ECB´s declaration to buy any bond on secondary market or Dragi´s “whatever it costs” is still strongly rooted in the minds of investors. Otherwise it will not be so positive for Italy which is again in some political crisis once the Prime Minister Mr. Letta has declared that he is prepared to resign. But Italians bonds have dropped at their lowest levels since 2006. Mr. Letta should be replaced by Mr. Renzi and markets believe that he will be able to set up a new government.
But not so fast with overestimate of the ECB´s the powers. Last week we informed you about the decision of German Constitutional Court about the OMT program prepared by ECB. It seemed last week that the GCG has skipped the final decision to European Court of Justice but some German’s analysts claimed that the decision creates some uncertainty because it could happened that the GCC could forbid Germany to participate on saving Euro at any costs or could force German government in some cases to leave Eurozone and that the decision cannot be ignored by government and other public institutions as Bundesbank.
Stress tests do not start yet and there is some information which could be for some European banks very sensitive. The new chair of the Supervisory Board of the European Central Bank Daniele Nouy said that “We have to accept that some banks have no future.” She has meant by that exactly what you think. Some banks must be left to die or bankrupt. She also said that “I do not have any idea of how many banks have to fail. What I know is that we want to have the highest level of quality”. Highest level of quality is the best benchmark and we have only to hope for the best because the last time the best quality was Dexia as well which had to be rescued a while after it passed by last stress tests.
Recovery is sometimes very interesting. One could think about it as better economic conditions for general public but it seems to be opposite. Especially, if you take as an example so called Greecovery. As national statistical bureau has shown Greek unemployment rose to a record high (28%) in November. It means that the number of people unemployed rose to 1.382 million. The Greek youth unemployment rate soared to 61.4 % which means a new record as well.
We were a little bit concern about the future of China´s financial system at the end of January because of possible default of one the Wealth Management Products (WMP) which lost 0.5 bln. USD. But it was saved two days before the deadline to repay investments. An if you think there is everything alright right now in China you have to be aware of the fact that Chinese coal companies are trading near or below book value because of low prices of their products. The problem is that many of them have loans to finance their operations which are used as collateral in some high yield financial products. One of them which raised approximately 47 million USD from wealthy clients technically defaulted on February 7th once it could not return funds to investors. I think that to monitor shadow banking system in China would be worth for everybody because the crisis trigger could come from this area anytime.
A little bit unexpectedly but the US House approves rising debt limit without any condition till March 2015 and technically ended two years discussions about conditions, saving and public finance consolidation. The vote was definitely a victory for President Obama, Democrats and those Senate Republicans who have argued that spending money for previously incurred obligations was essential for the financial standing of the federal government.
Besides strong public statements from EU Commission bosses that EU is in turning point in crisis the reality is much worse. You can find one example in Greece. Public Power Corporation has reported last week that many Greek households and corporations are not able to fulfill their obligation to pay their electricity bills. In total, debts to the power utility from unpaid bills currently amount to some €1.3 billion and growing at an average rate of €4 million per day. Yes this is also known as the “Grecovery”.
The similar situation is in Spain. Politicians started to celebrate because Spain has now clocked up two consecutive quarters of fragile growth and Spanish 10 Y treasuries (3.8%) have the smallest yield on the yearly basis. But the situation in country is not changing in the labor market. First there is 26 % unemployment rate. Spain has seen six straight years of job destruction. 198,900 jobs have disappeared in Spain in 2013. There are 1,832,300 households in Spain where nobody has a job. More than 3.5 million in Spain have been out of work for at least a year and some 2.3 million people have been out of work for at least two years. To demonstrate the seriousness of the situation is the example of IKEA 400 jobs offer challenged by 20,000 job claims from desperate Spaniards. It is stunning and it is possible to compare to Greece problem. There is no Spainovery whatsoever.
The same story is Italy. The country has also very low yield on 10 Y treasuries. On the other hand it is a little bit surprising to some of us that Italian bad loan rates rose at a stunning 23% year-over-year and in nominal terms it is EUR 149.6 billion. The Italian Banking Association admitted that it is the consequence of declining deposits (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy’s bank clients with bad loans have more than doubled since 2008.
A new study claims that an objective stress test of the Eurozone’s banks could reveal a capital shortfall of more than 770 billion euros (US$1 trillion) to bring bank´s capital to the level equal to 7 percent of their total assets to guard against failure in the financial crisis. The study shows that if there is a 40 percent fall in global stock markets which last over a six month period banks will need another 579 billion euros in a crisis to meet a 5.5 percent prudential capital ratio. We have to remained reader that the study covers only 109 largest banks compared to ECB exercise which covers 27 more. It means that objective stress test for all most important bank would create more complicated situation. The ECB stress tests assume that banks will write down only non-performing loans and meet ratio of 6%. The EU has agreed a 55 billion-euro backstop to resolve failing banks, which compare to those numbers look like drop in the see. The end of the stress test provided by the ECB will be in November 2014 as long as we don’t experience some real economy stress test.
China is becoming a hot topic. As we mention last week there is a possibility of the default of one investment shadow banking product this week and some claiming that this could trigger avalanche reaction within the Chinese banking sector. The PBOC has thrown nearly CNY 400 billion at the market in the last week but on the other hand Chinese regulators are probably prepared to let the product default to give a lecture to some investors not to think about these kinds of products as risk free. There are also some rumors that some citizens have been unable to withdraw „hundreds of millions“ in deposits in the last few weeks in the area of Yancheng City which indicates rising stress on the financial market. This is also a reason why Chines CDS´s are heading into the territory they were in the last summer when we experienced huge distrust among financial institutions. So could we be calm? Right now there is no reason to panic. Chines financial sector is state owned so we needn´t see any avalanche as we experienced in the west. But who knows?
Next week we have FED´s FOMC meeting and some started to speculate that FED could announce another tapering of monthly purchases from 75 to 65 billion USD as was indicated by the former FED´s president Bernanke. On the other hand we had some disappointing numbers from labor market and some disappointing numbers from stock market. We will see what exactly happens and what kind of impact it will have on shaky markets.
It was a Bitcoin´s week. Everybody was talking about bitcoins. Last week we had some records concerning bitcoins. First, bitcoin surged to new USD record high when it added 100 % gains only in 7 days. Then it overcame 1000 USD; fact is that on three important exchanges. And it was traded for a while as much as one ounce of gold but then slide down 13 % back on Friday. Is it bubble inside it now? I would say that from the short term point of view, yes. There are not any such strong fundamentals which would stand behind this run and we can await some kind of correction. If history repeats bitcoin could fall to 500 or 300 USD. But who knows? The fact is that in the longer term it has still much greater potential as today’s prices.
Some good news came from EU. The unemployment rate was down of 0.1% and was 12.1% in October 2013. Among the Member States, the lowest unemployment rates were recorded in Austria (4.8%), Germany, (5.2%) and Luxembourg (5.9%). On the opposite side are Greece (27.3% in August 2013) and Spain (26.7%). But what is more stunning is youth unemployment rate (under-25 population). Spain’s youth unemployment rate has reached 57.4% once again very slightly below of Greece which was still at 58%. Italy and Portugal also experienced notable rises at 41.2% and 36.5% respectively. The number for the Euro-area is 24.4%.
European Central Bank Governing Council member Ardo Hansson the head of Estonian central bank said the ECB is ready to cut borrowing costs further and is also prepared to make its deposit rate negative as we were discussing last week. It is a reaction to the low inflation in Euro zone which is close to 0.7 % and according to expectation will be at most 0.8 % in November. The next meeting of the ECB’s Governing Council will be on Dec. 5, when it will also present new projections for growth and inflation. We will see if we see any surprise from the bank.
It seems that there is only one opposition to this policy and the leading personality of it is Jens Weidmann president of Bundesbank who said last week that „Rather than for monetary policy to waltz with fiscal and financial policy, we need to erect walls between banks and sovereigns,“ Weidmann said. „Sovereign bonds should be adequately risk-weighted, and exposure to individual sovereign debt should be capped, as is already the case for private debt.“ But if I should bet on something I would said that Draghi and company will overwhelm this only and dove´s voice.
Yields on Chinese government debt have soared to their highest levels in nearly nine years. It caused rise of borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. The rise in borrowing costs and shrinking access to credit could have impact on the global economy which rest on the presupposition that China is going to growth. The recent rise in bond yields is because of worsening of funding conditions and growing expectations for a tighter monetary policy of PBOC. Interbank rate was also rose almost to 6 % highest since June 2013 where it was necessary to provide liquidity to the market because of the stress among banking and non-banking entities.
It was a thanksgiving day in US and nothing much has happened due to the typical American holiday. But we have to be aware more about future. If you still think that loans in US are not trouble anymore just be aware of this. As Reuters informed last week an increasing number of loans in US are slowly hitting their 10-year anniversary. This means that borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along. For a typical consumer, that shift can translate to their monthly payment more than tripling. More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding. Higher delinquency rate coming from this scenario could hardly hit already weak banking sector in US.
We already know that ECB is prepared to use so called OMT mechanism to buy on secondary markets government bonds in trouble. The only thing we know is that ECB is prepared but close details were never revealed to public. But the rhetoric was so strong that markets calmed down for now. Lower interests’ rates have been introduced two weeks ago. This week some hidden sources from ECB have revealed that ECB is considering introducing negative rates for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The true is that policy doesn’t yet have a consensus, the sources said. But I still think that it is more rhetoric than real policy decision. ECB has still some other option to intervene on markets as another round of LTRO, similar QE policy as we are witnessing in the US or direct forex interventions to which Czech central bank have decided two weeks ago. So we will see. But European leaders must be a little bit desperate because this news are coming with another measure which simply put should decrease extensive public debts by new debts. Yes you are reading correctly. The European Union is allegedly considering whether it could encourage countries to make long-term economic changes by offering them loans at below-market rates. Loans would be more suitable for smaller countries which have more difficult access to market sources. The only positive news is that loans for reforms would not be available to countries running excessive macroeconomic imbalances or under bailout.
Bundesbank gave noticed in the report from last week that southern European countries and their banking sector are still within the same vicious circle. According to Bundesbank Italian banks have increased their holdings of Italian public debt from €240bn to €415bn since November 2011 (+ 73pc). Spanish banks have raised their holdings of Spanish debt €166bn to €299. (+81pc) and Irish banks are up 60pc with Portuguese banks up 51pc. And we can only consider as one of the consequence apart of OMT mechanism why yields on sovereign debts still on sustainable levels are. But this state is not definitely sing of health banking system. Still works but not too long.
The best example of “effectiveness of the EU” is definitely moving parliamentary sessions from Brussels to Strasbourg. It is such a good idea that also Members of the European Parliament are tired of the monthly move from Brussels to Strasbourg for a week of plenary sessions. France on the other hand vetoes any change. After MEPs tried to merge two plenary sessions into one week last year to cut down on traveling time, France took the case to the Court of Justice of the European Union. What do you think happened? They won. So now MP´s are trying to change their strategy. They proposed that MP´s should in future be allowed to choose the seat of their institution themselves – with no mention of Strasbourg or Brussels. We will see if they succeed.
As we are always emphasizing it is not only about public debt. The extension of the debt of the whole western society is enormous. And public debt is only one part of it. It is very likely that much of private debt is not effective as well as public one. The situation is very considerable in the UK. Total personal debt in the UK has reached record highs – 1.4 trillion pounds. It means that households owe 94 percent of the UK’s economic output last year and an average household debt is about 54,000 pounds. It is almost twice the level of a decade ago. What is also more dangerous indebted households in the poorest 10 percent of population have average debts more than four times their annual income. So it is not very surprising that more than 130K people declare personal bankruptcy each year.
Globally, 86% of companies do not plan to hire in 2014. It is the output from the global survey within 11,000 companies around the world. Only 33 % of them are optimistic about the economic future for next year. Among most optimistic are US companies because 41 % of them presuppose better economic conditions in 2014 and only 19 % of them stated that they are not plan to hire anybody in 2014.
As we mention many times in the past China is preparing to enter world currencies world. One of the evidence is its vast activities in currency swaps with many countries or alleged increasing of their official gold holdings. The another step within this policy was last week clarification what the People’s Bank of China is going to do. There are two interesting points. First PBOC said the country does not benefit any more from increases in its foreign-currency holdings. It means that bank will very probably rein in dollar purchases as well. The second is that China’s central bank will “basically” end normal intervention in the currency market and will increase the role of market exchange rates and broaden the yuan’s daily trading limit. So do we see the step by step rise of new reserve currency? From my point of view, yes.
FED´s minutes revealed the dispute among members of monetary committee that they are prepared to tapper their easy-money policy within a few coming months. I still do not believe to that because it is not only about the unemployment rate which is if not manipulated at least managed according to some allegations that the last unemployment report before election in 2012 was manipulated. It is also about the structure of unemployment which is very bad. But who knows. On the other hand Bernanke has said last week that if FED tappers the policy of low interest rates remains for a longer period of time. It is clear evidence that nothing has been changed and trillion of US dollars from FED does not really help to economy. Otherwise we will see at least speculation about higher interest rates which also Keynesians consider as a healthy state of economy.
Haiya is the name for the biggest hurricane ever which was heading towards Filipinas this week. According to experts there is not almost nothing built on the Philippines that can withstand winds like that. We know natural disasters very well but do we heading into the some which are caused by men? Very probably yes. Monetary policies are the best example of these days’ potential catastrophes for human mankind. They are direct proof that nothing has changed since 2008. Otherwise we would have higher rates. As we wrote last week ECB finally cut the basic rates by 25 bps to historic lows and they will keep them unchanged for a longer period of time. The reasons behind were according to president Draghi low inflation expectations, risk of the growth remain downside as well as unemployment rate and ECB expects that Euro area will face prolonged period of low inflation if not deflation. The Bank of England unchanged its policy but surprisingly our brothers Czechs entered currency wars. Although CNB decided to keep interest rates unchanged it decides on interventions on the foreign exchange market to weaken the koruna so that the exchange rate of the koruna against the euro is hold close to CZK 27.
“Today there is only one country and only one in command: Germany” said Romano Prodi last week. What Europe needs is according to him that ECB should fulfill its inflationary targets by 2 %. Prodi said that Italy is in trouble because of low inflation and that it is trapped in deflationary spiral. Italy has primary budget surplus but its debt to GDP ratio is still climbing due to the unsatisfactory nominal GDP growth. Prodi also urged for creation of “Latin front” against Germany. He claims that Germany is obsessed by low inflation as teenagers are obsessed by sex. There is nothing strange that some Italians claim for lowering of purchasing power of Euro. They did it with their currency before Euro all the time. But as we have emphasized many times these opinions are still stronger and I think that higher inflation times is slowly coming into the Europe; hopefully not end by the word “hyper”.
We had another whole country protests in Greece for 24 hours. Protests were taking place as Greece holds talks with its ‘troika’ of creditors. Labor unions were fear that politicians will impose another wage and pension cuts to meet the terms of the bailout and that they introduce more job cuts in the public sector, as well as privatization. But we are accustomed with these news and we will see more strikes in the near future. That is for sure.
China´s Premier Li Keqiang declared last week that China needs grow at least 7.2 percent annually to create 10 million jobs a year which is necessary for employment as one of the country´s priorities. His remarks were made at a union meeting two weeks ago but were only published in full this week, just days before a pivotal Communist Party plenum to set policy opens. He also warned on easy credit supply, which is about 100 trillion yuan ($16.4 trillion) what means that is already twice the size of China´s GDP. And new credit could cause inflation which is for Chines leaders’ dangerous game in one billion men country. Growth at the peace of 7.2 percent is quite ambitious plan because as we informed you many times China is suspicious to adjust official economic data. There is also news from time to time which supports this theory as for example the one from the last week. Chinese leaders called for stopping expanding industries such as steel and cement in which supply outstrips demand to cut overcapacity of these industries. And as data shows cement manufacturers use only 71.9 percent of their capacity from 2012 and the steel industry use only 72 percent. So as you can see the situation around the growth of GDP is at least cloudy. On the other hand everybody expects introduction of some reforms on their Third Plenum meeting in terms of industry deregulation, financial liberalization, and reforms to land titles, state-owned enterprises and social security. We will see what this meeting brings to the globe.
The most important data for this week from the US were non-farm payrolls. So October nonfarm payrolls soar to 204,000. It was a nearly double digit contrary to the expectations on 120,000. Unemployment rate in the US is at 7.3%, a little bit up from 7.2% in September. Does it mean that FED changes its policy in the near future? It is difficult to tell. But as the UBS warns FED is trapped. According to the UBS the Fed is facing two major risks. First is that premature tapering could disrupt markets and triggers global turmoil across all assets classes with consequence of weakening already weak economy. Second is that if FED delays tapering of its policy of 85 billion purchase program it will fuels creating of asset price bubbles, which could burst eventually and do major damage as well. So you can choose as usually what really happens. Maybe we will witness no tapering at all but increasing of QE. Who knows?