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Uncertain Asia

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Asia_1(Sept. 15, 2009)

- Machine tool orders in Japan

Published last night, machine tool orders, down 71.5% on an annual basis, is one of the sectors, which have suffered the most from the plunge in global demand, given an 86.50% contraction since the peak between March 2009 and January 2009.

Like with the other indicators, rebounded by an impressive 83.7% last spring.

But once again, to quote Mr King whom I will discuss below, it’s the levels, stupid !

 

As you can see in the graph, below, despite this breath-taking percentage rebound, machine tool orders are still at their lowest levels since the statistic began publication, and that includes the deep dip of 1993. It is thus lagging, at half the average level of the past 25 years.

But this should come as no surprise. After all, who is going to invest in spanking new machine tools, when the world is weighed down by production overcapacity?

What is more worrisome is that, as one of the first available statistics for August in Japan, the 10% decline since June augurs for a reversal of the rebound in manufacturing. The red line, below, traces what was called, at the time, a “green shoot”.

Machine tool orders and industrial production in Japan
Keep a lookout for August IP, out 30 September

TC_915

Retail sales in Singapore also fell 1.6% in July, vs expectations of -0.3%, bringing the annual decline to -9.80%.

The Chinese Finance Minister confirmed worries about the strength of the current economic rebound, commenting that now was not the time to glibly talk about stimulus plan exit strategies.

One of the reasons for the yen’s appreciation against the dollar in recent weeks can probably be attributed to the following statements by the future DPJ government Finance Minister Hirohisa Fujii, who appears ideologically opposed to intervening on the currency markets in the current context for fear of repeating the errors of the 1930s:

"If the currency reaches an abnormal level, I think it is okay to make an exception to intervene.

But currency intervention is about leading the yen to a weaker position, right?

Before the Second World War, we called that currency dumping and everyone competed to dump their currencies.

Even now, some say our neighbouring country is doing exactly that.

But if we start this competition, the global economy will falter."

- European front

First, a little dig.

Retail sales published in the Netherlands this morning declined (-3.6% YoY) for the sixth consecutive month, reflecting a 2.1% fall in volumes and a 1.5% reduction in prices. Consumer electronics goods sales dove -15%.

But luckily, we have Iron-man Stark, who assures us that there is “no deflationary risk in Europe”!

Many of our clients have asked what drove Germany to launch debt in a foreign currency for the first time since WWII, with its $4bn 3-year issue.

We initially figured that the idea was to launch a sovereign issue in dollars at a lower rate than that issued by the US to take advantage of high international demand for paper in this currency by those seeking to diversify issuer risk and attracted by the German government’s excellent reputation.

Its CDS is 21.7 bp lower than that in the US, which is trading at 25 bp.

But no, the bond is trading in Mid-Swaps -25 bps, and thus 13.7 bp above IUS treasuries.

Not only does this appear strange, but I don’t see the point.

Some tell me that the German Treasury could carry out this operation, swapped at 35 bp below the Euribor, thus offering the 3-month at 0.35% to prop up certain banks in need of liquidity, i.e. those which have been driving the Eonia a bit every day.

The loudest cries of alarm about a credit crunch are now coming from Germany.

Mr Anton Boerner, President of the BGA (association of exporters and wholesalers) projects that wholesale sales will plunge 14% this year. I quote:

“warned that a broad credit crunch was looming due to the pro-cyclical credit rules stipulated under the Basel II banking regulations. “

His members anticipate on average a euro at $1.60 next year.

As for all my beloved clients who think that I return to the debt deflation whenever the opportunity presents itself, I admit, it is true!

And since you are right, feel free to check out the Evans-Pritchard’s acerbic article: US credit shrinks at Great Depression rate prompting fears of double-dip recession.

Tim Congdon of International Monetary Research has examined one of our favourite subjects: the decline in loans outstanding and M3 . I quote from his text:

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,"

Investment focus:

We remain favourable to fixed interest rate instruments, now with a bias more favourable to the 5-10 year range than to our 2-year champion.

We say the same thing for stock markets. We have considered it prudent to avoid participating in the recent rally, since the risk/profitability ratio does not look all that sexy.
But we prefer waiting until we get to the 2850-2900 range on Eurostoxx, before suggesting real delta negative hedging strategies.

Feel free to contact me at any time.

Erwan Mahé

Asset allocation and option strategy



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