News Highlights - Week of 22 - 26 August 2011
Consumer price inflation in Hong Kong, China quickened to 7.9% year-on-year (y-o-y) in July due to increasing food prices and a low base effect resulting from the timing difference of government's public housing relief measures. Japan's core consumer price index rose slightly in July to 0.1% y-o-y as energy prices increased. Singapore's consumer price inflation accelerated to 5.4% y-o-y in July from 5.2% in June on the back of higher costs for transportation, accommodation, and food. Consumer price inflation in Viet Nam rose to its highest level since December 2008, reaching 23.1% y-o-y in August from 22.2% in July as costs for food surged.
*The Bank of Thailand last week raised its 1-day repurchase rate by another 25 basis points to 3.5%. This was the sixth consecutive rate hike since January. Heightened concerns over inflation outweighed the risks to growth as domestic consumption and investment are expected to remain robust.
*Moody's Investors Service lowered Japan's credit rating to Aa3 from Aa2. The outlook on the ratings is stable. Standard and Poor's affirmed its AAA sovereign credit rating and stable outlook for the Singapore government's long-term debt.
*On 24 August, the Japan Credit Rating Agency (JCR) affirmed Indonesia's ratings for long-term FCY and LCY senior debt at BBB- and BBB, respectively. The outlook for both ratings was stable.
*The People's Bank of China (PBOC) announced the expansion of the existing cross-border trade renminbi settlement program to include the entire country. During the first half of the year, the People's Republic of China's (PRC) total renminbi settlement in cross-border trade increased 13.3 times to reach RMB957.6 billion.
*The Republic of Korea's external debt position rose to USD398.0 billion in June. The country's outstanding household loans grew 8.7% y-o-y in July to reach KRW826 trillion. Finally, the credit default swap (CDS) spread for 5-year FCY-denominated government bonds widened to 149.2 basis points. LCY corporate bond issuance in the Republic of Korea was down 29.5% month-on-month (m-o-m) to KRW8.1 trillion in July. However, the cumulative corporate bond issuance over the January-July period stood at KRW75.1 trillion, which was up 9.3% y-o-y.
*Last week, KT Corporation of the Republic of Korea raised KRW600 billion from a triple-tranche bond sale. In Malaysia, YTL Power International sold MYR2.2 billion worth of 7-year notes with a coupon of 4.35%. In the Philippines, United Coconut Planters Bank issued PHP3.15 billion of LTNCD (long-term negotiable certificates of time deposit), which carry a coupon of 6.0% (payable quarterly) and have a maturity of 5 years and 3 months. Thai property developer Quality Houses raised a total of THB3 billion in bonds. Meanwhile, the State Railway of Thailand issued THB1 billion of 12-year bonds at a coupon of 3.99%.
*Government bond yields fell last week for most tenors in Indonesia, Malaysia, and the Philippines, while yields rose for all tenors in Viet Nam and for most tenors in Hong Kong, China; and Singapore. Yield movements were mixed in the PRC, the Republic of Korea and Thailand. Yield spreads between 2- and 10- year maturities widened in Hong Kong, China; the Republic of Korea; Malaysia; the Philippines; Singapore; and Viet Nam, while spreads narrowed in the rest of emerging East Asian markets.
*WHAT'S NEW: The next edition of the Asia Bond Monitor will be launched on 1 September.
Update: sure enough, here is Ambrose Evans-Pritchard with his own perspective on just this topic, which is oddly comparable to Zero Hedge's: "Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union."
Original:
Every time we discuss the futility of the nth bailout of [Greece\PIIGS\Europe\the Euro] we make it all too clear (most recently here and here) that the trade off between Germany onboarding ever more peripheral financial risk in one after another all too brief attempt to prevent the implosion of European capital markets and its currency, is not only a relentless creep higher in German default risk (and lower in the German stock market, as August has so violently demonstrated) but increasing political discontent, which after claiming countless political regimes across the world, has finally settled down on one that truly matters: that of German chancellor Angela Merkel. And as Reuters reports, Merkel's disappointing response to an ever escalating set of crises, both domestic and international, means that the beginning of her end (and by implication of the Eurozone, and of the Euro) may be as soon as September 23, when the vote over the expansion of the latest and greatest European bailout lynchpin, EFSF, will take place.
To wit: "Germany's Angela Merkel faces the biggest challenge to her leadership since coming to power in 2005, with traditionally loyal conservative allies openly criticizing her approach to the euro zone crisis and her hands-off Libya policy in shambles….it is Merkel's piecemeal approach to the euro zone's worsening debt crisis that has come under fire over the past week and now threatens her iron grip on power in Germany." The biggest problem for Merkel is that she has gone "Japanese" in the opinion of the public: doing neither nothing, nor enough, to halt the European crisis in its tracks: "For some in Germany, she has gone too farby bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home." This latest attempt to placate everyone, while achievingprecisely the opposite, will come to a head on September 23 when the vote to expand the EFSF takes place: she is for the time being expected to have a sufficient number of votes to pass the critical for the eurozone proposal. "If it's not enough, Merkel would be forced to resign. It would lead to a crisis." And should there be a crisis, it will be the end for the European experiment as well, since with the political situation at the Euro's biggest financial backer in flux, the free fall in European risk will be one that no one, certainly not the ECB, will be able to arrest. Cue even more improvised bailouts by the central banker oligarchy, yet without Germany, the credibility of any and all such deseprate measures will be nil. This incremental political uncertainty will likely make the life of the FOMC's Sept 20-21 meeting slightly easier, as an adverse monetary announcement by the Fed, contrary to that priced in, coupled with the risk of a full blown European crisis, will be very frowned upon by the Status QuoTM.
From Reuters:
Seen for much of the past six years as a reliable, steady leader whose competence and knack for brokering deals made up for a lack of bold vision, Merkel's image has taken a beating over the past months and polls show an increasing number of Germans view her government as directionless.
The chancellor's troubles can be traced back to two decisions taken in March, when she abruptly dropped her long-standing support for nuclear power in the aftermath of the Fukushima disaster in Japan, and days later backed Germany's abstention from a U.N. vote authorising military action in Libya.
Coming shortly before a crucial state election, which her conservatives subsequently lost, the steps looked to many in Germany and abroad like cynical political ploys to placate domestic opinion.
For some in Germany, she has gone too far by bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home.
This conflict will come to a head next month.
Merkel's coalition has a comfortable 20-seat majority in the lower house of parliament. But if she is hit with dissent in her own ranks, and is forced to rely on opposition parties to pass legislation to expand the single currency bloc's rescue mechanism — the European Financial Stability Facility (EFSF) — then her coalition could collapse, sparking early elections.
"The euro crisis entered a new phase over the past week," influential German weekly Der Spiegel said on Sunday.
"Before the main question had been how the common currency could be saved. Now it is also about saving Merkel's chancellorship. If her coalition does not deliver a majority for the enhanced euro rescue mechanism in the autumn, people close to the chancellor say, the coalition is all but finished."
On the significance of September 23:
The chances of Merkel failing to secure her own majority in the EFSF vote, which is likely to take place on Sept. 23, still seem slim.
Her Christian Democrats (CDU), hovering at a weak 30 percent in opinion polls, have little incentive right now to bring forward an election that is not scheduled to take place until the autumn of 2013.
Merkel's conservative bloc — composed of the CDU, Bavarian Christian Social Union (CSU) and Free Democrats (FDP) — has shown discipline in previous euro zone aid votes, with only a handful of lawmakers rebelling.
"I expect she will get majority backing from her own coalition," said Gerd Langguth, a political scientist at Bonn University and biographer of Merkel, putting the number of dissenters at around fifteen.
"If it's not enough, Merkel would be forced to resign. It would lead to a crisis. No one is interested in an early election."
Slim… but getting bigger:
Critical voices from within the party have grown louder over the past week, with senior CDU lawmaker Wolfgang Bosbach vowing publicly to vote against the EFSF increase and popular Labour Minister Ursula von der Leyen — seen as a potential successor to Merkel — wading into the euro zone debate with comments that went against official policy.
Helmut Kohl enters the frey:
Perhaps most damaging of all, however, was former Chancellor Helmut Kohl's rare public criticism of his protege last week. Kohl plucked Merkel out of obscurity in East Germany after the fall of the Berlin Wall in 1989, bringing her into his cabinet and helping to launch one of the most unlikely and astonishing political careers that Germany has ever seen.
In an interview with newspaper Internationale Politik, Germany's longest-serving post-war leader and father of reunification broke his silence and unleashed a broadside against Merkel's foreign policy, saying it lacked direction and risked undermining Germany's global influence.
"The enormous changes in the world can be no excuse for having no view or idea where you belong and where you are going," Kohl, 81, said.
Yet not even the EFSF vote will do much to help Europe if the German economic implosion (documented here, here and here) continues. Should her own GDP not rebound, it won't matter one bit whether Merkel succeeds in sending the PIIGS to unseen economic golden ages.
However the biggest threat to her hold on power, should she survive the EFSF vote next month, could be the slowing German economy. Data over the past two weeks showed that Europe's biggest economy ground to a virtual halt in the second quarter of the year.
Business confidence plunged this month by its largest amount since shortly after the bankruptcy of U.S. investment bank Lehman Brothers in 2008. Some economists now see the risk of a recession in Germany.
The country's robust rebound from the global economic downturn of 2008/2009, and sinking unemployment, was one asset Merkel thought she could count on heading into the next election.
Now that support is crumbling too, wiping away some more of the magic that she exuded in her first years in office, when she was celebrated in Germany and abroad as the "Gipfelkoenigen" — or Summit Queen — for brokering deals with in the EU and G8.
"Her downfall may not come from the euro crisis, but simply from the fact that she has lost the shine, the sure footing that she had at the start," said Josef Joffe, editor of German weekly Die Zeit.
At the end, should Merkel drop out of the picture, and Europe be left with finding scraps of capital everywhere else it can, we can't wait for the ensuing hilarity as the future of a failed European experiment then proceeds to be a burden on the far narrower shoulders of one (AAA-rated) Nicholas Sarkozy.
Wikileaks' threat to expose Bank of America came and went, and yet all it took for the bank to implode was reality, a little time, and an independent media. That said, Wikileaks has not yet been completely relegated to the compost heap of one time fads. In a blast submission of several thousand cables, Julian Assange tries to regain his one time star status. While we have to go through the bulk, one that caught our attention was a cable from the US delegation in Chengdu, China, where a counsel met with a local representative of the World Bank's International Finance Corporation, for some candid one on one. While the bulk of the exposition, which took place in December of 2009, is not surprising, there are some frank admissions about the emergence of a Chinese bubble, long before the topic was mainstream (and only fringe investors would consider it), observation that urban housing prices are "here to stay for the coming few years as they are an unavoidable, long-term aspect of the nationwide, structural shift in the population from rural area to urban centers", the realization that the solar industry is plagued by overcapacity and due for a restructuring (many "solar" longs would have been delighted to know this well in advance of the recent decimation in the Chinese solar stock space), but most notable is the Chinese admission that "China will remain a "poor country" for years to come, and can expect to emerge as a "respectable mid-level" country only in another 10-20 years" in order to grow its service sector from the current 30-40% of the economy to a US-comparable 75%, many structural shifts will have to take place. And while such shifts "are already happening to some extent in places like the Pearl River Delta", and "Chinese companies increasingly setting up factories overseas" the biggest impediment is China's "terrible educational system" which "promotes copying and pasting over creative and independent thought." Explaining further, "the normal process undertaken by students when writing as essentially collecting sentences from various sources without any original thinking. He compared the writing ability of a typical Chinese Phd as paling in comparison to his "unskilled" staff during his decade of work with the IFC in Africa." Well, if China's education system is worse than that of the US, we can probable stop worrying about the dollar relinquishing its reserve status. On the other hand, we would be the first to point out that China, which does not admit defeat, is probably in the early stages of the next bubble: that of importing teachers, educators, professors and generally Ivy League Ph.D.'s. Which is great: take as many as you want. The average tenured Ivy League (not to mention MIT and NYU) professor has already done enough damage to the US – it is only fair that they destroy China next.
Citigroup Global Equities Research
India: Barely Hanging In!
+5%: in line with expectations, but with a weak bias — India's earnings growth continues to tread middle growth: +5%yoy for Sensex ex-oil (and 6% for CIRA ex-energy) remains in-line with expectations (+7%), relatively modest and simply not decisive enough. It has a slightly weak bias: 52/45 downside/upside surprises, more sectors disappoint than surprise positively, and management commentary at aggregate has been relatively cautious. While bottom up and global macro challenges rise, India's earnings growth expectations (20%) continue to hang on, but just about.
Sales still surprise and margins still face pressure — We expected sales growth to surprise on the downside, and margin pressure to surprise on the upside: was not to be. Sales momentum remains strong (+19% for CIRA univ exfin,energy) and margins continue to face pressure (-74 bps qoq). However, sectoral divergence is rising, interest cost pressures are yet to show up meaningfully and trends among Sensex companies and broader CIRA coverage are largely consistent – suggesting growth/profit trends are broad-based.
More laggards than leaders — It is a mixed quarter, with a weak bias: with 6/3 downside/upside sectoral surprises, 12/15 sectors generating positive yoy profit growth, and only four sectors generating positive margins qoq. The banks and Capital goods sectors have been the big laggards on the downside: with positive offsets in Energy (in part accounting), and Metals and Cements. The defensives – consumer companies have held their own, while Autos have also done a bit better than expected.
Quarter's take-away; it's tough but corporates hanging in there — The earnings season is – in our view – not decisive. It reflects the broader growth,profitability and global macro challenges that businesses are facing; but suggests slower/weaker growth, not an earnings collapse. Our Sensex earnings growth estimates for FY12/FY13 stand at 20%/16%, and we would expect GDP growth,the commodity and energy pricing cycle to keenly influence earnings trends from here.
Morgan Stanley
India Equities Research
What are the risks to earnings? What is the impact of potential funding stress?
Worse, Tail risks not in the price
The known "unknowns" are an uncertain DM world, weak domestic policy response, oil prices, inflation, high rates, slowing growth, and alleged corruption scandals. During the 2008 crisis, Indian earnings outperformed, but equities fell due to a large outflow of capital. A recession with no seizing up of capital markets is India's best case in the context. Massive global stimulus or a breakdown in capital markets will hurt India on a relative basis a la 2008.
Key Debate: We have cut our global and India GDP growth forecasts. What's the impact on earnings and how much is in the price?
F2013 Sensex earnings cut by 3ppt to 15%
Reflexivity is at work – lower share prices are affecting growth and vice versa. F2012 earnings growth forecast is unchanged at 18%. Consensus is expecting 20% and 17% growth for F2012 and F2013, respectively. Earnings have support from decade-low gross margins and strong balance sheets, but face headwinds from fragile global growth. We think broad market earnings growth may have troughed.
Sensex target implies returns of 11% to Dec-11 and 35% to Dec-12
Following the cut in absolute targets by our fellow strategists, notably on EM and AXJ, our new Sensex target for Dec-11 is down 15% to 18,850. We roll out our Dec-12 target at 22,750. The Dec-12 target implies P/E multiples of 18x and 16x on F2012 and F2013 earnings, respectively.
Key Positives for Indian equities
Corporate activity is surging.
Policy announcements have picked up pace.
The sowing season is going well, and this is good news for prospective rural incomes and food inflation.
Valuations look compelling on an absolute basis.
Interest rates could be peaking.
Our proprietary sentiment and market timing indicators are firmly perched in buy zone. What to buy and sell; still a stock picker's market We remain focused on domestic cyclicals versus global cyclicals with emphasis on discretionary names. Our top picks include DRRD, INFO and MM.
