Mar 28, 2012

There Will be No JPY Black Swan

Everyone is talking about The Yen's Looming Day of Reckoning by Andy Xie in which he spells gloom and doom about Japan and the yen. Japan's economy has indeed been trapped in a prolonged period of sub-trend growth and deflation. The strong yen makes things worse by reducing the competitiveness of the country's exporters.

But why a catastrophic collapse? In late Dec in Japan Nov Trade Deficit Worsens - Usd/Jpy to Turn the Corner Soon we thought the government or the BOJ should take steps to weaken the yen, which would impact positively Japan's economy and its exporters, which in turn can jump-start an outperformance of

Mar 26, 2012

Germany to Directly Supervise Spain's Budget Reforms

We have long maintained that the ongoing sovereign debt crisis in Southern Europe will precipitate further European integration. (See Another Step Forward in the Creation of the United States of Europe). With the second Greek bailout a done deal, the market's attention has again shifted to Spain. Last week yields on Spanish government bonds were once again up at 5.5%.

Today Dow Jones Newswires reported that a German government delegation will fly to Madrid to

corroborate first hand the government's reforms and assess the true risk of the new deficit target
Reading between the lines this means that representatives of the German government will have a direct

Mar 24, 2012

The Landing Will Be Hard

As we have opined in previous posts on its banking system and real estate market, China's economy is in a pretty bad shape. This is corroborated by a couple of recent economic statistics. Last Sunday, China's National Bureau of Statistics published the new housing numbers for February, saying that
Comparing with the previous month, among 70 medium and large-sized cities, the sales prices of newly constructed residential buildings declined in 45 cities while that of 21 cities remained at the same level. For 4 cities with increasing prices month-on-month, the increases were 0.1 percent.
The real economy (as opposed to asset prices) is not doing great either. On Thu HSBC's manufacturing

Mar 15, 2012

China's Wen Admits Banking System Dysfunctional

China's outgoing premier Wen Jiabao seems to have struck a sentimental note in his closing remarks at the NPC (China's parliament). This is completely normal but what is a bit surprising is that he pretty much admits China's system of financial intermediaries is dysfunctional. According to Caixin he said:
The problem is that companies, especially the smaller ones, need huge amounts of capital but, banks can't satisfy them. Meanwhile, the market is awash with private capital seeking opportunities."
China's state-owned banks pay negative real rates to depositors, while funneling capital to strategic

Mar 14, 2012

FOMC Statement Punishes Gold, Boosts Stocks

The guardedly upbeat comments in the March FOMC report yesterday pushed equity markets to new multi-year highs. At the same time Gold bugs were disappointed by the lack of any mention of QE3. The statement starts with the following comments about the general economy:

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further
As discussed in a previous post, recently Gold has been trading as the anti-dollar, mostly swayed by the

Mar 9, 2012

AUD Continues to Track Overall Risk Sentiment, Ignores Fundamentals

Over the past few days, all eyes have been on the Greek debt swap, with S&P futures quite volatile, swayed by rumours and expectations. At the same time Aud/Usd continues to trade in risk-on / risk-off mode, paying little heed to the economic reality. It underperformed slightly when GDP came out worse than expected on Wedn morning, but pretty much ignored worse employment data on Thu and an surprising trade deficit Fri morning. Overall things are not looking great at all, but the currency is

Mar 7, 2012

EU Credit Crunch Takes its Toll on Exports Despite Weak Euro

As released by Eurostat yesterday, the Eurozone and EU GDPs for the fourth quarter of last year dropped into negative territory. Looking at the components of the calculation, exports were down -0.4%. This was during a period when the EUR had weakened considerably against the dollar in the aftermath of the S&P downgrade of the US and subsequent equity markets sell-off. Usually a weaker currency should boost exports rather than dampen them. Also throughout Q4 the economies of

Mar 5, 2012

Gold Fails to Recover from Bernanke Shock

In the end of January, the price of Gold received a large boost when the Fed extended its prediction of zero short term rates until the end of 2014 (a year longer than previously announced). The market started pricing in another round of quantitative easing but those hopes were dashed with Bernanke's testimony before Congress last week. After a fast 5% drop, inevitably bids came in, but the bounce was short-lived. Given the strength of the US economy (relative to other developed countries) it looks like the need for Gold as a hedge against monetary collapse is becoming less pronounced. It is