Trader’s Review of the Week; 10 July 2011

[private] Sunday 10th July – Chinese CPI soars to 6.4% YoY in June

Australian PM Ms Gillard unveiled her carbon tax is forecast to raise approx US$30bn over 3 years. The carbon tax will switch to a cap and trade system in 2015. The revenue raised is earmarked for renewable energy projects. The PM wants to cut pollution per capita by at least 5% below 2000 levels by 2020, as Australia is the highest per capita polluter. CPI is expected to rise by 0.7% in the 1st year, as a result of these taxes.

Japanese markets rose to their highest levels since the 11th March earthquake, it has managed to recover some 2/3rds of its losses. However, last Friday’s US NFP’s data is bound to impact the market on Monday.

Malaysia is experiencing political dissent. Many took to the streets recently – the protesters are demanding more democracy and are seeking reforms related to human rights issues.

Chinese June CPI was 6.4% YoY (May 5.5% YoY), the sharpest increase since June 2008 and above the 6.2% forecast. Food prices rose by 14.4% YoY, for example pork an important part of the Chinese diet, rose by a staggering 57% YoY. Producer prices rose by 7.1% YoY (6.8% in May YoY), once again higher than the forecast of 6.9%.

Chinese imports increased by 19.3% YoY, this is a sharp decline from the May’s 28.4% YoY and well below expectations of an increase of 25.3%. This is a clear sign of a decelerating economy. Imports of Oil were down 12%, which is the 1st YoY decline, and most base metals such as ex copper, also fell.

However, the June trade surplus rose to US$22.3bn, which is well above May’s US$13bn. But compared to the trade surplus for the 1st 6 months of 2011 was US$44.9bn, the smallest for 7 years, yet much higher than the US$14.2bn expected. Exports reached a new record of US$162bn, rising 17.9% MoM, slightly below the 18.6% expected

Italy is now getting battered, as Berlusconi is losing control and there are reports of him having significant disagreements with Tremonti, his Finance Minister. Bond yields are soaring as they have risen for 5 consecutive days, the 10 year rising by 10 bps to 5.27% even higher intra day, on Friday, nearly 40bps higher than a week ago and the highest since July 2002.

Italian banks are being pummelled with Unicredit down 7.9% on Friday. The E40bn of Government spending cuts are facing problems in the Italian Parliament; if they are not approved then credit agencies (who have already warned of a credit downgrade) will certainly do so.

The debt to GDP is expected to reach 120% this year, making it the 2nd highest in the EU, with only Greece being the highest. There are rumours of ban on naked short selling, prior to the market opening tomorrow. Whilst debt to GDP is extremely high, though most of the debt is held domestically, Italy has bumbled along for decades in a similar manner.

In addition to all this, it is still a rich country with its high savings ratio, and with a huge black economy, so the reported numbers exaggerates the problems. Also, Italy’s primary deficit is close to zero. However, the real problems are that economy, which has grown very slowly at around 1.0%, could well have contracted in the 2nd Q this year, it was only +0.1% in the 1st Q.

The current forecasts of a rise of GDP by +1.1% is pure fiction and the market has the country in its sights. Finally, Italian banks hold more than 50% of the country’s Sovereign debt, which is their real weakness in spite of raising significant amounts of capital YTD, given the high Italian debt to GDP ratio.

In reality, Spain is much worse off as I have stated before. The spread between German and Spanish bonds was over 280 bps on Friday.

The European Banking Authority announced that banks will have to disclose capital levels, estimates of profitability for the current and next year and their holdings of Sovereign bonds, though they will not be forced to take haircuts on these Sovereign loans.

91 European banks are to be Stress Tested and will be expected to have a Core Tier 1 ratio of at least 5.0%. The Stress Test criteria include an assessment by the banks, assuming a 0.5% economic GDP contraction (not that stressful in my opinion). Banks that fail will need to submit plans to raise the capital necessary by end September and to complete their capital increases by end December 2011. If they cannot, other resolution measures will be taken.

Between 10 and 15 are expected to fail, this does include Spanish banks. However, the future President of the ECB and currently head of the Bank of Italy, Mr Mario Draghi stated he was certain all Italian banks would pass.

Clearly the Stress Test criteria has been strengthened, but is still not good enough, particularly as it does not force banks to recognise haircuts on their holdings of Sovereign bonds. The details of the Stress tests will be released at 5.00pm (UK time) next Friday.

The European Council President, Herman Van Rompuy has convened an emergency meeting of the top European officials for tomorrow, to discuss the Euro Zone debt crisis. It is great of him to call meetings, but without sensible results and conclusions, it’s yet another waste of time.

For the last time, Greece will default, it remains a solvency and not a liquidity issue, as everyone now knows. The overall level of Greece’s outstanding debt needs to be reduced, as is the case for other Euro Zone countries. Portugal certainly will be one, possibly Ireland as well, though other Euro Zone countries are now looking vulnerable as well.

The result is that European banks will need to be recapitalised by Governments as the sums are far too large for the markets; particularly as they will need to be recapitalised all at the same time. The Europeans told us there was no threat of contagion and the necessary measures could be taken in the 2nd half of 2013. (Yeah right).

And finally, the ECB’s/Trichet’s position is unsustainable, ludicrous and will not work.

Whilst the US NFP’s data was truly dreadful, Canada’s employment rose by more than forecasted in June (+28k, nearly double expectations of a +15k rise, though the majority were part time jobs). The unemployment rate remained at 7.4%, the lowest since Jan 2009.

However, the Governor of the BoC expects the economy to slow in the 2nd half. Average hourly wages rose by 2.0%. I see there are some concerning signs with Canada.

Last Friday’s US NFP’s data was truly dreadful; with the US adding just 18k jobs and the unemployment rate rose to 9.2%, from 9.1% previously. The public sector lost 39k jobs, and expect the losses to increase sharply, following the ending of Federal assistance to States from this month on. Whilst the private sector employment rose by a mere 57k jobs.

Even worse May’s numbers were revised down by 29k and April’s by 15k. A number of analysts believe that these numbers were so bad, they were a rogue number. This maybe the case, but don’t hold your breath, though July’s numbers should be better.

The household survey data was even worse with a total employment declined by 445k. Whilst part time employment rose by 3.0%, full time employment fell by 0.5% in the last 12 months, this isn’t a good sign either.

The US needs to employ a minimum of 125k people per month, to keep the employment rate constant, but are a far cry away from this level of job creation. US whole inventories rose +1.8% in May, which was more than expected. The consumer credit also rose by US%5.1bn.

Press reports state the US House Speaker Mr Boehner will pursue a smaller deficit reduction plan than the one President Obama is seeking, as apparently the White house wont approve a bigger deal without tax increases. This ludicrous saga continues.

Brazil implemented further measures to curb the rising Real last Friday – the Central Bank will require banks to make non interest bearing deposits equivalent to 60% of short US$ positions that exceed US$1bn, or their capital base. Whether these measures will work is debatable.


  • It’s going to be a tough week for equity markets given the US employment data, Chinese inflation numbers, and clear signs of a continued slowdown. The Euro remains grossly overvalued in my opinion, particularly given the problems with the peripherals. Though it is now creeping into the core Euro Zone countries, Euro Zone peripheral bond yields will continue to rise, until the Europeans finally get their act together.
  • In spite of all the mess, Brent is now above US$118, and analysts were predicting they expected Brent to decline to the mid US$80’s! The weaker Chinese Oil imports may impact negatively, though it is still a supply and demand issue, compounded by serious and rising geo political issues.


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]