Watch out for China

Markets are acting as if everything is great. A much stronger Euro and a weaker US$ is certainly helping equity markets. EM’s are going for growth policies, rather than taking measures to curb inflation.
Everything depends, crucially on the Euro Zone in the next few weeks, leading up to the G20 meeting in early November. The big issue is how a number of Euro Zone countries (France, Spain, Belgium recapitalise their banks). Germany is insisting that individual countries provide the necessary capital themselves – France, fearing a credit downgrade – its inevitable, in any event – is resisting – it wants the EFSF to be used. However, well over E200bn will be necessary to complete the exercise. That’s not available. The ECB is refusing to leverage up the EFSF. Something has to give. Personally, I believe it will be the ECB, especially following the departure of Trichet, Stark etc. In the interim there are going to be a lot of scares, but Euro Zone politicians (crucially German’s in particular) have finally got it.
Personally, I believe that the Euro Zone solutions will not be enough when announced later this month/early next, which will create a wobble in the markets. This will force them to rethink. Expect major policy decisions in the next few months.

The current Euro/£ strength seems overdone, though Gold/Oil is responding accordingly.

Equity markets remain dependent on the situation in Europe – however, continued political deadlock etc in the US is being ignored – dangerous. US economic data has been better than expected and reduced longer term interest rates is resulting in record low mortgage rates with a massive amount of mortgage refi’s, increasing disposable income – clearly positive. The US housing market remains the key to the US economy.

US season is beginning – Alcoa’s results were disappointing. Europe is to blame apparently – expect many more such issues.

At the end of the day, I believe that even Europe will have to push the inflation button – there is no alternative. The ECB/Germany remain the key obstacles, but QE by the ECB, personally I think its coming.
In any event, ECB will will be lowered by 50bps at least, probably starting this year, which will be welcomed by the peripheral Euro Zone countries, in particular, given their higher personal borrowing levels.

Whilst Europe is on every one’s radar, events in China are deteriorating rapidly. The attempts by the authorities to organise a “soft landing”, through monetary tightening are not going well. Will be bad news for the miners/A$. Look like great shorts pretty soon.
Watch this one very carefully indeed.

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Kiron Sarkar is a qualified UK accountant, Kiron joined the M&A dept of N M Rothschild in London. He was then appointed head of M&A of Rothschild (Hong Kong). On his return to the UK, he was a founding member of the Rothschild international privatisation team. Subsequently headed up the Central and Eastern European (“CEE”) team – rated No 1 in 4 out of 5 years (Privatisation International).

On leaving Rothschild, he worked as privatisation adviser to the UK Governments Know How Fund, which was established to advise Governments in CEE on policy, privatisation, economic, financial, regulatory and other issues. Subsequently European Head of Media, Tech and Telecoms at CIBC World markets. Following CIBC, Kiron advised on telecoms and energy deals in CEE.

Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.