Deal/No Deal on Greece Today?

The governor of the BoJ Mr Shirakawa, who retires in April next year, has defended the central banks actions, following mounting criticism from the head of the LDP party Mr Abe, in particular. He has urged the government to deregulate and “to raise the attractiveness of domestic investment”. Mr Shirakawa has the support of 7 out of 9 board members of the BoJ, though 2 new board members proposed that the BoJ ease more aggressively – to attain their inflation target of 1.0%. The incoming Japanese PM will replace a number of retiring board members in March and with Mr Shirakawa retiring the new governor, the BoJ should become more acccomodative, thereby weakening the Yen. The key is the outcome of the forthcoming general election in Japan on 16th December;

EZ finance ministers meet today to discuss Greece, yet again. Will it be the last meeting – unfortunately, there was talk over the weekend that an agreement would be delayed to 3rd December, a view that the Finns have expressed. However, the German finance minister expects that a decision will be reached today. Whatever, this sorry saga will haunt us for quite some time to come as, even with a “deal”, Greece will be back in the headlines, again and again and…..;

Italian November consumer confidence fell to a record low. The confidence index fell to 84.8, the lowest since 1996, lower than the 86.2 in October and expectations of 86.3. Italian data has been stabilising somewhat, though the country is in recession, which is expected to continue this Q and into next;

Secessionists won a majority (87 out of  135) of seats in the regional elections in Catalonia, though the ruling party, lead by Mr Mas, did not do as well as predicted – his party gained 50 seats (they lost 12 seats) as opposed to well over 60 expected. I will repeat – the bottom line is that without the approval of the Central Government, Catalonia cannot call for a vote on independence. In addition, Catalonia will not be able to become a member of the EU or retain the Euro if it achieves independence, which is/will be a key issue, indeed prerequisite, for the Catalans. However, the Spanish PM will be forced to make certain (financial) arrangements for Catalonia, which will add to his fiscal woes;

More important that the regional elections in Catalonia, at least in the short term, is whether Spain finally asks for assistance from the EZ bail out funds, the EFSF/ESM. To carry on borrowing at current rates given Spain’s declining GDP is tantamount to suicide. In addition, as EU officials have indicated that Spain will not be required to meet harsh conditions (Mr Rehn recent statements), I would expect Mr (ditherer) Rajoy to finally push the button and ask for help. Whether that’s this year or early next is the only question.

Spanish Press report that Spain will seek E42.5bn to recap its banks. Clearly far more will be needed, as will become obvious in time to come, but that’s Spain for you – they want to limit the amount as their debt to GDP stats worsen the more aid they receive;

Brent futures are set to overtake West Texas Intermediate (WTI), as the most-traded commodity future. Brent acts as the benchmark for a wider range of energy prices, including  Russian and Saudi Arabian crude. There is little doubt that Brent will become the more important price to watch in coming years, if not at present. (Source Bloomberg);

German consumer confidence (the GfK survey) index came in at 5.9 in December M/M, lower than expectations of 6.2 and 6.1 in November;

The US National Retail Federation reported that total retail sales rose by 13% Y/Y, to over US$59bn in the 4 days over Thanksgiving. Online shopping surged by 26% Y/Y on Black Friday, according to ComScore, though the average spend per person declined by -4.7% and the average number of purchases by -12%.


Asian markets closed mixed, with European markets weaker. US markets have opened lower.

The Euro is roughly flat against the US$ at US$1.2967, with Gold at US$1750 and January Brent at just below US$111 – I remain bemused at the level of Brent, especially given the ceasefire in Gaza, at present.

Bond yields of the major countries are lower, as markets turn lower.

Last weeks surge of equity markets was on low volume – not convincing. A Greek deal looks on the cards either today or in a week’s time – good for the Euro and markets. However, in the medium to longer term, I continue to believe that the Euro will weaken.

I get the feeling, as I have expressed before, that the market is overly optimistic over the state of negotiations on the US “fiscal cliff”. Even though I expect a deal, most likely at or, indeed, just after the year end, in the shorter term, statements from Washington are likely to be negative – not positive for markets.

The Yen has strengthened somewhat, as Mr Abe has backed of his more radical ideas, but the bottom line is that the Yen continues to look vulnerable in the medium/longer term, as a new team takes over at the Central Bank in March/April next year. Furthermore, if Mr Abe becomes PM, as currently expected, he is likely to support further measures to stimulate the Japanese economy, which should weaken the Yen. I remain short the Yen.

Cant really see any merits in buying or, indeed, going short the markets at these levels – really on hold, awaiting developments.

Kiron Sarkar
November 26, 2012

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