Friday, 6 July 2012

Weekly Review


What a week!  Looks like the major central banks fired some bullets with the intent to fuel the economy.  Lets take a further look into specific regions...........

This is the second time in a month (second time in four years!)  that the Peoples bank of China have cut interest rates.  One year lending rate decreased 31basis points and one year deposit rates dropped 25 basis points. 
The effects were felt immediately! Chinese property shares rose the the most in four months.  The Shanghai Composite Index added 350basis points.  Companies like China Vanke and Poly Real Estate Group benefited from this despite governments restriction on the property market.  Lets keep in mind that Chinese rates are currently sitting at 6% which gives them lots of fire power.

ECB president Mario Draghi adopted Bernanke style Economics by cutting the Benchmark rate to a Record Low of 0.75% and the overnight deposit rate to 0!  Unlike China's 6%, the ECB doesn't have much fire power left and will eventually fall into a liquidity trap. 
How have the European markets responded?...............Not Good!.  Despite the the rate cut and the EU plans to recapitalise the banks, Spanish yields are back up to 6.95% from 6.25% earlier this week (7% is very likely a tipping point).  There's not much the ECB can do now without some sort of Fiscal unity.  I say lock the EU leaders up in a cabin somewhere in the Alpes and don't let them out until they reach an agreement. 
Will the Euro Zone break up?...............  Roger Bootle thinks so, he is managing director at Capital Economics Ltd and talks about the outlook for the euro zone, central bank rate cuts and monetary stimulus. Bootle recently won the Wolfson Economics Prize for proposing a contingency plan for the breakup of the euro. 

Recovering from the Rupert Murdoch scandal of last year, England was hit with another one.  The Bank of England has been drawn into the scandal over Barclays Plc's rigging of LIBOR rates.  Nonetheless, the Bank of England raised its target for bond purchases by 50billion pounds to stimulate the economy.  The Bank has grown particularly concerned that rising borrowing costs could trigger defaults that cause bank losses to mount, setting off “an adverse feedback loop” that would weigh on economic growth and threaten the health of the financial system as a whole. Barclays is the most exposed of all UK lenders to the eurozone periphery, with loan and sovereign debt exposures equivalent to 170% of its entire equity capital. Royal Bank of Scotland also has dangerously large total exposures to the region.

After the FOMC and the extension of Operation Twist on June 20th we saw positive signs in the economy.  Home sales rose the most since April 2010 and the markets showed some signs of improvements.  But what's really happening? In the last month, two municipalities of California, Stockton and Mammoth Lakes filed for Bankruptcy.  A bad economy, housing problems and unfunded pension obligations seems to be the root cause of the problem. 
Just look the numbers! official data showed firms had created only 80,000 new jobs in June, leaving the jobless rate unchanged at 8.2%.  Job creation remains below the 100,000 judged necessary by the Federal Reserve for a stable job market, according to the US Labour Department.
So what will the Fed's do now?  Do I smell QE3?  TD economists tend to think so placing the odds of a third round of quantitative easing at  a relatively high possibility!


  1. very thorough in your analysis, where can I find more of your weekly postings/analysis?

  2. great overview!

  3. Thanks for keeping us informed.