Italian polls suggest Berlusconi just 4% behind Bersani

Australian December retail sales declined by -0.2% M/M, the 3rd consecutive monthly decline and much worse than the gain of +0.3% expected. The Australian Central bank kept rates on hold recently, though further cuts this year are very likely – perhaps by a further 50 to 75 bps lower than the current rate of 3.0%. The A$ declined on the disappointing retail sales data – currently US$1.0315;

Bloomberg reports that Goldman’s President Mr Cohn is bullish on Chinese banks. However, did not Goldman’s sell a major part of its stake in the Industrial and Commercial Bank of China (ICBC) recently, raising some US$1bn, though admittedly still holds a stake worth about US$1bn. Hmmmmm;

The Chinese government has pledged to raise minimum pay to 40% of average salaries by 2015, require SOE’s to increase dividend payments to the State by an additional 5 percentage points, loosen controls on lending and deposit rates, expand the pilot programme of property taxes, impose a consumption tax on luxuries, strengthen income tax collection and increase spending on education and public housing. The authorities are concerned over income disparities, which could lead to social tension. Indeed, China’s Gini coefficient, a gauge of income disparity, rose to 0.474 in 2012 – a reading above 0.4 is deemed to be the danger level, which could result in social unrest. Other surveys place the Gini level at 0.61. However, increasing wages is much more likely than a general redistribution of wealth, given the power and influence of a number of vested interests. (Source FT);

Some Italian polls suggest that Mr Berlusconi is just 4 points behind Mr Bersani’s PD party ie within the margin of error. Mr Monti has stated that he would be prepared to form a coalition with Bersani, if his centre-left party, the PD, agreed to his economic and financial policies – not that easy, given the policies of some of the left leaning members of the PD. This is getting messy;

As was likely, Fitch downgraded Holland’s AAA outlook to negative, from stable. They cited the high level of public debt, problems at some Dutch banks and a material decline in property prices. The credit agencies are very likely to reduce the Dutch credit rating below AAA. If that happens (likely), there will just be 3 EZ countries (Germany, Finland and Luxembourg) with a AAA rating. However, the downgrade, when it happens, will not have a material impact;

Yet another contentious difference of opinion between Germany and France. Yesterday, President Hollande of France called, for a weaker Euro, in effect. The German’s are opposed to currency intervention. The divide between France and Germany widens and I certainly don’t see any agreement on these issues in the immediate future;

German seasonally adjusted December factory orders increased by +0.8% M/M, roughly in line with expectations, though a significant improvement over November’s decline of -1.8% M/M;

The US December ISM survey came in at 55.2, slightly lower than the 55.7 (a 10 month high) in November, though above the 55.0 expected. Importantly, however, the employment subcomponent rose to 57.5, up from 55.3 in November, the highest since February 2006;

The US budget deficit is expected to decline to US$845bn, or 5.3% of GDP this year, assuming the sequester takes place. The CBO reports that the budget deficit will continue to improve till 2015, to just 2.4% of GDP. However, after that date, the deficit rises due to an ageing population, with the deficit increasing to 3.8% by 2023, with debt to GDP at US$20trn or 77% of GDP.

Outlook

The main Asian markets closed mainly higher, with the Nikkei up +3.8%. The main European markets are lower, with the exception of the FTSE. US futures suggest a flat open.

The continued rise in Brent (currently US$115.80, though off its highs) has largely been ignored by markets. However, the increase will negatively impact growth and increase inflation, especially in EM’s where the energy component is a larger element than it is in DM’s. These effects should come through pretty shortly – not going to be market positive.

The Euro is bouncing around, though currently lower at US$1.3520 – I remain short. The Yen, having declined to over 94 against the US$, is currently trading around Yen 93.61 against the US$ – I remain short.

Its ECB day tomorrow – no rate cut is expected, though Mr Draghi’s comments may be dovish, in particular, given the recent rise of the Euro. However, I do not believe that Mr Draghi will talk about the Euro explicitly, even though he will be asked a lot of questions on the matter. US short term yields (2 years) are some 3 bps higher than comparable German yields. This reversal suggests to me that the Euro should weaken against the US$.

Spot gold is trading at US$1674

I continue to reduce my equity holdings, as I believe that markets are overbought, complacent and due a correction. Inflows into equity markets are clearly supportive, though the political landscape internationally, in particular, looks more problematical and, I suspect, will outweigh other factors. I added a small short position in the mining sector.

Kiron Sarkar
6th February 2013