BoJ increases size of asset purchase programme

Not surprisingly, the Australian Treasurer, Wayne Swan, has admitted that Australia is unlikely to generate a budget surplus this year, which is a u-turn on previous statements and promises made by the Gillard government. They had previously promised a budget surplus of over A$1.0bn this year. Swan cited lower commodity prices, weaker than expected growth (due to a high A$ which has adversely affected tourism and non-commodity sectors of the economy) and that tax receipts were A$3.9bn (US$4.1bn) lower than expected. Swan stated that “In just four months we have seen the revenue hit that we were expecting for the full year”. However Swan also said that making spending cuts in order to make good their governments election promises would be “self-defeating” and that the policy of the government remained growth and jobs. The chief economist of the Bank of Australia stated that the likely deficit will now be A$1.6bn for 2012-13. The most recent polls report that Gillard’s government popularity dropped 4 percentage points to 32%, whereas the opposition Liberal-National Party gained three points to 46%. Gillard faces an election in the second half of next year and is being heavily criticised by the opposition on their management of the economy. The A$ has come off its recent highs of over US$1.0550, currently US$1.0487 – still believe its way overvalued. S&P has asserted Australia’s AAA rating as stable. (Source Bloomberg);

The BoJ, as expected, increased its asset purchase programme (the 3rd increase in 4 months) by Yen 10tr (US$117 bn) to Yen 101tr and, in addition, stated that they will review their inflation target. The BoJ left its lending programme at Yen 25tr. The BoJ will discuss its inflation target (currently 1.0%, lower than the 2.0% proposed by Mr Abe) at its next meeting on 21/22nd January. The market, unrealistically in my opinion, was expecting more. Personally, I believe that the BoJ has responded to the governments urging to ease monetary policy and I continue to believe that the Yen will weaken further, in spite of it rebounding today – currently Yen 83.97 against the US$.

The Nikkei closed lower -1.2% on the day, but is up around 15%, since the previous government announced its decision to call a general election. Foreign investors were net buyers for the 5th consecutive week, buying a net US$5.5bn of shares, the most since March 2011 (Source Bloomberg)

A senior LDP official stated that the government will decide on a significant supplementary budget spending programme on 15th Jan next year;

Chinese regulators are considering how to respond to the recent failure of a “wealth” management product sold by a Chinese bank. Chinese investors have bought some US$1tr of such products, which offer higher yields than bank deposits, though clearly with much higher risk. I have reported on this issue before and continue to believe that more failures of “wealth” management products should be expected. Chinese regulators have the traditional moral hazard problem, though realistically can they afford to support failures of such schemes. This is an issue which, together with the territorial disputes with its neighbours, are at least 2 of my major issues of concern I have in respect of China;

Greek 10 year bond yields decline further – currently around 11.5%. Yes, the EZ has provided an aid package and the ECB announced yesterday that Greek debt can be used as collateral. However, whilst I will not short, it is clear that Greek debt will need to be restructured and implementation risk next year remains a serious concern. I will stay well away;

Italian seasonally adjusted October retail sales declined by -1.0% (-3.8% Y/Y), much weaker than the flat reading expected and the -0.1% in September and the largest decline since April. Recently, Italian economic data has been weaker than expected;

The Italian government won a confidence vote in the Senate on the 2013 budget, as expected. The bill now goes to the Chamber of Deputies for a final vote. Mr Monti has announced that he will resign, following the passage of the 2013 budget. It remains unclear as to whether Mr Monti will stand for the role of PM. Mr Berlusconi’s plan to delay the budget vote and the general elections have failed;

Nationalist parties who won the regional elections in Catalonia have agreed to form a coalition and, in addition, to hold a referendum on independence from Spain in 2014. Personally, I don’t believe that Catalans will vote for independence when they realise that they will not be able to retain the Euro. In addition, the coalition looks fragile. However, it will create a further headache for the Spanish PM, Mr Rajoy, as the central government may well have to concede on more fiscal transfers to Catalonia;

UK November retail sales were flat, weaker than the +0.4% expected, though higher than the -0.8% in October;

The Brazilian government are introducing an extension of existing stimulus plans to the retail sector. However the Brazilian government has affirmed that it will increase oil prices in 2013 to help profits at state-owned oil producer, Petrobras, as the company has been hampered by the lack of investment capital as oil prices in the country are kept significantly lower than the world average. It is thought that increases in the oil price will significantly impact Brazil’s inflation next year, which the Brazilian Central Bank has targeted at 4.9% – unrealistic. Many analysts expect inflation to be north of +5.5%. Economists expect growth to be 3% in Brazil in 2013 as opposed to 4% by the Brazilian Government. Q3 growth this year of 0.6% was well below analyst expectations. The Real has declined around 10% this year and the Central Bank is intervening to ease the fall and to encourage foreign investment in the country;

Yet more politicking in the US, with President Obama threatening to veto a bill which Republicans intend to pass through the House, which includes tax increases on incomes over US$1mn. President Obama has proposed to increase taxes on those earning over US$400k. Negotiations clearly are becoming difficult (Mr Boehner’s press conference was particularly brief yesterday), though I continue to believe that a deal will be done, most probably just after the New Year;

US Q3 GDP was revised higher to +3.1% Q/Q, better than the +2.8% expected and higher than the +2.7% previous estimate. In particular corporate earnings component came in better, which is a good sign.

US Q3 personal consumption came in at +1.6% Q/Q, also better than the +1.4% expected and +1.4% previously.

Core Q3 PCE came in at +1.1% Q/Q, in line with expectations and +1.1% previously.

The US$ rose on the better GDP number;

Initial Jobless claims came in at 361k, in line with expectations of 360k (prev. 344k) and a small increase in jobless claims of 16k. Continuing jobless claims came in lower than expected at 3125k (exp 3200k) and lower than the previous 3213k.


Asian markets (ex Japan) closed mainly higher today, whilst European markets are flat. US markets sold off into the close yesterday, due to fears over a lack of an agreement on the fiscal cliff. Mr Boehner’s Plan B is going nowhere. Lets hope we don’t have plan C, plan D………. The Republicans and the Democrats are pretty close and I continue to expect a deal. US futures suggest a flat to lower opening – I would have thought that futures would have been higher.

Spot gold is trading around US$1653 (still remain bearish), lower following the better US Q3 GDP number, with February Brent at US$110.01.

The Euro is recovering against the US$, currently US$1.3269. The Yen strengthened in early morning trading on “disappointment” (totally unrealistic, in my humble view) that the BoJ did not endorse the 2.0% inflation target. However, the BoJ is studying the issue and looks as if it is ready to become more accommodative. The Yen has subsequently weakened, especially following the upwardly revised Q3 GDP data and is currently trading at Yen 84.29. I remain short the Yen.

I remain positive on equity markets and continue to buy on weakness.

Kiron Sarkar

20th December 2012


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