Fixing A Hole

- "Near-term leads to economic activity point to growth slowing from the near 3% pace of the first half. Forward looking indicators with a longer perspective such as credit conditions and corporate profitability do not suggest recovery is threatened. Nonetheless, the tailspin in financial markets has not been contained and signals that policymakers are prepared to reenergize stabilization efforts are mixed."
- "Plunging Treasury bond yields are a reminder that despite an extraordinary array of stabilization measures, including unprecedented monetary accommodation efforts, policy still has not completely overcome the threat of a deflationary downturn. If fiscal authorities were willing to tackle long-run programmatic imbalances in the budget, there would be more than ample scope for near-term measures to support recovery."
- "Despite another set of disappointing employment headlines, improvements in the labor market were on track heading into the latest financial market swoon. The decline in unemployment is especially encouraging as the private job component of the household survey is rising at twice the rate of its payroll counterpart."
Citigroup Comments on Credit 20100702

Banking Cycles: Upside and Downside Risks

- Room to leverage "We study how Asian banks are positioned in their respective banking cycles, by examining the range of loan growth, credit costs, ROEs and P/B multiples over the past decade. Given healthy balance sheets and economies, we generally see room for loan growth (mid/lower-end of cycle), ROEs (generally mid-cycle) and P/B valuations (mid/lower-end of cycle) to increase/re-rate through the cycle. Credit costs are generally at the lower end of the cycle."
- China (O/W unchanged): Widest ROE vs. P/B divergence "Chinese banks' ROEs are at the cycle peak but valuations are close to -1 SD; concerns over “peaked- ROEs” seem to be in the price. During 3Q, we expect positive catalysts: clarity on UDIV exposures; significant reduction in the capital raising overhang; a rate hike that is likely to be NIM positive. Book values understated by some 9% given the high levels of surplus provisions (highest in region). Top Buys: ICBC, CCB, MSB."
- Overweight Singapore, Thai banks "We expect stellar 2Q GDP growth of over 10% to be a catalyst for Singapore banks (O/W from Neutral). We remain positive on Thai banks (O/W unchanged) as the economic/banking sector impact from the political clashes is temporary/small and valuations look attractive. Top Buys UOB, OCBC, BBL, SCB."
- India (Neutral from U/W): Room to grow but not cheap "Indian banks are at the
lower end of the range on loan growth and ROEs, suggesting room for expansion. But this is somewhat priced in given cycle-high valuations. Supporting our upgraded view are improving macro environment, low credit multiplier, credit penetration and banking market cap/GDP. Buy SBI; watch ICICI, Axis."
- Indonesia (U/W from Neutral): Near peak valuations "Room for loan growth and
ROEs to expand, credit cost to decline, but valuations are close to historical peaks. We think most of the positives are in the price. Earnings expectations are high, and we see downside risks. Top Sells BBCA, BDMN, BBNI; Buy BMRI."
- HK banks (U/W from O/W) face earnings risks "Inexpensive valuations but we see
earnings downgrade risk for big domestic banks (we are 7-8% below consensus for BOCHK/HSB) on weak NIMs and fee income. We see only minor benefits from strong loan growth. We prefer Chinese banks (better growth) and Singapore banks (more resilient NIMs) over HK banks. Top Sell HSB; top Buys ICBC Asia, WHB."
- Taiwan (U/W unchanged): Cautious on insurers "Mark-to-market losses on the
investment book are likely to result in earnings disappointments for insurers. We relatively prefer private banks, with ECFA bringing cross-strait back in focus. Top Sells Cathay, Shinkong, Fubon; Buy Chinatrust, Taishin, Yuanta."
Citigroup Asian Banks Strategist 20100702

Sector strategy: What would make us BUY the miners?m

- Cautious on metals and mining stocks but value emerging "A few weeks ago we downgraded many of the more leveraged metals and mining names. We also did a broad brush downgrade on European steel. To be clear, it does look as though value is starting to emerge in some metals and mining shares. Larger cap names are trading on around 0.7-0.9x DCF. In this note we outline what we would like to see before becoming more positive in the sector. Key datapoints: 1) Newflow from China less negative 2) Lead indicators hit inflection point 3) Commodity prices find support “level” 4) Positive newsflow from Europe on credit and banking system. Our preference is for the precious metals names – we are buyers of Centamin, Hochschild & Petropavlovsk."
- Our key concerns are macro in nature "Our key concerns are macro in nature: 1) Slowing in China driven mainly by policies designed to cool the property market 2) Anaemic recovery in the US (see our recent cuts to US GDP estimates) and 3) Fallout from the European debt crisis leading to fiscal tightening and causing slower growth in Europe."
- China is key, Chinese property policy is key "China’s government has become quite vocal of late on its concerns on speculation in the property market. Feedback from Chinese property team of late
has been cautious with a view that there is still further risk both in terms of downside to prices and more punitive policy. A property tax hasn’t been ruled out and could be a “nuclear bomb” for the sector. China consumes circa. 50% of the world’s steel with some 60% of that steel used in construction & infrastructure."
- Lead indicators turned down, looking for inflection point "Global lead indicators have peaked and are falling. We look for a 2nd derivative inflection i.e. indicators hinting that they might be close to bottoming in key global indicators such as Chinese PMI, US ISM & the OECD lead indicator."
- Commodity prices: Copper $5500-6600, iron ore $110 "We see further near term downside to commodity bellwethers and look for a “floor”. For iron ore, we think $110/t (CIF) would see material production cuts from local, Chinese producers which would provide price support. For copper, we have recently seen Chinese buyers step in when copper goes below $6000/t."
- Europe (& US): Some positive newsflow would be helpful "Last but certainly not least, some positive newsflow from Europe regarding credit and the banking system. The stress test to be announced in July could be a key catalyst as could some definitive newsflow, one way or another, on Spain."
Merrill Lynch European Metals Mining 20100706

Contagion, Exposure and the Policy Response

- Bottom line: "Developments in the periphery can affect the rest of the euro area through various channels, ranging from the bond market to exports, confidence and bank lending. Contagion risks can be considerable in some cases, especially when countries the size of
Spain and beyond enter the picture. We look at the theme of contagion from four different angles:"
1. Exposure to the peripheral bond markets – who owns what? "Euro area banks’ exposure to the EMU periphery could amount to about €140 billion. Germany’s banking sector seems most exposed to Spain, France’s to Greece and Spain’s to Portugal."
2. Exports to the EMU periphery – is there a material risk? "No, not really. But German and, to a lesser degree, Italian exports are likely to be less affected by poor
economic prospects at the periphery than France’s and Spain’s, given their geographical specialisation."
3. How about the ‘confidence factor’? "The mood in core EMU is more upbeat than in the periphery, where it has not yet reached its long-term average. Negative feedback effects, admittedly unquantifiable, are more likely in the latter group of countries than in the former."
4. What’s the impact of an impaired bank lending channel? "Potentially large, we think. The chances are that the robust credit expansion witnessed over the past decade will not be there to support the euro area economy as and when growth strengthens."
- The policy response: "Providing additional liquidity can only buy time. Given the size of the fiscal and banking sector problems, a quick solution is unlikely. But we think that the recapitalisation of the banking system, along with further fiscal restraint and structural reforms in many EMU peripheral and also some core countries, might help to address the underlying issues."
Morgan Stanley Euroland Economics 20100702

Commercial real estate loans facing refinancing risks

- Strong corrections in commercial real estate markets worldwide. "It was the sharp corrections in housing markets that triggered the financial and economic crisis. The vacancy rates of commercial real estate also rose, with rents declining markedly. At the same time, initial yields climbed strongly in some cases. In many locations, the trough has been passed in the last six months."
- Loan defaults up sharply in the US. "Since 2006, the default rate on commercial real estate loans has risen from about 1% to roughly 9%. Default rates on commercial mortgage-backed securities (CMBS) have increased from 1% in 2008 to currently around 7% (in the US)."
- Securitisation market with special risks. "The CMBS market is a particular cause for concern, not only because there are major uncertainties about the size of the total market and maturity structures, but also because the atomistic investor structure makes a restructuring of debt via maturity extension much more difficult."
- Risks concentrated on few countries. "The strongest repercussions for the economy and financial services providers are likely to be seen in Ireland and Spain and, to a somewhat lesser extent, in the US and the UK. Germany has a worryingly large share of debt-financed, low-quality real estate with high loan-to-value (LTV) ratios."
- Major impact on overall economy, but less than during the housing market crisis. "First, the residential real estate markets are larger than the commercial real estate markets; second, primarily high-quality commercial real estate was securitised; and third, governments have taken precautions in the meantime to be able to handle further tensions."
- Adjustment strategies: There is no “ideal” path. "The objective is to reduce the share of debt capital in the real estate market, e.g. via stock market-listed equity vehicles. The revival of the securitisation market would be desirable but requires confidence-building measures."
DeutscheBank International Topics 20100706

Liquidity: abundant but with shorter maturity

- FI Strategizer: "Next week, the data calendar will be very light both in the eurozone and in the US, with the ECB and BoE meetings as the main events. As recent data have shown a slowdown in economic momentum, and there will be no economic releases to challenge this picture, demand for FI assets should remain healthy."
- EU Portfolio Strategy: "Strong or lasting directional trading at the long end of the EGB curve is unlikely next week given the quiet data calendar. We keep duration long."
- ECB: "Next week, the ECB meeting should bring little change in terms of the economic and inflation outlook. The ECB will also disclose the details of the graduated scale of haircuts that will apply to securities other than ABS and government bonds rated in the BBB+ to BBB- range. The new haircuts will be effective from January 2011."
- Inflation: "June flash CPI eased to 1.4% yoy from 1.6%, matching our forecast. The slowdown was probably driven by a base effect on energy. Core inflation was likely steady at 0.8% yoy; while food inflation should have recorded the first non-negative yoy reading in a year."
- MM: "Bids at this week's ECB refinancing operations showed that the liquidity picture is somewhat better than expected. Of the EUR 442bn expiring, only EUR 245bn were rolled over. While the amount is in line with expectations, the split between 3M and 6D was very surprising."
- Supply Corner: "Next week, supply should be quite subdued in the EMU, with just Austria and Germany holding auctions. Supply will then be limited, coming from core and easy to absorb, especially as there are about EUR 20bn of redemptions (coming from France)."
- FX Strategizer: "Fears of a new global growth crisis and the EMU woes are the two pillars behind the return of risk aversion. JPY and CHF will act again as a safe-haven to the detriment of the other FX majors."
- EUR: "EUR-USD has benefited from fears of more sluggish US growth, as also emerged from the labor market report. Yet, we would not ride a rally much above the mid-May high at 1.2675, as EMU woes persist."
- JPY: "Due to prevailing risk aversion, we now see less room for a USD-JPY bounce, not exceeding 100-105 in one year. The margin for a EUR-JPY recovery should be limited too in a still weak EUR-USD scenario."
- CHF: "We also revised down our EUR-CHF forecasts in favor of drop to the 1.29-1.27 area between now and 4Q10. But we still point to a EUR-CHF stabilization between 1.30-1.33 at the end of 1H11"
- GBP: "Cable’s ability to break through again the 1.51 level suggests that any downward correction should be seen again as a near-term potential buying opportunity for sterling against the USD."
- Pacific Rim & CAD: "The AUD recovery following the deal reached on the mining tax may be capped by the RBA that is expected to stay prudent on rates at the next meeting on Tuesday."
- Nordics: "We still keep a positive view on the two Nordics on medium-term perspectives, but both EUR-SEK and EUR-NOK will remain seriously exposed to large and abrupt swings for the time being."
Unicredit Curves & Crosses 20100702

Commodity Outlook

- Long-Term Prices Revised, Mostly Up "In some commodities the increases are dramatic. This is a major body of work and the most important section of this report."
- "The Main Drivers are operating cost inflation, and capital costs in commodities where ongoing capacity investment is required."
- "Margins are stable in the long term, although highly cyclical. They vary widely between commodities, reflecting structural differences."
- "Structural Change will be particularly important in some commodities. It takes various forms such as technology (nickel) and competitive landscape (coal)."
- Short- and Medium-Term Prices Revised Down a Bit "Demand indicators are still positive although slowing."
- Fund Flows – Risk Off "Speculative profit taking has been an important source of price weakness."
- Commodity League Table "Our preference for bulks over base metals is increased. We favour the coals, increasingly thermal coal. Copper remains our most favoured base metal. There is little downside risk for aluminium."
Citigroup Commodity Outlook July2010

Mini me or the real Dr. Evil?

- Macro viewpoint: Mini me or the real Dr. Evil? "In the face of weak data and tighter financial conditions, we are switching sides in the growth debate: we now expect GDP growth to fall short of consensus expectations both this year and next. Our biggest cuts are to: consumption, housing, and inventories."
- Fed watch: Hold on "As we noted last week, the June FOMC statement cited further risks to theoutlook and downward-trending inflation, suggesting the Fed was on hold for a while. Additional soft data and more cautious tones to several Fed officials’ speeches this week help convince us that the FOMC is even further away from tightening. Hence, we have pushed our expectation of the first rate hike back from August 2011 to March 2012."
- The week ahead: Holiday hangover "It will be a relatively light week on the economic calendar. Monday the marketsare closed for the Fourth of July holiday. The biggest event on the calendar will bethe June release of the ISM non-manufacturing survey. The index is likely to decline to 54.0 after posting a 55.4 previously, consistent with moderating growth in the service sector of the economy."
Merrill Lynch US Economic Weekly 20100702

What if central banks cannot withdraw liquidity before it is used?

- "Central banks in OECD countries have been forced to significantly increase the size of their balance sheets (the monetary base), first to lend to the banks when the financial markets where banks finance themselves seized up; to drive down long-term interest rates; and subsequently to become buyers of last resort of financial assets for which demand from private investors had disappeared, which now includes euro-zone government bonds. In the case of Switzerland, the objective was to prevent the appreciation of the Swiss franc."
- "This has markedly increased the holding of liquid and money-market assets by banks and institutional investors. Central banks obviously announced that they would reduce the liquidity once the situation in the financial markets normalises; but this may take time, due to the factors of uncertainty that subsist (financial situation of households, state of public finances, etc.) and we must seriously consider the possibility that holders of liquidity will try to
use it before it is destroyed."
- "If credit demand remains weak, liquidity will be used to increase demand for non credit-related assets whose risk/return ratio trade-off seems favourable for banks and investors; this is likely to involve emerging country securities and commodities if the financial markets in OECD countries still give rise to concern - which justifies maintaining monetary stimulus - and perhaps also real estate again."
Natixis Flash Economics 333 20100629

How economic and financial events have forced the ECB to switch from controlling inflation to the role of buyer of last resort

- "The ECB's "pragmatism" has forced it to change its monetary practice under the pressure of events, but each time lagging behind:
it controlled inflation when there was no longer any inflation (1999-2008), and when the problem was excess liquidity, rising indebtedness and asset price bubbles;
this would lead it to consider ways of controlling credit and asset prices when the banking crisis broke out, and when, instead of controlling liquidity, it had to act as lender of last resort (mid-2008/2009);
the resulting rapid growth in liquidity and bank reserves then led the ECB (in 2009) to reflect on various exit strategies; the first stage was to be the curtailment of fixed-rate repos;
but the sovereign debt crisis caused the ECB to forget the liquidity problem, especially since bank risks are increasingly correlated to sovereign risks, and to take on the role of buyer of last resort for public debts, potentially unlimited."
- "This represents a considerable change in the ECB's monetary practice. Initially, it thought that its role was to control inflation, and that the way to do so was to use the effect of interest rates on the supply of bank credit, which remains the normal channel for transmission of monetary policy in an economy financed mainly by credit, such as the euro zone."
- "Now, it believes that its main role is to prevent bankruptcies by banks and countries due to the dramatic effect they would have on the economy, on the euro financial markets, and on sentiment toward the euro in the rest of the world. This is not quantitative easing (the transition to a monetary base objective when interest rates are very low), but in fact the transition to an objective of financial stability. The important question is whether, once this objective has been chosen, it is possible to go back to the other more traditional objectives."
Natixis Flash Economics 332 20100629

The key role of the household savings rate in the euro zone

- "The household savings rate in the euro zone is high and has been rising since the start of the crisis, which explains the growth gap in 2010 between the United States, where households are dissaving again, and the euro zone."
- "The euro-zone countries are now going to reduce their fiscal deficits, which will be bearable in terms of growth only if households in the euro zone save less. Is it credible that this could occur, with no margin for lowering interest rates? The situation is complex and many trends are pointing in different directions:
• households can react positively (by saving less) to the reduction in uncertainty due to the reduction in the fiscal deficits and the announcement of the method used;
• but, if there is a slowdown in growth and if households are heavily indebted, their financial position deteriorates and they save more;
• moreover, households can react negatively (by saving more) to certain measures used to reduce fiscal deficits, e.g. a reduction in social transfers and the generosity of pension systems; if there is an increase in taxes on households or consumption, consumption declines irrespective of the savings rate trend;
• the consolidation of pay-as-you-go pension schemes, where it occurs, should normally result in a (favourable) decline in the household savings rate."
- "Lastly, we can look at the trends seen in those countries where fiscal consolidation has already begun (Ireland, Greece): in these countries, the economy is very weak and the household savings rate is rising."
Natixis Flash Economics 329 20100628

A soft patch with risks, not a double dip

- "The global economy still appears to be expanding at a reasonably firm pace thanks to robust growth in emerging markets. Economic recoveries are proceeding in the US and Japan, but growth remains sluggish in Europe."
- "Our baseline view of global growth prospects for the next year and a half has not changed appreciably on balance, with some strengthening of prospects in emerging markets more than offsetting a modest downward adjustment of the outlook for industrial countries."
- "The downside risks to growth have risen appreciably of late due to a significant deterioration of financial conditions stemming from growing concerns about sovereign risk and fragility of the banking sector in Europe. In many countries recent economic indicators have been less encouraging as well."
- "A significant soft-patch in growth over the quarters ahead should come as little surprise—indeed we suggested the possibility a year ago when it seemed probable that an initial credit and fiscal led bounce in growth would be followed by a lull when these impulses faded."
- "However, for a variety of reasons outlined in the following overview, we think the risk of a dramatic slowdown or a double dip recession remains relatively small. Perhaps most importantly, private discretionary spending that is cut as the economy turns down has already been cut to the bone."
DeutscheBank World Outlook 20100702

Threat assessment

- "Global growth has joined bank funding and fiscal imbalances as a new line of concern in the euro area outlook. The amount of the expiring 1-year LTRO that rolled (EUR243bn) was broadly in line with expectations; Trichet described it as an orderly transition. The focus is now on the EU bank stress tests in the second half of July."
- "Losing 0.6% of GDP through fiscal retrenchment in 2010/11 would be more affordable in the context of a strongly growing global economy. Our already sub-consensus euro area growth forecast would be hit if the global cycle falters. As such, it is imperative that the EU achieves a good outcome to the bank stress tests and designs the most pro-growth fiscal consolidations."
- "The ECB Governing Council meets on July 8 for its next policy discussion. Unless there is a further round of stress in funding markets between now and the meeting, it is unlikely the ECB announces any new policy initiatives in July. However, within the next couple of months we would expect the ECB to push back the exit from full allotment regime until Q1 2011."
- "In a theme article this week, we explore the feedback loop between sovereigns and banks. The linkage between the peripheral sovereigns and their banks has been at the fore of the recent episode of market tension in the Euro area. We argue that while this issue is significant, statistical analysis suggests that it should not be unduly overstated. In Spain and Ireland, banks have already reduced their role in government funding. Even if the decline in peripherals’ government securities is hurting them, their level of exposure to the sovereign risk is low by historical standards."
- "Also in this week’s Focus Europe we take a look at the most recent euro area inflation news, from HICP and PPI to the latest survey indicators, and the recent PMI reports for the CE3. We also reproduce the Euroland and UK section from DB’s latest World Outlook."
DeutscheBank Focus Europe 20100702


Goldman Sachs warns on global economic slowdown - Telegraph
What do banking crises have to do with consumption? - China Financial Markets
Weekly Summary and a Look Ahead - Calculated Risk
Baltic index at over 9-month low, seen weaker - Reuters
Chavez Crackdown on Brokerage `Thieves' Leaves Traders Jobless - Bloomberg
Saudi King: Halt To Oil Exploration To Save Wealth - Zawya
An Old Battlefront Returns in War on Euro - Der Spiegel

Back to the Future

- A new cycle of innovation?: "While the economic crisis undergoes its multiple transformations, two recent announcements—the creation of a "synthetic cell" and a new family of components that opens the way for quantum computers—come as reminders that technology is continuing to progress. Information technology has been the innovation fueling economic growth for the past 50 years. Will nanotechnology be the engine for the next cycle? Nanotechnology is extraordinarily promising, but also raises issues of societal choice that call for citizen participation."
- 50 years into the digital age: "The technologies that created and developed the digital world for the past fifty years are continuing to advance. A new age has dawned, with the capacity for over 4 billion people to use powerful information and communication tools delivering ever more numerous and innovative services."
- Future screens: You haven't seen anything yet!: "The year is 2018 and the sun is shining on the beach. Comfortably resting on a lounge chair, you switch on your
lightweight eReader (with photovoltaic cells embedded behind the screen) and view a video of Eclairages 189, the bimonthly economic publication of Crédit Agricole. A notification window opens, reminding you of a lunch reservation. A smile crosses your face as you roll up the flexible screen for storage. Eight years before, in the same place, after succumbing to the hype you were sitting with a brand new iPad. Alas, issue 142 that you had so much trouble downloading via WiFi at the local café turned out to be unreadable with the bright light and reflections, while the combined effects of your child's water pistol and the gritty beach sand finally changed your beautiful pad into a useless brick."
- ICT and agricultural development in the South: "Several innovative initiatives are exploring the potential of information and communication technology (ICT) for agricultural development in the emerging Southern economies. While no one doubts the utility of ICT under the conditions of scarcity that characterize rural areas in developing countries (DCs), their use raises significant sociocultural issues."
- The promising future of lithium-air batteries: "Lithium-ion batteries are now part of daily life; their benefits include large storage capacity, lack of memory effect, and a low self-discharge rate. But many future applications, e.g. in transportation, require the development of batteries with greater capacity. And lithium-air battery could be a solution."
- The new shapes of carbon: Fullerenes, nanotubes and graphenes: "Since the 1980s, researchers have discovered and identified new structures entirely made of carbon, which turn out to have exceptional properties for a broad range of potential applications. But while nanotubes are moving into a preindustrial phase, graphene is still a laboratory curiosity."
- Soaring composites: "After moving into the automotive and construction industries, composite materials are changing the shape of aerospace. Lightweight and durable, these mixtures of fibers and resins adjust to complex shapes while requiring less labor than the metals traditionally used."
- Biotechnology and therapy: from the mirage of genomics to the promises of stem cells: "Medical applications of biotechnology cover a range from basic research to diagnostics and therapeutics."
- Technoscience and society: the case of nanotechnology: "Nanotechnology is sometimes presented as a new industrial revolution, promising a range of extraordinary
applications, with bottom-up assembly of the universe through "molecular manufacturing" (also called molecular nanotechnology, or MNT). Governments consider nanotechnology a strategic area and are funding major programs. The new technology, however, is challenging relations between science and society, and citizens must participate in the decisions that will shape the future."

Prospects for National Stability and Convergence Programmes

- "Huge increase of government deficits in European countries in 2009 as a consequence of discretionary fiscal policies and, more important, a structural deterioration of budget balances."
- "A negative spillover from the increase in sovereign risk in Europe"
- "Are the current Stability and Convergence Programmes optimal with both short-run and long-run growth requirements?"
- "Very recently Olivier Blanchard and Carlo Cottarelli have proposed “Ten Commandments for Fiscal Adjustment in Advanced Economies”."
- "We evaluate Stability and Convergence Programmes according to these requisites."
- "Main conclusion: Stability and Convergence Programmes go in the right direction but more can be done, at least in the following areas:
Contingency programmes, and pension and health reforms.
Reforms to boost potential growth.
Improvement of fiscal institutions.
Coordination of monetary and fiscal policy, and coordination at the European level."
BBVA European Unions Economic Governance July2010

Markets react to weaker growth indicators

- "In line with global trends, market sentiment the past week across Asia was dented by indicators of slower global and regional growth. In addition to weaker data on the jobs and housing front in the U.S., markets reacted to a lower-than-expected PMI reading for June in China (see Highlights). Japan also posted lower-than-expected outturns for retail sales and industrial production. On the policy front, at the end of the week India raised interest rates to tame inflation. The timing of the move was unexpected (intermeeting), although markets had been expecting the possibility of a rate hike."
- "Korea, whose government recently revised up its 2010 growth outlook, posted better-than-expected exports for June, together with a set of robust data on domestic demand and production. Vietnam also posted a robust Q2 GDP outturn (6.4% y/y). And on the CPI front for June, inflation in Korea and Thailand moderated, although Indonesia posted a higher-than-expected CPI outturn (5.1%). Other positives were the signing of an anticipated trade agreement between China and Taiwan (see Highlights), and the reaching of a comprise in Australia on a new mining tax."
- "Monetary policy meetings will take place in a number of countries (see Highlights). We expect Indonesia, Malaysia, and Australia to remain on hold, with a possibility of a first rate hike in Korea. Markets will also be watching China’s June export figure at the end of the week to gauge the extent of the slowdown and whether global demand is weakening."
BBVA Asia Weekly Watch 20100705

FX Strategy Weekly

- "The Swiss franc has replaced the USD as preferred store of refuge in the G10 as the US economy clouds over and global equity benchmarks sink to the lowest levels for the year. With risk aversion stepped up and US short-term yields sinking to new historic lows, we look for the USD to stay under pressure over the coming week and the dollar index to close in on key support in the 83.19 area. The aggressive unwinding of short EUR and GBP positions is likely to slow ahead of the BoE and ECB meetings though no policy changes are anticipated. The ECB weekly refinancing operation is set to attract close scrutiny after the expiry of the one-year tender and the smooth transition to 3-month funding. We look to the RBA and Canadian jobs data for guidance on AUD and CAD, though feel defensive strategies are advised as the CRB and S&P eye pivotal support levels."
- "A broad-based retreat in global equities and an unrelenting run of weak US macro data boosted demand for the Swiss Franc and the JPY, propelling both currencies to the top of the weekly G10 rankings. USD/CHF has now extended its slump to 10 big figures since mid-June, sliding below 1.06. GBP enjoyed a mixed week, posting gains vs the high yielding and commodity currencies, but losing ground vs the Franc, EUR and SEK. The US employment report for June the June 17 SNB meeting, and progressed to below 1.35 vs the EUR. USD/CHF slipped below 1.10."
- "UK macro data brought news of slowing housing market activity and confirmation of a
rebound in business investment in Q1 (+7.8% q/q). The latest credit conditions survey from the BoE presented a sobering picture for Q3, with credit availability of secured credit to households set to decline, but to increase slightly to corporates. The manufacturing and construction PMI were steady in June, holding at 57.5 and 58.4, respectively vs May. MPC members Miles and Posen made no judgement on whether further asset purchases will be necessary and reiterated that credit developments in the euro zone pose a challenge for the UK economy. The US unemployment rate fell to 9.5% in June from 9.7% in May."
- "UK rates extended their bullish run backed by flight-from-risk and weak US macro data. 10y yields hit a 3.30% low, supporting the bullish flattening influence in 2s/10s (255bp). 5y swaps fell to a 2.41% low but ended the week at 2.48%. Trendline resistance runs at 2.55%. The 3mth Libor/Ois spread held steady at 24bp in contrast to the widening in EUR (+6bp to 33bp). The ECB switched successfully from a one-year to a 3-month tender, attracting bids of ‘only’ 132bln eur. The special 6-day fine tuning operation attracted bid of 111.2bln eur, leaving the ECB with excess liquidity of 289bln eur. Gilt sales (IL 2047) and the syndicated 2040 deal attracted very solid demand."
LloydsTSB FX Strategy Weekly 20100702

Non-commercial investors turn long JPY

- "The latest IMM data covers the week from 22 to 29 June."
- "The effective JPY index rose near its 21 January 2009 high last week, as USD/JPY broke below 90 to test 87 and as EUR/JPY set a new multi-year low. The strong JPY performance has coincided with non-commercial investors adding fresh JPY longs. Net long JPY positions are now at 23% of open interest – implying that positioning is beginning to leave a downside risk on the JPY."
- "USD longs were trimmed further – mainly reflecting a build-up in JPY longs, and trimming of CAD longs and GBP shorts – as the dollar is beginning to look more soft. Positioning was broadly unchanged against the EUR though, but there is good reason to believe that EUR shorts have been scaled back as EUR/USD has corrected 3% higher since the collection of the IMM data."
- "As the money market has been pricing out some of the expected interest rate hike from the Bank of Canada, and USD/CAD has corrected higher on reduced risk appetite, non-commercial investors have trimmed net long CAD positions significantly. Net longs as a percentage of open interest are now broadly at the same level in AUD, NZD and CAD."
DenDanske IMM Positioning 20100705

Reforming China’s Healthcare System necessary for growth rebalancing

- "China’s healthcare system has been underfunded in the past years. 2009, the government announced a “big bang” reform. The changes are not only meant to cover 90% of the Chinese population with healthcare insurance schemes by 2011 but also to boost domestic demand and thereby rebalance China’s growth path. Even though reforms are a step into the right direction, many challenges remain."
DeutscheBank Talking Point 20100705