, pulses, forage and vegetable oil behaved more modest — except for rice, which again went to the peaks of September. The meat is at its highs (the pork has even pierced them), while milk rapidly becomes more expensive. Fruits have reached new peaks; coffee and sugar stabilized; and even hitherto nailed cocoa and cotton showed some signs of life. Look forward to a new wave of cost-push inflation around the world?
Asia and Oceania. The situation in the global economy remains alarming, which is recognized by the authorities: last week it was confirmed by the Industry Ministry of China and Bank of Japan. The economy of South Korea slowed down — although the quarterly GDP growth of 0.7% can hardly be called bad. Industrial output in Japan fell in September at once by 4% m/m and the by the same amount y/y. Activity in the manufacturing sector of China, on HSBC account, returned to the growth zone in October after several months of decline;, the New Zealand business confidence has fallen off, and the trade deficit was above expectations. The same picture in Hong Kong (exports dipped unexpectedly), and in Japan the surplus was 2.6 times weaker in September than a year ago. Australian inflationary figures are very impressive in July-September — but without the volatile components the consumer prices rose by only 0.3% (minimum for 14 years); the New Zealand’s inflationary pressure has also weakened clearly in the third quarter. In Japan, prices of corporate services are falling in annual dynamics for 36 consecutive months; consumer prices have zero-changed — but are also in the red if fuel and food were excluded. Unemployment rate has fallen due to statistical manipulations — the level of employment also fell sharply. Retail sales are tumbling — both in general (-1.2% y/y), and separately for supermarkets (-3.6%, but this is partly to blame for the strong typhoons); household spending as a whole is also in the red.
Europe. Eurozone industrial orders jumped by 1.9% in August, including +56.5% in heavy transport (+0.7% without it); the leaders are Italy (+6.0%), France (+2.8%) and Spain (+2.7%), while Germany is an outsider (-1.2%); deterioration in the sector is expected in the coming months. In Britain it is already evident — orders and production fell in October down to the bottom since 2009. Business sentiments in Belgium and Italy sagged more in October; and in France they collapsed — while the prospects of demand went into negative and capacity utilization fell. Indicators of business activity continued to fall in the eurozone — and although the mood and the business climate slowed their compression a bit, the general southward trend remains. Current account deficit of Britain was only 0.5% of GDP in the second quarter — record since July-September 1998. In September, inflation resumed its offensive: producer prices in Spain and consumer prices in Belgium swelled by 0.2% m/m, while import prices in Germany — by 0.6%; but German retail prices stopped in October. Broad money supply (M3) swells in the eurozone — it is not clear why: the narrow aggregates are slowing down, credit activity does not grow. British mortgage fell, recouping the growth of the whole year, which so pleased the government. Consumer confidence falls — although Germans (and sometimes French) resist; in Britain it is at the bottom since early 2009; Spanish unemployment has grown to 21.5%. Retail sales slipped in Spain, and have not changed in Italy; consumer spending fell in France; private demand also remains nailed in the UK and Switzerland.
America. US GDP grew by 0.6% q/q and 1.7% y/y in the third quarter; per capita GDP added 0.4% and 0.9% — but if you calculate the deflator honestly, there will be a decline by 0.1% and 1.1%, and by 0.3% and 1.8% per capita. Domestic private demand (GDP without the attached rent, net exports, inventories and government spending) is +0.8% and +2.5% officially, +0.1% −0.2% in fact. Base for demand is weak — the salaries, if we are to estimate the inflation honestly, fall down: from the year 2000 peak they sank by 24.8%, reaching the level of 1958. The Canadian Ministry of Finance lowered the GDP forecast for 2011 and 2012. In the United States in September, orders for durable goods fell by 0.8% m/m and rose by 4.3% y/y — that is without inflation, so the case is not good; transport lags, particularly aviation — without them the picture is rather more decent. Regional indices of business activity have stabilized after the collapse. Housing prices continue to fall — but grow in Canada. Sales of construction developments in the United States swelled due to a collapse of the median price by 3.1% n/n and 10.4% y/y — the houses, construction of which has not yet begun, were bought most of all: it goes out cheaper. Pending purchase on the secondary market fell in September by 4.6% m/m after −1.2% in August. Consumer confidence from Conference Board collapsed down to the bottom since March 2009; evaluation of Bloomberg also went to a minimum. Review of the National Association for Business Economics showed that the corporations have sharply contracted their recruitment plans — only 29% of them want to recruit (minimum since January 2010) against 43% in July. Canadian retail sales had grown by 0.5% in August after falling by 0.5% a month before; sales in the United States, according to Redbook and ICSC-Goldman, have worsened in October — adjusted for inflation they are also in the red against the previous year. Real incomes are falling — but spending rises: the savings rate fell to 3.6% — the Americans, too, like to step on a known rake.
Source: U.S. Bureau of Economic Analysis, and independent assessments
Russia. Report of the Ministry of Economic Development estimates GDP growth in September at 5.7% y/y — we would only give 3-4%, despite the effect of a low base a year ago. We note the rise of retail and its explanation: savings of the Russians shrunk in January-September by 17.6% against the same period of last year — apparently, the MED means not the fall of the accumulated sum, but the slowdown of savings’ growth. In addition, personal loans grew by around 30% y/y, including 36.6% growth in mortgages — in general, the Russians are eating up what they accumulated (savings rate fell below 10% from 10-20% in 2009-2010) and go on a loan spree — this is not good. We already wrote about the banks’ record low reserves — liquidity deficit arrived just in time: record amounts since the peak of the crisis in 2009 were borrowed from the central bank — Bank of Russia even had to sharply raise the limit on daily distributions; Moody's downgraded the forecast for Russian banking system. But the authorities cannot be stopped — Popular Front and EdRo want to run a reverse mortgage for seniors (loans secured by houses): so that the legitimate heirs would get an apartment packed with the debt on the loan — and houses eventually going to the banks. The bosses’ general opinion about the situation was expressed eloquently by the First Deputy Prime Minister Shuvalov: «We do not expect any crisis, but we are ready for it» — long live the schizophrenia! In the meantime the authorities have fun: set up a fee for fishing, raced on combine harvesters and played badminton. North Caucasian chiefs became completely boorish: Chechens call for new payments for the damage inflicted to them during the war, and the Dagestani government is going to develop hockey on public money — and don’t you think the generous Putin aka Allah won’t pay them!
Meanwhile, another innovation has appeared in time — in Russia the summer time stays in place, while in Europe (now) and in America (in one week time) clocks will go forward. And now all that is happening in these regions will move one hour forward; Japan will remain unchanged, go one hour back in Australia. Thus, the Australian markets will now open at 1AM Moscow time, the Japanese — still at 3AM, continental Europe starts at 11AM, with the major economic data released at 11, 13, 14 and 15 o’clock. Britain now opens at midday, and the news to be expected at 13:30 and 15:00. US will remain in the same frame for this week — but as of 7 November their session will begin at 5PM, and the main data will go out at 17:30 and 19:00. Closure of Europe will be postponed to 8-9PM, and of America — until 1AM Moscow time. By itself, the Moscow time will now advance the astronomical by 2 hours — that is, Central Russia is going to live in the Urals time. It is not easy to understand the meaning of this innovation — like all the others, with which the Kremlin bosses are so abundant; as a comment here you can only quote from Alexis de Tocqueville: «There are no worst enemies of progress, than those whom I would call „professional progressionists“ — people who think that the world requires nothing more, but a radical implementation of their specific programs».
Have a nice week!