Germany reports a budget surplus for 2012 – only Germany could do that

The BoJ governor, Mr Shirakawa stated that the Japanese economy remains weak – wow, what a revelation. More interestingly, he added that the BoJ would pursue “powerful monetary easing” – sounds like he’s going to grant Mr Abe his 2.0% inflation target, though will he add a target date – unlikely, I would guess.

Neighbouring countries, in particular South Korea, have stated that they may have to take action to deal with the weaker yen – here we go, competitive currency depreciations. How long before China responds and will the weaker Yen result in higher Chinese inflation. Volatility, is on the rise. Interestingly, Mr Zhu Min of the IMF warns that Japan needs to implement policies to consolidate its huge amount of outstanding debt – he’s right, but it ain’t going to happen, Mr Zhu.

James Bullard, the governor of the St Louis Fed stated that he was “a little disturbed” by the currency stance being adopted by Japanese – it risks “beggar- thy- neighbour” policies. Well, he’s right, but is the US in a position to lecture – remember the “strong US$ policy” !!! (Source Bloomberg);

The Yen rallied strongly this morning following comments by the Japanese economy minister, Mr Amari, that the recent Yen weakness has negative effects on the Japanese. He added, that Yen weakness would result in higher import prices. All true Mr Amari, but was not the plan to weaken the Yen. It looks as if the Yen is no longer a 1 way bet, but I continue to believe that the Yen will decline further, in particular as the BoJ is likely to be accommodative next week. In addition, Mr Amari and his colleagues will realise pretty soon that it will be impossible for them to keep the Yen at levels that they are comfortable with. The Nikkei pared gains following Mr Amari’s statement, though still closed +0.7% higher.

A recent IMF report suggests that Japanese debt to GDP will rise to 245% by the end of this year. You still want to be long the Yen ?;

The EC has reported that China is providing illegal subsidies to its steel makers. If the EC concludes further that Chinese manufacturers are being subsidised by being provided rolled steel at a subsidised price, EU manufacturers could attack all sorts of Chinese products which use such steel. The EC is also considering whether to investigate Chinese telecommunications products. This case will be important, as it will be instigated by the EC itself, rather than as a result of a complaint by an EU company, if it happens. In the past Germany has tried to avoid a trade war, though Thyssenkrupp is a major German steel manufacturer. Going to get interesting.(Source FT);

It looks as if China will start to use its forex reserves to co-finance overseas acquisitions by Chinese businesses. Clearly the commodity and energy sectors remain key targets, though Chinese businesses have also looked at/invested in, inter alia, infrastructure, property, food and utilities. An office called SAFE co-financing has been set up. China has some US$3.31 tr of forex reserves – basically a lot of M&A potential;

A report on Chinese radio, quoting Premier Wen, states that China will introduce property taxes. That’s going to upset the property market;

I have to say, I remain staggered that investors are buying Spanish banks and bonds. Yes the ECB’s OMT programme is supportive if Mr Rajoy asks for help, but with debt to GDP set to rise to near 100% this year (IMF’s forecast is 97%) and a 2012 budget deficit of 9.0% (once again IMF numbers), combined with little better expected for the current year, the situation is hopeless for Spain, in my humble view. As you know, I believe that Spain will have to restructure its debt, which if I’m right, will prove disastrous for its banks. However, investors have differing views. Good luck to them. I think they are going to need it;

German Q4 2012 GDP probably declined by -0.5% Q/Q, according to their statistical office, with 2012 GDP (non seasonally adjusted) to have risen by +0.7%, slightly lower than the +0.8% forecast. However, the German Statistical office stated that GDP would have been +0.9%, excluding “calendar effects”, apparently. In addition, it looks as if Germany will reduce its GDP forecast for next year to +0.5%, from +1.0% previously. However, I continue to believe that Germany will do better than that and will stick at my +1.0% target;

However, Germany produced a budget surplus last year – yes, a surplus, amounting to +0.1% of GDP, the highest since 2007 – in the midst of a serious financial crisis – you have got to be impressed – only Germany could do that;

The EZ November (seasonally adjusted) trade balance came in at E11bn M/M, higher than the E8bn expected and the (marginally) downwardly revised E7.4bn in October;

The OECD reports that the UK economy is doing better than currently thought – indeed, its the best performing of the G7 economies, ex the US apparently. UK official data has been downright dismal and 4th Q GDP is expected to come in negative – current estimates are for -0.3% Q/Q.

However, the OECD’s composite leading indicators (CLI’s) a measure which, according to the Daily Telegraph, has a good record of predicting changes 6 months ahead, states that UK growth “is firming”. As you know, I believe that UK data underestimates the strength of the UK economy, in particular data prepared by the ONS. Historically, such data has been revised higher consistently, though unfortunately many, many years ahead of its initial publication. Apparently, the OECD’s CLI’s suggest that UK growth is above the +0.5% to +0.6% long-term trend growth. Time to sort out the ONS, Mr Osborne. (Source Daily Telegraph);

UK December CPI came in at +2.7% Y/Y, in line with expectations and similar to November. Input and output PPI came in marginally lower than expected.
UK house prices rose by +2.1% Y/Y in November, higher than the +1.6% expected;

President Obama is becoming more assertive with Congress. He has warned Republican members of Congress not to threaten the continued recovery of the US economy and/or create a situation which increases interest rate or threatens the “full faith and credit” of the US. Republicans are torn between a desire by business to resolve the debt ceiling/spending cut crisis and the Tea Party supporters who are urging a tough response. In my humble view, the Republicans are pushing themselves into a no win situation. My US friends tell me that the fight will be on spending cuts, rather than the debt ceiling – an automatic sequester is not out of the question. The impending fight will negatively impact markets. The only good news is that the absurd notion of printing a US$1 tr platinum coin has been trashed. Mr Bernanke’s comment that he would not give the idea “any oxygen” is totally appropriate. Democrat members urge the President to invoke the 14th amendment, which states that the debt of the US “shall not be questioned”. The President does not consider such a policy appropriate. I must say, I agree. If you start taking “dodgy” measures, the markets faith in the US will become less certain, at best.

Interestingly, Fitch has stated that a delay in agreeing to an increase in the debt ceiling will prompt a formal ratings review. Hmmmm;

Mr Bernanke stated that the FED was examining the impact of its QE programme, which he reiterated had produced beneficial results to date. However, with changed circumstances, the FED was reviewing its programme. His speech was non committal, though I would argue that having raised the question, the likelihood of QE ending sooner rather than later is greater. Mr Bernanke added that he was “cautiously optimistic” of the US economy over the next few years and added that inflation was low, though unemployment too high.The FED has estimated that the US economy will be in balance with an unemployment rate of between 5.2% to 6.0%. Finally, he urged Congress to raise the debt ceiling above the current US$16.4tr level, at present. Absolutely;

Outlook

Chinese and Japanese markets rose by +0.6% and +0.7% respectively. Other markets were mainly higher, though Taiwan and Korea closed lower. European markets are marginally lower, with US futures suggesting a slightly weaker opening, through its early days.

The Euro is trading at US$1.3368, with the Yen at Yen 88.72 against the US$. There were some reports that Mr Amari’s comments earlier this morning were mistranslated, but the damage was done. My trailing stops kicked in and closed out all my short Yen positions. Oh well, will just have to put them back on.

Spot Gold is trading around US$1681, suggesting increased concerns, with March Brent at US$111.11.

On balance, I think its time for me to reduce my equity positions – I’ve had a great run and its time to become more cautious .Will concentrate on currencies, in particular.

Kiron Sarkar

15th January 2013

Category: Think Tank

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