Good afternoon. The political process last week was developing not only in Russia. In Morocco parliamentary elections were held — moderate Islamists took the victory: the same happened recently in Tunisia — so democratic «Arab spring» brought up some interesting flowers, and the not least interesting berries are due to, we should think. In some places these are already ripe — in Kuwait, for example, anxious population prompted the authorities to tackle corruption, albeit a peculiar one: the head of state, Emir Al-Sabah, drove out Prime Minister Sheikh al-Sabah for bribes of $350 million — presumably bribe-takers will be tried by some another Al-Sabah. The process in democratic countries is arranged otherwise: according to American journalist Epstein, French President Sarkozy stands behind the scandal with former IMF chief Strauss-Kahn — the latter’s phone was tapped, and e-mails censored by the Parisian intelligence agencies, for Nicolas feared Dominique as his future competitor in the elections; Elysee Palace, of course, denied the allegations as slander — but Strauss-Kahn’s lawyers would not give away the cause, so we have a chance to have fun in public parsing of French laundry.
Galvanizing the corpse
Monetary markets. Fitch, as promised, completed the revaluation of the US rating before the end of November — indicator remained unchanged, but the forecast is now negative: realistically assuming that before the election no breakthrough on budget can be expected, the agency gave the USA until 2013 to finally start reducing the Treasury deficit — otherwise the rating will be cut. S&P has changed the methodology of corporate ratings’ calculation — and immediately lowered the ratings of 15 major US banks, including JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley; no one was much impressed, for the inadequacy of previous methods was obvious to all — and yet it was now only partially resolved, while the negative outlook promises further steps in this direction. Another blow to the oligarchy was struck by Southern District of New York Judge, Jed Rakoff, who cancelled the transaction between the Securities and Exchange Commission and Citigroup for fraud in mortgage-backed securities that brought customers to a loss of $700 million, while the bank itself received a profit of $150 million — without admitting guilty, but paying a fine of $285 million, the bank came out unscathed, that angered the judge: he advised the SEC to decide — if the bank is guilty, it must be prosecuted and if not, what was the fine for? Bankers, actively using this tool of evading responsibilities, are very unhappy.
Illustration: Artem Popov
The Eurogroup has given approval for the issuance of €8 billion to the Greeks and €8.5 billion to the Irish; Fitch lowered the ratings of middle-sized Italian banks; placing of Italian treasury bonds went at 7.9% per annum for a 3-year papers and 7.6% for 10-year; yields of 2-year Italian bonds have exceeded 8% (peak since 1996), and of 10-year Portuguese — 14% per annum; German bonds for the first time on record came with negative yields — that is, their buyers will receive less at maturity than they spent on the purchase. Second-rate agency Egan Jones has downgraded France, making it clear that that is not the end. S&P reduced the rating of Belgium, leaving the negative forecast — in response the major parties of the country have agreed on the budget and the coalition Cabinet: after year and a half (!) after elections there will be government in Belgium. Rumors about the IMF’s desire to give Italy a loan of €600 billion at 4-5% blew up the markets: the fund does not have such money, but the euro-structures could join — in this case, Italy would have left the markets for 1.5 years and would calmly prepare the budget reform. Soon, the IMF has denied the rumor — but the gruesome feelings remained: there is a suspicion that the negotiations on this issue did take place, and perhaps are even going on — but so far (as usual for Europe!) the decision was postponed indefinitely. Markets are gloomy — and the new players had to intervene.
China for the first time in 3 years has reduced the reserve ratio for its banks by 0.5% — marking a u-turn in monetary policy from tightening to easing: all have rejoiced. And almost immediately the leading central banks of the world (Fed, ECB, Swiss National Bank, Bank of Japan, Bank of Britain and Bank of Canada) have broadened the scope of reciprocal swap lines and reduced the interest in them — the meaning of the action is that, if euro-banks would need it, they will be able to get a nearly unlimited liquidity directly from the Fed, now that Europe itself would rather discuss to death than decide on anything concrete. But this is just the current liquidity — and what to do with low solvency of eurozone countries, the core component of the current round of the debt crisis? Because there are still a lot of problems: the head of the Federal Reserve Bank of Richmond Lacker voted against the decision, threatening to increase the opposition to the Fed’s plans for emission; then, US banks get money from the Fed at higher interest rates under the discount window than the Europeans have now been promised — on the next meeting of the Fed the discount rate will be probably cut; the ECB, in addition to rate cuts (which is essentially a thing done), will probably offer banks 2-3-year loans at the meeting on December 8 — but it still will not monetize the sovereign debt. And if so, the main problems of the eurozone would not be solved — hence, recent initiatives are similar to galvanizing the corpse.
Currency markets. Optimism that occurred on another emission promises caused the fall of bucks against the major currencies-rivals. Euro has jumped from 1.32 to 1.35, the franc is back to 0.90-0.91, the pound went to 1.58, while the Australian dollar has established above parity with the American. The ruble rejoiced too, now having a chance to go in 29 — well, just as we wrote in our previous review.
Stock markets. Leading indices jumped sharply on the joys of another monetary freebie — Dow rose by 800 points in 3 days and came back to 12000: impressive start of the «Santa Claus rally»! At the same time do not forget that on the Thanksgiving Day week the Dow fell by 4.8% — which has not happened even once since 1942, when the markets were closed for the first time on the holiday. So for a while we can only speak of extreme volatility — and not rush to predict the development of a powerful trend in any direction. From the corporate news, we note the long-awaited bankruptcy of AMR, the parent company of American Airlines; and yet there was a resounding scandal around Japanese company Olympus, whose bosses were hiding losses from the acquisitions of other companies for more than 10 years — of course, the profits from these transactions went into managers’ personal accounts managers. As always, the developments were colored with beautiful details: some write about the explicit presence of the Yakuza mafia — the fraud-consultant Nakagawa, whom the journalists caught in Hong Kong, escaped from the pursuers in the elevator with a yell «Get out! Get out, I said!».
Commodity markets have not gone away from the emission optimism. Oil grew slightly, industrial metals rebounded substantially (except for a weak nickel), precious rejoiced too — especially gold. Grains and pulses look modest — just slightly bounced off the bottoms, but nothing more; the exception was oats, which fell the strongest recently — and now it suddenly jumped by 15% in a couple of days. Meat, milk and fruits were already growing in price — so they have nothing to be excited about and behave calmly. Some signs of life were shown by cotton and sugar — but the cocoa and timber are still very weak and even managed to show new lows.
Vegetables and fruit
Asia and Oceania. Philippine GDP grew twice weaker in the third quarter than in the second, and three times weaker than expectations. Floods have undermined terribly the Thailand’s manufacturing industry — in October its output fell by 38.9% m/m and 35.8% y/y. The business activity in the manufacturing sector of India has declined, although remained in the zone of expansion; much worse are things in China — both at the official version, and according to HSBC, PMI fell down into the area of decline, reaching bottom since February 2009; with very bad orders — especially export. Similar index of Australia is now for 5 months in a row below 50 points separating growth and decline; building permits plummeted in October by 10.7% after collapse by 14.7% a month earlier — as a result, the annual decline is already 29.8%; retail sales (excluding inflation) slowed down to +0.2% against +0.4% in September, +0.6% in August and +0.8% in July. In Japan in the third quarter capital expenditures of non-financial companies fell by 9.8% y/y; in October industrial production grew by 2.4% — but after declining by 3.3% a month earlier it is not so brilliant; business activity again went into the zone of recession; the number of construction developments are still in the red against the previous year; unemployment has jumped at once by 0.4%; retail sales have only recouped the fall of September, while household spending have only slowed down the fall with a jump in car sector (+22.7% y/y) — compression of real disposable income by 3.8% y/y is not inspiring in terms of demand prospects.
Europe. Swiss GDP slows down; GDP of Denmark lost 0.8% at once — and the annual dynamics has left into negative; only the Swedes have pleased with the growth of reserves and exports — while private demand weakens. Economic confidence in eurozone and the business climate have dropped down to 2-year lows; Swiss leading indicator from KOF has fallen sharply. PMI in the production were falling across the continent: in November there is 46.4 in the eurozone (bottom since the summer of 2009), in Britain — 47.6 (since spring 2009), in Switzerland — 44.8, in Sweden — 47.6, in Poland — 49.5. And the prices are retreating very reluctantly — eurozone consumer inflation has kept at +3.0% y/y for three months: really there is plus 6.0-7.0% — so the «incession» (inflation plus recession) is in force. In Britain, the mortgage is more or less alive — but consumer credit is very weak; house prices do not want to fall — making the influx of buyers quite difficult. Consumer confidence is low everywhere (including Britain) — except for Germany, where optimism reigns. And why not — this is the only country where employment is rising: unemployment has fallen again — while in the eurozone as a whole a peak since June 1998 was reached; Spain noted an astounding 22.8% — record peak, to understand which it is worth noting that the peak of the Great Depression in the United States was 25%; in Greece, the latest data available are for August — so things there are probably no better. Hence the dynamics of demand: cars registration in France is worse than last year, while general consumer spending is weak; retail sales accelerates its fall in Spain, and remains in negative territory in Switzerland; the British balance of sales in November were at the bottom since March 2009 — and the orders in the industry have simply collapsed. The recession in Europe is getting closer...
Source: OECD, Eurostat
America. The Fed’s «Beige Book» stated the sluggish growth, except in the area of FRB of St. Louis, where activity fell down. Canadian GDP was helped by external demand: exports swelled at a record pace for 7 years. Manufacturing activity in the USA either grows slowly or stagnating — and in the Midwest region it is surging. According to S&P/Case-Shiller, home prices accelerate the decline; sales of developments are weak — but construction costs are not bad; pending home sales have jumped — but they are hardly embodying into the actual purchases. Consumer confidence improved in early November after the panic in October — but the Bloomberg survey showed stagnation in the last 2 weeks. According to Challenger, layoffs planned in November were slightly less than before — but hiring shrinks more rapidly; ADP report on private sector employment was unexpectedly good — while the online jobs are ever fewer, the employment index of Monster has fell, while weekly statistics of unemployment deteriorates. The official labor report was mediocre — sharp decline in unemployment (from 9.0% to 8.6%) was caused solely by the fact that Labor Ministry at once thrown out half a million people from the labor force; everything else was modest — average length of stay in the unemployed status even showed a new record high; Canadian report is bad (unemployment rose). Sales at stores in the Thanksgiving week has jumped by 6.6% against the same week a year ago (though it is below the real inflation rate); US Retail Association generally speaks of the jump by 16%; online discusses video from the shop, where a crowd (mostly negroes) fight for cheap towels — apparently, the poor are forced to wait for the maximum discounts, or they would not make ends meet. Problems with demand are obvious — but against the background of numbers in Asia and Europe, the States still looks good.
Source: U.S. Bureau of Labor Statistics
Russia. The annual growth rate of monetary aggregates M0 and M2 as of November 1 was the lowest since late 2009 — when you consider that loans to individuals swelled obviously stronger (by a third), it is easy to see that everything else should look bleak. Demographic report for October showed an increase in fertility and decline in mortality; in general for 10 months, both indicators reduced — although, of course, the death rate has declined much stronger, because last year it was very great due to extreme weather events. Authorities were preparing for the elections: Prime Minister disputed with the governors, on the point who should bear the expenses of repairing ancient monuments in the regions, and then demanded the Congress of ruling party to chant «Russia!»; the President talked about the dangers of parliament, in which the authorities can’t easily carry out their policies; prominent bosses were continued to be cursed by the public — well, etc. CEC banned propaganda video, which called to vote for the fruits instead of hateful vegetables — under the pretext that «vegetables» may be offended when they saw themselves in such context; the authors suggested to close all offended with the black squares and to remove controversial phrases — but the video was still banned from the screen. Elections in South Ossetia ended in scandal: candidate less pleasing to the ruling mafia clan won there — the outcome was canceled; the winners are rallying, while Medvedev immediately sent an emissary to sort things out. Kadyrov is in grief: his horses were not allowed to race in the USA — accusing the owner of mass murders: sovereign democracy is not in favor everywhere — what a nuisance!
Illustration: Artem Popov
Have a nice week!