Resignations and collapses
Translated by Alexander Vasiliev
Russian version
Luckily, the last week was not rich with catastrophes and criminal – besides a mad cabman who made a firing in England, we could only note the beginning of the hurricane season in the Atlantic: the first storm was named Agatha and killed around 150 people in the Central America (first of all, in Guatemala) – more than 110 thousand people were evacuated. In other respects, the politics were prevailing – one of its expressions was the Chinese word juggling: getting to know the results of inter-Korean investigation, they brought in a verdict – North Korea is guilty, but it is guiltless. And it does not deserve sanctions too – however, there were no desperate cries yet: the Chinese are cautious as usual.
On the other hand, an epidemic of resignations has happened – its beginning was marked by David Laws, Chief Secretary to the Treasury, who was caught on spending £40 thousand of public money to indulge his cohabiter; mischances never come single – as was found out by Daily Telegraph, the replacing Scottish Secretary Danny Alexander “forgot” to pay capital gains tax while selling his second house. At the same day, German President Horst Koehler has resigned – the first case like this in the history of Germany: Koehler made an unwise speech on the issue that “the good must have its fists, especially against the Somali pirates” – but local journalists and pacifists thought this was a signal to Germany’s militarisation, recalled Hitler and so on, so President decided to capitulate. President and Secretary General of the South Korean ruling Grand National Party (both having the same last name Chung) left their posts, because of losing local elections.
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Pic: Artyom Popov, ITinvest
Resignation of Japanese Prime Minister Yukio Hatoyama was demanded by just about everyone – during 9 months of his Cabinet’s work, his rating collapsed from 70% to 18%; when social-democrats left the ruling coalition, it became clear that the time has come – everything happened at Monday, and, moreover, Hatoyama took with himself the DPJ’s “strong man” Ichiro Ozawa, infamous for pickings. Summarizing the government of the departed Premier, we would note his close ties to Russia: his grandfather Ichiro Hatoyama signed the South Kuril Declaration of 1956 with Soviet Prime Minister Nikolai Bulganin, and his son Kiichiro Hatoyama teaches in the Higher Business School of the Moscow State University. Ex-Premier’s wife Miyuki Hatoyama became known for her book, telling how she was kidnapped by aliens and “her soul was brought to Venus” – which brings her closer to a Russian politician, of whom we wrote recently. We would also add that the new Prime Minister is former Finance Minister Naoto Kan, renowned for his furious desire to make yen as cheap as possible – to help exports.
Other news were mostly devoted to the summit of G20. As usual, before the nations’ leaders there are finance ministers and heads of the central banks to talk – those assembled in the South Korean Busan. Of course the European crisis has been discussed – but nothing substantial were devised. Leaders of G20 will meet at the end of June in the Canadian Deerhurst resort not far away from Toronto – as been reported, authorities are planning to spend a handsome billion on security provision: locals told that the lakes are already patrolled by mini-subs, while a special unit was created in the police – its mission would be to guard the greats playing golf from the local bears, if the latter would drop in to say hello to the presidents. Deplorable fact of violating the animals’ rights – the local environmentalists would definitely pan the politicians later!
Nervous markets
Crisis in Europe. Epopee around the euro zone goes on – after the lowering of Spanish rating the continuation has followed. Fitch agency burst into an extensive comment, from which it followed that, first of all, it’s all bad in Spain, and secondly, its rating would not be lowered in the 12 months coming. While the public tried to make sense out of two contradicting theses, it was reminded that S&P agency has Spanish rating a point lower than Fitch, while Moody’s – a point higher: which means, that Fitch just decided to sit between two monsters. That is all the reason – and we were beating our brains! IMF’s Head Dominique Strauss-Kahn cheered up the Spaniards, praising their austerity measures – they should only be implemented, he said: well, yeah – opposition’s rating is already 9% higher than of the ruling socialists. Market has no illusions – at Friday, yields spread of Spanish and German bonds jumped to historic maximum little lower than 2% annually.
Of course, the world is bigger than Spain. Irish Ministry of Finance was tortured on the issue of €2 billion, issued to save Anglo Irish bank – the latter said that this is only a part of the aid package, while in total the bank would need 10 billion. Spiegel informed markets of the fact that the ECB buys not only the Greek, Spanish and Portuguese bonds, but also those of France (i.e. these assets are also considered bad) – it is not surprising, that the rumours of a soon lowering of the country’s rating began to flew at Tuesday. Memorandum of the French MinFin also added oil to the fire – it admitted that the country would need to make a push at overcoming difficulties and preservation of its rating. New negative blow came from the Wall Street Journal: European banks don’t trust each other, and keep their available assets not in the banking system, but in the special “overnight” deposits of the ECB – even with the rates here being lower than the market ones (a quarter of per cent versus a third); usually there were millions of euro on those accounts – now there are billions. In general, it is sad.
Financial stability report of the European Central Bank forewarned: budgets’ deficit are so high that the authorities would hardly manage to find buyers for such a mass of treasuries – if the spending won’t be cut, the rates would go up. Banking system’s write-offs in the euro zone are estimated at €90 billion this year, and €105 billions – next year. Greece has said that it wants to return on the market and even begin to borrow in July; by now, the Hellenes want to sell state assets for the sum of €3 billion to fill up the budget. Head of the Athenian Finance Ministry George Papakonstantinou gave an interview to the Japanese newspaper Nikkei – he assured that there would be no default, and that the taxes would be lifted, spendings cut and assets sold: so far everyone regard us sceptically – but the real fruits would come soon, Minister added. After that, the rumours crawled that Portugal wants use the EU’s stabilization fund – the latter’s bosses refused to comment. Thankfully, the Portuguese successfully placed half-billion euro 3-months bonds – and the public temporarily settled down. However, not for long – at Friday the authorities of Hungary informed of “major difficulties”: they said that “default is not an exaggeration” – and the market rushed down again.
Inside the euro zone the war continues. Elections of the new Head of ECB are coming in a year – the main candidates are the governors of German and Italian central banks – Axel Weber and Mario Draghi. Last week both commented rigorously and categorically on the ECB’s programme of taking out the state bonds – they support its quick dismantling in order to avoid “stability threat”. In the meantime Juergen Stark reminded that in July falls due a year from the moment of the ECB’s €442 billion emergency credit assignment to the banks – and, since the credit was given exactly for a year time, the money should be returned soon: it is clear that the exclusion of such sum from the banking system is fraught with the liquidity deficit – but the Germans keep their ground by demanding to tighten the euro zone’s monetary policy. The disagreements are being voiced – ECB’s governor Lorenzo Bini Smaghi told: “one large euro-area country thought that public support for swift action could be achieved only by dramatizing the situation, for instance, by telling the public that ‘the euro is in danger’ or by considering the possibility of expelling a country from the euro area”. He didn’t specify which “one big country” is meant – but everyone understood. And renewed their popcorn stocks!
Monetary markets live their own life. Hysterics around the EU tells that for time too long the public was confident in the durability of the euro zone – while now it becomes clear that the matters there are just as everywhere else. But the contrary is correct too – it is not better anywhere else than in the euro zone! Already 7 US cities’ ratings of municipal bonds are lowered to the junk level – countries of South Europe never dreamt of such situation. Australian Reserve Bank left the rate unchanged on 4.5% level – giving to understand that if the market is so rough than the pause needs to be taken. Central bank of Canada raised the rate from 0.25% to 0.50% - but said that the problems of global economy and financial markets are multiplying so further tightening steps would have to be carefully weighed. Only the Fed’s dissident Thomas Hoenig demands to lift the interest up to 1%, “look, what happens” and continue lifting until 3%, initiating sell-backs of the bonds previously taken on the market in the same time. But the Fed is generally in a different mood – its Head Ben Bernanke gave to understand this rather clearly: he said that high unemployment and weakness of the credit market are too worrying to risk doing any abrupt movements in such situation. In the meantime, the market rates mostly grew – LIBOR rates are on the highs since the last summer, cost of 30-years mortgage in the USA again reached the point of 5% annually.
Currency markets. Euro is in the spotlight here. And the disagreements inside the EU are visible here too – especially spicy here is the fact that exactly Bundesbank, which was demonstratively concerned about the euro’s fate, is now hailing the latter’s dive: weak euro helps the exports – and that is the same Bundesbank, which always irritated with its uncompromisingly tough stance on its currency! As we supposed, the first comments of the wealthy funds on the issue of their alleged devotion to euro were only a politesse – Chinese Premier Wen Jia Bao is worried with what is happening in the euro zone, though in a rather veiled manner; Xinhua agency reported that the central bank of Iran sheds €45 billion in exchange for dollars and gold – and that the other countries of the Persian Gulf are doing the same. Soon the central banks of Japan, South Korea, India and Brazil announced the preservation of their investments into the euro-assets – but the market took that sceptically. In general, euro-to-dollar rate behaved gloomy – it broke previous minimum around 1.2140 and went lower than 1.20. In other respects, Forex was dawdling – only rouble is falling silently against dollar: in the process of growth it recouped half of the devaluation of 2008 and beginning of 2009 (in logarithmic price scale) – so that could even be a turn.
Source: SmartTrade
Stock markets. Those were nervous – they were mostly chasing the Americans, while the latter were naughty: committing surges and collapses in the beginning of bidding they fluctuated sluggishly until the final hour, in which course took an impetuous movement somewhere – though alternately going up in the first day and down in the next. Accordingly the other stocks were diddling – but some of them nevertheless moved on their own reasons: Tokyo was mostly growing, recouping the previous fall on the expectations of cheap yen – while the Shanghai stock exchange continued to go down in the fear of realty market’s collapse, which could be brought in by the governmental measures of fiscal and monetary tightening. In other respects, everything is as before – general pictures of major indexes hint on a good probability of noticeable rising corrections, but the turns are unlikely: to all appearance, the new waves of decline are to follow in some time – and only after those could it be possible to think of something positive. Among the corporate news we could note the failure of the British Prudential group’s purchase deal of the Asian unit of the US insurer AIG – AIA: Englishmen offered the sum lower than previously, and the Americans proudly told them to get lost.
Source: SmartTrade
Goods markets. British Petroleum’s operation for stopping the oil leak from the well in the Mexican Gulf has not helped – US authorities already submitted to the fact that the flux would continue until August – and then oil would not just go by gravity. Irritation is great – US Attorney General Eric Holder initiated both civil and criminal investigations on BP. Restless Fitch lowered the long-term rating of the British oil-giant – and left the forecast “negative” too: business reputation is suffering, they say – and the payments would be major too; Moody’s made the same next day. Oil went up – which could not be said about industrial metals: facing the fall of exports in EU due to weak euro, China decided to cut imports in response, for not to dash into the deficit again: the Chinese cut purchases of expensive raw materials – and are calmly consuming inventories, which they previously created in the period of low prices. Metals were getting cheaper because of that – especially nickel, which already fell from the April’s highs by more than 1.5 times. Australian companies are in a difficult situation – Chinese demand fell and their native government enacts 40% tax on mining operations, and Resource Minister Martin Ferguson gave to understand that no concessions would be made. Firms are beginning to leave the Australian market in response – so, the Swiss Xstrata froze its major projects of coking coal and copper ore mining in Queensland: the price of the question is 6.6 billion Australian dollars, or $5.5 billion; however, Premier Kevin Rudd confirmed that the tax is to be. The only good which doesn’t care about anything is gold: it returned to $1230 per ounce – and only slightly corrected its impetuous growth afterwards.
Source: SmartTrade
Methane innovation
Asia and Oceania. World economy continues to flounder in the crisis waves, though sometimes shows some signs of life. By the data of the CPB think-tank, the volume of international trade grew in the first quarter by 5.3% versus the final quarter of 2009 – but the process is decelerating: in October-December the addition was 6.0%. GDP of Australia in January-March increased by 0.5% q/q and 2.7% y/y: households’ expenditures slowed down their growth, but government expenditures and stocks increase made the business. Current account was balanced in the first quarter of the year with the deficit of 16.6 billion Aussie, though the companies’ income grew by 3.9% q/q. Inflation advances – its indicator TD-MI added up 0.5% m/m in May and 3.7% y/y. Tightening of the monetary policy did not helped here yet – but because of it the private credit sector becomes weaker as does the business activity, especially in services; in the neighbouring New Zealand business confidence also went down. Australian trade balance went into mini-surplus in April – the reason is the surge of raw materials prices by 17% m/m. Retail sales grew in April by 0.6% versus March, while building permits collapsed by 14.8% m/m, recouping the March’s surge by 16.8%.
Investments fell in Japan in the first quarter by 11.5% versus the same period of 2009 – the previous quarter had -17.3%, while forecast promised -9.5%; besides the software (and those are costs, not investments), the figure fell by 12.9%. Industrial output in April grew by 1.3% m/m and 25.9% y/y – base effect of an awful beginning of 2009 begins to vanish quietly: annual growth in March accounted for 31.8%. However, this effect is absent in the building development sector – its number was 0.6% higher in April than a year ago. In general, the sector shakes wildly: building orders in March showed annual growth of 42.3%, while in April there was 25.0% fall. However, some optimism is casted by the increase of nominal and real salaries in April, together with the growth of PMI in May up to the maximum since September, 2006 – but it should be noted, that the wave of export orders begins to weaken.
Europe. GDP of Switzerland grew in January-March by 0.4% q/q and 2.2% y/y – quarter growth is worse than the forecasts and also weaker than in the previous quarter, but the annual increase gladdens. Second estimation of the euro zone’ GDP agreed with the first in quarter growth (0.2%) and improved in annual (0.6% instead of 0.5%); private consumption fell by 0.1% versus +0.2% in the fourth quarter; investments are in the red zone too (by 1.1%) – that is the eighth fall in a row for them; on the other hand, government expenditures surged (by 0.6% at once) as well as exports. Machinery orders in Germany showed an increase of 36% in April versus the same month of the previous year – at that, inside the euro zone orders grew by only 11%, so all the happiness is for China. In Spain in April industrial output grew by 2.4% y/y. Car sector is not happy with the removal of governmental stimuli: registration of new cars in May fell in France by 16% y/y, and by 34% in Germany; nevertheless, German car exports surged by 46% versus the same period of 2009, due to which the sector’s output also swelled by 10% (exports compensated the collapse of internal demand) - thanks to China again. Business activity indexes are looking nice everywhere – except for the industrial sector of the euro zone, where a slight fall was registered; in every case the levels of indicators are very high; however, a strong surge of prices for raw materials and components is alerting.
British building sector was giving optimistic signals – but demand went down again: Council of Mortgage Lenders revised its 2010 forecasts downwards – without governmental stimuli, the population is not eager to buy houses. Mortgage applications crawl up slowly after a strong downfall in the beginning of the year – but their level is low; sectoral specialists warn that the plans of David Cameron’s Cabinet to cut budget costs could deteriorate situation even further. Figures of various offices create a mixed picture of prices on the British real estate market: in general, it seems that stagnation has started – though at the levels approximately 10% higher than a year ago. Credit sector stays nailed: in April there was a decline of M4 credit lending in Britain by 0.4% m/m, while in the euro zone the volume of private lending happened to be 1.8% lower than a year ago. But inflation is rising: producers’ prices in France surged in April by 1.0% m/m and by 4.0% y/y, in Spain by 1.0% and 3.7%, in Italy – by 1.2% and 3.2% correspondingly; around the euro zone in general monthly growth made up 0.9%, and annual – 2.9% (maximum since November, 2008). Consumers’ prices of the euro zone reached maximum of annual addition since December, 2008 (1.6%); study by ECRI stated 1.5 year maximum of the future inflation indicator. However, the downfall of prices for raw materials in May should relax situation to some extent in the coming months.
European labour market gives mixed signals. In France in the first quarter the unemployment level left unchanged (9.9%); number of unemployed grew up to 11-years max, but the deterioration has slowed down. Despite the sharp fall of unemployment in Germany, in April its growth was registered in the euro zone in general – and its level (10.1%) reached maximum since 1998; the matters are best in the Netherlands, worst – in Spain. In May, the number of unemployed in Germany fell again and reached its minimum since December, 2008 – 10% surge of exports y/y is to be blamed together with governmental programme for stimulating temporary and part-time employment. In Italy in April the employment shrank – while in Spain it already began its growth, which accelerated noticeably in May. However, austerity measures in the budget sphere could undermine this process – as they already undermined consumers’ sentiments, which collapsed in May. German retail sales grew in April by 1.0% m/m but fell by 3.1% y/y – monthly increase was far from compensating March decline by 1.6%. Around the euro zone in general the sales fell unexpectedly by 1.2% versus March and by 1.5% versus April, 2009 – consumers sector is still very weak.
America. GDP of Canada grew in March by 0.6% versus February and by 3.1% versus March of the previous year; total increase of the first quarter made up 1.5% versus October-December – Asian demand for raw materials has helped. Orders of US industrial enterprises in April showed their eighth monthly growth in a row, this time by 1.2% - Asian demand is responsible here too, but not for the raw materials though. May’s indicators of industrial activity are not so optimistic – for example, FRB of Dallas informed of the decline in its regional indicator from 21.1 to 2.9. National ISM index has also sagged – but stayed high, while its exports component grew to 20-years maximum. In the sphere of services activity stays on the same level for 3 months in a row – in May the employment component grew maximally since December, 2007. US May auto sales amounted 11.6 mln annually – 19.1% higher than a year ago, but modest versus January-April; retail component has even declined – the whole growth fell on dealers’ carpet purchases.
Prices of Canadian producers in April grew unexpectedly, while the May’s report was weaker than the April’s one – but still positive. The same could not be said about the similar US report: 431 thousand jobs were created – but excluding those employed for the census, we are only left with 20 thousand. Unemployment shrank from 9.9% to 9.7%, but only because of the shrinkage of the labour force – we should note that the Bureau of Labor Statistics put under the knife those people who can’t find a job due to illness or because the employers consider them too old or too young for the work. The total number of employed even shrank by 35 thousand – and that is including the above-mentioned census employment of 411 thousand! It is curious that besides the census the governmental structures are firing, but not hiring – 20 thousand state employees have lost their jobs in May: the problem is difficult financial situation of states and municipalities – and there are no improvements to be waited for. Duration indicators are deteriorating: average period of holding the unemployed status reached 34.4 weeks, median – 23.2; number of those who search for a job for more than half a year grew to 46.0%; all the numbers are record-breaking. By the way, other studies of labour market also stated stagnation in the end of spring, while the weekly statistics are deluding: though the number of initial application for unemployment benefits has decreased, the total number of beneficiaries grew up to the maximum since November, 2009 – extended and special programmes at all showed the new maximum.
Source: US Bureau of Labour Statistics
Expenditures in the US construction sector surged in April by 2.7% m/m – such did not happened since 2000: the point is that the end of April saw the ending of governmental programme for stimulating realty purchases. For the same reason April’s pending home sales grew by 6.0% m/m and 22.4% y/y – however, annual growth rate began to decelerate (in March it reached 25.4%). In general, benefits attracted a million buyers – but that same million would be missed by the sector in the next months; and since the number of alienations of property promises to reach record-breaking 1.1 million this year (this means an increase of cheap supply on the secondary market), the builders would have a hard time. It is a hard time for the rest of the economy too – for many years it was feeding with abundant lends, but the matters are bad here now: at the Fed’s data, the loan losses of banks in the first quarter surged to the new maximum of 3.1% of the total sum of loans (versus 2.7% in October-December) – it means, that the banks would make credit conditions tougher. All of this affects the circulation: sum of bank loans in May was 10% lower than a year ago – though for all 64 years of observations it went into red only 4 times (and only by share points), after which rushed upwards at once. M3 aggregate which reflects the scale of credit activity shrank last year by 8% - though previously it did not went over -1%. Finally, M3 to monetary base ratio collapsed in a year odd from the maximum of 16.2 to the minimum of 6.5 – though on the moment the decline has stopped, since the reduction of emission by the central bank begot moderate shrinkage of the base. However, without the credit nourishment, further decline of demand is unavoidable – and the reserves of governmental stimuli are limited by the sizes of budget deficits: Europeans have already felt this – the Americans’ turn is near.
Source: US FRB and independent estimations
Russia. Bank of Russia again cut the refinancing rate – by 0.25% to 7.75% annually. Head of Sberbank German Gref stated his discontent with the low rate at once – this public is incorrigible. Gold and currency reserves grew in the end of May by $1.6 billion per week, up to $455.0 billion. At June, 1, the volume of MinFin’s Reserve Fund accounted for $39.3 billion – that is 1.3 billion lower than a month ago; National Welfare Fund shrank by 3 billion to $85.8 billion. But bosses don’t give a damn – Premier Putin promises annual economic growth by 3-4% until 2013: however, this “conservative estimation” (Premier’s words) was voiced on the meeting with the leaders of United Russia – in such environment one could blab out anything. In general, Putin had a bad luck – on one occasion his car suddenly drove into some metallic object, which punctured its tyre and made Premier to switch into another car; on other, singer Shevchuk began to pester with his intercession for the rallying opposition – and one had to promise to be civilized, while on the next day the police already tames the dissenters with special cruelty. What is significant is that the procession of sexual minorities, solemnly called by its organizers a “gay-parade”, wasn’t broke up by anyone.
Consumers’ prices grew in May by 0.5% versus April and by 4.0% since the beginning of the year. Base effect of the previous year vanishes – 12-months addition ceased to decrease and repeated its April’s figure of +6.0%. As usual, utilities are in the front, their prices swelled by 16.3% during the year, including the gas – by 26.8%. As was stated by the Deputy Minister of Economic Development Andrey Klepach, gas would rise in price by 15% more in 2011, and heat – by 12-14%; that is a principle – gas prices should grow by 15% per year, for Gazprom not to earn less inside the country than it earns outside – and if anyone gets frozen because of such a commerce, than it’s nothing. In this respect, we would mark out Felisa Smith from the American New Mexico University in Albuquerque – together with her colleagues she wrote an article in the Nature Geoscience (cited afterwards in the New Scientist), from which it follows that a major freezing happened 15 thousand years ago, because people exterminated all the mammoths: those have been letting out a lot of methane into the atmosphere, warming the Earth – and after they were killed, the methane’s concentration fell by 1.4 times, which provoked freezing. We would submit the government with an innovative idea – if people would have nothing to pay for the gas rising in price, use this model: Russian cows are not any worse than the mammoths – though any single one is smaller, their total number is much bigger, so the overall methane emission is comparable: therefore, complaining folks should be advised to buy a cow – than, if we believe the article, they would be warm and couth. Good idea – cheap but good, bosses like the ones like this; and if you, our distinguished reader, would think that we run to a satire, we would ask you to turn your eyes on the Sayano-Shushenskaya hydroplant, which the authorities decided to save with the shamans’ help – and you would agree that comparing to such a creative power any satire looks as a gloomy realism.
Pic: Artyom Popov, ITinvest
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