Mr Abe has threatened to introduce legislation which curtails the independence of the BoJ, unless the central bank agrees to announce a policy to “target” inflation at 2.0% at its next meeting on 20/21st January. The BoJ’s current “goal” is to rise inflation to 1.0%. Having won a landslide victory in the recent general elections, albeit on a low turnout, Mr Abe’s LDP, together with its coalition partner, control 2/3rds of the Lower House and can secure the passage of the necessary legislation, without the approval of the Upper House, which the coalition does not control. I continue to believe that Mr Abe’s proposed policy risks increasing interest rates materially, a serious problem for Japan, as the governments financing requirements to meet its significant budget deficit, (which could well increase if, as expected, the Japanese government pursues aggressive fiscal stimulus), is significant. The situation is even more dangerous as Japan’s debt to GDP is in excess of 220%. However, the quite explicit statement by Mr Abe over the weekend will be hard to retract and will negatively impact the Yen. I remain materially short the Yen. Mr Abe called for a Yen rate of around Yen 90 to the US$;
The Chinese Securities and Regulatory Commission (“CSRC) have agreed to allow smaller Chinese companies to list overseas. The previous restrictions on listing were as a result of the the CSRC becoming worried that a flood of IPO’s on the domestic market would depress stock prices. Recently, the US SEC has increased oversight on a number of Chinese companies and, in addition, has questioned the quality and reliability of Chinese accounting firms. A number of fraud charges have been made against Chinese companies listed in the US. It is expected that Chinese companies will favour Hong Kong. It is going to be interesting to see how the regulators in Hong Kong respond;
Mr Monti resigned as PM on Friday and over the weekend announced that he would be prepared to serve as PM following the impending general elections, expected to be called for 24th February. Unsurprisingly, he rejected the call by Mr Belusconi to head up a coalition of centre right groups to fight the upcoming elections, though did not totally dismiss the idea of running for PM as head of other centre right parties. However, such parties may just gain 15% of votes, with the centre left party lead by Mr Bersani at around 30%. Mr Berlusconi’s party is thought to be supported by just 15% of the electorate. Italian politics is traditionally highly Machiavellian and all I can say is expect the situation to change, possibly quite frequently;
It looks as if the EU will relax rules designed to force countries to meet predetermined budget targets – Spain and France are rumoured to be the beneficiaries of such largesse, with France’s target raised to 3.5% this year, from 3.0% at present (and 3.0% in 2014) and Spain given a further 2 years to meet their 3.0% target. They were never going to meet their targets anyway, though the concessions will concern the ECB who want their support to be linked to EZ countries reducing their budget deficits;
The UK and Germany seem to be moving to a plan to link pensions to life expectancy, rather than set a predetermined age, as is currently the case.
Asian markets closed flat on the day (Japan was closed for a public holiday), as did European markets, with Germany closed. The politicking over the fiscal cliff continues – its getting as bad as the EZ. However, I remain positive on equity markets, as I expect some sort of deal will be fudged in respect of the fiscal cliff, most likely in the new year.
Gold is trading flat at US$1659, with February Brent lower at US$108.33.
The Euro is trading at US$1.3215 and should rise further if a deal on the fiscal cliff is reached – likely – some suggest to around US$1.35. The Yen is weaker, given Mr Abe’s comments over the weekend – currently trading at Yen 84.45. The A$ is trading at US$1.0392. Closed my short at just above break even, as the A$ should rise on a risk-on trade, assuming a resolution of the fiscal cliff. I will wait till the A$ rises to well above US$1.05/06+ before I even think of shorting it again – its been a particularly tough trade this year.
Please note that there will be no further newsletters until the 2nd January.
May I just take this opportunity of wishing you a very merry Christmas and a particularly prosperous and happy New Year.
24th December 2012