A bit of calm in Europe today – for how long?

Rumours circulate that the Japanese authorities will announce an increase in their asset purchase programme this Friday to Yen10tr, from Yen5tr at present. Certainly possible;

China’s Leading Economic Index rose by +0.8%, the slowest pace in March, as compared with an upwardly revised 1.0% in February. Markets fell on the news. However, there is enough evidence around to confirm that China is embarking on an easier monetary policy and, in addition, introducing measures to stimulate their economy – not surprising given the major political changes (7 out of the 9 members of the State Council – the guys who run China change) later this year;

Australian CPI came in at +2.1% YoY (+0.4% Q/Q in the 1st Q), close to the 2.0% – 3.0% range set by the RBA and lower than the +0.6% Q/Q or +2.4% YoY expected. The trimmed mean gauge of core prices rose by +0.3% Q/Q, the lowest since the 3rd Q of 1998. The fall in inflation should allow the RBA to cut interest rates by at least 25bps next Tuesday. The A$ declined on the news – currently US$1.0286;

German press reports (Die Welt) that the authorities will increase their forecast for 2012 GDP growth to +0.9%, from +0.6% previously and between +1.6% to +1.9% for 2013. Private sector forecasts are marginally more bullish – they suggest that GDP will rise by +1.0% this year ;

The Dutch PM, Mr Mark Rutte has resigned, following the failure by Mr Geert Wilders ultra right wing Freedom Party to support measures to reduce Holland’s budget deficit to 3.0% in 2013 from 4.6% expected (involving E9bn of spending cuts/revenue increases), as required by the EU’s fiscal compact. The good old European Commission has reacted by restating that Holland will have to submit plans to Brussels to meet the target within 7 days – some hope. It is unclear as to whether Mr Rutte can obtain a majority in Parliament to ensure the budget deficit target is achieved. Holland has been a staunch supporter of strict budget measures in respect of the EZ. The Dutch Parliament is to meet today to try and seek approval for the budget and to schedule new elections – quite probably on 27th June. Moving the elections forward make it more difficult to agree to the proposed budget as parties gear up to electioneering. The more lefter leaning parties want to reduce the budget deficit to 3.0% in 2015, rather than 2013, though Mr Rutte’s party is committed to achieving the reduction, as scheduled. Will Holland lose its AAA rating – probably, but unlikely
in the near future. Whilst it’s debt to GDP is only 62.5%, high private sector debt, a recession and increasing unemployment is straining the Dutch economy. It Holland does lose its AAA rating, only Germany, Finland and Luxembourg in the EZ will retain their AAA rating. The loss of a AAA rating by Holland also puts the EFSF/ESM under pressure. The problems in Holland reconfirm the problems of just introducing austerity without growth measures. Essentially, the proposed austerity measures are toast. However, the EZ does not have a back up plan;

Bond auctions by Spain, Holland and Italy today. Spanish bond sales
were very short term and, in addition, they reduced the size though
had to pay higher rates and, in addition, marginally missed their
targets. The Dutch sale included 25 year bonds which went well, as
expected. Spreads between Dutch and German bonds narrowed. Hysterical
(mainly US based) comments about Holland leaving the Euro, facing
fiscal problems etc, etc are a complete nonsense. The Dutch will
extricate themselves from their current difficulties – indeed, the 10
year yield has declined some 9 bps to 2.34% today. Italy had to pay up
for its zero coupon bond issue, but otherwise was OK;

The Murdoch’s face a tougher session at the UK’s Levson inquiry today
(it’s James Murdoch’s turn today) – they are to be grilled by QC’s ie
lawyers. Numerous new stories of Internet and phone hacking have
surfaced, as have reports of “unusual” ties with politicians and the
UK police force;

The UK’s budget deficit increased unexpectedly in March. Public sector
net borrowings, ex support for banks, rose to £18.2bn in March, up
from the £16bn expected. However, February’s PSNB was reduced from the
initial estimate of £15.2bn, to £12.2bn. The 2011/12 PSNB (ex the
financial sector) came in at £126bn, in line with estimates;


Asian markets closed mixed with no real signs of panic. European
markets opened higher and are rising. US futures indicate a higher

The Euro is strengthening – currently US$1.3167 though off its morning
highs, with spot Brent at US$118.51.

The EZ crisis will rear its ugly head yet again. In addition, it is
clear that there is an increasing backlash against the German inspired
austerity plan and, in addition, against the EU generally. However,
with no plan B …..

Kiron Sarkar

24th April 2012

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