Good afternoon. Of the last week’s political news we note the defeat of Berlusconi’s coalition in local elections in Italy – especially sensitive are the losses of mayors of Milan and Naples; the opposition in Japan was unable to pass the no-confidence vote – but the unpopular Prime Minister Kan (70% of population support his early discharge) privately promised to leave as soon as Cabinet deals with major challenges of the earthquake. As was expected, the roots of the war in Libya partly lie in the monetary sphere - and everybody have different reasons: Goldman Sachs has managed to lose 98% Jamahiriya reserves given into bank’s control – it is too much to be true, so contrivance is probably hiding somewhere; Russian authorities in exchange for support of Libyan operation received a 50% discount on Mistrals from France – the contract is now for 1 billion instead of the original two, so the head of Gaddafi is valued dearly by Monsieur Sarkozy. New problem in Europe – cucumbers kill; mostly suffered the Germans – who rashly accused the Spaniards, but the latter threaten with suits: the idyll of European solidarity is evident. The UN Commission concluded that the fight against drug trafficking is bad, and it is better to legalize drugs around the world – no comments. Another New York maid complained about a major Egyptian banker – who asked for napkins and then began harassing her; it is interesting that the banker is 74 years old (Strauss-Kahn is only 62) - so the stakes are rising, and soon it will reach, perhaps, Greenspan or Volcker, who are well past 80.
Illustration: Artem Popov, ITinvest
Monetary markets. Bank of Canada left rates on the spot, as expected. The Bank of England has a new pigeon – Paul Fisher, worried about bleak economic indicators, has publicly wondered about the second round of quantitative easing. The idea is that the US Fed should also bow down to the third wave of the operation - but so far it is not so: results of the second wave are so bad that few people resolve to offer the third – and it is unclear why it is needed, as the Republicans would die in the last ditch in their demands to squeeze fiscal expenditures. So far, things are bad – and Moody’s does not sleep: the agency threatened to lower the bond ratings of the Japanese governments of all levels (which was expected), and plans to do the same with the three largest US banks – Bank of America, Citigroup and Wells Fargo (which is a surprise); and finally, Moody’s promises cut the rating forecast of the United States if the Democrats and the Republicans would not agree on raising the debt threshold in a matter of weeks. The US authorities have put such a pressure on the Swiss banks which helped Americans to evade taxes that the results are really impressive: over 5 years, customers have took away $200 billion only from UBS while the share of investors from the USA in the assets of Swiss banks has fallen from 18% to 2%.
Fitchdowngraded Greece and Cyprus; Moody’s has withdrawn its rating of Greece out of the investment area and equalled it with the one of Cuba. Greeks themselves massively withdraw money from banks, expecting default; in April, they took out €2 billion, in May – about 4 billion. EU is discussing the idea of external control for Greece; however, Athens is unlikely to agree. The ECB has another plan – the Greeks will repay their bonds, but investors will not get money but new bonds; to replace the “restructuring” and “soft restructuring” came the “refinancing” – little sense, but an exercise in linguistics. The final decision depends primarily on Germany – and there the rumours are contradictory: Wall Street Journal says that the Germans are willing to give the Greeks money with no demand – but a member of the ruling coalition Shafler calls on Greece to get out of the eurozone. Greeks will hand out concessions for oil and gas extraction in her waters: the authorities want to gain €30 billion from this – well… The Minister of Transport of Ireland Varadkar hinted that his country needs a bailout package, since to take money on the market is still unreal. Results of stress-tests of the European banks have been postponed – regulators suspect that they were cheated by giving unrealistically optimistic figures.
Currency markets. Main rates twitched nervously, serious movement took place in the cross-rates: the Swiss franc was growing rapidly, establishing historical peaks against major rivals – a franc now yields $1.2, 2.2 times more than 10 years ago. Euro-dollar has reached 1.46, the pound and the yen fluctuated without much momentum. Another semi-annual report of the US Treasury again has not called China a currency manipulator – although grumbled that it would be better to revalue the yuan faster; American producers are disappointed – they had hoped for an early introduction of anti-China tariffs.
Stock markets. The leading stock exchanges were unhappy – especially on Wednesday when the Dow Jones opened positive and fell by nearly 400 points afterwards. This is understandable: economic data is recently only getting worse – so the corporations have become anxious about their performance. Since an obvious bubble has formed on this market in recent years, the authorities will have to think twice as to how let it blow away without much damage – it is very difficult.
Commodity markets. Gloomy economic news could not keep the commodity prices down – even the sudden drop in US oil inventories could not make the black gold become cheaper; natural gas in the United States ran up in big surges – emission, coupled with inflation, does not leave investors choice but to invest in risky assets instead of useless bonds. Industrial metals rushed about – nickel slipped down, palladium grew up. Silver behaved nervously, while gold again picked up to the punch distance from the historic maximum. The agricultural sector is quiet: wheat and rice fell slightly, while corn threatens its maximums; other cereals, legumes and vegetable oil slowly rose in price. The meat has stabilized, and the milk continues to rush up frantically. Cotton and sugar slowly rose in price; fruits stand in the highs, and cocoa – in the lows. Global structures – from the World Bank to charity organizations – are sounding the alarm: if the gallop of prices for food would not be stopped, many developing countries will face severe famine in a short time...
Asia and Oceania. Economic news mocks the G8, which saw “sustainable and accelerating” recovery. Australia’s GDP in January-March fell by 1.2% q/q (anti-record for 20 years) – the collapse of exports from the flooded areas of Queensland has taken away 2.1% from the economy, so the spring-summer will see an improvement. India’s economy is also slowing down and, apparently, China’s too. In Japan, industrial production in April recouped 1.0% of 15.5% lost in March – car industry is quite impressive collapsing in 60.1% against April 2010. However, in May, business activity was actively restoring – so the output has probably improved too. Activity was also growing in the New Zealand – but Australia has plunged deeper into the zone of recession; in China, activity continued to slow down in late spring. Australia’s current account balance was terrible in the first quarter – but it has improved in spring; the same applies to retail. Lending remains weak – only mortgage is showing signs of life: but there was a bubble – now building permits are falling (as in the New Zealand) while house prices fall for 4 months in a row. In Japan, the number of construction developments was 0.3% higher in April – after falling by 2.4% in March it is not impressive. Employment in March-April decreased by 600 thousand jobs, unemployment has risen. Japanese wages continue to fall, per capita incomes shrink even steeper (-4.8% y/y) – it is logical that in response costs decline too (by 3.0% - but it is better than the March’s -8.5%).
Europe. Switzerland’s GDP grew by 0.3% in the first quarter instead of the expected 0.7%. Denmark’s economy fell into recession, shrinking by 0.5% after falling by 0.2% in October-December. And this will happen with any economy, if the budget support would be taken away: austerity measures have collapsed government investments by 20%, government procurements fell by 0.8% - in response, private investments and consumption reduced (by the same 0.8%); net exports and inventories helped out – if not for them, GDP would have declined by 2.0%; to all embezzlers of budgets who create the illusion of economic growth – be afraid! Business activity in May has worsened everywhere except for Switzerland – and the retail sector of the eurozone even got into the recession zone. Prices in the eurozone slowed down in April-May – mostly because of the high base effect of last year’s spring. In Britain, the demand for real estate is low – prices and activity are slowing down, mortgage sags, M4 money supply fell during the year with the worst rate in the history of observation; construction orders collapsed by 18.0% in January-March even against the cold first quarter of 2010. Unemployment decreased everywhere in spring – but by May the process has slowed down even in Germany; there is a seasonal acceleration in Spain, but the “cucumber crisis” created new layoffs. In Switzerland, retail was not bad in April – but here too is the base effect of late Easter this year; German retail gave a growth of 0.6% in April after the March collapse by 2.7%; expenditure of French consumers shrunk by 1.8% m/m and 0.1% y/y – cars sagged by 10.2% versus March. In general, demand in Europe remains weak.
America. Canadian GDP rose in March by 0.3%, recouping the fall of February by 0.1%. In the United States in April industrial orders fell by 1.2% after rising for 3.8% in March – it seems as the sum is an increase, but this is without taking inflation into account, which is raging now. Regional indices of activity in May were terrible – especially dramatic tumbled down the new orders, but part of the decline occurred because of the problems with Japanese deliveries; national ISM index showed the worst monthly fall in the manufacturing sector since 1984, reaching a 20-month low. House prices in the United States from S&P/Case-Shiller decreased by 4.9% y/y in the first quarter, breaking through the crisis lows – long graph of the index’s author Robert Shiller is quite eloquent: taking into account real inflation, prices have played off all the growth of 2000’s, returning to years 1998/99; the gap with the cost of construction is still high – further convergence is inevitable. The labour market is unhappy: online vacancies stopped growing; the number of planned layoffs is greater than ever, while recruitment is falling (data of Challenger); private sector employment by ADP is 6 times worse than expected; initial applications for unemployment benefits are still above recessionary barrier of 400 thousand. The report for May is ugly – the number of jobs created is three times less than the forecast, unemployment grew, average length of being in an unemployment status set a new record (almost 40 weeks) etc.; still, this is with manipulations – last year, adult population of the USA has grown by 1.8 million, but the workforce, for some reason, declined by 0.5 million. So the consumer sentiments worsen too, while inflationary expectations are rising. Car sales in May decreased by 12.2% against April – of course, blame is on the Japanese supply interruption, but not only: as soon as the customers’ benefits were cut they began to refuse from purchases.
Source: Robert Shiller
Source: Bureau of Labour Statistics, USA
Russia. Rosstat published a demographic survey for April. Birth rate is 9.7 thousand lower than in the same month of 2010, and mortality – by 8.2 thousand; for 4 months in general mortality decreased by more – but the only difference is in excess mortality of last year’s February. Bank of Russia has again raised the deposit rate, because “inflation has accelerated”. Annual growth of monetary base at May, 1 has been minimal since December 2009, and of the M2 broad money supply – since January 2010: i.e. monetary factors of the current spike in prices are no longer relevant, but Ignatiev and Ulyukaev don’t care – it was said “prices are rising – tighten the policy”, so they are tightening. Already 143 km of the “Don” federal highway, advertised as the success of recent years, have become paid – while the alternative free roads are of abominable quality. Recalls of the officials from the boards of governmental corporations acquired a fun continuance: Duma Speaker Gryzlov offered to appoint EdRo functionaries on the vacant posts – this will “make the work of these companies more efficient and increase their competitiveness”; as in a joke where Petka studies the phrase “Patricians went to thermaes with hetaeras” – and Vasily Ivanovich explains that the first word means “party members”. Medvedev and Putin were drawn as tennis players by some master of street art – “I took two most famous people in our country who, despite the fact that we all live in a consumer society, are completely alienated from the world of fashion and show-business”: what an ideological hooliganism! Lawyer Navalny complained about expensive electronic voting machines for the Central Election Committee – and received a rebuke from the head of the latter: “Some don’t sleep for nights – waiting for Churov to steal something... Churov himself never took a penny!” Even in greyhound puppies?..
Illustration: Artem Popov, ITinvest
Have a nice week!
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