Japanese General Election in December

Australian wages rose by +0.7% in Q3, lower than the +1.0% increase in Q2. The Westpack consumer confidence index rose to 104.3, the highest level since April last year. However, Australian company directors are more pessimistic than at any time in the past 2 years due to budget cuts, increasing regulatory burdens and a slowing China, according to reports in the Australian press The A$ rose to over to US$1.0450, though is weakening – currently US$1.0420. Notwithstanding the better data, I will look to increase my short – the views of Australian business leaders are far more important;

Japanese PM Mr Noda is planning dissolve the lower house this Friday and call a general elections if the opposition agrees to electoral reforms. Elections are likely be held on 16th December. Voting on the deficit-financing bill is expected tomorrow, which will pass. The Yen should weaken, as the head of the current opposition (the center-right LDP, which is likely to win the elections), Mr Abe, has called for aggressive monetary easing policies – indeed, he suggests that the BoJ should target an inflation level of 3.0% !!!!. Furthermore, Mr Abe stressed (a) the need to beat deflation, (b) for the BoJ to take “bold steps” toward this goal by taking unlimited action (he has suggested changing legislation which, in effect, would make the BoJ less independent), (c) for more public works (which Japan certainly does not need) and (d) to agree on a large supplementary budget – all measures which should weaken the Yen;

Given the spat between Japan and China, Bloomberg citing Nikkei, reports that the Japanese are looking to invest Yen1.2tr into India. Great news for India, but historically investment into India has always faced numerous problems, including bureaucracy, corruption, delay ….. the list is endless. Hopefully the Indian authorities will get their act together, though bad habits are hard to get rid of;

The 18th Chinese Party Congress ended today, following the appointment of members of its Central Committee and Central Commission for Discipline. Tomorrow, the Central Committee meets to endorse the new Politburo Standing Committee (expected to comprise 7 members, from 9 at present)

The governor of the BoC, Mr Zhou, has been dropped from the Communist Party’s central committee, which suggests that he will be replaced, once his term ends next year;

The Indian October wholesale-price index declined to +7.45% Y/Y, from +7.81% in September and well below the +7.9% expected. However, a reduction in the subsidy for diesel is expected to increase inflation in coming months;

Negotiations between Cyprus and the EZ have stalled, as Cypriot banks have allegedly been involved in money laundering on behalf of Russians. German authorities allege that Cypriot banks hold some US$26bn on behalf of Russians, as compared with the country’s GDP of just US$17bn. In addition, a number of Russian controlled companies are registered in Cyprus. Recently Cyprus have, in effect been selling EU passports in return for purchases of properties in the country. There certainly is a lot to clean up in the EZ;

The German finance minister, Mr Schaeuble, confirmed that providing Greece with E44bn in one lump sum was being considered. However, he added that control mechanisms need to be put in place and that the final report from the Troika was necessary before any decision could be made. The Dutch have stated that they would not support any plan which provides additional funds for Greece, other than that agreed, adding that there was a “big risk” that Greece would need more funds. Greece managed to sell E4.1bn of 1 and 3 month treasury bills, to help raise the E5bn necessary to repay maturing bills this coming Friday. However, far more interestingly, the German opposition leaders insisted yesterday that the IMF testify in front of the Bundestag to confirm whether Mrs Merkel’s promises that there would be no need for more aid to Greece were realistic and as to whether existing aid would be repaid. Will not happen, but……However, Mrs Merkel’s promise that bail outs wont cost Germany is her Achilles heel. Furthermore, to align herself with the Greeks, given the country’s history, seems particularly dangerous;

Greek Q3 GDP, on a non seasonal basis, contracted by -7.2% Y/Y, worse than the -6.2% Y/Y in Q2. Greece is in the 5th year of recession;

The Bank of Portugal reports that the economy will contract by -1.6% in 2013, as opposed to a previous estimate of a flat reading – the government has forecast that GDP will decline by just -1.0%. Furthermore, its budget deficit target of -5.0% this year looks as if it is going to be tough to achieve – it has moved higher from the -4.5% in September. Unemployment data released today reveals that the Q3 unemployment rate has risen to +15.8% Q/Q (up from +12.4% in the corresponding period last year), as opposed to +15.0% in Q2, the 8th quarterly rise. Furthermore, the government has forecast that unemployment will rise to +16.4% next year. Why should any of this be a surprise – the more the Portuguese cut spending and raise taxes, the larger the decline in GDP and, as a result, revenues will contract. It is almost certain that the fiscal multiplier in Portugal is above 1, as the IMF has suggested.

Portuguese Q3 GDP declined by -0.8% Q/Q (more than the forecast of a decline of -0.6%) or -3.4% Y/Y (the largest decline since Q2 2009), as compared with -1.2% Q/Q and -3.2% Y/Y in Q2. The Portuguese economy has been in recession for 2 years, with the recession expected continue into 2013;

It looks as if the EU will confront Spain over its forecast budget deficit later today – Spain has stuck to its forecast of -6.3% this year, whilst indications are that it will come in around 8.0%;

The recent Euro group meeting of finance ministers failed to reach agreement on the proposal to set up a banking supervisor. The EU had set a deadline to reach agreement by the year end which, as usual with the EU, looks optimistic. The establishment of a banking supervisor is a precondition for allowing EZ countries to access the bailout fund. Remember that Spanish banks need to be recapped

Agreement on the EU budget later this month looks unlikely;

EZ September seasonally adjusted industrial production declined by -2.5% M/M (-2.3% Y/Y), worse than the -2.0% M/M expected and the upwardly revised +0.9% M/M in August.

Interestingly, a recent YouGov poll suggests that 57% of Germans want to stay in the Euro, with only 25% opposed;

The YouGov poll results for the UK suggests that 49% of Brits want to high tail it out of the EU, with 28% wanting to stay in. I’m amazed that 28% want to remain in;

UK October jobless claims rose by 10.1k, worse than the flat reading expected. The September unemployment rate declined to 7.8%, from 7.9% forecast and 7.9% in August. UK unemployment has not risen materially for some inexplicable reason – it may well start to rise from now on, especially as Olympics related temporary jobs fall away;

The BoE quarterly inflation report revised down UK growth forecasts, though increased its inflation expectations and, indeed, was decidedly downbeat:

  • UK GDP may post a small decline in Q4, though is expected to rise to around +1.9% in 2 years time, down from +2.0% in the August report;
  • UK recovery is expected to come later than expected and, in addition, there were “material risks” that growth would be weaker for longer. Furthermore, UK growth is likely to remain sluggish in the near term and below 2008 pre-crisis levels until 2015. The BoE reduced its growth forecast to +1.6% for 2013, down from around +2.3% in August;
  • The EZ was the greatest threat to a sustained recovery in the UK;
  • Inflation is expected to decline below +2.0% over the forecast (2 year) period (+1.8% in 2 years time), though is expected to increase in the near term;
  • The Governor confirmed that the decision to hand over interest income on the BoE’s holding to the UK Treasury was a major reason (together with higher inflation) as to why the BoE did not increase its Asset Purchase programme (currently ¬£375bn);
  • The new forecasts assumes no further QE, though the BoE will reintroduce QE, if necessary. In addition, the BoE had not lost faith in the impact of QE.
  • The governor stated that the effective rise of Sterling was “not a welcome development”.

All in all a much more pessimistic forecast than expected. Sterling declined on the news;

The FED’s Vice Chair, Janet Yellen stated that short term rates should remain around zero until 2016. In addition, she proposed adopting inflation and employment targets to set FED rate policy. Essentially, she seems prepared to accept higher inflation to reduce unemployment. Ms Yellen is expected to take over from Mr Bernanke, when he retires at the end of next year;

US NFIB October small business sentiment rose marginally to 93.1, as opposed to 93.0 expected and 92.8 in September;

The US October budget deficit soared to US$120bn, well above forecasts of US$114bn. Action is long overdue;

US October PPI declined by -0.2% M/M ( +2.3% Y/Y) , much lower than the +0.2% expected.

US October retail sales came in at -0.3%, slightly worse than the -0.2% expected and +1.3% in September.

Ex autos and gas, October retail sales declined by -0.3%, as opposed to +0.4% expected and +1.0% in September;

President Obama has called for US$1.6tr in additional taxes over the next decade, double the US$800bn previously discussed with Republicans in mid 2011. Meetings will start this Friday. The President did not suggest that current spending, including on entitlements, was sacrosanct. Clearly the extent of the proposed tax rises will be resisted strongly by the Republicans;


Asian markets closed flat to higher today. European markets are lower. US markets have opened slightly higher. The Euro has risen – currently US$1.2745. Gold is trading around US$1727, with December Brent at US$107.58.

Given the forthcoming elections in Japan and the likely win of the LDP, the Yen should weaken. Increased my short (against the US$) materially – currently trading at Yen80.28 against the US$.

A wave of co-ordinated anti-austerity protests has swept across Europe today, in particular in Spain, Portugal, Italy and Greece, though French workers were also involved. In spring next year, as the weather improves, watch out. I continue to fear that public opposition to the austerity measures will increase materially next year, which will pose a major problem for the EZ’s austerity policy. Whilst the Euro should rise on some kind of deal on Greece and subsequently Spain, I continue to look to short the currency thereafter.

Ms Largarde repeated that the EZ needs “a real fix, rather than a quick fix”, including on debt sustainability in respect of Greece. With the IMF and the EZ at loggerheads, where do we go from here. The EZ is likely to proceed with its politically inspired (though financially absurd) bail out of Greece even though everyone knows that the EZ will have to agree to haircuts on bail out funds already provided. The IMF is expected to be unwilling to participate – not good politically and will embolden the euro-sceptics.

Cisco shares rose by over +7.0% in after-market trading yesterday, following comments by the CEO of a pick up in demand in the US. Revenues rose by 6.0%, above the 4.0% forecast and despite a 10% decline in Europe. He added that Europe remained weak and that EM’s were not “strong enough”. Cisco sales in China had collapsed following press reports that the company was the source of a critical US report on the Chinese tech company Huawei. However, the announcement confirms that the US is economically much better positioned than other regions across the globe.

Unless there is some bad news from the EZ, in particular, markets look somewhat oversold, in particular US markets, though I don’t see much upside – currency markets remain far more interesting.

Kiron Sarkar

14th November 2012

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