Искандер Луцко

Good afternoon. Republican Party primaries continue in the United States — last week Romney made a resolute step towards securing leadership: he won in Massachusetts, Vermont, Virginia, Idaho, Alaska and Ohio — the latter plays the role of Jerusalem for the Searchers of Holy Grail, for all the previous presidents from the elephant party won the Ohio caucuses. Santorum has beaten his foe in Tennessee, Oklahoma and North Dakota — not a major achievement; in any case both Romney and Santorum produce a depressive impression — and if nothing extraordinary happens, Obama should beat both — but if Paul or Gingrich succeeded it would have been far less obvious. Alas, this is the sign of the times — politics turn into circus, for the mass consumer chooses clowns as their leaders; modern politicians more and more resemble the characters of «The Simpsons» series — and the most promising of the new generation are already close to the images of Beavis and Butthead.

Some variety to this gloomy picture is made by «​dictators» — last week one of them, Lukashenka, chided in response to all claims onto homosexuality of the German Foreign Minister Westerwelle: saying that «it is better to be a dictator than a gay» — he did encroach on the sacred, and thus has caused a return tantrum. The triumph of progress is however unstoppable by pathetic marginals — in the Netherlands, for example, «ambulatory euthanasia service» was established: mobile medical teams arrive on demand of those wanting to end their lives — and the demand has significantly exceeded the supply, so (in exact accordance with the market laws) it was decided to assemble additional death squads, sorry, the «emergency medical groups». Unexpected problems were seen by the zealots of another idol of this mad world, «transparency» — a Frenchman, has filed a lawsuit against Google for that during the filming of their Street View project he was captured peeing in his own garden: the sufferer complains that his village neighbors now constantly mock him — and demands €10 thousand; the hearing is to be held next Thursday.

Illustration: Artem Popov

Surprise, another surprise

Monetary markets. Central banks were extremely active last week. Reserve Bank of India raised the reserve requirements for banks from 6.0% to 9.5% — however, this is a temporary measure due to one-off «technical» reasons. But the Brazil’s central bank’s rate-cut by 0.75% (from 10.50% to 9.75%) is very real — the market expected such step, but of a bit smaller value (by 0.50%). No changes in interest rates were made by the monetary authorities of the eurozone, Britain, Canada, Australia, the New Zealand, South Korea, Indonesia and Poland — all make it clear that they want to wait for developments in the global economy and global markets and respond with their actions. Meanwhile, Fed continues to hatch plans for new programs of quantitative easing — but this time, according to the Wall Street Journal, the idea is to «sterilize» the emission: i.e. Fed wants to buy bonds on the market — but limit the traders’ rights to use the money received from the central bank; although it’s unclear how such measures could be implement. At the same time the Republicans are undermining the Fed — Deputy Chairman of the Congress Joint Economic Committee Brady presented the bill according to which Bernanke’s office will be deprived of mandate to maintain employment, forcing it to focus on controlling inflation only; of course, the Democrats and the current Fed chiefs are opposed — so they will support Obama with all their power on the eve of the November presidential election.

Moody'sjoined the colleagues from S&P and Fitch and gave Greece a default rating — and there is no forecast for this rating: really, what can a forecast be if the rate is already at the bottom? So, obviously, it can only grow — there is no place to fall. Voluntary-compulsory exchange of Greek bonds should pass without complications. And meanwhile the Athenian authorities continue to «please» the markets and euro-officials: Greek Minister of Finance Venizelos has announced happily that, as it turned out (surprise!), his country’s debt has amounted to 170% of GDP and not 160% as was thought previously — this simply puts all the road maps for reducing the debt burden of Hellas to bin; the EU structures are in a rage — although should have be used to the Greek habits. Another surprise was presented by Spaniards — their new PM Rahoy said that because his predecessors Socialists lied about the actual figure for treasury deficit, it is impossible to cut it according to the previously made plans: therefore he requests to allow this year's hole in the budget to be 5.8% instead of the planned 4.4% — but in the next few years (oh yeah!) everything will be tiptop. Spain is not Greece, so the Europeans are very concerned about what is happening there; the markets also were not very happy — for the first time since August last year, the yields of 10-year Spanish treasuries surpassed the Italian ones. Only the ECB now keeps the EU financial system’s pants at their place — in the cause of glorious deals its balance rose to a record €3 trillion, which is a third more than Fed’s balance sheet (and 31% more than the GDP of Germany). Experts are concerned that soon the burden of «junk assets» of the central bank will become unbearable...

Currency markets. The main rates rose and fell, generally almost without any movement from their last week’s positions. Only the ruble fell slightly — and, in general, Russian markets have played the presidential elections in the classical principle (for stock trading) — «buy expectations, sell the facts».

Stock markets. The latter circumstance applies fully to stocks — they also collapsed after the initial positive reaction to the election. However, Tuesday decline happened everywhere: Dow fell by 200 points, which hadn’t happened for almost 3 months — however world indices now are still very close to their peaks, and the falls look no more than corrections. The exception was the Spanish index, which is close to the lows of 2011 — and the bottom of 2009 is near there. Among the corporate news we note the good report of beer giant Anheuser-Busch InBev, whose profits in 2011 jumped by 45.4% — however, as was expected.

Source: SmartTrade

Commodity markets. Reviews by Credit Suisse and RBS show that the Chinese demand for raw materials (which was one of the main drivers of its increase in price in the 2000s’) will get weaker — for the capacity of China to utilize energy and metals is massive, so the authorities will pursue a policy of increasing efficiency of production. This is another argument in favor of an early (by historical standards — that is, within a few years) end to the «commodity super-cycle», which started in the late 1990s’. As we expected, US natural gas went to the new lows, reaching $84 for 1000 cubic meters — and in real terms (adjusted for inflation, free from official distortions) its price is now at the minimum since July 1973; in those years, it was on this price-level for 13 months only, from June 1972, and before that the gas cost so cheap only in the autumn of 1947; from the tops of 2001-2008, the price already decreased by 5-8 times. Oil, industrial and precious metals initially fell and then rose; grain gets cheaper — but feeder and oilseeds continue to go up; tangible declines were observed in meat and milk; coffee is very weak — a little optimism here.

Source: Ministry of Energy and the U.S. Bureau of Labor Statistics, an independent evaluation

Military Modernization

Asia and Oceania. Chinese Premier Wen Jiabao has lowered the target rate of GDP growth from 8.0% to 7.5% y/y — for the first time since 2004; he also made ​​it clear that inflation and the real estate market bubble disturb him more than the slowdown in the economy — the same applies to the debt of local authorities that has reached $2 trillion; the central government’s budget deficit will be limited to the value of 1.5% of GDP (instead of 1.1% in 2011) — and military spending will increase by 11.2%, already causing broad discussion in the foreign media. Business activity in the services sector from HSBC has improved in February; inflation has slowed down — PPI has reached zero change in 12 months, CPI rose by only 3.2% y/y. In January-February the annual production growth totaled at 11.4% (after 12.8% in December), capital investment — 21.5% (against 23.8%), retail trade — 14.7% (after 18.1%): slowdown is obvious. Japan's GDP was revised slightly upwards (as expected), but was left in the minus — negative influence was made by net exports and inventories, while investment and private consumption have made ​​a positive contribution. Engineering orders tumbled; economic conditions improve, but are still bad; trade balance is still in deficit, wages stagnate. Australia's GDP was twice weaker than expected (+0.4% instead of +0.8%), and if it were not for government spending and net exports it would be at −0.1%; corporate profits fell by 6.5% q/q, and the current account deficit soared by 1.5 times. In February, the services sector got back into recession, while the construction sector fell in depression; employment unexpectedly fell in January and unemployment rose, trade balance saw deficit for the first time since February 2011 due to the collapse of exports — in general, nothing to rejoice with.

Europe. Confirmation of eurozone GDP confirmed the fall by 0.3% q/q — if you remove net exports, it would be −0.6%; private consumption declined by 0.4%, and capital investment — by 0.7%. Industrial production has fallen by 2.0% — this trend has not gone in 2012: in Spain, Italy and the UK the decline of production has accelerated, in Hungary for the first time in a long time the yearly dynamics went into negative; Germany remained the exception (+1.6%), but the growth in January was followed by a stronger decline in December (by 2.6%), while industrial orders fell by 2.7% m/m and 4.9% y/y; the worst case is in capital goods (-5.5% against December), which recouped a third of the recovery growth of 2009/11 in 6 months of decline. In France capacity utilization is falling, industrial production fell by 1.5% y/y, the trade deficit has grown — but the surplus grew up in Germany; PMI of the services sector of the eurozone and Britain have deteriorated markedly in February — although business sentiment in both countries is showing signs of life. In Switzerland, consumer prices have grown in February — but the annual dynamics are still getting worse (-0.9%); retail prices in Britain gave the smallest increase since March 2010 (+1.2% y/y) — and without food there is a deflation (-0.7%); British realty is getting cheaper too. The increase in unemployment occurred in Greece, France and the Czech Republic; Switzerland is stable; in Britain the number of vacancies for permanent employment increases (but wages offered are going down), but the contract employment is falling. In January, the retail sector perked up a bit — thanks to traditional discounts after the holidays; but in Britain and Spain things are still bad.

Source: Eurostat, the Federal Statistics Office Germany

America. Not only the leaders of the New World are being challenged: Venezuelan inflation reached 26% y/y; industrial production fell in Brazil by 2.1% m/m and 3.4% y/y in January, and GDP for the last four quarters was revised down, so that the annual gain in October-December shrank to 1.4%. In Canada, GDP in December increased by 0.4% m/m and 1.8% y/y — taking into account the statistical machinations actually there is already a minus in the annual dynamics. In the United States in 2011 labour productivity rose by 0.4% — minimum since 1995; labour costs grew with a maximum rate since 2008 (+2.0%) — this promises problems to the market, if only the demand goes up dramatically. Production orders fell by 1.0% m/m in January; considering the growth of population and statistical distortions actually −1.8% m/m and −1.5% y/y. But the consumer credit is growing rapidly, and the activity of services has increased — even though the employment component deteriorated. The trade deficit in January has peaked since October 2008. In Canada, building permits fell by 12.3% in January after a gain of 10.5% a month earlier; but the number of developments has increased in February.

Source: U.S. Census Bureau

According to Challenger, February layoff plans in the USA were slightly lower than January's, but slightly higher than a year ago; tendency to hire new workers, even after increasing in January, is still clearly lower than at any month of 2011; review of employment in the private sector from ADP came out as expected. The official report is mixed: employment grew, but so did the unemployment — Labor Ministry graciously returned 300 thousand people back to the labor force (from more than 2 million kicked out last year); long-term unemployment figures have improved slightly — the whole experience is moderately positive; similar picture in Canada. Weekly numbers of sales in stores continue to deteriorate — the demand is weak. But economist David Shulman explained why in this case the US data looks good in recent months — this winter was very warm (6 degrees warmer than last year), causing higher activity, while the standard coefficients for seasonal adjustments does not take this fact into account: that's why the outcomes are overstated — and if the statisticians kept at least a drop of objectivity, they will have to substantially and retroactively reduce all of their seasonally-aligned data for the last few months.

Russia. As expected, Putin won in the first round of presidential elections — and he received less than 50% only in Moscow. As the diagram of the distribution of votes against turnout shows, this time the deviation from the normal horizontal line was much weaker than in the Duma elections: and if then the contribution of fraud and administrative resources in the final result of United Russia could have been estimated at 12-15%, now — only at 4%, i.e. the real result of a «clean» vote was likely to be 59.0-59.5%. The only subject where nothing has changed in this respect since December is Chechnya: 100% turnout and 100% of the votes — but that Kadyrov does not care for anyone, is not really news; just another demonstration. In general, the vote does reflect the preferences of the electorate — of course, the electoral process as a whole can hardly be called fair, but that was obvious beforehand; other successes of the authorities are obvious — population, on seeing discredited politicians among the opposition leaders decided that Putin would be better; probably the last straw here were the calls of Gorbachev — this is too much even for the more or less neutral citizens. In the long term outcome of the elections is bad — encouraging the government not to change anything threaten the country (in a few years) with serious troubles.

Source: Central Election Commission

United Russia’s candidates in local elections were not very successful — but it is a trifle. Putin gracefully wept at his supporters’ rally, and gymnastics coach Viner declared: «Russia has entered the era of Aquarian, and in this era came the great leader». Opposition protests (slightly comical) were calmly and even lazy dispersed by the authorities; Duma Speaker Naryshkin, responding to claims of the European observers, gave birth to a new swear word — saying, that their assessments are «Western-flavoured». After victory, the authorities decided to proceed with their business — Deputy Prime Minister Sechin angrily reported Prime Minister Putin on corruption in state companies, for which received praise and was instructed to «take measures»: all this would be funny if it was not so sad. The real problems are only on their way: according to Fitch, Putin's campaign promises cost 8% of the future (increased against the current) GDP — given that the non-oil part of the federal treasury is now in deficit by 10% of GDP, the unreality of the aforesaid promises becomes perfectly clear. But innovations thrive — for example, the Defense Ministry upgraded its website: a good thing, but it took 36 million rubles — for which the manufacturer saturated the site of the military department with extremely intelligent games «Battleship», «Minesweeper» and «Tetris». And in January, the natural decline in population amounted to 21.8 thousand people — it is much less than a year ago, but the situation will worsen in February, since three weeks of a very high atmospheric pressure have likely increased mortality. But who cares...

Illustration: Artem Popov

Have a nice week!

Искандер Луцко
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