Trader’s Diary; w/e 27 May 2011

[privre] Monday 23rd Markets Weak

China’s PMI (HSBC/Market survey) dropped to 51.1 in May, from a revised 51.8 in April and the slowest in 10 months and well below the series long term average of 52.3 – reconfirms that China is slowing – no great surprise, but the market seems surprised. Export orders contracted in May and stocks of finished goods declined, suggesting a further slowdown in coming months.

A number of people are wondering whether Japan’s credit rating will be impacted post the significant decline in GDP. I would have expected it was too early. Japan’s core CPI rose 0.6% in April, the first rise in 26 months. Inflation in Singapore declined to less than 5.0% as their policy of a stronger currency has helped.

Pakistan has asked China to build a naval base at Gwadar. In addition, it expects China to maintain a presence at the base. This clearly will upset both India and the US. Shortly, in the US, there will be a trial of a Pakistani/American allegedly linked to the Mumbai terror attacks.

US relations with Pakistan have deteriorated following the revelation that Osama Bin Laden was in Pakistan, a stone’s throw away from the equivalent of Sandhurst. The US provides Pakistan with significant funding, but there are constant allegations that the Pakistani Intelligence Services, the ISI, assists the Taliban and other terrorists. This is getting tense. There is also a very serious issue of China damming a number of rivers that flow into India. In the past, India’s response has been to stir up trouble in Tibet.

Merkel has lost yet another regional election – this time in Bremen where her CDU came THIRD, behind the SPD and the Greens. Whilst the SPD had been expected to retain their hold, Merkel’s Christian Democrats share of the votes slide to 20.2%, the lowest since 1959. Her party has lost all 5 elections this year.

PM Zapatero’s Socialist Party lost heavily in the weekend’s elections. The opposition People’s Party gained 37.6% of the votes, the Socialists were down to 27.8%. The Socialists ceded Seville and lost control of Barcelona. Furthermore, they lost Castilla-La Mancha and Extramunda, regions which the Socialists have ruled for decades. Voter turnout was higher than the 2007 elections. A general election is due in March 2012.

Bond spreads (10 year) widened 20 bps against equivalent German bunds last week Expect a number of revelations about hidden debt in the semi autonomous regions, which makes Spanish bonds vulnerable to a further rise in yields – this is certainly not good news, as Spain was considered to be the buffer.

With her chances of being appointed head of the IMF improving significantly, Mrs. Lagarde stated that a “voluntary” restructuring of Greek debt, agreed by banks/bondholders would be acceptable. In the past it was, Non, Non, Non. She is clearly keen on the IMF job. A credit rating downgrade on Credit Agricole (due to their Greek subsidiary) clearly hurt the bank last week – expect more weakness – (for full disclosure purposes, I’m sure).

French manufacturing PMI came in at 55 in May, down from 57.5 in April and below forecasts of 57. Just confirms that even the stronger Euro Zone countries are slipping somewhat. However French Services PMI was 62.8, marginally lower than April’s 62.9, but better than the forecast 62; Fitch considers a “reprofiling” of Greek debt a default – whoops – using a different word for default wont work Mrs. Merkel.


  • Asian markets are off significantly (Shanghai is down 3.0%) – closing at the lows of the day. Asian markets, generally, are down to 2 month lows. Clearly the Italy/Greece downgrade etc is not helping.
  • Yet more of a scramble by European banks to raise cash – this time Commerzbank.
  • The Euro is down again today though, at present, by not as much as I had expected, though Euro selling looks as if it’s picking up.
  • Oil (Brent) is clearly coming off – currently just above US$110.

I will repeat


Tuesday 24th (am) Goldman’s is now positive on commodities

Germany flash manufacturing PMI is 58.2, way lower than 62 in April and the forecast of 61. It also is the lowest reading since last November. Services PMI was 54.9, down from 56.8 in April and well below forecasts of 57, the lowest reading since last Sept.

Euro Zone manufacturing PMI was 54.8 in May, well below 58 in April and below forecasts of 57.4, the lowest since last Oct. The Services PMI was 55.4, down from 56.7 in April and below forecasts of 56.5, the lowest since December.


Interestingly, Italy consumer confidence was up to 106.5 in May, well up from 103.7 in April and much better than forecasts of 103.5.

Can the current Spanish Socialist party survive till March next year (the expected date of the next General elections) – unlikely, given Zapatero leads a minority Government. In addition, he has announced that he will not seek re-election, so quite frankly, he DOES NOT CARE. Further austerity measures will weaken his party further and given their leanings, are not going to push for it and/or support such moves.

The Popular Party is likely to win in the next genera elections. However, any new Government will have to come up with a new fiscal plan i.e. further spending cuts, though further spending cuts, without growth is a non starter, particularly as unemployment is over 21% and youth unemployment is over 40%. A report suggests that some E33bn of unpaid bills remains outstanding! by semi autonomous regions.

It is blatantly clear, that a number of debts cannot be paid by the provinces – oops, and that the overall debt position in Spain is worse and that banks have not w/off as much as they will need to. A number of Spanish banks (and other European banks) will need huge amounts of new capital, as I have been banging on about ad nauseum.

Whilst the negative focus yesterday was on Italy and Spain (Spain clearly deserves serious attention), the outlook downgrade by S&P of Italy will not be followed by Moody’s and Fitch – they have virtually said so. Having read a number of reports, it appears to me that S&P’s view on Italy is harsh.

However, what about Belgium and France, which have their onw problems – a downgrade of core Europe will really put the cat amongst the pigeons – by the way, this is no pie in the sky speculation on my part, the numbers suggest that both these countries are susceptible to a downgrade.

Moodys joins Fitch in stating that “reprofiling” would be construed as an act of default – bad luck Mrs. Merkel. Moodys have placed 14 (out of 18) UK financial institutions on review for possible downgrades. Of the major banks, only Barclay’s outlook has been placed on negative – no surprise, as you know I have always commented on Barclay’s aggressive/creative accounting. The review will take 3 months to conclude. The issue of possible withdrawal of Government support is the issue exercising Moodys.

Goldman’s have suggested buying commodities – Oil, copper, Zinc. Wait a second, did they not recommend getting out of commodities a few weeks ago?! Goldman’s have also reduced their forecast for Chinese GDP this year.


  • Markets closed weak yesterday, but seem to have stabilised in Asia today. European markets have just opened marginally up. Well clearly with my very short positioning, rather selfishly, the current markets are quite positive – I’m even making money on my forex position (short Euro against the US$ – wonders never cease).
  • Markets look as if they will be far more news/event driven, rather than ignoring it in the past.
  • Credit rating agencies, having totally missed it a few years ago and now getting aggressive – a number of people would argue far too aggressive. Personally, I would share that view, in particular, in respect of the announcement re Italy – I could understand Belgium, but Italy …
  • The question is whether the ECB will raise interest rates – first talking about “strong vigilance” at June’s meeting – I believe they would be nuts to do it, but …

Tuesday 24th (pm) EU proposes to oversee Greek Privatisation Programme

More analysts are cutting China’s growth – this time Goldman’s. In addition, Goldman’s state that inflation will peak at 5.6% in August, but will be sticky, reducing only slowly, which will require the continuation of tight monetary policy for longer.

The (important) German IFO index came in at 114.2 in May, unchanged from April, though marginally higher than the forecast of 113.7. There were fears that the index would come in much lower – has supported the Euro. The expectations component slipped, though only marginally, to 107.4, from 107.7. Construction and exports were the key drivers.

France’s May Manufacturing Sentiment Index came in at 107 versus 110 in April, below expectations of 109. Other components e.g. Executives own company outlook came in much lower (11) as opposed to 19 in April. Not good news.

Euro Zone industrial orders fell by 1.8% MoM in March, though was up 14.1% on the year, in line with expectations. Belgium has had its debt outlook lowered to negative by Fitch, which has echoed S&P comments that a lack of a Government will complicate efforts to cut debt – currently debt to GDP is approx 100%, the 3rd highest in the Euro Zone. No real market impact as this was expected.

The Greek comedy continues. The leader of the opposition party, Mr. Samaras has stated that Greece should REJECT the new austerity plan. I really don’t see why anyone is bothering with the country. ECB/IMF/EU officials say that Greece has not met its obligations in respect of the previous plan – why would anyone think they will follow a new and tougher austerity plan!!?

Euro Zone countries are proposing measures to ensure that Greece completes its proposed privatisation programme – it has singularly failed so far. However, the EU focus on realising proceeds through privatisation suggests that the Euro Zone countries may be prepared to assist Greece.

The UK’s net borrowing for April was £10bn, (£7.2bn in April 2010) and well above the forecast of £6.5bn. It was also the worst on record. Apparently “one off” factors caused the higher borrowing requirement (Source UK Treasury). Hope so.

The UK’s CBI distributive trade (i.e. retail sales) came in at 18 in May, from 21 in April, though materially better than the 10 expected.

The New York State Attorney- General had added additional banks to his probe on mortgage practices. And banks are now being investigated, including JPM, GS, MS, RBS, Deutsche, BoA and UBS. Sales on new homes in the US climbed 7.3% to an annual pace of 323k in May, somewhat higher than the annual pace of 300k expected.

The US Richmond Fed index collapsed to -6 in May, from +10 in April.

Not only a Euro Zone debt/banking crisis, but now we have the largest volcano in Iceland erupting, with its ash cloud sweep across the UK. Thanks Iceland, we asked for our CASH back (from failed Icelandic banks bailed out by the UK) and not ASH. Flights have been cancelled.


  • European markets closed higher on the day and the Euro has recovered a bit.
  • Oil (Brent) is trading above US$112 – Goldman’s and Morgan Stanley have set a US$120 target for 2011 and US$130 for 2012.
  • US markets closed marginally lower.

Wednesday 25th (am) Is the ECB coming to its senses and rethinking its position of further rises in interest rates

Japan posted its first trade deficit (US$5.7bn) for 31 years in April – clearly the impact of the disaster, though only around 40% of the forecast. The US Government sold shares in AIG yesterday, just above their break even price – something most analysts would never have expected. Crysler also repaid its bail out funds, ahead of schedule.

The EU raised E4.75bn, for its bail out fund, through the issue of 10 year bonds. The issue was 3 times oversubscribed and was priced to yield 3.53%, some 50 bps above equivalent German yields.

German June consumer sentiment indicator fell to 5.5, from 5.7 in May and a forecast of 5.6. Is the ECB coming to its senses – normally hawkish ECB members are making far more cautious statements about possible interest rate rises.

Bini Smagi stated yesterday that “inflationary pressures are in part temporary and due to higher prices for food and Oil”. Well, clearly yes, but why was that not obvious previously? The market is expecting Trichet to use the “strong vigilance” phrase at the June meeting, signaling a 25bps rate rise in July. Maybe, just maybe, the ECB has “done its homework” a phrase that Euro Zone politicians/officials love to use and is rethinking – if so, about time;

The much touted Glencore is trading below its IPO price – no surprise. Yandex, the Russian tech company traded approx 50% above the IPO price.

The Republicans lost the Congressional seat in Western New York yesterday – the election was billed as a referendum on Medicare. Current Republican plans look as if they have back fired – the Democrats are likely to use the tactics employed during this campaign in next years Presidential election, which will put the Republicans under significant pressure.


  • Asian markets closed lower today and European exchanges are weaker, across all sectors. The markets are looking skittish, no wonder why. The Euro is declining across the board.
  • Oil (Brent) is lower – US$111.70

Wednesday 25th (am) QE3 later this year?

The OECD forecasts that Germany will grow by 3.4% this year (most likely slightly more – the German DIHK survey suggests 3.5%), though slow down to 2.3% in 2012. Interestingly, they state that the ECB should not raise interest rates further this year and only slowly start withdrawing monetary accommodation. Unfortunately, the ECB are deaf and (dumb).

The Finnish Parliament (as expected) voted in favour of the Portuguese bail out.

The Swedish Riksbank warns of rising inflation due to increasing food prices and pressures in the labour market. Looks like further interest rate rises. My short Euro/long SEK is nearly at break even at present – been a tough ride so far. Will hold on, the SEK seems to be gaining momentum.

Reuters reported that the Slovak Finance Minister who (I don’t know him either) stated that a debate as to a “soft restructuring” for Greece is coming – the Euro tanked on the news.

It is clear that the EU/ECB/IMF are totally FED UP of Greece – the Greeks have not even tried to meet their obligations, in respect of the bail out – indeed they are resorting to try every means to wiggle out. The rhetoric is rising and the comments are getting tougher. NOT BEFORE TIME. However, there is yet again another public sector strike in Athens. I wonder if Turkey wants them.

UK net trade added 1.7pp to 1st Q GDP QoQ, the best result since 1985 and more than offset a slowdown in consumer spending and construction (though the decline was revised marginally up). However GDP was unrevised (I thought it would be revised marginally upwards) at 0.5% QoQ or 1.8% YoY.

Household spending was weak (-0.6% QoQ) and -0.3 YoY. Investment spending declined by 4.4%, the largest since 2nd Q 2009. Overall demand declined by 1.3%, the largest since the 1st Q 2009. The GDP deflator rose to 1.8% QoQ or 2.8% YoY, mainly due to a rise in VAT.

The OECD has reduced the UK’s GDP forecast (yet again) to 1.4% for this year and 1.8% next. They also recommend a rate rise.

A default by Greece will shut Ireland out of bond markets, according to the ECB etc – I don’t believe so, but Ireland needs to sort out their banks first (restructuring/haircuts on senior bonds/debt/equity swaps etc) and, most importantly, get rid of their senior bankers.

The economy is improving, particularly exports. However, a Greek default will be a problem for Portugal, in particular, probably Spain, as well.

Interesting views from UBS – US regional growth is slowing (recent Philly Fed and Richmond Fed surveys) US banks increased profitability was nearly all due to reduced provisions according to the FDIC. With lower loan growth and a slowing economy, bad debts may well rise – no more write backs of provisions.

That’s one of the reasons why I’m not keen on the sector. Clearly banks will also be subject to additional regulation.

Wholesale financing costs are rising, according to GE Oil supply issues are a serious threat – Saudi Arabia is starting to extract heavy crude – and needs over US$100 to meet its give aways (to balance its budget).

Copper demand exceeds supply Profitability of Chinese banks is declining + (off course) bad loans are serious and rising – my views are that the major Chinese banks are INSOLVENT. The Chinese drought is intensifying – it will be a huge problem in the future, due to Chinese practice of planting 2 to 3 crops per year, even ignoring the drought In spite of suggestions to the contrary.

Petrol sales in the US are declining as prices rise Chinese exporters are focusing on Europe rather than US, due to recent rise in Euro (that’s why they were buying the Euro). However what happens when the Euro declines, which it should. One big issue – they suggest that the FED will introduce QE3 (I FIRMLY BELIEVE SO TOO, possibly even later this year)


  • In spite of (very low) bond yields, US Treasuries still seem the place to be at present, though in due course, is SELL, SELL, SELL as inflation rises.
  • European markets have recovered from their morning lows – however, downside risks still dominate in my view.

Wednesday 25th (pm) S&P reports that Ireland has reached the bottom of the downturn

The situation in the Middle East has been demoted off the front pages. However, the coalition is intensifying its bombing campaign against Colonel Gaddafi’s forces and the situation in Syria is worsening. In addition, Israel is making noises about Iran!

S&P reports that, whilst Ireland may have a few further Q’s of negative growth, they believe the bottom of the downturn has been reached. They also say that a Greek restructuring may not trigger an Irish downgrade. Very much my view as you know. However, Moody’s suggests that a Greek restructuring will impact Ireland (and Portugal – certainly agree with this).

Apparently EU/ECB/IMF officials left Greece following their initial review of the numbers – you guessed it, the Greeks are completely missing their targets – watch out for the inevitable leaks. However, Greece needs the next tranche of bail out funds imminently – the result from the Greek Government – we will speed up privatisation – the problem is – who are the buyers, and can they proceed (given strong union opposition) and will they?

I would suspect (based on decades involved in privatisations) that a number of the Greek state controlled companies are grossly inefficient, hugely indebted, loss making, corrupt and have been used as employment schemes – not sure whether any buyer would want to own and manage that.

Just heard that an EU Commissioner suggested kicking Greece out of the Euro (Euro, you guessed it – collapsing again) and some people still take Euro Land/EU seriously.

All sorts of talk about referendum regarding the further austerity measures/general elections, in Greece – all denied. However, it seems that the movement towards a “soft restructuring” i.e. a “voluntary” haircut.

Though if bond holders don’t accept (note, no longer “reprofiling”) – is gaining momentum. Clearly, bondholders will have to take a hit – there is no alternative and/or money and/or EU support.

I’m not sure what the Slovak’s are up to today – must be that they don’t want to contribute to further bail outs. However, it’s now the Slovak PM turn – he is quoted on the Dow news wires as saying:

Greece has not enacted the reforms necessary for fiscal consolidation. They need to cut social benefits and reform the welfare State, The 2010 bail out was a MISTAKE. Will only support a further bail out, if Greece meets its pledges.

Yep, the Slovaks don’t want to pay up. Joking aside, this view reflects growing EU frustration with Greece.

German sources have reported that their banks have passed the Stress Tests. But what provisions (if any) were made on their holdings of Sovereign debt, for example. However, Fitch reports that German banks exposure to Greece is “manageable”.

Whilst Commerzbank (who have recently announced a capital raise) have the largest exposure to Greece in absolute terms (Deutsche Postbank – part of Deutsche in % terms), Fitch states that they do not expect any rating action on the German banks.

There are reports that a number of French citizens are using the social media to call for a protest this weekend, similar to the recent Spanish one – no great surprise, but things in Euro land are getting “difficult”. The G8 meeting in Deauville will be interesting – normally attracts a number of protesters.

US State Attorneys General report that US banks may face up to US$17bn in civil lawsuits if they don’t address the foreclosure problems. Seems a huge amount, but clearly the banks will have to pay up, though I find it hard to believe that the number will be quite as high.

US April durable goods orders declined by 3.6%, as opposed to a rise of 4.4% in March and well below the decline of 2.5% expected. Excluding the volatile transportation sector, orders declined by 1.5%, well below the forecast RISE of 0.5%. Virtually every sector was down – not good news.

The recent numbers show, quite clearly, a declining trend, but I believe that the impact of the Japanese disaster could well have impacted by much more than expected, especially in the auto sector.

Interestingly, S&P have raised Brazil’s outlook to positive from stable. Personally, I thought the economic numbers were getting worse. S&P cites improving exports, economic diversification and fostering the growth of the middle class. Will look much more closely, but I’m not convinced (I’m short the Brazil country ETF – Ticker EWZ).

US home prices fell 5.5% in the 1st Q, from the previous years 1st Q, the largest decline in 2 years. Clearly the market is being depressed by sales of foreclosed homes.

President Obama has been less than supportive of the alleged “special relationship” between the US and the UK. In the past, he has believed Germany to be more important. However, he has discovered that the UK is useful. Indeed, my friends say he has gone overboard to be ultra friendly during his current State visit. Must want British troops to stay longer in Afghanistan.

Goldman’s (Jim O’Neill’s) bullish call on Russia seems to be being ignored, particularly by the Russians, who are exporting capital at an even faster rate – Net capital outflows rose to US$7.8bn in April, from US$6.2bn in March according to the Russian Central Bank. I suspect the pace has risen even faster since then.

The RTS is down near 15% from its early April highs (I’m short the Russia ETF – Ticker RSX). When you realise that the 4 Russian oligarch shareholders of TNK BP want to sell, you know it’s time to exit – its pretty simple.


  • Have been watching it for some time, but finally decided to short Burberry and LVMH, for obvious reasons + they are expensive + the overly bullish momentum seems to be changing. A (good, in my opinion) report in the FT’s Lex column also expressed reservations about the luxury sector, in general.
  • Have to buy something – I’m far too short at present. I suppose consumer staples, utilities etc.
  • Euro taking a real pounding, except against the US$, but even against Sterling and, off course, even more so against the Swiss Franc (+1.0%).
  • Now this is funny – the head of the Polish Central Bank said today that the Euro Zone area was a gentlemen’s club, without any gentlemen!
  • Goldman’s (finally) is advising investors to stay clear of Spanish and Italian bonds – well, we agree on something, but a GS call on this is something you cant ignore, particularly at these times – GS also advised to avoid PIGS bonds.

Thursday 26th UBS to spin off investment banking business and incorporate in New York, London or Singapore

Australian home loan delinquencies rose to a record last Q, according to Fitch. Mortgages more than 30 days overdue rose to 1.79%, up from 1.37% in the last Q of 2010. Generally mortgage lending is slowing.

Li Ka-Shing warns about Hong Kong property prices. A number of analysts suggest property price declines of 20% next year, with a further decline of 10% in 2013 (Source Barclay’s).

China, clearly interested in keeping the Euro strong to help their exporters, is buying Euro bail out bonds, reports Bloomberg.

Shell is talking to the Russians about a possible joint venture to explore for Oil in the Arctic – basically the proposed Rosneft/BP deal. May spur BP into action and do something silly.

Better weather conditions in Russia may result in the end of the export ban on grain which was imposed by the Russian Government last year – following the wildfires.

UBS announced that they may spin off their investment banking operations and incorporate the business in London, New York or Singapore. Interesting.

German April import prices rose +0.3% MoM, or +9.4% YoY, lower than the +11.3% YoY in March.

Export prices rose by +0.3% MoM, or +4.2% YoY, lower than +4.9% YoY in March Better news – the reduction in energy prices were the main reason.

French May consumer confidence rose to 84, up from 83 in April and in line with expectations.


  • Asian markets have risen across the board today (ex China), following a weak performance recently. European markets have opened up, following Asia.
  • Brent Oil is above US$115.
  • Euro strengthening again this morning – Chinese buying?
  • Profits rose 43% at Burberry’s and a large rise in divs – however, somewhat less optimistic on 2nd half margins – shares are currently down 2.5% – should have shorted more aggressively yesterday.

Friday 27th Is Germany becoming more lenient and, essentially, will agree to a Greek bail out?

Jean Claude Junker stated yesterday that the IMF may not release its next tranche of its bail out funds to Greece, as there is a doubt that Greece will be able to refinance itself over the next 12 months. Why Mr. Junker is making statements on behalf of the IMF escapes me, but hey, it’s the Euro Zone.

However, recently (last 2 days) I have been getting the feeling that Germany (the key country) is relenting. The German Finance Minister appeared far more conciliatory yesterday.

There are a number of other reasons, but I decided to cover a lot of my shorts today (CRH, Credit Agricole, Soc Gen, BBVA, Santander, Burberry) and the Spanish Index, the IBEX. Also reduced mining shorts (Anglo American, BHP, and Rio) by 50%. I will close at least half of my country EFT shorts in New York this afternoon.

Also closed my short Euro, long US$/SEK positions – actually made money (modest) for a change.

Essentially, it has been a truly fabulous month and I really think its time to take profits. In addition, it’s coming to the month end – possible window dressing. Finally, markets have been beaten up with all the bad news and look much more immune, particularly in the past few days. Maybe a bit too early, but a profit is a profit.

Trader X is a pseudonym. The author is a former senior corporate financier at a prominent London investment bank who now manages his own money from his homes in London and the West of Ireland. [/private]