Daily Note- What Nigella tells us about contagion


United States: Second Tier data improves but gives no insights into Wednesday’s Federal Reserve meeting.

Euro zone: How long can Germany hold up the rest of Europe?

ECB: Still open minded on a new LTRO

RBA minutes: Saw it prudent to hold rates, but not cut off chance of a cut

Australia Mid-Year Economic and Fiscal Outlook: 2013/14 budget deficit at A$47bn vs. A$30 bn August estimate



It’s a chilly one this morning in Dublin. The Christmas carry on is getting more and more bizarre. Our vantage point beside the railway station here, allows us to see commuters well the worse for wear attempting to sober up before they present themselves for home duty!

It’s going to be a long week.

But spare a thought for poor old Nigella. We are fans and can’t quite believe that her ex husband could be so horrible. That said the revelations about more coke, rolled up notes and the like, this time offered by her former PA, suggest that Nigella could do with being surrounded by a bit more loyalty.

It also got me thinking about the similarity between these type of scandals and bank scandals.  Initially, when the celebrity admits to something, following a revelation, the strategy appears to be admit the problem, try to isolate it as a one-off incident, declare an apology and move on, hoping to draw a line (I know an unfortunate choice of word) in the sand. It’s rarely the end of the story as Nigella is now finding out.

The same thing happens in banking scandals/crises. The first reaction is always to paint the problem as being a one-off, unique to the dodgy balance sheet or to the decisions of that bank or even the (corrupt/badly managed) country. Then gradually the dominoes begin to fall and one bank after another becomes involved through the ephemeral supply chain of leverage which links us all together. Nowhere was this complex, interwoven chain of involvement more evident than in the European banking/asset/sovereign crisis.

Today, we are going to focus a bit on this, as tomorrow we will be fixed with the FOMC.

The United States: Second Tier data improves

U.S. equity indexes rebounded from their worst weekly losses since August and European stocks rose for the first time in five days yesterday. In thin holiday trading the gains were attributed to the better than expected Industrial Production data out of the US.

With market participants standing on the sidelines ahead of the Federal Reserve meeting tomorrow, market moves can be more pronounced than otherwise would be the case.

In terms of news overnight, second tier data – which if my Dad were still with us he would describe as Mickey Mouse numbers  – improves but gives no insights into Wednesday’s Federal Reserve meeting.

Within a slew of Mickey Mouse numbers,  a better than expected industrial production number for November was the only real data point of note yesterday.

17th 1

Global fixed income markets traded sideways yesterday as the few market participants that are around at the moment are sitting on their hands waiting for the Federal Reserve tomorrow.

The US 10 Year closed at 2.88% not far from  the recent high.

Eurozone: How long can Germany hold up the rest of Europe?

17th 2

Data in the Eurozone yesterday was once again mixed to disappointing with very weak manufacturing and services data in France, somewhat offset by better German data.

Throughout the crisis, France has been keen to portray itself as the “mini-me” Germany, trying to pretend that it is more German than Italian. We are not convinced.

There has been a very noticeable divergence between French and German manufacturing sentiment in recent months. (see chart below)

France-Ger manu

Again with the trade balance figure, you see how significant Germany has become to the overall Eurozone economy.

Exports were up 1% YoY while imports were down 3%. As you would expect Germany held the biggest trade surplus €148.3bn then Holland €40.5bn.

On the other hand, the biggest deficit was France €57.5bn, UK €55.1bn, Greece €14.5bn and Spain €11.6bn.

Here is the dilemma for Germany and it links into my view of what is going to happen deep inside the ECB. Germany needs to sell its Mercs to someone. Traditonally it has sold them to its European neighbours. But to buy German stuff, we need cash. If we don’t have cash, we don’t buy their gear and if we don’t buy their gear, what happens to their rate of unemployment?

This is paricularly the case with the Euro above 1.37.

And this is where Mr Draghi comes in.

ECB: Still open minded on a new LTRO

In a speech to the European Parliament yesterday, ECB president Mario Draghi suggested a further LTRO is on the cards but liquidity is not the problem. What is the problem is growth and without banks being supported there is no growth and without peripheral growth, the Germans have no one to sell to, so everyone has an interest in more cheap money.

Other highlights from the speech included,

  • Risk aversion of banks is going down – people think they are getting better.
  • Differing risk weights on sovereign bonds is a Basel issue, but they will be considered risk free for stress tests. The German ECB guys mightn’t like this.
  • He stressed that the ECB still has plenty of instruments available.

Good read here on European banks linked to sovereign debt and the problems with the upcoming stress tests.

RBA minutes: Saw it prudent to hold rates, but not cut off chance of a cut

Off to Australia now.  The Aussies won the Ashes overnight, a bit of a whitewash in fairness. Maybe the sport will take their minds off the dreadful budget news released.

Very little change in the minutes from the most recent RBA meeting held a couple of weeks ago.

  • AUD remains uncomfortably high, lower level needed for balanced growth
  • Board has not closed off possibiity of easing further
  • See further signs that past rate cuts are stimulating the economy
  • Expects below trend growth over the next year, pick up thereafter
  • Mining investment to decline over next few years
  • Sees other business investment rising from current weak levels but will take time
  • Labour market remains soft, but there are tentative signs of stabilization
  • Household consumption looks to have picked up a little since Q3
  • Forward-looking indicators suggest dwelling investment would strengthen
  • Chinese economy appeared a bit stronger in H2 vs. H1

The importance of the minutes was superseded by Glenn Stevens’s comments last week – we don’t need to dissect the minutes to know what Stevens and the RBA is thinking.

Australia Mid-Year Economic and Fiscal Outlook: 2013/14 budget deficit at A$47bn vs. A$30 bn August estimate

Following on from what we heard last week, we got the official mid-year report from the Australian government and as suggested last week it is not good.

  • 2013/14 budget deficit at A$47bn vs. A$30.1 bn August estimate
  • See net debt reaching 15.7% of GDP in 2016/17
  • Sees 2013/14 GDP at 2.5% (2.5 also seen in August); 20145/15 seen at 2.5% vs. 3.0% seen in August
  • Australia budget deficits totalling A$123bn over forward estimates
  • Says that without policy changes, budget projected to be in deficit every year to 2023/24, debt to reach A$667bn
  • Transition to non-resource drivers of economic growth likely to be slower than previously forecast
  • Debt seen at A$430bn by June 2017 vs. prior estimate at 370bn

A deteriorating budget position was expected; what is going to be interesting is the take on this from the ratings agencies. Also of interest will be the reaction of consumers to the inevitable ‘budget blowout, belt tightening’ headlines that will follow – consumer sentiment is already deteriorating.

This is the WSJ’s take.


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