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Bullet dodged
Lugano
The Greek bullet has been dodged for now though the scheduled April elections in Greece
remain an obvious stumbling block. Accordingly, GREED & fear’s base case remains with the
“risk on” trade which means that any pullback in equities should be bought. A potential
moderate disappointment for the markets may be that the LTRO-2 is not quite as large as
previously expected because of the apparent reluctance of the big German and French banks to
be seen taking up the carrot of generous ECB funding. For this reason the amount raised may
be less than the €500bn-1tn previously guesstimated.
Still this will not be enough to end the “risk on” rally since those banks that really need the
funding, or the profits from the carry trade like the Italian and Spanish banks, seem likely to
participate again. Meanwhile, it is a telling sign of improving market conditions that Italian bank
Intesa Sanpaolo was able this week to issue an €1bn unsecured bond with a five-year maturity,
following its successful issuance of €1.5bn in unsecured 18-month bond at the end of January.
Such longer term funding would have been impossible prior to the LTRO.
It also continues to be clear that Flexible Mario would like all the major European banks to take
advantage of the LTRO. Indeed the ECB stance towards the banks is increasingly likely to be
either take funding from the LTRO or raise equity, rather than the other option of pursuing
deleveraging and balance sheet contraction. While, as previously noted here, it is also likely
that the European Banking Authority (EBA) will come under growing pressure to relax its capital
requirements even if nothing specific appears to have been announced yet.
In a further demonstration of Flexible Mario’s extreme flexibility, it is also worth noting that in
its recent relaxation of collateral standards the ECB has allowed national central banks to set
individual collateral rules tailored to meet individual countries’ banking systems’ particular
funding needs. A very informative article on this was published in the European Wall Street
Journal last Tuesday (“ECB allows diversity of collateral rules”, 14 February 2012). Thus, by
way of example, the Bank of France will accept assets denominated in US dollars reflecting
French banks’ large pool of dollar assets.
One consequence of this so-called “balkanisation” of the Eurozone financial system is that all
collateral is not created equal. This is, of course, the exact opposite direction of the current
efforts to move Euroland towards greater fiscal integration. Still Flexible Mario is, clearly, a
believer in “needs must” to the delight for now of owners of risk assets.
Meanwhile, the longer term issue raised by the LTRO is that certain banks may become hooked
on ECB funding. This is presumably why certain major European banks do not want the
perceived stigma of being seen to be dependent on ECB largesse. The issue here is whether
markets will make a distinction between those banks reliant on ECB funding and those which
are not. This appears to be happening. Thus, the differential between the five-year CDS spread
of Deutsche Bank and the average CDS spread of Banco Santander, BBVA, UniCredit and Intesa
Sanpaolo has widened by 33bp to 156bp since bottoming on 7 February prior to the ECB
monetary policy meeting and a European finance ministers’ meeting on 9 February
The fundamental improvement in Europe’s credit markets is also clear from the fact that the
ECB has of late been able to reduce massively its buying of sovereign debt. Thus, the ECB did
not buy any Eurozone government bonds last week for the first time since early August 2011,
after buying a mere €59m in the previous week (see Figure 2). Nowhere is this improvement in
sentiment more evident than in Italy where the 10-year government bond yield is now “only”
5.51%, down from a peak of 7.26% reached in November (see Figure 3).
GREED & fear has been in Italy this week and there is no doubt that sentiment has improved
dramatically. The key reason for this is that the Mario Monti-led technocratic government is
seemingly achieving concrete results. Thus, it has already secured fundamental reform of the
pension system for both the private and public sectors which effectively means that, starting in
2022, people cannot retire until the age of 67. Moreover, the reform was achieved without
major strikes reflecting the popular support for the current government.
The next goal of the Monti government is labour market reform, which would free up
employers’ ability to hire and fire. The deadline for this potential landmark reform is the end of
March and GREED & fear hears that the likelihood is that it will pass. The good news in this
respect is that the next general election is not due to be held until April 2013 while Monti is
being careful to remain neutral of the political parties. A lot of structural reform can be
implemented in a year if popular support is maintained
For this reason GREED & fear is happy to stick with the long Italian 10-year / short French 10-
year trade first recommended here on 5 January (see GREED & fear – Reformulated outlook, 5
January 2012). This has the potential for even greater spread contraction than has already
occurred. Thus, the spread between the 10-year Italian government bond yield and the 10-year
French government bond yield has fallen by 119bp since 5 January to 255bp, and is down
150bp from the peak reached in November (see Figure 3). There are two reasons why. First,
the French are as yet nowhere near embracing the structural reform Italy has begun to do
because the country has, first, to go through a divisive electoral contest on 22 April and 6 May.
Second, Italy is a major part of the global fixed income index. Thus, Italy accounts for 5.5% of
the Bloomberg/EFFAS Global Bond Index. So benchmark orientated investors are being forced
to buy back Italian bonds which they sold last year as the rally’s momentum intensifies.
Meanwhile, none of the above means that Italy will avoid an economic contraction this year.
Italy’s real GDP declined by 0.7%QoQ and 0.5%YoY in 4Q11 (see Figure 4), while the
consensus forecasts a 1.3% contraction this year. In this sense, the process of structural
reform impacting the real economy will take time. That is why the key prerequisite is
continuing popular support conferring legitimacy on the Monti government. Meanwhile, a clue
to the LTRO’s success, or lack of it, in helping the real economy rather than the banks’ funding
needs will only come with the next release of the ECB’s quarterly survey of credit conditions.
This is not due until 25 April. The other critical area to watch is deposit flows. Remember that
in December the Eurozone saw deposit outflows. Thus, Eurozone household deposits included in
M3 fell by €29.4bn month-on-month in December on a seasonally adjusted basis, the biggest
monthly decline since the data series began in 2003. While deposits placed by non-financial
corporations also declined by €12.5bn month-on-month in December and are down 1.0%YoY
(see Figure 5). The next data on this critical area is due on 27 February.
Returning to Asia, the failure of the Shanghai A-share market to generate more excitement
from the latest 50bp cut in the reserve requirement ratio (RRR) on Saturday is instructive. The
lack of a reaction suggests that the main motive of the move, as discussed here before, is to
offset recent capital outflows. Remember China’s foreign exchange reserves fell by US$92.6bn
or 2.8% in the last two months of 2011 (see Figure 6). As a further sign of the lack of liquidity
easing, the latest “social financing” data from the PBOC, which is now issued monthly, shows a
continuing sharp contraction in the rate of overall credit growth. Remember “social financing” is
the PBOC’s data series for measuring credit growth in the so-called “shadow banking system”, a
description which by the way is misleading given that the mainland regulatory authorities are
well aware of it. Thus, social financing in January fell by Rmb800.1bn, or 46%YoY, from January
2011 to Rmb955.9bn
The key issue for Chinese equities remains when incremental easing begins. In his latest
“Sinology” report, CLSA’s China macro strategist Andy Rothman argues that it is likely that the
Communist Party will declare victory in its campaign against rising residential property prices at
the National People’s Congress scheduled to begin on 5 March (see CLSA research Sinology –
China Property: Easing still expected, 20 February 2012). Rothman’s view is that there is now
sufficient evidence of property market weakness to allow the PRC leadership to take this
stance. Thus, the National Bureau of Statistics (NBS) reported on Saturday that new home
prices in 48 of the 70 cities surveyed fell month-on-month in January. While 15 cities saw new
home prices decline year-on-year, up from nine cities in December (see Figure 8). This is also
the first time since the data began in January 2011 that none of the 70 cities reported monthon-
month increases in new home prices. CLSA’s China Reality Research (CRR) also reported
this week that property prices in 120 CRR-tracked residential projects in 40 2nd and 3rd tier
cities declined by 0.4%MoM and 2.5%YoY in January
The commencement of incremental easing on residential property by the middle of this year
also remains GREED & fear’s base case. This is why the overweight on China in the MSCI Asia
Pacific ex-Japan relative-return portfolio is maintained (see Figure 13). Still if such easing is not
forthcoming it will have been wrong to have maintained this overweight. Meanwhile, in what
could be interpreted as a first hint of easing, it is interesting to note that 29% of property sales
managers surveyed told CLSA’s China Reality Research last month that mortgage availability
had improved month-on-month, up from 13% in December and only 6% in November (see
Figure 11). It is also a potentially encouraging signal that Shanghai announced this week that
non-locals living in the city for more than three years would be allowed to buy a second home.
The other point to note about China is that recent developments in the political leadership in
China potentially create a reason for easing to be brought forward. GREED & fear refers to an
article published in the South China Morning Post this week (“The plot thickens” by Shi
Jiangtao, 22 February 2012). Investors should keep a close eye on the Shanghai A-share
market which, from a technical perspective, last week broke above its 100-day moving average
To increase the beta on the China bets in the Asia ex-Japan long-only portfolio, the investment
in China National Building Material will be increased by three percentage points by removing
the investment in Shandong Weigao
The lunacy of political correctness in the Western world becomes ever more extreme with
GREED & fear reading this week that Britain’s “Culture Secretary” is concerning himself with the
important public policy issue of professional footballers being free to “come out”. Still the PC
movement can also have practical commercial consequences. Nowhere has this been more ever
evident than in the “global warming” hysteria and the resulting mushrooming of businesses
dedicated to profiting from the taxpayer-funded subsidies set up to cater to this hysteria.
If “global warming” is one element of environmental hysteria, another related one is Euroland’s
aversion to hydraulic fracturing. This is based on the “global warming”-driven alternative
energy lobby’s justifiable concerns that shale gas offers a profound threat to its existence. On
this point, an excellent article in the European Wall Street Journal this week (“Europe can’t
ignore shale gas” by Alan Riley, 21 February 2012) highlights the long-term risk Europe is
running in turning its back on the energy revolution likely to be ushered in by shale gas. For
example, the article raises the issue of the long-term viability of Europe’s chemicals industry
which uses hydrocarbons as a feedstock and fuel. The other point is that with the US likely to
become, sooner or later, no longer dependent on imported energy, will Washington still be
willing to pay for policing the Persian Gulf.
These may be long-term issues. But they are valid nonetheless. Certainly, any development
that reduces the West’s dependence on the Middle East for energy can only be good news.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bullet dodged
Lugano
The Greek bullet has been dodged for now though the scheduled April elections in Greece
remain an obvious stumbling block. Accordingly, GREED & fear’s base case remains with the
“risk on” trade which means that any pullback in equities should be bought. A potential
moderate disappointment for the markets may be that the LTRO-2 is not quite as large as
previously expected because of the apparent reluctance of the big German and French banks to
be seen taking up the carrot of generous ECB funding. For this reason the amount raised may
be less than the €500bn-1tn previously guesstimated.
Still this will not be enough to end the “risk on” rally since those banks that really need the
funding, or the profits from the carry trade like the Italian and Spanish banks, seem likely to
participate again. Meanwhile, it is a telling sign of improving market conditions that Italian bank
Intesa Sanpaolo was able this week to issue an €1bn unsecured bond with a five-year maturity,
following its successful issuance of €1.5bn in unsecured 18-month bond at the end of January.
Such longer term funding would have been impossible prior to the LTRO.
It also continues to be clear that Flexible Mario would like all the major European banks to take
advantage of the LTRO. Indeed the ECB stance towards the banks is increasingly likely to be
either take funding from the LTRO or raise equity, rather than the other option of pursuing
deleveraging and balance sheet contraction. While, as previously noted here, it is also likely
that the European Banking Authority (EBA) will come under growing pressure to relax its capital
requirements even if nothing specific appears to have been announced yet.
In a further demonstration of Flexible Mario’s extreme flexibility, it is also worth noting that in
its recent relaxation of collateral standards the ECB has allowed national central banks to set
individual collateral rules tailored to meet individual countries’ banking systems’ particular
funding needs. A very informative article on this was published in the European Wall Street
Journal last Tuesday (“ECB allows diversity of collateral rules”, 14 February 2012). Thus, by
way of example, the Bank of France will accept assets denominated in US dollars reflecting
French banks’ large pool of dollar assets.
One consequence of this so-called “balkanisation” of the Eurozone financial system is that all
collateral is not created equal. This is, of course, the exact opposite direction of the current
efforts to move Euroland towards greater fiscal integration. Still Flexible Mario is, clearly, a
believer in “needs must” to the delight for now of owners of risk assets.
Meanwhile, the longer term issue raised by the LTRO is that certain banks may become hooked
on ECB funding. This is presumably why certain major European banks do not want the
perceived stigma of being seen to be dependent on ECB largesse. The issue here is whether
markets will make a distinction between those banks reliant on ECB funding and those which
are not. This appears to be happening. Thus, the differential between the five-year CDS spread
of Deutsche Bank and the average CDS spread of Banco Santander, BBVA, UniCredit and Intesa
Sanpaolo has widened by 33bp to 156bp since bottoming on 7 February prior to the ECB
monetary policy meeting and a European finance ministers’ meeting on 9 February
The fundamental improvement in Europe’s credit markets is also clear from the fact that the
ECB has of late been able to reduce massively its buying of sovereign debt. Thus, the ECB did
not buy any Eurozone government bonds last week for the first time since early August 2011,
after buying a mere €59m in the previous week (see Figure 2). Nowhere is this improvement in
sentiment more evident than in Italy where the 10-year government bond yield is now “only”
5.51%, down from a peak of 7.26% reached in November (see Figure 3).
GREED & fear has been in Italy this week and there is no doubt that sentiment has improved
dramatically. The key reason for this is that the Mario Monti-led technocratic government is
seemingly achieving concrete results. Thus, it has already secured fundamental reform of the
pension system for both the private and public sectors which effectively means that, starting in
2022, people cannot retire until the age of 67. Moreover, the reform was achieved without
major strikes reflecting the popular support for the current government.
The next goal of the Monti government is labour market reform, which would free up
employers’ ability to hire and fire. The deadline for this potential landmark reform is the end of
March and GREED & fear hears that the likelihood is that it will pass. The good news in this
respect is that the next general election is not due to be held until April 2013 while Monti is
being careful to remain neutral of the political parties. A lot of structural reform can be
implemented in a year if popular support is maintained
For this reason GREED & fear is happy to stick with the long Italian 10-year / short French 10-
year trade first recommended here on 5 January (see GREED & fear – Reformulated outlook, 5
January 2012). This has the potential for even greater spread contraction than has already
occurred. Thus, the spread between the 10-year Italian government bond yield and the 10-year
French government bond yield has fallen by 119bp since 5 January to 255bp, and is down
150bp from the peak reached in November (see Figure 3). There are two reasons why. First,
the French are as yet nowhere near embracing the structural reform Italy has begun to do
because the country has, first, to go through a divisive electoral contest on 22 April and 6 May.
Second, Italy is a major part of the global fixed income index. Thus, Italy accounts for 5.5% of
the Bloomberg/EFFAS Global Bond Index. So benchmark orientated investors are being forced
to buy back Italian bonds which they sold last year as the rally’s momentum intensifies.
Meanwhile, none of the above means that Italy will avoid an economic contraction this year.
Italy’s real GDP declined by 0.7%QoQ and 0.5%YoY in 4Q11 (see Figure 4), while the
consensus forecasts a 1.3% contraction this year. In this sense, the process of structural
reform impacting the real economy will take time. That is why the key prerequisite is
continuing popular support conferring legitimacy on the Monti government. Meanwhile, a clue
to the LTRO’s success, or lack of it, in helping the real economy rather than the banks’ funding
needs will only come with the next release of the ECB’s quarterly survey of credit conditions.
This is not due until 25 April. The other critical area to watch is deposit flows. Remember that
in December the Eurozone saw deposit outflows. Thus, Eurozone household deposits included in
M3 fell by €29.4bn month-on-month in December on a seasonally adjusted basis, the biggest
monthly decline since the data series began in 2003. While deposits placed by non-financial
corporations also declined by €12.5bn month-on-month in December and are down 1.0%YoY
(see Figure 5). The next data on this critical area is due on 27 February.
Returning to Asia, the failure of the Shanghai A-share market to generate more excitement
from the latest 50bp cut in the reserve requirement ratio (RRR) on Saturday is instructive. The
lack of a reaction suggests that the main motive of the move, as discussed here before, is to
offset recent capital outflows. Remember China’s foreign exchange reserves fell by US$92.6bn
or 2.8% in the last two months of 2011 (see Figure 6). As a further sign of the lack of liquidity
easing, the latest “social financing” data from the PBOC, which is now issued monthly, shows a
continuing sharp contraction in the rate of overall credit growth. Remember “social financing” is
the PBOC’s data series for measuring credit growth in the so-called “shadow banking system”, a
description which by the way is misleading given that the mainland regulatory authorities are
well aware of it. Thus, social financing in January fell by Rmb800.1bn, or 46%YoY, from January
2011 to Rmb955.9bn
The key issue for Chinese equities remains when incremental easing begins. In his latest
“Sinology” report, CLSA’s China macro strategist Andy Rothman argues that it is likely that the
Communist Party will declare victory in its campaign against rising residential property prices at
the National People’s Congress scheduled to begin on 5 March (see CLSA research Sinology –
China Property: Easing still expected, 20 February 2012). Rothman’s view is that there is now
sufficient evidence of property market weakness to allow the PRC leadership to take this
stance. Thus, the National Bureau of Statistics (NBS) reported on Saturday that new home
prices in 48 of the 70 cities surveyed fell month-on-month in January. While 15 cities saw new
home prices decline year-on-year, up from nine cities in December (see Figure 8). This is also
the first time since the data began in January 2011 that none of the 70 cities reported monthon-
month increases in new home prices. CLSA’s China Reality Research (CRR) also reported
this week that property prices in 120 CRR-tracked residential projects in 40 2nd and 3rd tier
cities declined by 0.4%MoM and 2.5%YoY in January
The commencement of incremental easing on residential property by the middle of this year
also remains GREED & fear’s base case. This is why the overweight on China in the MSCI Asia
Pacific ex-Japan relative-return portfolio is maintained (see Figure 13). Still if such easing is not
forthcoming it will have been wrong to have maintained this overweight. Meanwhile, in what
could be interpreted as a first hint of easing, it is interesting to note that 29% of property sales
managers surveyed told CLSA’s China Reality Research last month that mortgage availability
had improved month-on-month, up from 13% in December and only 6% in November (see
Figure 11). It is also a potentially encouraging signal that Shanghai announced this week that
non-locals living in the city for more than three years would be allowed to buy a second home.
The other point to note about China is that recent developments in the political leadership in
China potentially create a reason for easing to be brought forward. GREED & fear refers to an
article published in the South China Morning Post this week (“The plot thickens” by Shi
Jiangtao, 22 February 2012). Investors should keep a close eye on the Shanghai A-share
market which, from a technical perspective, last week broke above its 100-day moving average
To increase the beta on the China bets in the Asia ex-Japan long-only portfolio, the investment
in China National Building Material will be increased by three percentage points by removing
the investment in Shandong Weigao
The lunacy of political correctness in the Western world becomes ever more extreme with
GREED & fear reading this week that Britain’s “Culture Secretary” is concerning himself with the
important public policy issue of professional footballers being free to “come out”. Still the PC
movement can also have practical commercial consequences. Nowhere has this been more ever
evident than in the “global warming” hysteria and the resulting mushrooming of businesses
dedicated to profiting from the taxpayer-funded subsidies set up to cater to this hysteria.
If “global warming” is one element of environmental hysteria, another related one is Euroland’s
aversion to hydraulic fracturing. This is based on the “global warming”-driven alternative
energy lobby’s justifiable concerns that shale gas offers a profound threat to its existence. On
this point, an excellent article in the European Wall Street Journal this week (“Europe can’t
ignore shale gas” by Alan Riley, 21 February 2012) highlights the long-term risk Europe is
running in turning its back on the energy revolution likely to be ushered in by shale gas. For
example, the article raises the issue of the long-term viability of Europe’s chemicals industry
which uses hydrocarbons as a feedstock and fuel. The other point is that with the US likely to
become, sooner or later, no longer dependent on imported energy, will Washington still be
willing to pay for policing the Persian Gulf.
These may be long-term issues. But they are valid nonetheless. Certainly, any development
that reduces the West’s dependence on the Middle East for energy can only be good news.
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