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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Contagion is no longer a risk….
The story overnight is very simple – market participants continue to lose faith in European policymakers
to resolve an escalating sovereign debt crisis.
Italian 10-year bond yields surged overnight to close at 7.25% (they had been as high as 7.46%), more
than 100bps higher than just a week ago and now 553bps over the bund. The whole curve is now trading
above 7%. This level makes Italy’s debt burden unsustainable, especially given also the impact on an
already ailing economy. Yields surged despite signs that Italy will pass its Financial Stability law by
Sunday. Investors remained bothered by uncertainty about the composition of the next Italian government
(Berlusconi has continued his push for new elections, which as we continue to note would be a bad
outcome). Also unhelpful was LCH Clearnet’s announcement that from the close today it was raising the
initial margin call applied to Italian debt by between 3.5pp and 5pp across all maturities (initial margin for
7Y to 10Y maturities raised to 11.65%). Meanwhile, Greece appears no closer to picking a new PM, with
talks reported to have collapsed Wednesday after an earlier deal fell apart. A new meeting will take place
today to try to hammer out a new deal. We note that these events are impacting a wider range of
countries. For example, French 10-year bond yields now yield 148bps more than the equivalent bund,
about double what it was just a month ago. We shall be keeping a close eye on this spread. Whilst the
Stoxx600 closed down 1.8%, as I write the S&P500 is down 3.6%. A report in Handelsbatt suggesting
that Angela Merkel’s party is seeking to make a possible for countries to exit the euro but retain EU
membership helped spur losses in New York.
Yesterday China’s CPI inflation rate met market expectations, with a 0.1% mom increase in prices
driving the annual rate down to 5.5%. Our Chief Economist for China, June Ma, believes that the trend of
disinflation is well established (we note that PPI inflation fell to 5.0% yoy from 6.5% yoy in September).
Indeed he thinks that CPI inflation will fall much faster than market consensus. He now forecasts that
annual CPI inflation will decline to 3.8% in December, which is 0.9pts below consensus, and to 3% yoy in
Q2 next year. Despite this, on the assumption that the economic “landing” this time is much softer than
that in 2008 (he expects GDP growth to hit a trough at slightly below 7% saar in Q1 next year) he now
expects “no major reversal” of macro policy. Rather, he sees a range of possible marginal policy changes,
including: some increase in monthly lending in November and December while keeping the annual loan
target within RMB7.5tr, 1-2 RRR cuts early next year, a modest increase in quota for bond issuances by
local governments, resumption of some railway projects, and some modest tax cuts.
Looking at the day ahead, the focus will obviously remain on European policymakers, who need to
demonstrate that they are capable of getting ahead of the crisis. Inevitably this needs to be led by
Germany. As far as data is concerned, Italy’s September IP report seems unlikely to help sentiment. The
BoE’s policy meeting is likely to do more than confirm the policy decision made last month. In the US the
focus will be on the weekly jobless claims report to see whether last week’s sub 400k reading can be
maintained and on the September trade balance to see how US exports are weathering the global
slowdown. In Asia Japan’s machine orders report and China’s trade balance are due. In Australia the
October labour force report will help condition expectations for the next RBA Board meeting whilst both
business and consumer sentiment surveys are due in New Zealand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Contagion is no longer a risk….
The story overnight is very simple – market participants continue to lose faith in European policymakers
to resolve an escalating sovereign debt crisis.
Italian 10-year bond yields surged overnight to close at 7.25% (they had been as high as 7.46%), more
than 100bps higher than just a week ago and now 553bps over the bund. The whole curve is now trading
above 7%. This level makes Italy’s debt burden unsustainable, especially given also the impact on an
already ailing economy. Yields surged despite signs that Italy will pass its Financial Stability law by
Sunday. Investors remained bothered by uncertainty about the composition of the next Italian government
(Berlusconi has continued his push for new elections, which as we continue to note would be a bad
outcome). Also unhelpful was LCH Clearnet’s announcement that from the close today it was raising the
initial margin call applied to Italian debt by between 3.5pp and 5pp across all maturities (initial margin for
7Y to 10Y maturities raised to 11.65%). Meanwhile, Greece appears no closer to picking a new PM, with
talks reported to have collapsed Wednesday after an earlier deal fell apart. A new meeting will take place
today to try to hammer out a new deal. We note that these events are impacting a wider range of
countries. For example, French 10-year bond yields now yield 148bps more than the equivalent bund,
about double what it was just a month ago. We shall be keeping a close eye on this spread. Whilst the
Stoxx600 closed down 1.8%, as I write the S&P500 is down 3.6%. A report in Handelsbatt suggesting
that Angela Merkel’s party is seeking to make a possible for countries to exit the euro but retain EU
membership helped spur losses in New York.
Yesterday China’s CPI inflation rate met market expectations, with a 0.1% mom increase in prices
driving the annual rate down to 5.5%. Our Chief Economist for China, June Ma, believes that the trend of
disinflation is well established (we note that PPI inflation fell to 5.0% yoy from 6.5% yoy in September).
Indeed he thinks that CPI inflation will fall much faster than market consensus. He now forecasts that
annual CPI inflation will decline to 3.8% in December, which is 0.9pts below consensus, and to 3% yoy in
Q2 next year. Despite this, on the assumption that the economic “landing” this time is much softer than
that in 2008 (he expects GDP growth to hit a trough at slightly below 7% saar in Q1 next year) he now
expects “no major reversal” of macro policy. Rather, he sees a range of possible marginal policy changes,
including: some increase in monthly lending in November and December while keeping the annual loan
target within RMB7.5tr, 1-2 RRR cuts early next year, a modest increase in quota for bond issuances by
local governments, resumption of some railway projects, and some modest tax cuts.
Looking at the day ahead, the focus will obviously remain on European policymakers, who need to
demonstrate that they are capable of getting ahead of the crisis. Inevitably this needs to be led by
Germany. As far as data is concerned, Italy’s September IP report seems unlikely to help sentiment. The
BoE’s policy meeting is likely to do more than confirm the policy decision made last month. In the US the
focus will be on the weekly jobless claims report to see whether last week’s sub 400k reading can be
maintained and on the September trade balance to see how US exports are weathering the global
slowdown. In Asia Japan’s machine orders report and China’s trade balance are due. In Australia the
October labour force report will help condition expectations for the next RBA Board meeting whilst both
business and consumer sentiment surveys are due in New Zealand.
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