Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. It was a big weekend for data and for Spain, and as such I was reading on my twitter feed that some people were sitting this one out. What? Yes, I heard that a lot, and sure it might have worked for some, but we can see today that it was the wrong thing to do. Resources sold off heavily, eerily the Jozi all share closed at 33666, off around 0.7 percent on the day. Locally there was a strange interpretation of a Reserve Bank speech from Thursday evening, which you can read (if you want) here -> Monetary Policy and Inflationary Challenges in the Face of the Global Economic Crisis. The suggestion is that if pushed, the Reserve Bank will act.
It was expected I guess. The news Friday that kept coming was that Spain was going to engage the rest of the union and ask them for funding for their banking sector. Someone said something interesting on the weekend, I think it was the FT which pointed out that the three countries which have taken funds from the European Union, Ireland, Portugal and Greece collectively are half the size of the Spanish economy. So, Spain are in the category of too big to fail, most definitely. Mariano Rajoy, who when campaigning that they, Spain, would not be taking any money. Read my lips, no bailouts. So, how did this go down politically? Victory of course, announced Rajoy, because this proves that Spain's finances are in order and their banks just need the money. Politicians, I swear to you, victory at all corners. It doesn't matter Mariano, it is like saying that Torres should have scored and Spain should have won three – one. Yes, Balotelli should have buried one too, but was pretty Harry casual.
OK, into the nitty gritty, Spain has "asked" for 100 billion Euros to recapitalise their banking system, more than the fellows at Fitch suggested. So how is it going to work? Well, there is that fund that the Spanish have setup already, called Frob. Sorry, Fund for Orderly Bank Restructuring, or just Frob as before. What the Frob is that about? OK, that is and was rude, let me not get involved in that. The Frob, as Felix Salmon explains in this article over the weekend, is the Spanish version of the US TARP, if one wants to look at it in the crudest sense, the TARP is the Troubled Asset Relief Program, check it out if you need a refresher. Felix asks the question, surely the Europeans could have lent the money directly to the Spanish banks? But again, this is about sovereignty and with that a certain amount of dignity for the citizens. Begging (?) bowls and dignity, how does that work?
So, simply, Spanish banks will be recapitalised via the Frob by the Spanish authorities, who are in turn borrowing the money from the European Union. You can read the very brief announcement: Eurogroup statement on Spain. That one line is supposed to calm the markets: "The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The Eurogroup is confident that Spain will honour its commitments under the excessive deficit procedure and with regard to structural reforms, with a view to correcting macroeconomic imbalances in the framework of the European semester. Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance."
The real questions to be asking are, what are the terms and conditions of the line of credit? Fabrizio Goria, an Italian financial journalist, who you can follow on Twitter, has had the following to say:
"EU spokesman says interest rate of 3-4% is reasonable in regards to the loan to Spain from the EU"
"EU spokesman says EU loan shouldn’t affect Spanish deficit"
"EU spokesman says EU loan to have strict conditions on Spanish bank overhaul"
"EU spokesman says EU loan to Spain may not reach EUR 100bln, average loan rate depends on the market conditions"
OK, thanks Fabulous Fabrizio, for letting us know what we can expect. I am thinking that the next steps will be for the Spanish banks to let the Frob know of how much money they think they need to be OK. At the same time, another independent audit, stress tests of the local banks. Just to see how bad the books actually are. In other words, how much money the Spanish banks will actually need in order to meet capital requirements. But this is a really good graph, via Fab again (I follow him on Twitter, he MUST be my friend), which shows one how good and or otherwise the capital market structures are inside of the European economies. Because you would imagine that German pension funds would own mostly German debt. But this graphic shows how loads of people are keen to own German and French debt, but it seems that locals don't want to own their own debt in the smaller markets. There is little appetite for local Fins to own Finnish debt, or so it seems. Ditto Greece and Austria. Portugal and Ireland too. Check it out and see if you can understand it.
See. Austrians are more likely to own German debt it seems. So much for that school of Economics. That is meant to make you laugh. I suspect what the Europeans want to do here, and Felix Salmon deals with it in his conclusion, the Spanish must decide how they deal with the fund flow, maintaining some sort of control, even though in theory this is a defeat. A Spailout. And remind me, Rafa did not completely take it away from Novak (first names basis, you know, like people pretend to know actors) yesterday. And the rain is expected to keep them away again today.
So, what do we think here? Well, Europe in their slow and bureaucratic manner are dealing with each problem, one at a time. Spains borrowing costs would be reduced. And as you can imagine, the next time that any Spanish property developer asks for money to build 250 units on the Galician or Andalucian coastline the answer from banks is going to be a resounding no in a double negative way, as one does in Spanish. Spanglish. Oh, and whilst we speak, there is a little detail, collateral is wanted by some of the smaller Northern European economies. The anchors of the CNBC program in London said that perhaps Rafa could be used, handed over to the Netherlands or the like.
Byron's beats deals with the other big issue this weekend, the one that everyone was "scared" of, the Dragon of the East.
- We had lots of Chinese data this weekend so let's jump straight into it. Firstly we had industrial production which came in slightly below consensus. Consensus was for a 9.8% increase and the actual number was 9.6%. This is a very important number because industrial production represents 40% of Chinese GDP. It is also a number which has been slowing because of higher wages and of course slower demand from Europe. 9.6% still sounds strong to me but I feel production will become less significant over time which is good for long term sustainability.
Consumer prices (CPI) fell by more than expected which is a good thing. This gives policymakers more room for stimulus like we saw on Friday. Inflation is a threat to the Chinese economy so numbers like this are very good news. The recent fall in commodity prices should help maintain this control.
Retail sales also missed consensus. This is not good because this is where the next phase of China's growth is going to come from. Consensus called for 14.2% growth while the actual number came in at 13.8%. Growth is never linear. There are so many moving parts and there will be pull backs in the economy. This is what we feel has just happened. A slump in economic activity. We see it time and time again. We expect data to start improving again and all the naysayers will start quieting down. They have been very loud lately. Even so 13.8% is a strong number.
Fixed Asset Investment managed to beat with a 19.9% increase compared to May last year. Here is the breakdown of the data thanks to The BusinessInsider. Property FAI growth rebounded to 18.0 percent in May, from 9.2 percent in April. Railway investment growth was -35.2 percent, compared with -46.9 percent the previous month. Manufacturing FAI jumped to 28.2 percent in May, from 22.7 percent the previous month. The leading indicators of FAI growth, total planned investment in newly started projects jumped to 28.2 percent, from 191.9 percent in April. "The pickup of FAI growth in May suggests that the govt was ramping up infrastructure and social housing investment to bolster the economy on the weak economic data in April."
So overall a mixed bag but following Fridays rate cut and proof of fiscal stimulus from this Data you would have to say that the Chinese economy, with a little help, will remain healthy
Currencies and commodities corner. Dr. Copper is last at 336 US cents per pound, the platinum price is slightly higher at 1443 Dollars per fine ounce. The gold price is last at 1591 Dollars per fine ounce. The oil price is better at 85.05 Dollars per barrel. The Rand is a little here and there, 8.32 to the US Dollar, 12.94 to the Pound Sterling and 10.46 to the Euro. We are better here today, but off the best levels so far.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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