Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. The stuff online, on twitter, on the box, that I saw on Friday, ranged from this is very good, "the Europeans had gone a long way to solving their integration issues", all the way through to the usual "this solves nothing". Question, is Greece still in the Euro zone? The answer is yes. The decision by the Europeans to not lend the money to Spain, but rather directly to Spanish banks sent the borrowing costs of Spain and Italy markedly lower on the day, but had the opposite effect for Germany, their borrowing costs climbed, but admittedly we are not really that far off record low levels for the German Bund. So, I am guessing that it is fair to say that bond investors in Europe were either scrambling to cover their tracks, or genuinely believe that the Europeans were closer to a banking union, which is the first full step towards fiscal integration. I think that it is important that the Europeans have a central banking authority. If not Euro Bonds immediately, because the statistics (and Angela Merkel's not in my lifetime comment) leads me to believe that we should see these late 2036. By which time most of us will have forgotten this crisis. But I am pretty sure that we might be able to recall the wonderful football of Euro 2012, poor Italy last evening, but Spain were just too majestic. Now time for the tour de France.
Friday we had stocks rocking, resource stocks benefited from a lift off in commodity prices, the copper price, the oil price, the precious metal prices all steamed ahead in a rally alongside the equity market, and alongside falling sovereign yields for the peripheral bonds. At the end of the session resource stocks had rallied a whopping 2.54 percent, it could have been more if it were not for a surge in the Rand to almost all the major currencies. It was a clear sign of risk back on again. The Jozi all share index closed at 33708, up 455 points on the day, or a gain of 1.37 percent. Gold stocks slipped, but that probably was the currency, the Rand which had been trading at 8.40 plus the US Dollar earlier in the week, traded at the best level in weeks, down to 8.19 to the US Dollar. Mr. Risk-on was shooing Mr. Risk-off away from Mr. Markets house. There were a couple of downgrades, from the day prior where ABSA and FirstRand were both given the 'unlike' button, with a ratings change from buy to hold. Not that I care too much about 12 month target prices and estimates, because our time frames are a lot longer than that, but they matter.
When a scandal rocks, you expect someone to take the fall, not so? Accountability is very important in the way the world works, saying sorry is a hard but necessary part of life. In South Africa I get the sense that we are not good at this. The story that I am referring to is the Barclays Chairman having resigned overnight. He said sorry. And then he went his own way. No wait! He is staying until the company finds a replacement.
Is it a good thing that Marcus Agius took the fall? I reckon yes. According to the Barclays CORPORATE GOVERNANCE document that I dredged up: "The Chairman's main responsibility is to lead and manage the work of the Board to ensure that it operates effectively and fully discharges its legal and regulatory responsibilities. The Chairman will lead the Board to ensure its effectiveness in all aspects of its role, including setting its agenda to ensure that adequate time is available for substantive discussion on strategy, performance and key value issues."
Accountability is key for shareholders, lawmakers, employees and Joe public alike. So whilst I think that this is a step in the right direction, I am not too sure what it means about the culture of the bank itself and the perception by politicians at large. Only bad things for the bank. In CEO Bob Diamond's letter to a Member of Parliament Andrew Tyrie (who is also the Chairman of the Treasury Select committee) he makes it clear that this sort of behaviour is out of line: "The first issue is that Barclays traders attempted to influence the bank's submissions in order to try to benefit their own desks' trading position. This is, of course, wholly inappropriate behaviour. Barclays submissions should reflect the cost of interbank borrowing rather than individual traders' positions."
And then Diamond says something even more interesting, that will leave you saying a multitude of things, these days expressed through short hand in text messages and social media: "It is also important to note that these traders had no way of knowing whether or not their actions would ultimately benefit or detriment Barclays overall. They were operating purely for their own benefit. This inappropriate conduct was limited to a small number of people relative to the size of Barclays trading operations, and the authorities found no evidence that anyone more senior than the immediate desk supervisors was aware of the requests by traders, at the time that they were made. Nonetheless, it is clear that the control systems in place at the time were not strong enough and should have been much better."
Undoubtedly the way that Libor functions now is kind of silly, as John Cleese in a Monty Python act might say. It is rather silly. How can the banks send their rates to Thomson Reuters, who then aggregate and slice and dice and then come to a number. Surely the process itself, of which hundreds of trillions of Dollars globally depend on a rate, should be refined. The WSJ (in an article titled Barclays's Agius Is Stepping Down) puts the silliness into perspective, or perhaps it is just me: "Libor - or the London interbank offered rate benchmark - is supposed to measure the interest rates at which banks borrow from each other. It is based on data reported daily by a 16-bank panel."
And then the reason why I think it is silly appears in the next part of the explanation of how Libor is set: "By 11:10 a.m. London time, the banks on the Libor panels submit to Thomson Reuters, as an agent for the British Bankers' Association, their estimated borrowing rates. Thomson Reuters discards the highest and lowest submissions. The remaining 50% of the submitted quotes are averaged to work out the Libor rate. By about 11:30 a.m. London time, Libor rates are published."
Discards the high and the low rate? And then averages? What is the point, if the importance is for tens of trillions in swaps, securities and loans depend on a few reported bank rates and then the aggregating by Thomson Reuters, is the only benchmark. That has to change. And no doubt will. Expect Bob Diamond to appear in front of the politicians.
Byron's beats covers a pretty poor trading update from Angloplats and shifting PMI.
- This morning we had a very disappointing trading update from Anglo Platinum. This industry cannot catch a break with the biggest global producer announcing a more than 20% decrease in earnings compared to the 6 month period ending June 2011. The stock is down 2.7% while the whole index is down 1.7%.
"Anglo American Platinum's earnings for the period is expected to decrease by more than 20% from that reported in the six month period ended 30 June 2011. However, in view of volatility in exchange rates and metal prices, Anglo American Platinum cannot, with reasonable certainty, quantify the extent of the decrease in expected earnings other than that the decrease is expected to be more than 20%. The expected decrease in earnings is primarily as a result of lower sales volumes and lower metal prices achieved compared to the comparative period."
So not much info given but I can tell you now that reasons include lower production due to labour issues, increasing costs due to electricity tariff and wage increases. The Platinum price, as we spoke about a while ago is not actually that cheap when you compare it to oil. I wouldn't say that is an excuse for a 20% decrease in earnings. Last year the company made 1236c per share for the period. Assuming best case scenario, earnings are down only 20%, the company will make 988c. At R468 the company looks pricey for an industry that is struggling. I can't say in decline because I do feel the platinum price will pick up. We will await the full release on the 23 July for all the explanation.
In other news we had a whole lot of PMI numbers released today which paints an interesting picture. For the record PMI measures activity in the Manufacturing sector. Any number above 50 shows expansion. Any number below 50 shows a contraction. As expected the average for the Eurozone was not good, 45.1. But, there is light at the end of this tunnel. Ireland which was one of the first countries to be bailed out and have had a torrid time showed their best improvement in manufacturing for the last 12 months. The read came in at 53.1. The Irish are still being funded by bailout money but the yields on their bonds have decreased exceptionally. If they can do it, so can the rest.
Elsewhere India showed their best month on month increase since August 2011 with a healthy looking read of 55 while locally we had a negative read of 48.2. China also came in with a read of 48.2 as their economy shifts to one of higher wages and stronger consumers. I am not trying to sugar coat this read. It is not good that Chinese exports are decreasing. Lower demand from Europe is taking its toll on both our economy and the Chinese. No one said it would be easy.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Lift off. Stocks surged through the session, closing at the highs, with the nerds of NASDAQ rising a whole three percent on the optimism that the Europeans had finally done something concrete, or moved in the right direction. Forward is a good direction to move. The broader market S&P 500 added two and a half percent to 1362, whilst the Dow Jones added a more modest (relatively speaking) 277 points or 2.2 percent to close at 12880. This was the single biggest rally and day for markets since last October, so I guess it is worth a serious mention then.
The rally was pretty broad based and across all sectors, energy, materials conglomerates all clocking huge gains, only one stock went backwards in the Dow Jones Industrial Average (out of 30), and that was JP Morgan. The size and scale of their hedge gone bad is just being predicted at this point. The London Whale finds his position at a parish called Kemble, the source of the Thames River. I beg your pardon, the River Thames is the correct way to name the river. If you are interested the FT has a whole lot of articles on how and why the London Whale trades have not yet all been unwound, meaning what, I am not too sure. So, JP Morgan still have serious problems on their hands.
Currencies and commodities corner. Dr. Copper was last at 346 US cents per pound, the gold price is slightly lower at 1592 Dollars per fine ounce. The platinum price is also slightly lower at 1434 Dollars per fine ounce. The oil price is also lower at 83.66 Dollars per barrel, but had a huge rally late last week from prices that we have not seen for the last 18 months. The Rand is firmer at 8.17 to the US Dollar, 12.79 to the Pound Sterling and 10.37 to the Euro. We are firmer here today, just a little bit, after having been lower initially.
Currencies and commodities corner. Dr. Copper was last at 346 US cents per pound, the gold price is slightly lower at 1592 Dollars per fine ounce. The platinum price is also slightly lower at 1434 Dollars per fine ounce. The oil price is also lower at 83.66 Dollars per barrel, but had a huge rally late last week from prices that we have not seen for the last 18 months. The Rand is firmer at 8.17 to the US Dollar, 12.79 to the Pound Sterling and 10.37 to the Euro. We are firmer here today, just a little bit, after having been lower initially.
Sasha Naryshkine and Byron Lotter
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