For the 2nd consecutive month, FDI into China declined (by -12.7%) in December to US$12.2bn YoY. FDI was down by -9.8% in November, the 1st decline since 2009. However, 2011 FDI came in at a record US$116bn. As I keep banging on, FDI into China should decline materially in the current year, which, in my humble view, will result in a flat (possibly even a lower Yuan) against the US$ – outflows of speculative money, combined with capital outflows generally, will negatively impact the currency;
Chinese authorities concern about a declining equity market has resulted in relaxation of restrictions by foreign investors and, inter alia, buying by state funds. Personally, I believe these measures represent the significant concern of the Chinese authorities and I for one will not be a buyer;
The Chinese Securities Journal reports that there will be no cut in interest rates in the 1st Q 2012 and any adjustment will be made through reducing RRR’s. Another Chinese publication suggests that RRR’s will be cut by 50bps this month;
Chinese new home prices rose in just 2 out of 70 cities in December. They were up +1.8% on the year, down from +2.4% in November YoY. Chinese authorities are of the opinion that they can “manage” residential home prices lower – they will learn. Bloomberg reports that the Chinese are moving away from property and the stock markets and are buying Gold. By some accounts, China has been buying more gold than even India;
Euro Zone December inflation came in at +0.3% MoM or +2.7% YoY, lower than expectations of +0.4% and +2.8% respectively;
German consumer confidence rose by a record in January. The ZEW index rose to -21.6 from -53.8 in December, much better than forecasts of -49.4. The ZEW gauge of current conditions rose to 28.4, from 26.8. Domestic demand is expected to keep the German economy ticking over. In addition, the recent 3 year LTRO’s and expectations that the ECB will cut its benchmark interest rate further were the main reasons for the improvement as were expectations that the worst of the Euro Zone crisis was over !!!!!. German newspapers report that the Government is forecasting GDP growth of +0.75% for the current year – pretty optimistic in my view – the problem is that the Germans seriously believe that they will be immnune from a sharply declining Europe and a global slowdown – complete rubbish;
Fitch stated that Greece will default on its E14.5bn bond, which matures on 20th March. None of the traditional “may” or “possibly” or …. Pretty definitive statement – personally, I think that Greece will reach an agreement with private bondholders on PSI. However, its residual debt load will remain unaffordable. As a result, I, like Fitch, believe that Greece will default, but its unlikely to be as a result of the E14.5bn bond, maturing on the 20th March;
Mario Draghi’s comments are getting more and more strident – getting concerned do you think?
UK December CPI was up by 0.4% MoM or +4.2% YoY, well below November’s annual rate of +4.8% and in line with forecasts. The YoY decline from November was the largest slowdown in inflation since April 2009. Inflation, which peaked at +5.2% last September is expected to decline much further due, to a large part, to base effects. Annual inflation measured by the retail price index fell to +4.8% in December, from +5.2% in November. Core annual inflation slowed to +3.0% in December, from +3.2% in November. The decline in inflation will support the BoE’s policy and, in addition, will enable the BoE to increase its QE programme, from the current Sterling 275bn in either February or March – the BoE forecasts that inflation will decline to below 2.0% by the year end;
The World bank has cut its forecast for 2012 global GDP to +2.5% from +3.6% last June. They suggest that the Euro Zone may contract by -0.3%, from a previous estimate of growth of +1.8%. Their US GDP forecast was reduced to +2.2%, from +2.9% previously. China is forecast to grow by +8.4% and India by +6.5%, both optimistic, in my humble view. In particular, the World Bank warns EM’s that their economies will be hit in particular if there is a serious crisis in Europe ie NO DECOUPLING. Mr O’Neill of GS however, keeps banging on about EM’s and China, in particular – does anyone still take him seriously !!!!;
The material reduction in short term rates of, for example, Spanish and Italian bonds is likely to force these countries to issue shorter term debt to avoid excessive interest rates on longer term maturities. However, the average maturity profile will clearly decline, representing a problem for the future. Clearly the ECB’s 3 year LTRO has had a material impact – if only to stop mass selling;
Summary
The euphoria surrounding better than expected Chinese 4th Q data did not convince US markets and, as a result, European markets drifted off their highs on the lack of US follow through. The Euro rallied yesterday – just keep shorting in my view, though watch out for Japanese buying. Brent is hovering just below US$112.
Numerous and conflicting reports re the Greek PSI negotiations circulate – personally, I believe a deal will be done, but Greece will default some time thereafter.
Asian markets are mixed with the Nikkei the star performer on technical buying. Looks like it will be a lower European opening.
