Likely diplomatic friction between the US and China

Australia is drought free for the 1st time in a decade – a really big deal down under. Agricultural production should increase, which means lower prices – a relief to many (particularly in EM’s) and a resultant decline in inflation? Good news if it turns out that way;

Just a further point on the BoJ’s net Yen 5tr increase in its asset purchase programme, which they announced last Friday. The programme was to be completed by year end – it has now been extended till June 2013. Yet more evidence that the BoJ policy remains timid/cautious. As a result, it’s Yen weakening impact is likely to be limited;

A Chinese dissident and blind human rights lawyer, Mr Chen Guangcheng, who has been held under house arrest for the past 19 months, is under US protection. A serious diplomatic crisis ahead of Mrs Clinton’s visit to China is inevitable. She has, in the past, publicly stated that she was “alarmed” at Mr Chen’s house arrest. Recently, the disgraced Mr Bo’s henchman, Mr Wang Lijun who sought refuge with the US, was returned to the Chinese authorities – this is going to be difficult and very different;

Foreign investors have (slowly) begun to withdraw money from India – USS$105.4mn was withdrawn in April, by comparison to the huge inflows (US$2.04bn, US$5.13bn and US$1.68bn) respectively in January, February and March of this year. The Indian Government has also introduced General Anti-Avoidance Rules, which is resulting in funds which invest in India, moving their residence to Singapore, rather than Mauritius – which had previously acted as a tax haven in respect of investments into India. I have been to Mauritius many times and indeed successfully completed one of the largest privatisations in the country – however, the only good thing about doing business in Mauritius, as far as I’m concerned, was the flight home;

Mr Yuval Diskin, the former Israeli director of internal security, has described the current PM Mr Netanyahu and the defence minister Mr Ehud Barak as “messianic” politicians who cannot be trusted, reports the FT. This latest attack is yet another from former security and intelligence officers over the Iran nuclear issue. The former head of Mossad, Mr Meir Dagan, stated that a proposed Israeli attack on Iran is the “stupidest idea” he has ever heard of. The current head of the Israeli armed forces Lieutenant General Benny Gantz has been particularly cautious on a proposed attack on Iran. Strong stuff. However, trying to figure out Israeli actions is way beyond little old me;

A short while ago I suggested Portuguese bonds could well be an interesting buy. Portuguese yields have continued to decline – on Friday, Portuguese bonds declined further – the 10 year closed 40 bps lower, though even more dramatically, the 3 year bond yield declined to 11.23%, from 14% just 2 weeks ago. Indeed, in % terms, Portuguese bonds have declined further than any EZ country, against their equivalent German bunds. Should have followed my own advice;

A crackdown on tax evasion in Italy has resulted in the State collecting an additional E6bn in the 1st 4 months of the year. I will repeat, Italy is a rich country with a reasonable amount of flexibility – it is no Spain. Having said that, the country is tiring of Mr Monti and, in particular, his austerity measures and Mr Monti knows it – hence his agreement to water down much needed structural/labour reforms recently;

Ireland is proposing to return to the international bond markets by the end of 2013. The Irish debt management agency is hoping to initially sell bills in June/July this year. It is also seeking to issue annuity bonds to domestic pension funds and extend the maturity of debt due to be redeemed in coming years. Certainly looks possible – the 10 year is trading below 7.0%. In addition, the EZ desperately needs a success and is likely to be helpful where possible;

Mrs Merkel proposes to discuss measures to resurrect growth in the EZ at the June EU summit. Strengthening the European Investment Bank is one idea being considered. However, Mrs Merkel rejected providing further stimulus, preferring structural reform measures and boosting competitiveness. She also ruled out reopening the EU’s fiscal compact, demanded by Mr Hollande, though she promised to work with him, if he is elected as French President. It’s going to get surreal very soon;

Following the proposed nationalisation of YPF by Argentina, Vale is reconsidering a US$5.9bn investment in the potash sector in the country. Vale is not alone, a number of other investors are reconsidering their proposed investments. The nationalisation of YPF by Argentina certainly looks like being a bad decision.

Argentina’s economy ministry has tapped US$3.1bn from the country’s Central Bank and Pensions Agency, making a total of US$4.3bn it has borrowed from these entities YTD. Argentina has no access to the international capital markets since 2001, when it defaulted on some US$100bn of debt. Whilst it has had a budget and trade surplus in the past, it has been able to cope. However, it looks as if that is changing. The Argentine President Mrs Cristina Fernandez promised some “fine tuning” when elected for the 2nd term as President. With spending rising more than 100% faster than revenue since 2008 and rising even faster recently, “fine tuning”……..Hmmmmm;

Think it’s time to return to the weekend.

Kiron Sarkar

29th April 2012

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