Archív značiek: inflation

ECB´s words over reality

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.

Matúš Pošvanc

Barroso has declared victory

It was the week of central banks announcements. But frankly speaking nothing new has happened. ECB let rates unchanged and so to say the Bank of England.  Mario Draghi admitted that euro area growth is still under question and that we may expect prolonged period of low inflation. This brings us back to the question what kind of arms ECB will use in the future concerning inflation, support of economy and backing the back of some sovereign nations as Spain, Italy or Portugal which experiencing low rates on their sovereign bonds.

Unemployment of the Eurozone remains unchanged at 12.1 % as expected. The lowest rates are in Austria (4.8%), Germany (5.2%) and Luxembourg (6.1%), and the highest in Greece (27.4% in September 2013) and Spain (26.7%). The only surprise is that Spain youth unemployment is (probably because statistics from Greece are delayed) higher than Greece one and is at stunning 57.7%.

Thanks to God, José Barroso has declared victory again. The European Commission chief told that the eurozone crisis is finally over. Ireland has exited from rescue program and Latvia has joined the euro and is now the EU’s fastest growing country. Brisk future is before us. baroso

This is not the case for France. Their attempt to introduce 75 % tax was approved by constitutional court. But country is facing many problems caused by very extensive social policies. One example. Two managers of Goodyear Tire Company were captured by unions’ workers for more than 30 hours because union workers did not agree with the closure of the ineffective company. French workers have a history of holding managers captive. Companies including, 3M, Sony and Caterpillar were affected in 2009 as well. Generally workers have not been prosecuted for holding their bosses captive and according to the CGT union, the “two managers have been given water and still have their mobile phones”.

It seems that China Banking Regulatory Commission is full aware of the threats of shadow banking system which is estimated as 69 % of GDP of the country in 2012. China’s banking regulator told lenders to publish data including off-balance-sheet assets and interbank liabilities. Lenders with total assets of $264 billion or more must publish 12 indicators within four months of the end of each financial year. To watch China in 2014 will be worth of your time. Why? Because the new crisis trigger could come from this country.

Venezuela is experiencing tough times. It is 56 % official inflation rate in the country and government has introduced fixed prices for some products. The consequence of it is lack of everything. The story of an ordinary taxi driver of border town Maracaibo is very informative. He has to drive to Columbia to buy rise because he haven´t seen it in the shops since July. President Maduro solves problems with no food very clever. Maduro has urged citizens to abstain from “nervous buying” of imports, saying on state television Jan. 6 that “consumerism is an addiction that destroys the human being.” To be addict on food is a problem.

The most important but widely expected event from US was election of Janet Yellen as the first women president of the FED. Good by Ben and welcome Jannet but from the point of view of the policy of the FED has nothing changed apart from the fact that Yellen could be more pro stimulus oriented person as Bernanke. The minutes reveled that many FOMC members favored QE tapering in `measured steps’ and most participants were more confident in job market gains. Job market showed us decline in unemployment from 7 to 6.7 % but the economy creates only 75 k jobs pretty below 200 k expectations and labor force participation rate is the lowest since 1978.

Merkel won but reforms failed

German elections – actually the most important EU election – ended by the victory of Angela Merkel. On the other hand the election ended with the defeat of strong right wing policy. It seems that Merkel is willing to create a strong big coalition with German socialist and as it is in politics it means many compromises in the field of economy, austerity measures, social policy and it can slow down or prevent to make any reform which is needed in Germany as in any European country. It means that we will still see a great involvement of taxpayers’ money in saving the Euro and periphery countries. What was interesting is the outcome of so called Germany’s euroskeptic Alternative for Germany (AfD) party which is not finally in the parliament but it stole voters especially from Christian Democrats (230 000 from CDU) and  Free Democrats (330 000 from FDP).merkelova_problem

We definitely need strong Germany. Especially, if there are so many problems within the EU. Italy is still in the political crisis mode because of Berlusconi. Any political weakness could trigger big problems for the serving of the debt of the country. Italy´s prime minister said that „Italy is a trustable country with a budget and debt under control” but I do not think that anybody believes him. The country has a plan to continue fiscal consolidation and maintaining the deficit under control and the government is also working to reform the country’s labor market to encourage companies to start hiring. But as usually more words, promises and not so much actions.

Allegedly unprecedented cuts in public spending for 2014 announced France. The only problem is that it is worth only 15 billion euros. It is not too much if you realize that it represents approximately 3.3 % of all spending of central government. So called it unprecedented is a little bit strong. 80 percent of these savings will come from ministries of defense, finance and environment. Only 20 percent of the savings will come from tax increases. State spending, which will reach 57.1 percent of GDP this year, is expected to drop to 56.7 percent in 2014. On the other hand public debt will reach a record 95.1 percent of GDP in 2014 because of smaller GDP growth.

And as we are accustomed so many times with Greece the troika has once again doubts about Greek projections for a primary surplus this year and the next one which will be either minimal or noting. The same is true about Greek projections for a primary surplus of 1.5 percent of GDP at the end of next year. But do not worry. It is a just a matter of time once everything changes because 4 % growth is coming. Once again. And once again the next year.

The financial crisis has turned almost one in ten of the UK’s 2.5 million companies into so called “zombies” companies which face a insolvency. So-called zombie businesses have soared by 108 per cent in the last five years, to 227,000. These companies are able to produce at their very best only enough cash to service their bank and supplier debts, have liabilities far in excess of their assets and yet collectively employ around 500,000 people. And this is also one of the reasons why Bank of England cannot increase interest rates. Once this happens all of these companies will bankrupt faster than you count three. Unemployment and the damage to healthier companies which are their business partners could be even worse.

China’s economy is probably growing at an annual rate of 4 percent, said Marc Faber. He stated that „I said to an economist I think China is growing at 4 percent per annum and he said do you mean minus 4 percent? It is probably exaggerated but there are still more and more investors who are very skeptical about numbers from China which declares economy growth by 7.7 percent last year and the outlook for this year is targeted to 7.5 percent. And it is interesting that not only we see the currency wars. There surprisingly exist politicians who claim the same. 60 US senators signed letter to protest against the Japanese currency manipulation. The only mystery for me is why they forget that it is not only Bank of Japan but also US via their massive quantitative easing policies and monthly bond purchases who manipulate with the currency.

The US Federal Housing Administration will likely need a cash infusion from the U.S. Treasury. The agency offers private mortgage lenders guarantees against homeowner default would face a shortfall of $943 million for the fiscal year that ends on Monday. But the biggest issue in the US is the debt limit problem. Treasury Secretary Jacob Lew said that the government has time only till Oct. 17, leaving the United States just $30 billion cash on hand to pay its bills. It means that the US will be unable to pay all of its bills. The US reached its $16.7 trillion debt limit in May this year. Since then, it has been using so called „extraordinary measures“ which consist of for example suspending U.S. investments in federal employee trust funds ($300 billion). So we will very probably see interesting quarrel between Democrats and Republicans which at least in my opinion ends by increasing of debt limit. But who know. Maybe we will see the shutdown of the most powerful government of the world. But it is not very likely.

Matúš Pošvanc

 

Italy is the same as Spain

Will the crisis trigger anti-environmental agenda? Who knows but e.g. Antonio Tajani, the European industry commissioner stated that „I am in favor of a green agenda, but we can’t be religious about this. We need a new energy policy. We have to stop pretending, because we can’t sacrifice Europe’s industry for climate goals that are not realistic, and are not being enforced worldwide.“ Yes very strict environmental agenda is not very healthy for European business environment which faces over regulation and higher taxation as well. Contrary to Mr. Tjani I am not a proponent of the weak currency and currency wars. The only sustainable path is a strong currency and easier business environment which means lower taxes and lower regulations. This is the only way to really boost economic activity within the Eurozone. The only problem is that politicians want something else.

Tax records will be shared around the world by 2015. That is the strong statement from G20 meeting leaders who want to crack down on individual tax cheats and global corporations which intend to pay as little tax as possible. “We are committed to automatic exchange of information as the new global standard,” states the G20 final communiqué. So we will see what this brings but as one saying claims “if you do not like tax havens, please do not create tax hells”.

Italy contrary to Spain is not on the radar of mainstream media and it lives its own live. But to be honest this country has a lot of problems; maybe more than Spain which is in troubles. From the political point of view it is heading into the big political crisis connected with Silvio Berlusconi and his supporters who threaten to abolish Italy’s governing coalition which would be not good for economic reputation of the country. About one month ago Berlusconi was found guilty by Italy’s highest court. The verdict – four years for tax fraud. But it seems that Berlusconi and his party want special rules. Italian media are therefore in a constant state of alarm. Every week there are new headlines claiming the government is about to collapse, for real this time. We will see. Fact is that the country is not in a good economic performance and any government failure could cause so many troubles. The biggest issue for government could be Italy´ banking sector which is, simply said, broken. One of many banks in trouble is the Monte dei Paschi di Siena Bank which is facing nationalization. The management of the bank set up plan to raise 2.5 billion euros capital from shareholders within next 12 months. But this is very unlikely scenario and the bank could fall under direct state control. Italy, struggling to control its 2 trillion euro public debt and looking to boost revenues through privatizations, can fall in more deep troubles once it becomes a shareholder of the bank and would be responsible for another indebted body.

Italian housing market is set to shrink significantly and not only because of the housing bubble but also because of trends within Italian population. The most important buyers – it means between 30 and 40 years old – have declined by more than 1 million since 2005 and trend will continue till the end of this decade. It means that there will be less possible buyers of houses. Outcome? It is very probable that prices will follow. And be aware of the fact that Italian 10 Y treasuries are for the first time higher than Spanish one in last 18 month.

We have 5th anniversary of the Lehman failure. 5 years of crisis. What is new? The world’s developed (G7) nations have added around $18tn of consolidated debt to a record $140 trillion combined and they have produced only $1tn of nominal GDP activity. In other words they had to use $18 dollars of debt to generate $1 of growth. Is this sustainable? For now? Yes. But only because we have such a low interests rates which are set up artificially by central banks.

After two tough days of negotiations in Geneva John Kerry and his Russian counterpart Sergey Lavrov announced they have reached an agreement about situation in Syria and how Syria must act to destroy its chemical weapons. It means that the military intervention from the side of the US is not very likely. At least for now.

Matúš Pošvanc

War against Gold

indian_warThe war against gold continued in India. Many Indian customers find out this week that it is no longer possible to purchase gold by credit card. The Reserve Bank of India is leaving no stone unturned to discourage gold buyers in India. Indian consumers tend to convert gold purchases into equated monthly installments of three months or six months but Central Bank asked banks to stop accepting credit card for this kind of gold purchases. This affects most of the customers who enjoyed purchase and repay for it in longer term. Gold imports significantly decreased by 70 % and also compared to record high imports in May on the level of 162 tones. On the other hand some banks are trying to accommodate to new conditions. They try to buy gold on consignment basis and to keep it in places like Dubai due to the lower storing charges and bring to India by paying full money when required. Banks having such an infrastructure abroad would find this viable. Imports might rise again after the new arrangements are in place, said a sector official. Many also presuppose that demand in India traditionally pick up with the start of a series of Hindu festivals in August. Demand peaks during the festival of lights, also known as Diwali, in November.

The data about Chinese gold imports have been released last week. China imported 108 tons of gold and we witnessed the second largest import after the record level seen in March at 136 tons. China looks like heading to absorb over 50% of global gold output this year – and still rising. The reason why we did not witness a new record could be in the fact that gold is hold in strong hands for now and investors are not willing to sell at present prices. So far net imports through Hong Kong for the first five months of the year have totaled over 413 tons – double those of a year earlier when China imported just over 830 tons in the full year.

South Korea ranked 34th in gold holdings last month data showed Monday. South Korea’s gold holdings reached 104.4 tons. The country was ranked 56th in July 2011.

Gold sales from Australia’s Perth Mint declined for a second month in June. Sales of gold bars and coins totaled 49,460 ounces in June, compared with 92,781 ounces in May and 116,755 ounces in April. The similar situation is with the U.S. Mint which sold 57,000 ounces of American Eagle gold coins in June from 70,000 ounces in May and 209,500 ounces in April.

Matúš Pošvanc