Good afternoon. Last week there was a lot of politics. French President Sarkozy, who hopes to be re-elected for a second term (the first round is due April 22), has enlivened — he suggested to tighten immigration laws and even threatened that if he would not be heard France will withdraw from the Schengen Agreement; moreover, dashing Nicolas insists on pan-European protectionism — these ideas were just enough to significantly reduce the gap to his socialist rival. By the way, the European Commission declined to comment on Sarkozy’s initiatives — making it transparently clear (though not without irritation) that the pre-election speeches should be ignored as having no sense to reality. The United States, too, are preparing for the presidential election — in the Republican Party caucuses the favourite Romney won in Kansas — his main rival Santorum won in Wyoming, Alabama and Mississippi; in general the situation is the same — Romney is confidently ahead, but the race finish is still far away. In Britain there are no elections — but that does not mean that politicians lie dormant: a drunken MP for Scotland Joyce appeared in the parliament bar, gone steaming and, catching sight of three conservatives around him, issued a battle cry «three Tories in one pub — it is too much!» and used his fists — in the rage of attack Joyce not only all kicked all the villains, but even his party colleague; when he was arrested he broke the window in police custody — for which he was punished by fine and ban to visit the ill-fated pub. Long live the good old England!
Large corporations got into habit to change the text of the Wikipedia articles about themselves — and they are not smart enough to do it otherwise but from corporate IP-addresses, and then justifying by the «activities of individual employees»; bloggers are watching over these events and log them — it is funny that in the long list of schemers there were the CIA (protecting the honour and dignity of former Presidents Nixon and Reagan) and the FBI (scraping out the photo of the Guantanamo base). Doctors and nurses held a strike in Kenya — it ended in the dismissal of all 25 thousand of its participants; ignorant people are amazed at how can you drive out the entire staff of the industry — but since it’s quality is eloquently characterized by travel agencies’ disclaimer («do not get sick, for the nearest hospital is only in South African Republic») the loss is not great. March of progress in the UK is unstoppable — employers have prohibited the staff to wear Christian crosses on workplaces: the latter rebelled — but the Cabinet supported the employers. Quite another thing is the self-expression of homosexuals, which now became the major human right: English Catholics only thought to oppose the legalization on gay «marriages» and the former PM Blair left their ranks in protest. Italian experts (UN advisers, by the way) demand schools to expel Dante’s Divine Comedy from the curriculum for anti-Semitism, racism, homophobia, and Islamophobia. Russia still revere Alighieri — oh yes we do: when the St. Petersburg branch of the Society of Dante renewed their registration papers, the officials did not accept the documents asking to «seek approval with the poet himself» — and the fact that the latter died almost 700 years ago have not disturbed the minds of the authorities. Russia!
Monetary markets. Central banks have been less active than a week before — but still acted regularly: the Norwegian has lowered the rate by 0.25% to 1.50% per annum, the Indian left the rate unchanged (8.5%), the Swiss did not change its monetary policy (interest rate is zero here). The People's Bank of China eased reserve requirements for three (out of four) largest banks in the country and raised their target credit level for this year — it also made it clear that it is ready to reduce the reserve ratio for other banks. Bank of Japan changed neither the rate nor the size of the asset purchases program — but increased all credit plans, extended them until March 2014 and introduced a new line of loans (in dollars); at the same time all of the board cut their salaries by 20-30 % to donate for the earthquake victims; the Japanese Finance Ministry has announced the building up of Chinese bonds’ purchases «for closer economic cooperation». Memorandum on the results of the Fed meeting was more optimistic then the preceding one: «global risks» weakened, business investment, housing and labour markets grow stronger; there were fears of inflation — but when the current surge in oil prices will be played back, the price dynamics will relax again; thus launching of the next program of quantitative easing has so far been removed from the agenda. At the same time the Fed released the results of stress tests of 19 largest banks in the country, carried out against fairly severe assumptions (stock falls by half, the housing market — by 21%, unemployment is at 13%): four institutions will not have enough capital in this scenario — of which most loudly sounded Citigroup, while the others (Suntrust, Ally Financial and MetLife) have not made a strong impression on the markets.
The US federal budget deficit in February has surpassed both the last year's value and analysts' expectations — the reason is that against February 2011 revenues have now sank by 6.5%. Yet the process still goes generally according to plan — and the Greek scenario is well off; the latter however is apparently entering a new phase. Lowest point of its trajectory was the announcement of the International Swaps and Derivatives Association that the latest exchange of bonds is still a default — and the owners of credit default swaps may receive payments due to them: nothing scary, since the net payments on these securities will hardly exceed €3 billion. Nevertheless, sharp decline in the debt burden of the Athenian government has impressed the market: Fitch has raised the rating of Greece for the first time since 2003 — by 4 points at once up to B-, giving it a stable forecast. Britain got it harsher: the agency warned that in the next two years it could cut the rating (the chances are «slightly above 50%»), because the economy is weak, public debt is large, and the euro crisis is very close. Cyprus was even less fortunate, with its rating being downgraded by Moody's — the forecast remains negative. The Spaniards did push the euro-structures to increase the deficit target level — from 4.4% to 5.3% of GDP: they asked for 5.8% but were satisfied with they got — subsequent placements of government bonds were good. Term of the Eurogroup head Juncker (Prime Minister of Luxembourg) expires soon — he is tipped to be replaced by the chief of Italian Cabinet Monty: market participants cackle — how convenient! Monty would be best one to arrange a rescue operation for Italy.
Currency markets. The dollar has grown slightly against all currencies — particularly the yen: USD/JPY pair peaked since the spring of last year, when it was driven by interventions after the earthquake — if it manages to rise above 85, it will be at the levels of summer-autumn of 2010. The Swiss National Bank left the lower threshold of franc-euro exchange rate at 1.20 — stating that it is ready to protects it by all means. In general, nothing dramatic happens.
Stock markets. Optimism of the Fed created a new wave of joy on stock exchanges — major indexes showed new peaks since 2008/09; the exception was the Shanghai Stock Exchange — which is grieving on the obvious problems in the Chinese economy. Volatility indicator of S&P-500 (VIX) reached a minimum since the spring of 2007 — which could spell another collapse in the future; however, this indicator is still quite able to cling even more — and do not forget that in 1990s’ the same pattern was followed by the rapid growth of the market, rather than the fall; however, we believe that it is now a much less likely scenario — and, in general, a fall in the next 1-2 years is quite realistic. Of the corporate news we note the announcement of J.P.Morgan Chase to increase dividends and repurchase of good 10% of its shares in the current year (valued at $12 billion) — that has noticeably surged the bank’s stocks. On the contrary, shares of Citigroup sat down after the dismal results of the stress test.
Source: Yahoo Finance
Commodity markets are much less optimistic — despite the bravura songs from America: probably the fact is that in recent years Chinese demand is much more important — which hasn’t been brilliant recently. Incidentally, the USA, EU and Japan have filed a case against China in the WTO for lifting rare earth metals prices through the creation shortage with the country’s monopoly in these resources. Oil is at the same level, while the gas falls in the US — it has already reached $80 per 1,000 cubic meters. Industrial metals refused to be hurried and the precious ones fell, so that gold went down below $1,650 per ounce. Grain has quickened up — except rice which remains nailed; legumes, cooking oil continue to grow in price aggressively. Beef went up while pork and milk fell; cotton and especially coffee have rushed to the new lows.
Asia and Oceania.China begins to create almost a panic in the world — everyone was expecting a deceleration, but not so fast! February was the fourth consecutive month of decline in foreign direct investments (versus the same month last year). The trade balance recorded the highest deficit in 10 years ($31.5 billion): exports grew by 18.4% y/y, imports by 39.6%; it is clear that the shifts in the celebration of the New Year influence the index, but the deficit is still too big, even taking into account the recent rise in oil prices. Car sales were falling as did the demand for basic production and building goods (steel, cement, etc.) — and the building sector itself abruptly went into depression. Against this background, at the session of the National People's Congress there was a painfully familiar pattern: Premier Wen Jiabao called for party conservatives, warning that unless policy reforms were made the country will soon face a new Cultural Revolution — it looks like Perestroyka™ is coming with the consequences poorly predictable both for China herself and the outside world too (especially for the neighbours, including Russia). We hope that the local Gorbachevs wouldn’t reach to the power — and therefore the authorities are unlikely to live under the slogan «guillotine — the best remedy for a headache».
Illustration: Artem Popov
The Japanese Ministry of Finance conducted a survey of firms in the first quarter (a similar review of the central bank — Tankan — will be published in early April): sentiments have suddenly deteriorated (especially in large industrial companies) while investments and profits have fallen against the growth expectations. Engineering orders jumped by 3.4% m/m in January — but after collapse by 7.1% in December it is not very impressive, the demand for equipment is in the red by 8.6% versus the same month last year. Activity in the services sector fell, and in February the consumers suddenly darkened too — but authorities fed the people with promises for improvements in the coming months. In Australia lending declined in January: in general by 7.1% m/m, including lending for housing by 1.2%; however, the December figures were quite good so it's not that scary. In February, business confidence unexpectedly declined and in March consumer confidence fell substantially; quarterly dynamics of the number of construction developments (-6.9%) in October-December was the worst since the mid-2010. Also sad are the figures and other countries in Asia and Africa: in Malaysia industrial production is ready to go into minus on annual basis; retail sales in South Africa slowed sharply at the beginning of this year and so on.
Europe. Italian GDP fell in October-December by 0.7% q/q and 0.4% y/y. According to the NIESR, UK GDP went into positive at the end of winter — the officials will tell if that was so in a month. In January industrial production fell in Hungary, Greece, and (particularly strong) in the Netherlands; the eurozone as a whole has a monthly plus of 0.2% (thanks to Germany), but the annual minus of 1.2%. The Germans have spike in optimism due to distribution of money by the ECB: the index of economic sentiment from the ZEW soared in March to a peak since June 2010 — and there is even more dramatic improvement in the eurozone. Trade balances of Britain, Italy and the eurozone slightly deteriorated in January. Wholesale prices are galloping in Germany (+1.2% m/m in January and another +1.0% in February) — but a year ago they grew even more aggressive, so the annual increase shrank to 2.6%; a similar situation in Switzerland — only there the annual figures are already in the red. Consumer inflation in the eurozone swelled in February by 0.5% m/m and 2.7% y/y; without food and fuel the prices are 1.5% higher than a year ago — of course the real figures are much higher than these. The Britons actively buy housing, seduced by benefits — but prices are still stagnating; and in Spain realty fell in price by 11.2% y/y — the worst figure since 2007 when the crisis started in the country. In Britain unemployment is at its peak since 1995, while wages increase much slower than inflation; in Greece in October-December the unemployment rate rose from 17.7% to 20.7%; in the eurozone as a whole employment is also declining. Germany has revised the monthly dynamics of retail in January from −1.6% to −2.3%; the number of new cars registered in the EU fell by 11.8% y/y — and even the Germans had already ceased to show a plus. Demand across Europe is still very weak...
America. Production and capacity utilization in the USA have not pleased in February — but the January was revised well up. Regional indices of activity are weird: the numbers of the Federal Reserve Bank of New York and Philadelphia grew — although new orders and shipments dipped everywhere, and the improvement was only noted in the components of employment and inventories; the index of small business optimism from NFIB grew a bit. The current account deficit was the worst in October-December for 3 years; the inflow of foreign money into the long-term securities soared in January — in the green are Britain, Japan and China, while Russia is in the red. However, it would later turn out that Russia is not in the red, it simply buys through British or Caribbean offshore — as was the case last year, noted by the Treasury in its February annual audit: but the Russian conspiracy theorists have managed to see another plot here, which is logical — lately they were joyfully screaming that Russia flees US treasuries, and what should they say now? In February, the prices of producers, consumers, as well as for exports and imports added 0.4% m/m — actually 0.5-0.7%: inflation is trying to accelerate. The mood of consumers is on the 4-year peak according to Bloomberg — but the University of Michigan says of the deterioration, while the index of economic optimism of IBD/TIPP has fallen because of expensive fuel and a weak labour market: the last argument was explained by the researchers by the fact that 23% of all American households have at least 1 unemployed. Still not very strong are the weekly sales in the stores; February retail sales jumped by 1.1% against January, but adjusted for real inflation, per capita sales would show +0.4% m/m and −0.5% y/y — the latter featuring is in the red for 4 months now; sales are still at the bottom of the crisis — and it is at the level of 1960s’.
Source: U.S. Census Bureau
Russia. As of March 1, the monetary base slowed its annual growth to 4.4% — apparently, the fight against inflation continues. Meanwhile, the budget for January was revised up — but in February it got a fairly large hole (6.4% of GDP): for 2 months the deficit was 3.0% of GDP — whereas last year there was a surplus of 1.1%; excluding oil and gas revenues, the budget liabilities equal to 15.7% of GDP — which is understandable, because the revenues from oil and gas exceed half of all revenues (54.4%). Reaction of liberal «experts» is natural: the Bank of Russia Deputy Chairman Ulyukayev wrote an article, which suggested essentially abolishing pensions and replace them with patronage system and the «solidarity of generations» (let the children provide for their the elderly). Arguments? — old people are ever more numerous, and the workers are ever less, whereas (horror!) pensions have reached 8.7% of GDP instead of 5.1% in 2007. But this is nonsense: in 2007 the average pension was equal to the pensioner’s subsistence minimum, and now it is 1.5 times higher — which means that the actual increase in the number of elderly had almost no impact on the outcome, for all the increase has occurred due to an increase in the average pension (both labour and social). And that’s not all — we give the examples of average pensions and benefits as a share of GDP in 1989 (i.e. when liberal idea has not yet become global mainstream) in different countries of the world: this gives us 14.7% as an average — and the leaders (Benelux, Sweden , France) have full 20-25%, while the Soviet Union was far behind (8.2%). These numbers are the true «horror» for Ulyukaev — but for normal people it would be useful to know that until the reign of the man-eaters ruling today such picture was quite ordinary.
However, the opposite view on the application of the treasury is now, too, to put it mildly, quite peculiar — so Russian Railways is eager to lay a railway across... the Bering Strait, in order to connect routes with the USA: Yakunin’s agency is, of course, great in «assets’ disbursement» — but that is too much even for them, especially when you consider that over the past 20 years the length of paths has decreased, and this process was uniform both in «hated 1990s’» and the «stable 2000s’» — perhaps someone should slow down stupidity and get down to business? And here also, Putin's press secretary Peskov reported of his patron’s feat and plans: «The first term — was the resuscitation of the country, the second — rehabilitation, and now is about to begin the physical and spiritual development of the country», so why should we be bothered by Yakunin? — the parish is the same as the pope. Madame Matvienko has confessed in her commitment to feminism and exclaimed: «Get ready to matriarchy, it is coming». It seems likely — at least Madame Medvedev is overwhelmingly «for»: she has arranged a week-long vacation in a five star hotel in the Italian Tuscany, renting off the whole thing (all 140 rooms) — which actually costs not less than €150 thousand euros, plus providing for her court of 30 people; meanwhile, according to the declaration of her sovereign spouse, Madame has not a penny in the bank accounts — but bosses assure that the she «pays for everything herself». Media wrote that the head of the Russian Space Agency Popovkin got into the hospital, after a quarrel with his colleague about press secretary, the femme-fatal model — the official version, is that either he was overworked or fell from the stairs, but we understand that this is a harsh step of matriarchy!
Illustration: Artem Popov
Have a nice week!