Yet another all-nighter in Brussels

21/02/12 @ 08:31 GMT by Michael Derks, Chief Strategist

These days, one of the strongest-performing sectors in Europe is catering - supplying food and drink to the cognoscenti at all of these meetings of European leaders in Brussels. It was another all-nighter for finance ministers, resulting in a statement being issued at around 4:00am. Greece has apparently won a second bailout from Europe worth EUR 130bln, with private sector bond-holders supposedly accepting a haircut on their Greek holdings of around 75% in net present-value terms. There is much to be done in a very short time before this deal can be said to be actuated. For instance, bond-holders must accept the terms of the debt swap, and each of the eurozone’s individual parliaments must sanction it post-haste. A lot can, and probably will, go wrong. But for now, markets are prepared to suspend disbelief and buy the politicians’ hyperbole. Invariably, this response results in regret later on, usually very quickly. Watch this latest deal unravel over coming days, as it inevitably will.


As good as it gets for risk assets. Risk assets and currencies received a further fillip yesterday after the PBOC announced another 50bp reduction in the reserve requirement ratio (RRR) for its banks. With house prices down in most major cities again last month, and property lending and construction slowing markedly, the only surprise is why it took so long to make this decision, one which many commentators had been expecting weeks ago. More reductions in the RRR can be expected over the course of this year, because at 20.5% for the country’s largest banks it is still very high and therefore restrictive. Policy-makers in Beijing are proceeding slowly, cognisant that they still need to keep their collective foot on the brake because inflationary pressures are only easing gradually. Interest rate-cuts are unlikely to result until inflation is below 3%, which may not happen until mid-year. As a result, policy-makers will prefer RRR cuts and looser fiscal policy instead as they progressively relax financial conditions. For their part, global risk assets strengthened still further yesterday, with the DAX up more than 1%. It just does not get any better for risk assets at present – China’s latest easing follows Japan’s last week and the BoE’s earlier this month, with the Fed still contemplating more QE and the ECB about to undertake another massive helicopter drop of liquidity next week. Meanwhile, the news coming out of the major economies in recent weeks has surprised on the upside almost with exception. High-beta currencies are surging; for the year-to-date, both the MXN and the BRL are up more than 10% against the dollar, while the NZD is 8% higher. Right now, risk assets and currencies are partying like it’s 1999!

Record trade deficit adds to yen woes. Adding to the recent woes of the previously impregnable Japanese yen was the announcement yesterday that Japan registered a record trade deficit last month. The seasonally-adjusted trade shortfall reached JPY 0.61trln in January, extending a run of deficits that commenced in April last year. Over this period, the cumulative trade deficit is JPY 4trln, or around USD 50bln. Weighing heavily on Japan’s trade performance over the past year has been the strength of the currency which has seriously damaged competitiveness. In the year ended January, customs-cleared exports fell more than 9%. Also impacting adversely on the trade sector is a general decline in productive capacity in the aftermath of last year’s tragic earthquake and tsunami. The latter has contributed to a rise in imports to compensate for the lost production. Also, higher energy prices are adding to the import bill. Total imports rose 10% YoY in January. Some care is required when analysing January’s figures because the Lunar New Year holidays fell in January, reducing the number of trading days. In seasonally-adjusted terms, exports fell only slightly while imports were up 0.4%. Notwithstanding this qualification it is clear that Japan’s trade competitiveness has suffered enormously over the past year. Thankfully, the currency is starting to pay attention. USD/JPY almost reached 80 yesterday. It would not surprise to see higher levels over coming months once March fiscal year-end flows are complete.

Britain’s two-tier housing market. Even more apparent over recent months is the two-tier nature of the British housing market. In London, house prices have been rising, whereas in the North, West and in Northern Ireland prices have been falling. According to Rightmove, a property website, asking prices in London jumped 2.5% this month, just below the record achieved last October. HBOS reported a 3% increase in London house prices in Q4 of last year. In many areas of the British capital, the supply of homes coming onto the market is declining, whereas demand is high despite widespread economic and financial uncertainty. London is definitely being assisted by an influx of foreign capital from Europe at a time when there are genuine fears over the long-term security of the euro. In times of real uncertainty, London often appeals to the wealthy as a safe and secure place. Also, London property is usually quite liquid. Elsewhere, the picture is very different as fiscal austerity and public sector cutbacks weigh on demand. In Scotland and Northern Ireland, prices collapsed by 8% and 7% respectively in Q4, according to HBOS, while in Yorkshire prices were down by nearly 6%. In 2012, this divergence in property prices between London and the rest of the UK will only widen further.

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