NEW$ & VIEW$ (18 July 2012)


Lightning  Dire Signs for Spanish Economy

Spain’s housing and banking sectors continue to deteriorate, grim new government data showed, providing the latest indication that the country’s economy remains caught in a protracted recession.

House prices declined at the fastest pace since the start of the crisis in the second quarter, the public ministry said, while bank deposits saw a record decline in May from a year earlier, and bad loans increased for a 14th month in a row, the Bank of Spain reported.

Total private-sector deposits held in the country’s banks shrank 5.75% from a year earlier in May to €1.327 trillion. Some €7.4 billion were withdrawn compared with April, the data showed. The pool of bad loans jumped to €155.84 billion, or 8.95% of total loans, up from 8.72% in April.

Credit volume in Spain—which during the boom grew at annual rates of almost 30%—has been falling every month since February 2011, and in May was down 3.82% on an annual basis.

(…) The country’s house price index dropped 8.3% from a year earlier in the second quarter, indicating that the free-falling real-estate market has yet to find a floor. (…)

Hollande scraps tax breaks on overtime
Latest measure upsets French business and opposition

The move follows a number of other actions taken by the new government that have unsettled business leaders. The budget measures include scrapping a move by Mr Sarkozy to reduce employers’ heavy labour costs by shifting some of the financing of social welfare from employment charges to value added tax.

BCA Research warns that French recession could get worse:

France is currently headed toward mild recession and according to our Global Investment Strategy service, there is a non-trivial risk that if the French recession turns out worse than ’mild’, then its debt problem will be in the spotlight, creating intense pressures in the French bond market.

Lightning  Italy’s PM warns of Sicily default

Italian Prime Minister Mario Monti expressed serious concern on Tuesday over a possible default by Sicily, an autonomous region long criticized for its wasteful public administration and bloated government payroll.

Mr. Monti said in a statement that there were “grave concerns” that the southern island could default and he said he had written to Governor Raffaele Lombardo seeking confirmation that he would resign by the end of the month.

The highly unusual intervention from the Prime Minister underscored the gravity of the situation in Sicily, which accounts for around 5.5 per cent of Italy’s gross domestic product and has an unemployment rate of 19.5 per cent, almost twice the national level.

Despite the worry over its finances, Sicily is not expected to pose a major threat to Italy’s overall public finances and credit agency Fitch said it saw no immediate risk it would fail to meet its commitments.

“As far as we know, the region of Sicily is not in the best of financial conditions. But it’s not on the verge of an imminent default on its loans and bonds,” said Raffaele Carnevale, senior director for international public finance.

Fitch rates Sicily triple-B-plus with a negative outlook, one notch below Italy’s sovereign debt rating. The debt of Sicily and other local authorities amount to around €115-billion, contributing to Italy’s huge €2-trillion public debt.



Storm cloud  Intel warns on outlook for new orders
PC makers demand on hold amid uncertainty and Windows 8 launch

Paul Otellini, chief executive, told an analyst conference call that a recovery expected in the US and western European markets, where there had been “softness” for several quarters, had failed to materialise.

In the emerging economies of Brazil, Russia, India and China, PC prices had been rising with the value of the dollar, while China’s economic growth had been slowing.

“While we still see growth [in China], we don’t see quite as much as we first thought,” he said.

Smile  Homebuilder Sentiment Beats by Wide Margin



China’s Communist Party seems to have successfully restarted the FAI machine that it over-cooled in 2011. Spending on infrastructure slowed to only 2% YoY in December 2011. The pace of infrastructure spending has accelerated to 6% in the first half of 2012 but notice the monthly trend since April: +9% YoY in April, +9.7% in May and a huge +17.5% in June.

Not convinced that Beijing is behind the recovery? State-Owned-Enterprises infrastructure spending growth dropped spectacularly from a 20-25% pace in early 2010 to +15% in early 2012 and to 5-10% in the last 12 months. SOE’s infrastructure spending growth jumped to +11.1% in May and +24.7% in June.

Obviously, Beijing is re-stimulating in a non-traditional but quick-fire way.


China total electricity consumption came in at +4.3% YoY in June, from +5.2% in May. YTD electricity consumption rose 5.5%. The Chinese economy has yet to show any substantial sign of stabilization as these charts from ISI and Standard Chartered Research show.

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  • According to our recent survey of steelmakers, almost all respondents told us sales in July were getting worse and actual demand was below their expectations. (…) As for the demand outlook for next month, most steelmakers revised their expectations downward, with no one expecting improvement in the coming month, while about 20% of respondents thought demand may shrink further.
  • Construction machinery dealers surveyed mentioned that they did not see any recovery signs of improved demand in the first half of July.
  • Overall cement sales growth for the first two weeks in July remained sluggish. New project starts stayed at a low level in the property and infrastructure sectors. The majority of infrastructure projects are resumptions, whereas new starts were limited. (…) most of cement makers that we surveyed were pessimistic and generally believe that it will be difficult to see a recovery in cement demand for the next two months.
  • The July heavy truck dealer survey shows heavy truck sales this month may follow seasonal patterns, with M/M growth becoming negative and Y/Y growth coming in at around -20%. (CEBM Research)

If the dragon has landed, still a big if, it has yet to show signs of a new take-off. Chinese companies have been surprised by the rapid and significant slowdown. What will they do now to bring cost more in line with revenues? Fire people? That may be why Wen said yesterday that the employment outlook “will become more complex and severe.” Pointing up

“There are insufficient signs that China’s economy has hit bottom,” said Zheng Xinli, deputy head of the China Center for International Economic Exchanges and a guest economist of China Daily.

“Whether the economy has reached a turning point or will continue to decline in the third quarter remains unclear,” he told China Daily.

“Though the labor market remains stable, businesses have already had problems. If the economy remains in a downward spiral, more social conflicts will emerge following business closedowns and a decrease of local fiscal income,” Zheng warned.

Storm cloud  Chinese companies warn profits plunging as slowdown spreads

On Wednesday, Air China Ltd., one of three main government-owned airlines, warned first-half profit will fall by at least half from a year earlier. State-owned ZTE Corp., one of the world’s biggest producers of telecommunications equipment, is projecting a decline of up to 80 per cent.(…)

ZTE’s statement Friday said some Chinese phone companies were postponing new equipment orders – a downbeat sign for Beijing, which is pinning its hopes on higher investment to drive growth.

Air China blamed its lower profits on weak travel demand at home and abroad. China’s two other major state-owned airlines, China Eastern and China Southern, issued similar warnings earlier.

The country’s shipbuilding industry association, slammed by weak trade, says May orders for new vessels were half the level of a year earlier.

TCL Corp., one of the world’s biggest producers of televisions and other consumer electronics, said Sunday its first-half profit will be “significantly lower.” A major appliance retailer, Suning Appliance Co. Ltd., warned its own profit might fall by 30 per cent.

Li Ning Co., a maker of athletic shoes and sportswear, issued a profit warning in early July and announced the departure of its CEO and the launch of an overhaul to improve efficiency and profitability.

In the auto industry, Dongfeng Motor Co. Ltd., the local partner of Nissan Motor Corp., warned last week its first-half profit will be down 60 to 70 per cent. (Chart below from China Daily)

To summarize:

As of Tuesday, 449 listed companies said they expect their first-half profits to decline from a year earlier, while 233 others expect losses, accounting for 46.74 percent of listed companies that have issued their first-half performance forecasts thus far.

Due to economic complexity in the second quarter, 103 companies trimmed their profit forecasts for the first half, accounting for 64.78 percent of those that revised their first-half forecasts.


Make or Break Time for China

Storm cloud  Dell CEO warns of slowdown in China

Dell Inc. is experiencing a business slowdown in China, its largest market outside of the United States, chief executive officer Michael Dell told a business forum on Tuesday.

China June Property Prices Flat

Average housing prices in 70 Chinese cities were flat in June from May, ending eight straight months of declines and offering yet another sign that the country’s real-estate market may have bottomed out.

[image]Encouraged by cheaper mortgages after China’s central bank cut interest rates twice since June, home buyers have returned to the market in droves, and “pent-up demand from genuine home buyers and upgraders—as well as worries [by prospective buyers] that the market will rebound–sent prices in some cities higher in June over May,” said Ma Xiaoming, a statistician from the statistics bureau.

Some property developers have also canceled discounts as transactions increased, he added.

Based on Dow Jones Newswires calculations, prices in the 70 cities increased by a marginal 0.02% on average in June from a month earlier, compared with a 0.1% fall in May and a 0.25% decrease in April.


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