WEEKLY ECONOMIC COMMENTARY, 20 MAY 2012 (by DIFC)

Markets

It was a dismal week for equity investors with all regions affected by the ongoing Greek drama and Spain sub-plot as even the Facebook IPO received only a muted response. Regional markets were not spared either, with Tadawul closing near a 3-month low on Saturday. While the euro continued to be battered, the Indian rupee continues to slide to record lows given its burgeoning current account and fiscal deficits alongside withdrawals by foreign funds. Among commodities, gold was one of the gainers, posting its biggest weekly gain in a month, while crude oil prices slipped.
Global Developments
Americas:

Industrial production in Apr recorded an uptick of 1.1% mom (Mar: -0.6%), above market consensus, with manufacturing rising by 0.6%. Motor vehicle production, at 3.9% (Mar: 1.2%), accounted for much of the rise; factory output excluding this segment recorded only 0.3% hike. Capacity utilisation increased to 79.2% (78.4%) - the highest since Apr ‘08.
Retail sales grew at the slowest pace this year by 0.1% mom in Apr (Mar: 0.7%), weighed down by building materials (-1.8%) and clothing (-0.7%).
Housing starts increased 2.6% mom to 717k (sa) in Apr, though building permits fell to 715k (sa) from a 3.5 year high largely owing to a 23% drop in the volatile apartments segment.
CPI for Apr was 2.3% yoy and remained unchanged mom (Mar: 0.3%) while core CPI, which excludes food and energy costs, picked up 0.2% mom.
Initial jobless claims remained flat at 370k in the week ended May 12, taking the four-week average to 375k from 379,750 previously.
US tax rules that require reporting of Americans' overseas bank accounts has resulted in some Asian banks turning away US customers while an official from BlackRock stated that “foreign investors may choose not to invest in funds that include US securities because they could be penalised if they work with a foreign broker who isn't compliant”.

Europe:

With no coalition government in Greece, the country goes into another election, scheduled for June as the speculation that Greece could leave the euro continues to spook markets. It was also reported that about USD 894mn was withdrawn from Greek banks on Monday alone, leading to a potential bank run.
The Bank of Spain disclosed that bad bank loans had risen to EUR 148bn at end-Mar, the highest since Aug ‘94, accounting for about 8.4% of the sector’s entire loan portfolio. Moody’s, meanwhile, downgraded 16 Spanish banks, citing “recession, reduced funding access for lenders and deterioration in loan quality.
Q1 GDP data was released for the Euro area along with a clear divergence pattern emerging in growth numbers of Germany, France, Italy and Spain. Euro area growth was unchanged from the previous quarter (Q4: -0.3%), avoiding a recession headline helped by Germany, which reported a strong 0.5% qoq pick-up helped by exports (Q4: -0.2%). France’s growth dissipated in Q1 (Q4: +0.1%) while growth in Italy was down by 0.8% (Q4: -0.7%).
EU industrial production fell 0.3% mom and 2.2% yoy in Mar (Feb: +0.8%), as energy production declined by a whopping 8.5% (+8.7%). Production increased in Germany by 1.3% while most other nations reported declines: Netherlands (9%), Spain (1.8%), Greece (1%).
German ZEW registered a decline by 12.6 points to 10.8 in May: as per the report, "the outcome of the elections in Greece and France has made it more doubtful that European governments will resolutely fight the sovereign debt crisis", resulting in lower investor confidence.
26 Italian banks, including UniCredit SpA and Intesa Sanpaolo SpA, were downgraded by Moody’s last week citing “the banks' vulnerability to mounting loan defaults and potential funding problems”.

Asia and Pacific:

Japan’s machinery orders declined by 2.8% mom in Mar (Feb: +2.8%), largely from the volatile chemical sector which dipped followed a rise the month before. However, inspite of the decrease, orders for Q1 remained positive at 0.9% qoq.
Domestic demand and exports rebounded in Q1, enabling Japan’s GDP to expand by 1.0% qoq, from Q4’s unchanged reading. In yoy terms, growth was up 2.7%, the first yoy rise in 5 quarters.
Singapore’s non-oil domestic exports (NODX) rose by 8.3% yoy in Apr (Mar: -4.3%) with strong performance from both electronic (+1.0%, Mar: +2.8%) and non-electronic (12%, -7.8%) segments. While NODX to US and Europe declined, the top three countries expanding were Japan, Hong Kong and South Korea.
Singapore GDP grew 10% qoq and 1.6% yoy in Q1, a tad higher than initial projections, compared to 2.5% qoq contraction and 3.6% yoy growth recorded in Q4 2011. Growth forecast for this year has been maintained in the range of 1-3%, amidst uncertain global outlook.
Unemployment rate in Korea held steady at 3.4% in April, while total employment was up 1.9% yoy to 24.76mn. Meanwhile, the UN’s Social and Economic Survey of Asia and the Pacific forecast youth unemployment in the region to remain unchanged at 10.2% this year.

Bottom line: Even as Greece dominates headlines and heads to another round of elections in June, the G8 leaders have sent out a statement that “we reaffirm our interest in Greece remaining in the euro zone while respecting its commitments”. The balance of power between Germany and France is likely to come into the forefront again, if the G8 meeting (where France’s growth-oriented strategy found some acceptance) is anything to go by. Till the question of Greece’s “will it or won’t it” leave the Eurozone is answered, market volatility can be expected, irrespective of data releases.

See: http://www.difc.ae/difc-blogs/weekly-economic-commentary-may-20-2012