Italian markets suggest a Bersani win, with Berlusconi to fail: What about Grillo?

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“Japan is not, and will never be, a tier-two country” the Japanese PM, Mr Abe, stated during his visit to the US. Whilst true, such a statement is bound to annoy Beijing, who see themselves as the sole regional power. Mr Abe is also proposing to increase defense spending and defend Japanese sovereignty of the Senkaku Islands, which the Chinese call the Diaoyu islands and, indeed, claim as Chinese territory – an ongoing “tricky” situation to say the least. Mr Abe raised the issue with President Obama, who is trying to defuse the situation.

The PM also raised the issue of entering talks re the proposed Trans Pacific Partnership, the TPP – though agriculture (politically important Japanese rice farmers) are an issue;

Japanese press reported over the weekend that Mr Haruhiko Kuroda, the current president of the Asian Development Bank, will be chosen by PM Mr Abe to be the next head of the BoJ, with the announcement to be made in a few days. He certainly seems to be the best of the 3 contenders allegedly in the running. Mr Abe needs the approval of the Upper House of Parliament, which he does not control. Mr Kuroda has, in the past, recommended that the BoJ target a higher inflation rate (he once suggested 3.0%, but has stuck to the PM’s 2.0% target recently) to dig Japan out of its 15+ year deflation problem. There is also speculation that Mr Iwata, the uber dovish candidate, may get one of the 2 deputy governor positions. The markets welcomed the news, with the Nikkei up over 2.4% at the close and the Yen weaker, though off its lows. Traditionally, Japan appoints the head of the Asian Development Bank, though if Mr Kuroda does get the job, there may be a move by some countries in the region to try and change that;


The HSBC February flash PMI came in at 50.4, lower than the final reading of 52.3 in January and the forecast of 52.2. The reading is just another piece of information which suggests that the Chinese economy has not sprung back as robustly as was thought initially. The Chinese New Year holidays may have impacted, but the new orders component declined to 49.8 in February, as opposed to 53.7 in January. Whilst too early, other anecdotal evidence I have received, suggests some weakness is creeping in. In addition, there are fears over rising inflation and proposals to increase fuel prices, for the 1st time since September, will not help.

On another issue – the trial of Mr Bo has not started as yet – Hmmmmmm. It has been a very long time. Some reports suggest that the ousted leader has regained some support – will prove tricky for the new leadership, which takes over in March, if true. Too early to fully analyse the situation though;


The Centre-right Mr Nicos Anastasiades won the Presidential elections in Cyprus over the weekend, defeating his Communist challenger. The President, who has the backing of Mrs Merkel, has promised to solve the country’s sovereign and bank debt issues quickly !!!. Essentially, Cyprus and its banks are bust. Mrs Merkel needs the support of her opposition to approve a bailout and the opposition (the SPD) are deeply concerned about allegations that Cypriot banks were engaged in money laundering and tax evasion on behalf of Russians, in particular. Whilst most expect a speedy resolution, I believe that the more likely outcome is some kind of fudge (yet again) by the EZ, which tides Cyprus over until after Mrs Merkel’s September general elections. There is a question of bank bondholders and depositors facing haircuts. These are potentially serious potential contagion effects. However, I believe that bondholders will, indeed, face haircuts, though depositors (just and I repeat just) are unlikely to be hit, based on present circumstances. The Russian authorities will have to contribute. The IMF is pressing for a restructuring of Cypriot sovereign debt as it has to be comfortable with the prospective debt sustainability of the country. The negotiations are likely to be tougher than the market expects and some kind of repayment of bailout loans, linked to prospective natural gas revenues and a significant downsizing of the country’s financial sector are likely demands by the Germans, in particular. The other major issue is whether all of this can wait till the German elections are over?;


The Bank of Greece forecasts that GDP will decline by -4.5% this year !!!!. They do forecast growth for next year. It’s going to be a long hot spring/summer. The threat of civil disorder must be extremely high;


The French Finance Minister has requested that the EU allow the country an extra year to get their budget deficit down to the 3.0% target – a target which the French were supposed to have been met this year. The EU forecast that the French budget deficit will reach 3.7% this year, rising to 3.9% next, with the EU Commissioner, Mr Olli Rehn, talking semi-tough (for his German audience) last Friday – but in reality, what can he or the EU do. The EU will have to argue that France has embarked on a programme of fiscal and structural reforms – quick go get the microscope !!! and, most likely, they will. The bigger issue, is that relations between Germany and France will become even more strained. The German’s are demanding that France, as their key “partner” in the EU (divorce is on the cards), should stick to its commitments. Well they can ask/demand, but………Relations between Mrs Merkel and President Hollande are “strained” and worsening day by day. Seriously, the continuing split between Germany and France will have some pretty profound implications for the EU/EZ in coming years – watch this space;


Moody’s stripped the UK of its top Aaa rating, downgrading the country by 1 notch to Aa1, through with a stable outlook. The ratings agency cited the country’s weak growth outlook, high and rising debt, a reduced capacity to withstand shocks and the challenges it faces in respect of its fiscal consolidation programme. Moody’s suggested that UK government debt was unlikely to decline before 2016, The news should not have come as a surprise, though sterling did decline by some 0.9 cents against the US$, to a 2 ½ year low, following the news. However, the downgrade should not really impact the UK (the 10 year gilt yield has risen by just 1 bps). After all the US, Japan and France have all been downgraded, as have other countries, with no discernible negative impact – indeed, quite the opposite. However, politically, the UK Chancellor will be challenged by the opposition party, given his pledge to retain the AAA rating and his party and coalition partners may put pressure on him to limit the austerity measures – unlikely to accede to their requests. The yield curve may steepen, with the short end stable, though the longer end rising, given the inflation outlook – good for UK financials. Latest EU reports suggest that UK debt will rise from 90% of GDP last year, to 95.4% this year and 98% next. In the EZ, Holland is likely to be downgraded as well;


CPI rose by just +0.1% M/M in January, or +1.0% Y/Y, well below the Bank of Canada’s 2.0% threshold. It is the slowest rate of inflation since the crisis in 2009. The BoC has been threatening to increase interest rates since the start of 2012. With the extremely poor retail sales numbers announced on Friday, the chances of the BoC increasing rates is zero. However, an interest rate cut by the BoC in due course?. Canadian Q4 GDP will be announced shortly. The C$ declined following the retail sales/CPI data released last Friday and should come under further pressure;


Current information suggests that the sequester will take place. However, there are some who say that there will be a deal sometime after the sequester takes place. A game of chicken/blame game is being played out. The effects of the sequester will take time to impact, which could be a reason for the lack of movement for the present;.



Asian stocks closed higher, with the Nikkei up +2.4%.

European markets are much higher as well, ahead of the Italian elections, where polls are to close shortly. The MIB is up strongly (up over +2.3% at present), following up on decent gains on Friday – seems like the market is saying that Bersani will win with Berlusconi failing to make a serious impression. However, what about Mr Grillo?.

US markets closed at their highs of the day on Friday, following comments by the St Louis FED governor that the FED”s easy money policy would continue for a “long time”. However, US markets (S&P and Nasdaq) broke their 7 week winning streak. US futures suggest that US markets will open higher.


The A$ having weakened on the poor HSBC flash PMI data, is recovering and is currently flat at US$1.0315 – however, the RBA signaled that it was unlikely to cut rates, which should be positive for the A$;

The Yen is weaker on the prospective appointment of Kuroda as BoJ governor, though well off its highs – currently Yen 93.98 against the US$ – about Yen 0.70 stronger than its early morning lows;

The Euro is up around +0.8% at US$1.3302 – will be impacted by the Italian elections – also suggests a Bersani win;

Sterling remains in the doghouse following the Moody’s downgrade – currently US$1.5138.


US 2 year Treasury yields are at 0.25%, with the 10 year at 1.97%;

German 2 year bunds are yielding just 0.13%, with the 10 year at 1.59%.

UK 2 year gilts are yielding 0.26%, with the 10 year yield at 2.12%.

The US/German short term yield differential (12 bps) is in favour of US Treasuries and is US$ supportive.


Spot gold is trading at US$1592 at present – the market is not focused on the precious metal at present and, in addition, the US$ is strengthening. In addition, it looks like hedge funds, in particular, are reducing their long positions;

April Brent is up strongly, trading at US$115.38 – up 1.1%+, a real concern, given the state of global economies.

No major US economic news scheduled for today.

Generally, I remain cautious to negative of equity markets and, in terms of currencies, prefer the US$ to other currencies.

Finally, welcome to the Sarkar Global Macro newsletter – a mouthful of a name, I know. I trust we all have a long and profitable relationship.

Kiron Sarkar

25th February 2013



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