Ah, ha, Mr Amari, the Japanese Minister of Economy, has had a rethink. He has withdrawn his previous statement that the Japanese authorities should target a 13k Nikkei level by the end of March. Blast and here was I thinking we could just follow his play and retire to the beach forever !!!;

Japanese press and Reuters are now reporting that Mr Muto is the favourite for the job of governor of the BoJ. Whoops. This would be a bit of a surprise and his appointment seems to be opposed by the Minister of Finance.  Mr Muto is deemed the most conservative of all the 3 likely candidates. In addition, his candidacy was rejected by the current opposition, the DPJ and, in addition, some opposition MP’s are not in favour of an ex MoF official (which he is) becoming the governor. If the press reports are true, its bad for the Nikkei (which was -1.2% today) and suggests that the Yen will strengthen, which it is. Rather stupidly, I did not follow my advice to close my residual Yen shorts. I have done so this morning at a terrible rate – blast.  Having said that I think that I will almost certainly be shorting the Yen again in due course;

Cypriot elections to elect the President are scheduled for this coming weekend. OK, you say, why bother with Cyprus. Well, I believe you need to follow Cyprus. The reason is that EZ leaders need to agree on a bailout of the country, which if properly financed, will exceed the annual GDP of the country. Cypriot banks are BUST – no other word to describe them. EZ politicians are also concerned about alleged money laundering/tax evasion, engaged by these banks on behalf of Russians. In addition, it is clear, that the EZ will not deal with the current administration. The Germans have threatened that Cypriot bank bondholders will have to take a haircut – some German politicians have even talked about a haircut for uninsured depositors !!!!. The threat is that if bondholders and others take hits, the allegation that Greece was a special case is no longer the case. The threat of contagion is then back on the table – watch this space – don’t ignore Cyprus. Furthermore, there are differences of opinion between the IMF and the EZ. Finally, Cypriot debt, unless restructured ie CUT, will be unsustainable – a line the IMF is taking;

The head of the Portuguese debt management agency claims that Portugal will have full market access to bond markets in the next few months. Hmmm. Yes, it is true that yields of Portuguese 10 year yields, for example, have declined to 5.74%. However – sorry there I go again with however. Portuguese GDP declined by -3.8% Y/Y in Q4 2012. In addition, Portuguese debt to GDP is uber high and continues to rise. Borrowing at 5.74% or thereabouts, with a declining economy and with high debt – well, whatever the Portuguese head of the debt management agency states, it seems that’s he’s whistling in the wind to me. Portuguese debt is unsustainable in the medium to longer term, quite possibly even the short term. Sorry;

The head of the Bundesbank, Mr Weidmann states that the ECB will not cut interest rates to weaken the Euro. The Euro rose on the news. However, come on, lets get real. Mr Weidmann has just 1 vote on the ECB board and has been outvoted many, many times. Thanks for your comments Mr W, but I, for one, will not follow your advice. However, I accept that it will be difficult for Draghi to cut rates in March, given all this chat over currencies/currency wars. However in Q2……..;

Mr Weidmann stated that Cypriot bondholders etc would have to agree to a bail in – he refused to talk about uninsured depositors.

Just one other point. Mr W alluded that the deal over the Irish promissory note was tantamount to monetary financing of an EZ state, albeit for him, his remarks were somewhat subtle. Well, he is right, BUT IT HAS HAPPENED. Forget Mr Weidmann -  Mr Draghi and Mr Weidmann’s boss, Mrs Merkel are far, far more important.

What’s this – Mr Draghi said in Moscow that the ECB would review the deal by the Irish on the promissory notes. However, to block the deal, 2/3rds of the ECB board will have to vote against it, may I remind you;

Mr Draghi has been speaking at the G20 in Moscow. He stated:

• The Euro exchange rate is not an ECB policy target BUT is important for growth and inflation;
• He does not believe that the EZ will suffer from deflation;
• Q4 EZ GDP was clearly worse than expected;
• The LTRO repayments signifies a return of confidence in the EZ;

The EZ December trade surplus (seasonally adjusted) came in at E11.7bn, in line with estimates and as compared with the E11.0bn in November;

UK January retail sales (ex petrol) declined by -0.6% M/M (-0.6% Y/Y), much worse than the rise of +0.4% (+0.8% Y/Y) expected and the largest decline since April 2012.  Food sales declined by -1.6%. I continue to scratch my head. Recent data by the British Retail Consortium suggested that January retail sales had risen materially – indeed, by +1.9% in value, on a like-for-like basis. Sterling declined on the news. Personally, I think these numbers are unadulterated rubbish – food sales down -1.6%? come now;

Just a follow up on yesterdays US weekly unemployment claims. The blizzards in the East coast of the US may well have impacted the numbers, to the extent that the reported decline suggests a more positive position than is the case, in reality.  Sounds likely. We should know next week;

Bloomberg reports that a draft of the G20 communique does not refer to any particular currency and/or country in terms of currency manipulation. Basically, the draft contains the normal boring guff, which no one should take seriously. There are major differences (particularly between the most of the G7 countries – possibly excluding France – and the other members of the G20), though these are unlikely to be aired in public, especially by the major economies. However, watch Brazil and Russia and maybe India. All 3 countries believe that the US, Japan and, to an extent, the EU are manipulating their currencies – they have some pretty decent arguments. China will not be keen on references to market based currency levels;

Bloomberg also reports that Soros and Bacon (Moore Capital) have reduced their long gold positions. As you know, I do not invest in gold.  Seems to be inappropriate at present. Having said that my fellow countrymen here in India love the stuff. Just heard that the Chinese may be thinking of launching a gold ETF – if so positive for gold;

Just listened to an interview with Mr Gurria, the head of the OECD. Is it just me or is this guy a bit of a nutcase;

Outlook

Asian markets closed lower, following the bad Japanese and European GDP data yesterday. European markets are marginally lower. Early days, but US markets suggest a marginally lower open.

The focus is on the G20, though the draft report is pretty boring.

The Euro, having initially strengthened on My Weidmann’s comments, has given up its gains – the market realises that he is just one (lone) voice and Mr Draghi responded by stating that the ECB will remain “accommodative”.  Its trading ar US$1.3320, having been just below US$1.34 at its high. The Yen is strengthening – possibility of Mr Muto being selected – its trading at Yen 92.65 against the US$. Sterling, well its at US$1.5493, having been over US$1.60 recently.

Spot gold is trading at US$1626, with April Brent at US$117.52.

A bout of nervousness around, I feel. As you know, I believe that markets are overbought and due a correction – cant see any really good news around at present to buy the markets, apart from liquidity.

Have a great weekend

Kiron Sarkar

15th February 2013=

Category: Think Tank

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