Chinese markets surge over 3.0% today

Australian mortgage approvals unexpectedly declined in November, the 1st time in 4 months. Approvals declined by -0.5%, as opposed to an increase of +0.5% expected. The RBA has been far too cautious in cutting interest rates in my humble opinion, though another cut next month is pretty likely. However, the A$ is rising on better news from China;

Japan is to increase its defence budget for the 1st time in 10 years, including increasing expenditure on its coast guard. In addition, will Japan go for a nuclear weapon – there are some indications that it is considering such a move. Are the Chinese ratcheting up pressure over territorial claims in the South China Seas to deflect from criticism over censorship of the internet, combined with corruption issues, involving senior officials? If so, its a particularly dangerous strategy. The Chinese had better understand the concept of “blowback”;

A former deputy governor of the BoJ, Mr Iwata, suggests that Japan may establish a fund to buy US treasuries – a figure of Yen 50 tr (US$560bn) has been mentioned. JPM has suggested that the size of such a fund may be doubled, or indeed have no cap – wow. CLSA’s Greed and Fear suggest that Mr Iwata is a leading candidate to replace Mr Shirakawa as governor of the BoJ. May need to rethink my strategy of shorting US treasuries. Furthermore, if Japan starts buying US treasuries, is their any point in the FED doing the same?. Such a move may be US$ supportive, as well. Mr Iwata stated that the Yen may decline to Yen 95 against the US$. All this proposed fiscal and likely monetary easing could well result in a Yen freefall, that will be hard to contain. I must say, I’m not totally convinced that the Japanese will introduce all these measures, but such announcements, given the current momentum, are clearly Yen negative. However, buying US Treasuries will limit the rise of Japanese bond yields;

India’s wholesale price index declined to +7.18% Y/Y in December, lower than the +7.37% forecast and +7.24% in November and the lowest rise since December 2009. The better inflation data suggests that the RBI will cut interest rates by 25 bps to 7.75% at its next meeting on the 29th of this month, inspite of consumer prices rising by +10.56% Y/Y, the highest since January last year;

Italian November seasonally adjusted industrial production came in at -1.0% M/M (-7.6% Y/Y), much worse than the -0.2% expected, though slightly better than the -1.1% in October.

EZ November seasonally adjusted industrial production came in at -0.3% M/M, worse than the +0.2% expected and the upwardly revised -1.0% in October;

Capital flight out of France has amounted to E53bn in October and November last year, as Monsieur Hollande announced an increase in taxes. 6 month real M1 has been contracting at an increased rate, since President Hollande’s election in May last year. I remain of the view that French markets will underperform this year and that France remains the biggest threat (together with Spain) to the EZ. (Source Ambrose Evans-Pritchard in the Daily Telegraph);

The EU has circulated proposals which would force EZ countries to either invest in their failing banks, alongside the ESM or guarantee the ESM against any losses. The plan which ensures burden-sharing, will fail to break the link between failed banks and the relevant countries. It will be bad news for Ireland, which has been trying to shed debt accumulated through the E64bn of support that it has provided to its banks. However, more importantly, what of Spain, Greece and Cyprus, in particular……..Peripheral EZ banks are likely to react negatively to the publication of these plans, which are due to be considered by EZ countries in June this year;

David Cameron has changed the date that he is to speak on a referendum in the UK on continued participation in the EU. Originally set for the 22nd January, the 50th anniversary of the Elysee Treaty between France and Germany, the UK had received strong criticism from Germany. The Foreign Office allegedly had forgotten about the 50th anniversary. The speech has been postponed to, most likely, the next day;

The US Dept of Agriculture reduced its estimates of corn, as inventories are some -17% lower than last year, with wheat -5.0% lower. Soya stocks are also -17% lower. The news will be reflected in higher inflation in EM’s in particular, given their higher inflation weighting for food. The news was unexpected and corn, wheat and soya prices rose.(Source Bloomberg);

The Obama administration has now proposed that the UK does not hold a referendum on remaining in the EU. These interventions are getting totally absurd. Indeed, it just forces the UK to hold one – the uproar in the UK otherwise would be impossible for Mr Cameron to deal with.

A number of prominent UK businessmen warn about the UK leaving the EU – were these not the same people who suggested we join the Euro or faced unmentionable consequences !!!! As with the US, it would be far, far better for such businessmen to leave this matter alone;


Asian markets closed higher. The Chairman of the Chinese Securities Regulatory Commission reported that China would consider increasing quotas (in respect of foreign ownership of Chinese securities) by 10 times, which resulted in the Shanghai Composite rising by +3.1%. European markets are trading higher, with US futures indicating a higher open as well. Mr Bernanke speaks today – can’t see him changing his generally dovish view, though he is likely to say that the US economy is improving.

The Euro is trading around US$1.3368, having traded above US$1.34 earlier. The Yen’s at Yen 89.36 – has backed off somewhat, though I expect it will rise to above the psychological Yen 90 barrier shortly.

Gold is trading around US$1669, with March Brent at US$110.32.

Kiron Sarkar

14th January 2013

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