Archive forAugust, 2012

Mid Morning Market Report, 31st August 2012

As global markets wait for keynote utterances, whether from Fed Chairman Ben Bernanke in Jackson Hole in the next 24 hours, from the ECB President Mario Draghi on the 6th September or from the German Constitutional Court on the 12th September concerning the legal framework of the European Stability Mechanism, there is a sense of profound procrastination. Policymakers claim to be waiting for a trigger for action from economic data but even the numbers are, by default, ‘kicking the can down the road’ as they emerge like pixels either side of a trendline that appears not to justify immediate stimulative action. Meanwhile, the silent killer is Time as all our futures dissipate off into the sunset.

Weak economic data from Japan signals growth concerns

Japan’s industrial output fell 1.2% in July, after gaining 0.4% in June, as against market expectation of a 1.7% increase. The Markit/JMMA Manufacturing Purchasing Managers Index also declined to a seasonally adjusted 47.7 in August from 47.9 in July, its lowest level since April 2011. Separately, core consumer price index fell 0.3% in July on y-o-y basis.

ECB must take ‘exceptional measures’ – Draghi

In an opinion piece in German weekly Die Zeit, ECB President Mario Draghi said the central bank could have to take ‘exceptional measures’ to fulfil its mandate of price stability. The ECB is likely to detail the plan on sovereign bond market intervention at the policy meeting on 6th September. The comments could be aimed at placating Bundesbank’s fears that bond buying by the ECB contravenes the European law, may compromise ECB’s independence and lead to the politicization of its monetary policy.

Mid Morning Market Report, 29th August 2012

While markets have become overly used to seeing a few billion being thrown here and there to shore up this or that economy, another chunky financial situation has been steadily trundling towards its denouement . At its heart is a discrepancy in valuation of almost £12 billion. The commodities trading group Glencore is offering 2.8 of its own shares, currently standing at £3.70 (down 3.7% so far this morning) , for every share of the mining group Xstrata, now quoted at £9.16 (-2.5%). Based on Glencore’s current market capitalisation of £25.6 billion, this would give Xstrata an aggregate valuation of £71.7 billion. However, at the current market prices, the implied ratio is just 2.5 times and the discount reflects uncertainty about whether the deal will go through.

Spain sinks deeper into recession

A 0.4% contraction in the Spanish GDP in Q2 2012 was confirmed yesterday, with a decline in output widening to 1.3% y-o-y, worse than the expected 1.0% drop. Furthermore, the country’s most economically important region, Catalonia sought an aid worth £5bn from the centre to meet its financing needs and debt costs this year.

Mid Morning Market Report, 28th August 2012

The old rhyme ‘An apple a day keeps the doctor away’ was a forerunner of the more recent ‘5 a day ‘ campaign to encourage a healthier fruit and vegetable diet in Britain. However, following the recent court ruling in favour of Apple Inc over Samsung it is more a case of ‘an Apple a day keeps the Androids away’. From its recent high two weeks ago of Won 1.348 million or US$ 1,187 – and you thought the Apple share price at $675 was ‘heavy’! – Samsung’s share price has fallen by 11% around the award of $1 Billion in damages to Apple. Meanwhile, the share price of Apple has marched on to a new all-time high – now up 67% year-to-date. Another beneficiary of the ruling could be Finland’s Nokia whose shares rose 7.7% on Monday on the possibility of reduced competition in the U.S. smartphone market.

Japan downgrades economic assessment

The Japanese government lowered its economic assessment for the first time since October 2011, citing a slowdown in key markets (such as the US and China) and escalation of Europe’s debt crisis as key factors. The government downgraded its view on personal consumption, exports, imports, home-building and industrial production. Bank of Japan would hold a meeting on 18th and 19th September to review the monetary policy.

PMI survey shows contraction in Eurozone

The composite purchasing managers’ index (PMI) for the Eurozone stood at 46.6 in August vis-a-vis 46.5 in July, indicating a prolonged slump. Manufacturing PMI improved slightly to 45.3 from 44.6 in July, but remained below the 50-mark. Services PMI slid to 47.5 in August from 47.9 the previous month. Contraction of Composite PMI for Germany to a 38-month low was concerning. Nevertheless, manufacturing activity picked up in the US as indicated by an improvement in manufacturing PMI to 51.9 in August from 51.4 in July.

Accelerated contraction in Chinese factory activity

Preliminary reading of the purchasing managers’ index (PMI) compiled by HSBC and Markit was 47.8 in August, down from the final reading of 49.3 in July, indicating a faster pace of contraction. The global slowdown is weighing on Chinese businesses, and additional monetary and fiscal stimulus would be required to achieve the goal of stable economic growth, HSBC’s chief China economist Qu Hongbin said.

Mid Morning Market Report, 22nd August 2012

Have you ever been to a wedding where, as much as you want to wish the happy couple well, you don’t feel deep down that it is going to work out for them but you can’t intervene? Certainly, if you want to survive the cake-cutting ceremony intact, you might just keep smiling and sipping the champagne. After ten years of ‘pre-marriage’ by the members of the Eurozone , markets have been hoping that a true marriage (joint responsibility, mutual respect, shared use of the Ferrari and the au pair, you know, the usual things) is in sight, subject to a few tweaks.

Japanese exports hurt as Europe, China stutter

Japan’s trade deficit widened to a larger than expected ¥517.4bn in July as exports plunged 8.1% y-o-y dragged down by the slowdown in China and the European Union. Exports to China dropped 12%, while that to the European Union plunged 25%. Higher fuel prices boosted imports 2.1%. Japan had recorded a trade surplus of ¥60.3 bn in June.

Mid Morning Market Report, 21st August 2012

One of the highlights of the comedy series ‘Blackadder’ was Rowan Atkinson’s manservant, Baldrick, having a ‘cunning plan’ – invariably doomed to spectacular failure. There was a hint of this yesterday as Eurozone leaders hunkered down for a week of intense negotiations to try to establish a framework for resolving the recurrent problems facing the monetary ‘union’. Weekend press comment in Germany had suggested that the European Central Bank, in order to moderate borrowing costs for the weaker Eurozone members, was considering introducing a system of sovereign bond yield thresholds (calculated with reference to yields on German bunds) which, once reached, would trigger bond purchases by the ECB. This prompts again the unavoidable question of who will fund this potentially bottomless pit.

Bundesbank opposes ECB plan to buy bonds

Though the European Central Bank (ECB) dismissed reports that it was embarking on a new bond-buying programme, Germany’s central bank has stressed its opposition to the purchase of Spanish and Italian bonds by the ECB. Buying sovereign bonds is equivalent to providing monetary finance to governments and breaches European law, Bundesbank added. Last week, German Chancellor Angela Merkel said Germany would support the ECB’s crisis fighting strategy.

Mid Morning Market Update, 20th August 2012

It seems that Lewis Carroll had it sussed all along. Some of the mindset of markets in recent weeks has come from central casting in the ‘ Alice’ books. Most recently, it has felt that markets are in a kind of ‘Looking Glass World’ as bad news has been good news and good news not too good to qualify as bad for the purposes of stimulus. From ‘Wonderland’, early-stage crisis meetings of the Eurozone leaders sometimes felt like the Mad Hatter’s Tea Party although that is not to diminish the size of the problem the politicians face or to belittle their efforts.

Rebound in new home prices in China; but outlook grim

New home prices rose in 49 of the 70 Chinese cities in July, as per a survey by the National Bureau of Statistics. The reading for July is strong considering that new home prices rose in just 25 cities the previous month. The survey suggests the recent back-to-back interest rate cuts could have attracted buyers to the market. However, a rise in property prices lowers the likelihood of the central bank further easing the monetary policy. Recent data has indicated sluggish growth in China after a decline in exports, while factory activity and lending missed economists’ forecasts. Foreign direct investment in China declined 8.7% y-o-y to US$7.6bn in July, suggesting waning investor confidence.

Mid Morning Market Report, 17th August 2012

Fresh from her hiking holiday in Austria’s South Tyrol, Germany’s Chancellor Angela Merkel has resurfaced in Ottawa, reiterating the on-message Euro-mantra ‘whatever it takes’ (to save the Euro) and praising Canada for not living on borrowed money. Cue firmer equity markets in Europe this morning. The FTSE 100 Index is up 0.2% so far after closing flat on Thursday. Comments such as this from Mrs Merkel carry great weight for supporters of the Euro project but it glosses over the open-ended obligations implied and the cost in terms of her political capital at home. Certainly, ‘saving the Euro’ does not appear to preclude the possibility of Greece’s departure, however disruptive this might be.

Merkel backs ECB while pushing for closer fiscal union

German Chancellor Angela Merkel backed ECB President Mario Draghi’s pledge to do everything it takes to save the Euro, saying the remark was “completely in line” with views shared by Eurozone political leaders. She stressed that time was running out while reiterating her stance on closer fiscal union whereby the European Commission would be granted more power to monitor and regulate state budgets that breached EU-specified deficit limits.

Mid Morning Market Report, 16th August 2012

It may feel like the wrong time of the year for Murder Mystery weekends but the current intrigue around why recent U.K.’s employment numbers look so much stronger than the weak state of the economy would suggest is quite a hot topic de jour. While it may not compete with the Olympics or property prices at dinner parties, depending on which part of Britain you happen to live in given the large discrepancy that has built up in London’s favour versus the rest of the country or whether dinner parties are still fashionable, the issue has prompted the media to beat the bushes in search of anyone who might know. Last night, our television screens glowed with the image of the Bank of England’s own version of ‘Mr Bean’ – definitely not to be confused with comedian Rowan Atkinson’s bumbling alter ego. It was to be a defining moment as all was about to be revealed by the Bank’s Deputy Governor,’Charlie’ Bean. In the event, the awful truth appears to be that no one really knows. Cue much verbal reassurance by Mr Bean that the people at the Bank of England are working hard, beaver-like, to unlock this Fustian riddle. Apart from possible errors in the statistics resulting in understated economic activity or overstated employment or, indeed, a dramatic fall-off in productivity, it would seem most likely that what we are witnessing is ‘resource hoarding’ by employers as they hang onto experienced staff in anticipation of an upturn in business. Will the real statistical quirk please stand up!

FDI in China falls steeply in July

Foreign Direct Investment (FDI) inflow to China declined 8.7% y-o-y to US$7.6bn in July, the lowest since July 2010, the Ministry of Commerce said today. FDI inflows totaled US$66.7bn during January 2012 to July 2012, down 3.6% over the same period last year. Investments in China’s real estate sector dropped 9.3% during the first seven months of 2012 compared to 2011. China drew record US$116bn in FDI last year.

Mid Morning Market Report, 15th August 2012

Fifty shades of… sublety, whatever your literary tastes, perhaps just about begins to describe the recent flow of economic data from the Eurozone. Better-than-expected Q2 over Q1 growth from Germany of 0.3% was moderated by ‘null points’ for France for the second successive quarter, Netherlands unchanged at 0.2% Q2-over-Q1, Italy -0.7% against -0.8% but further deterioration in Spain (-0.4% in Q2 against -0.3%) and Portugal from -0.1% to -1.2%. The net effect was a decline of 0.2% in Q2 for the Eurozone countries as a bloc against zero growth in Q1. Unfortunately, the implications are far from subtle and, although equity markets in Europe closed around 0.7% higher yesterday on what looked like encouraging figures out of Germany, they have been giving back the gains so far today. The underlying message would seem to be ‘no growth – no hope’ , at least, not for a very long time.

Eurozone economy contracts despite growth in Germany

The Eurozone economy shrank 0.2% in Q2 2012 after recording flat growth in the first quarter, Eurostat said yesterday. Germany grew 0.3%, beating forecasts marginally, while France recorded a third successive quarter of zero growth. Among the economies that contracted the most were Portugal (-1.2%), Cyprus (-0.8%), and Italy (-0.7%).

Mid Morning Market Report, 14th August 2012

Continuing the perverse contradiction that has been apparent in markets for several months, the news announced this morning that second quarter GDP growth for Germany has ‘not slowed as much as was feared it would’ has prompted a rally in European market indices. Welcome to the ‘win-win’ investment scenario where the potentially bad news is not as bad as expected even though it could represent a case for less Central Bank stimulus being required. Meanwhile, reflecting the more standard form of response, minutes from the Bank of Japan’s last policy meeting which revealed a Draghi-type ‘whatever it takes’ resolve to boost the economy has elicited a positive response from markets in Asia this morning (+0.5%).

UK home price index drops to lowest level in a year

UK house price index fell to -24 from -22 in June, the lowest in a year, the Royal Institution of Chartered Surveyors said today. The gauge for newly agreed sales declined to -20 in July from -13 in June, reaching a four-year low.

Mid Morning Market Report, 13th August 2012

So the party’s over but we’re not talking Coalition Party – just yet. As London and the nation at large eases back to normality, thoughts must turn from the excellence displayed in the various Olympic arenas back to the struggles on the global and economic fronts. The jury remains out on the longer term cost benefits for Britain of staging the Games – ‘The Legacy’ – but, thankfully, the human qualities on display far outweighed mere material considerations. It would be naive to ignore the linkage between levels of national investment into Olympic sports and the outcome. Some countries have yet to fully engage with the relationship between notable success every four years and the potential benefits of enhanced national prestige. Given London’s remarkably large medal tally from the past fortnight, with the support of investment from the National Lottery as well as successive governments’ funding , it raises the issue of whether we are about to witness a more widespread sports ‘Arms Race’ as we have in the past between the Superpowers, China, the former Soviet Union and the United States. Whilst, undoubtedly, this would create new and huge commercial opportunities in many different ways, it has to be hoped that this will not feed the degree of cynicism that has crept into other international sports such as football and motor racing as the levels of funding have risen over the years.

Japan’s economy slows more than expected in Q2 2012

Japan’s economy grew a marginal 0.3% in Q2 2012, much lower compared to 1.3% the previous quarter, the Cabinet Office said today. The GDP growth undershot market expectations of a 0.6% expansion. On y-o-y basis, GDP grew 1.4%, missing economists’ forecast of 2.3%. Despite a ramp-up in government spending since March 2011 earthquake, Japan’s economy has slowed down on lower exports and poor consumer spending.

Mid Morning Market Report, 10th August 2012

Sometimes the sequence of news stories throws up curious coincidences. As the Jamaican ‘MegaSprinta’ Usain Bolt was powering his way into Legend status by defending his 200 metres Olympics running title, having already successfully defended his Beijing title in the 100 metres sprint days earlier, the Glazer family was about to raise $233 million in New York trading today in an Initial Public Offer for 10% of the shares of football club, Manchester United. When asked where his career might go next, the ‘Lightnin’ Bolt said that, if the manager of Manchester United Sir Alex Ferguson were to call him, he might consider football. While there may be some doubt about the seriousness of Usain’s suggestion, there can be no doubt that the Glazer’s have had a struggle to achieve anything close to the value they originally wanted for their shares. Personally, I am not sure that Mr Bolt could last too long in ‘sunny’ Manchester after growing up in Jamaica but a ‘marriage’ could be great for match attendance levels and for sales of merchandise. Perhaps the Glazers, themselves, should make a dash for the Olympic Park.

China’s trade growth misses forecasts

Chinese exports rose a meagre 1% y-o-y in July, missing the 8% growth forecast by a huge margin, the Customs Bureau said today. Imports increased 4.7% y-o-y, undershooting market expectations of a 7% growth. Consequently, the trade surplus fell to US$25.1bn from US$31.5bn the previous year. Given the downbeat economic data, most investors are anticipating some action from Beijing policymakers to bolster growth.

Mid Morning Market Report, 9th August 2012

The paradigm now clearly lodged in the psyche of the markets is ‘it’s bad news so it’s good news’. I hesitate to use the term paradox because it is hard to see where the common sense is in this. It’s an issue of timing. The bad news, generally historic data, reflects how things have been while the current tendency to interpret this positively is based on expecting the implementation of measures which will borrow from the future. It’s a perpetuation of the ‘never-never’ philosophy that created much of the present economic problems – ‘live now, pay later’ although, thanks to the austerity, it’s more a case of ‘survive now – pay later’. Markets typically discount the future but it is interesting to see which part of the future they choose to focus on to discount. Currently, equity buyers are making a big bet that that the stimulus measures that will presumably eventually ride to the rescue of the global economy will be strong enough to kick-start economies back into rude health and generating the level of growth needed to repay debt. The fact that bond yields are still so low indicates that, for many investors, the situation is far from clear cut.

BoE lowers UK growth forecast

The Bank of England (BoE) reduced its 2012 GDP growth forecast to zero. Governor Sir Mervyn King said there was no urgent need for fresh stimulus, but signalled it may adopt more quantitative easing in the future. Investors were anticipating that the BoE would point to an easing in policy to battle against the double dip recession.

Mid Morning Market Report, 8th August 2012

At twenty-two Olympic gold medals, Team GB is only an incredible eight medals behind the United States at the end of only day 11 of the Games. What becomes apparent quite quickly is the depth of organisation and focus that has been applied in many of the particularly successful disciplines. At that point, the fantasy fades as we turn back to the state of the United Kingdom economy which is not even medalling at Bronze. Today, the Bank of England is to release its Quarterly Inflation report and it is widely expected to show a downward revision for 2012 GDP of its forecast in May 2012 of 0.8% to virtually nil. If that doesn’t dampen the Olympics party spirit then nothing will. The slowdown in the Eurozone economies must be identified as part of the problem although the present austerity programme, intended in part to protect Britain’s triple-A credit rating, must also take some of the blame. With the inflationary trend expected to continue lower, it is likely that a cut in interest rates will again come under consideration along with other monetary measures to try to boost the economy. As a start, the Bank might think about powering things up by connecting Sir Chris Hoy and his team in the cycling events directly to the National Grid.