The Big Fix

Sudden movements aren’t desirable.  That wisdom came from Japan’s Finance Minister Aso regarding JPY moves which saw the currency return yesterday to 120 and post his advice rally back to 122. The point is that volatility isn’t anyone’s friend and central banks, politicians and other officials are doing everything to squelch it.   The Fix is on for markets with China shares higher again – unwinding some of the weekly pain but not all of it.  The margin calls and squeeze for cash remain with 1Y and 2Y rates still higher.  The Japanese consumer confidence bounced but price expectations are lower and the battle against deflation isn’t so simple as talking.  The Greek deal hopes are back on track with the market surprised that the Greek PM having won the “no” vote to refuse the EU deal submits something almost the same for approval this weekend.  The risk is that he gets what he wants and it fails to work.  The pain trade in EUR and Greece is still months ahead.  That leaves the markets to the weekend and the US afternoon with Yellen the key speaker and event – as she has to offer her own spin on global risks and events.  The fix is on as central bankers and politicians win the day and the barometer for most remains the EUR/USD.  This means we are back to watching the Monday open and the Friday clock with 1.1170 the key close for today and 1.1450 the target for a deal on Monday in EUR or worst-case another test for 1.09 for 1.07 panic.

Question for the Day: Are Greece and China fixed?  The risks for both Greece and China remain but the worst case scenarios are unwinding – for Greece the deal hopes are high but the longer term doubts that any deal actually works remains.  The biggest problem is that without a growing economy, significant debt relief and some actual tax collection – there isn’t any way Greece will be able to not return in March 2016 with a request for even more money. Overall, the Greek government's latest reform proposal to its creditor is seen as very similar to the one presented by the Eurogroup on June 25 and thus the same deal the Greek public voted 61.31% 'OXI' on Sunday. Below are key elements of the draft proposals leaked:

• Package is three-year deal until mid-2018 worth at least E53.5bln.
• Proposals do not include immediate demands for debt relief.
• There are no pension cuts in the draft of the proposal, the pensioners' contribution to the health sector is raised from 4% to 6% which could be regarded as an indirect way of reducing pensions.
• The governmental commitment to freeze early retirements remains.
• The draft also mentions that the 30% discount in VAT for most islands is maintained but it excludes the so called "big" islands which get the biggest percentage of tourist reservations.
• The draft keeps the VAT for hotels to 13% but raises the Value Added Tax for the food industry to 23% which was a creditors' demand.

 
The Euro Working Group (EWG) is now expected to study the proposals and the ESM Board of Directors, which is comprised of Eurogroup Finance Ministers, is then due to vote today ahead of a Eurozone Finance Ministers meeting for its 'ultimate approval' on Saturday. It will then be passed to the the EU's 28-person Leaders Summit for a final 'ultimate sign-off' on Sunday. The Greek Parliament is also due to vote on these proposals by the end of today and is expected to be approved, despite resistance in the Syriza party after Greek PM Tsipras secured support from opposition party leaders after the referendum vote.

As for China, with slightly less than 50% of the shares not trading and with a significant amount of buying from insurance companies and others, the price action isn’t so convincing to the broader investor world. The risk for China is that they have become Japan in the 1990s with a zombie banking system and shares interconnected to all businesses leaving values well-below book.  This may mean the end for volatility in equities but it will show up somewhere else.  The next risk for China is in the delayed reaction that this crisis will have elsewhere – consumer spending – things like the Apple I-phone and on China and US real estate.  Note that the CAICT reported China's cell phone shipments to domestic market fell 10.2% y/y to 38.12 million units in June The Chinese Premier Li said he is confident that the government can prevent systemic risk, pledging to fine tune policy and to "promote transparent capital and money markets. He said the economy in the first half, particularly in the second quarter, has stabilized, with some indicators improving but said the economy's foundation needs more consolidation while warning of risks and uncertainties associated with the global economy. The government has the "confidence and ability" to prevent systemic and regional risks, he said, calling for increased investment and urging that construction projects be started.

What Happened?

• UK May total trade deficit narrows to GBP393mn from GBP1.834bn – better than GBP2bn expected – could lift 2Q GDP, best since June 2013.  Imports fell 3.2% to GBP43.44bn while exports were flat at GBP43.047bn. Imports of ships and material were key drivers of the drop.  The goods trade deficit also narrowed to GBP8bn from revised GBP9.387bn with non-EU trade deficit at GBP1.57bn down from GBP2.99bn.
• UK May construction output -1.3% m/m, +1.3% y/y – hit by new housing weakness.  The 3M comparison off 0.4% q/q – leaving June data as key for GDP estimates.
• French May Industrial Production up 0.4% after -0.8% m/m – as expected. April revised better from -1.0%.   Manufacturing rose 0.4% after -0.8% m/m decline – also in line with expectations. The gain in output in May was the sixth in the past seven months and showed that the French manufacturing sector continues to recover despite the hit to business confidence caused by the Greek crisis.  In the three months through May, manufacturing output increased by 0.4%, with nearly all major sectors showing gains, Insee said. Output was generally mixed in May, with strong gains in production of transportation materials (+2.3%) offset by declines in refining and and "extractive" industries like mining and water.
• Italian May industrial production up 0.9% m/m, 3.0% y/y after -0.3% m/m – better than 0.3% m/m expected.  Consumer output rose 0.7% m/m, capital goods up 2.3% m/m, intermediate goods up 0.6% m/m and energy up 1.7% m/m.
• German June WPI off 0.2% m/m, -0.5% y/y after -0.4% y/y – energy key.  Solid Fuels/Oil products -2% m/m while grains, seeds up 0.8% m/m and Fruits/Vegetables up 3.4% m/m.
• Japan June consumer confidence rises to 41.7 from 41.4 – first rise in 3 months. Consumers turned slightly more optimistic about all of the four key aspects that affect their sentiment - overall economic well-being, income growth, job prospects and whether people thought it would be a good time to buy durable goods over the next six months. The government maintained its assessment after downgrading its last month, saying, "The pace of pickup in consumer confidence is slowing." But expectations for inflation fell again with June showing 3.2% expecting lower prices up from 2.9% and 87.3% expecting higher down from 87.4% in May.
• Japan June Producer Prices -0.2% m/m, -2.4% y/y after -2.2% y/y – weaker than 0% m/m, -2.1% y/y expected.  This is the third consecutive y/y drop as unwind of VAT hike effect goes on. The decrease was led by lower prices for electricity, iron and steel, chemicals as well as lumber and wood products. Prices of petroleum and coal products still fell 20.3% from a year earlier in May, although the pace of decline decelerated from -21.3% in April.
• Australian May housing loans -6.1% m/m after 0.7% m/m revised – worst drop since Dec 2009.  Construction loans drove the decline falling 8.3% after 5.5% gain in April. Loans for new dwellings rose for the fourth consecutive month but at the slowest in that period. In original terms the number of first-homebuyer commitments as a percentage of total owner-occupied housing finance commitments rose to 15.9% from an upwardly revised 15.8% in April.

Conclusions: Do stable China shares and higher EUR from a Greek Deal mean FOMC September lift-off?  That is the central question for the weekend as we wind down with little other news from the US other than wholesale inventories and a Cleveland speech from FOMC Chair Yellen.  Expect this question to be asked from the audience – and to be dodged.  The FOMC speeches this week are all over the place – from Chicago Evans talking about mid-2016 timing for rate hikes to Kansas City George saying now is even too late. This is how George put it - "I view the considerable progress in labor markets and the relatively steady inflation rate as encouraging," she said. "However, keeping interest rates near zero to achieve still further progress toward labor market improvement and higher inflation is risky in my view." Markets don’t seem to think the risk of a hike in September is very high and that makes the Yellen speech today and the testimony to Congress next week even more important.

GOOD LUCK