Correction to the correction

After an 80 point sell-off in the Australian 10 year bonds and 100 points in the 3 years, we've spent the last 8 days correcting from the lows. We're at some pretty good resistance this morning and although volumes are light and the market is a bit skittish it seems a reasonable low risk idea to be short again around these levels - 96.89ish in the tens for example.

Spanish Stockmarket

The Spanish Sharemarket takes out the GFC lows.

Mexican Stockmarket

Housing Assets to GDP

(Australian equities had a total market capitalisation at the same time of $1.17 trillion, superannuation funds had a value of $1.3 trillion)

S&P Futures

Suddenly everyone is touting the US recovery and there doesn't seem to be a lot of catalysts to the downside in the offering. But (for the moment) it might pay to be cautious - its at the top of a trend channel and looks overbought after an extended low volume rally;

Australian Exports

Australian Exports of Goods and Services by Destination
2010   

                                                           Value (US$ billion)    Share (%)

 East Asia (excluding China and Japan)* 61                             23 

 China                                                  59                             23 

 Japan                                                  42                            16 

 European Union**                                 25                            10 

 India                                                   18                             7 

 United States                                      13                             5

 New Zealand                                       10                             4 

 Other                                                  32                            12

 *Includes ASEAN member nations, Hong Kong, Korea and Taiwan
**EU 27 including the United Kingdom

 Source: ABS; RBA 

What about Japan?

From Business Spectator's interview with Hayman Capital’s global strategist, Richard Howard;

What about Japan? 

Japan’s debt to GDP ratio is the worst in the world yet the country’s interest rates are the lowest in the world, excluding Switzerland. 

The primary reason is that for the past 15 years we’ve seen an excess of Japanese savings and a deficit of demand for those savings. So the Japanese government was able to issue debt without any competition from the private sector. But the Japanese demographic profile means that more workers are withdrawing from the workplace and drawing down their retirement savings. 

The Japanese government is running a fiscal deficit of 10 to 11 per cent of GDP. Spending on social security accounts for ¥27 trillion out against total revenues of approximately ¥45 trillion. In addition, the Japanese government has interest expense of ¥10 trillion. Add them both together, and the Japanese government is spending 90 per cent of its total revenue on these two items. 

We think that we are in the midst of an inflexion point, where there’s not enough Japanese savings to finance Japanese government debt. That means that the Japanese government will have to borrow in international capital markets. Given Japan’s risk profile – its debt to GDP ratio is 230 per cent – Japan may have to pay, say, 3 to 3.5 per cent to borrow. But that would push Japan’s interest expense to ¥30-35 trillion. We believe that is a recipe for disaster. 

The Bank of Japan has announced that it will start buying a lot of Japanese government debt, which will temporarily allay the problem. But if the market starts thinking that Japanese inflation will pick up, interest rates will be pushed higher.
One other thing that has provided stability in Japan and solace for investors in Japanese bonds has been Japan's consistent current account surplus. However beginning before, but obviously accelerating after the earthquake, tsunami and accident at Fukushima, Japan has seen its trade balance decline sharply. The reactor meltdowns and subsequent closure of the vast majority of nuclear plants has forced Japan to aggressively shift away from nuclear base load power. But that has meant it has had to pay a lot for LNG, oil and coal for its power generators.  

Last year, Japan’s ran a full-year trade deficit for the first time since 1980. The just released data for January show that Japan also ran the largest single month full current account deficit (in unadjusted terms) since the oil shocks of the 1970's. In addition preliminary data show Japan on track for another trade deficit in February, despite it being traditionally the strongest month for trade performance.  

Now, one of the things that the market relies on for Japan is that it is a net saver because it runs a current account surplus – take that support away and the market's sentiment on Japanese debt sustainability could change very quickly and very aggressively. 
We think a Japanese crisis is going to happen – there are some clear warning signs. And we think it will happen sooner rather than later. At present, the market view is that a Japanese crisis as an impossibility because there is so much committed capital that relies on stability that there is a cognitive bias and willful blindness to the risk that it will blow up in their faces.

 

Notes

From the wire;

• Greek official says 8-9 State Pension funds agree to take part in debt swap, four refuse to do so

• All of Greece's banks expected to take part in bond swap program

• "IIF Staff Note: Confidential" - A disorderly Greek default would cause more than a trillion euros ($1.3 trillion) of damage to the euro zone and could leave Italy and Spain dependent on outside help to stop contagion spreading

• Netanyahu: Israel Has Been Patient With Iran But Cannot Afford To Wait Much Longer 

• Brazil, which is South America's largest economy and has been one of the world's most dynamic emerging markets, reported weak growth for 2011 that raised fears it is slipping into a new era of mediocre growth. That came a day after China cut its growth forecast and data indicated that Europe is likely to fall back into recession

• The Bank of Queensland increased its standard variable mortgage rate by 10 basis points to 7.46 per cent, arguing that higher costs of raising funds overseas had put too much pressure on its margins.

Against this backdrop, the latest Reuters poll of Australian interest rates showed that "a number of analysts see the risk of a rate increase towards the end of the year and into 2013"... (might be time to punt on a rate cut)

Multiplex SITES

Multiplex SITES;

are Step-up Income-distributing Trust-issued Exchangeable Securities, which are fully paid units issued by Multiplex SITES Trust. 

Brookfield Multiplex Funds Management Limited is the responsible entity of Multiplex SITES Trust. 

SITES are listed on the ASX and trade under the ASX code 'MXUPA'.

The face value is $100 and they are currently trading at $76 dollars. They pay 3.9% over the three month bank bill rate and so the current distribution rate is 8.313%

Currently the three month BBSW is about the same - lets say 4.4% + 3.9% - so if you buy them at $76 instead of $100 the yield is just under 11%.

Additionally, they are buying them back themselves;

Brookfield Asset Management Inc bought 361,664 Multiplex Sites Trust units between August 29, 2011 and September 29, 2011, becoming a substantial holder with 361,664 units (8.03%).

Will they buy them all back? Who knows, but if they do they might not pay you 100 dollars but it would have to be more than $76...

Italian 2 year rate

The ECB's 1% three year LTRO funds have found a home...Italian 2 year bonds
down another 100 bps this week.

The Three year Ten year curve

The curve traded out at 39 on the close today. This should contain selling for the week
above which the market can potentially retrace to 51 over the next 1-2 weeks. On a close
below 39 for the week support is at 30.5 and 24.5.