Polls suggest that Mr Abe’s party will win an absolute majority

Australian unemployment declined unexpectedly in November, with the unemployment rate declining to 5.2%, from 5.4% in October, much lower than the 5.5% expected. Employment in the mining sector rose (I expect it to flatten/decline in coming Q’s though), though declined in the construction sector,. However, Australian employment looking as if its peaking. The A$ rose on the news, currently A$1.0482, though the deputy governor of the RBA called it “uncomfortably high”. Optimism over China could help the A$, though I believe it remains overvalued and I remain short against the US$;

Japanese press suggests that Mr Abe’s LDP, together with its ally, the New Komeito Party, will win a majority in the lower house. Other reports talk of a high degree of complacency amongst voters. If the press reports are true, the LDP will push for monetary easing, higher inflation, a weaker Yen and a more nationalist foreign policy/country. Should be Yen negative. Having said that the New Komeito party calls for far more restraint over measures to force the BoJ to act to increase inflation and, in addition, is far more conciliatory towards China. I remain short the Yen, against the US$;

The Indian government won the key vote yesterday (253 out of 471 votes) in the lower house of parliament, in respect of a bill to allow foreign multi-brand retailers. The parliamentary win was symbolic, as the government did not need parliamentary approval, but a failure could have threatened the governments other proposed reforms, some of which do require parliamentary approval. However, the upper house is to debate the bill, which is considered to be more difficult – however, as its non-binding, its not as important. The finance minister has proposed a number of other reforms which, if enacted (likely) will help to introduce crucial reforms, in the banking and insurance sectors and, in addition, in the acquisition of land;

Transparency internationals “corruption index” places China in 80th place (out of 176 countries), with India in 94th place (in line with Greece) and Russia in 133rd place. More then 2/3rds of countries came in below the neutral reading. The UK and the US came in at 17th and 19th place respectively. The least corrupt were, the Nordics/Scandies, as usual, with Denmark and Finland at the top, with New Zealand;

South Africa’s Q3 current account deficit was unchanged in Q2 at 6.4%, as opposed to 6.7%;

Greek September unemployment rose to 26.0%, up from 25.3% in August;

The Italian PM, Mr Monti, won a vote of no confidence today on new economic measures. However, Italian politics looks like getting a bit “difficult” lots of rumours around, including that Monti may resign. Berlusconi lambasted Mr Monti in a sppech yesterdsay- he’s trying to get back into a leading role – highly unlikely in my view – his party is disintegrating. However, his party has withdrawn support for Mr Monti – they did not vote in today no confidence vote.The centre-left party headed up by Mr Bersani (a former communist, though has been more pragmatic in recent years) is gaining and if he wins, will replace Mr Monti as PM. Italian markets which were trading higher, are around 1.0% lower, though off their lows;

Former bank employees allege that Deutsche bank hid some US$12bn of losses during the financial crisis, by overvaluing derivative positions. These allegations have been around for some time. Deutsche have denied the allegations;

Mrs Merkel was reappointed almost unanimously (98%) as the party lea\der of the CDU, her best result in 7 years. Her approval rating is around the 70% level and 58% as compared with her main opponent Mr Steinbruck (head of the SPD), who rating is around 38%. The CDU polls some 39%, with the opposition SPD at 30%. Her partner, the FDP, has less than 5% support, which suggests that she will have to find a new partner. It is rumoured that she will seek an alliance with the Green party in spite of obvious policy differences – would be a blow for the SPD, though. Mrs Merkel has proved to be a consummate politician;

German seasonally adjusted factory orders rose by +3.9% M/M, much higher than the +1.0% expected and the upwardly revised -2.4% for September. Foreign orders, in particular, rose materially – they were up by +6.7%;

The Q3 French ILO jobless rate rose to 10.3%, up from 10.2% in Q2, though below the 10.5% expected. I continue to believe that France remains the key problem country in the EZ. How long before markets begin to focus on the country is the issue, in my humble view;

EZ Q3 GDP came in at -0.1%, in line with previous estimates, or -0.6% Y/Y;

The ECB left its benchmark interest rate on hold, as expected. The deposit rate was unchanged at 0%;

Fitch reports that UK debt to GDP will rise to near 100% in 2015/16, which is close to the maximum for a AAA credit rating. I believe that the UK faces a credit downgrade in 2013, though is it the big deal that it used to be?;

UK visible trade deficit rose to £9.539bn in October, higher than the £8.650bn expected and £8.439bn in September. Overall, the trade deficit came in at £3.644bn, higher than the £3.0bn and £2.493bn in September. Exports were lower, as were export prices;

UK authorities are to review the current regulations which force pension funds into UK government debt – changes are expected. If indeed they do change, longer term gilt yields are likely to rise, and there may well be greater demand for equities;

The BoE, as expected, kept rates on hold at +0.5% and its QE programme at £375bn – the minutes will be published on 19th December, which will be more interesting;
US November ISM non-manufacturing index came in at 54.7, stronger than the 53.5 expected and 54.2 in October. The employment component was weaker at 50.3, as opposed to 54.9 in October, the lowest since July. New orders were firm though, coming in at 58.1, versus 54.8 in October, the highest since March. The prices paid component was significantly lower at 57.0, as opposed to 65.6, the lowest since July. Wells Fargo points out that the services sector includes agriculture, forestry, real estate, mining and construction, which, other than mining, did well, as did financial services. Not quite the definition of the services sector that most think;

US October factory orders rose by +0.8%, as opposed to unchanged expected. Durable goods were revised higher to +0.5%, up from unchanged. Non defence ex aircraft orders were up +2.9%, from +1.7% previously;

The US Dept of Energy forecasts that oil production from tight oil (shale) will rise to 7.5mn bpd in 2019 (previously 6.7mn bpd), up from less than 6.0mn bpd in 2011. Gas production is also expected to increase materially, with LNG exceeding domestic consumption by 2020, with exports rising to 1.6tcf by 2027, double previous estimates. Energy imports in 2040 are expected to decline to 9%, from 19% last year. I continue to believe that energy from shale will prove to be a game changer for the US, with a number of businesses relocating back to the country, with a resultant better unemployment prospects. US competitiveness should also improve;

A few Republicans have indicated their willingness to negotiate over the fiscal cliff;


Asian stocks closed mixed, with the Nikkei higher, though China marginally lower. European stocks are higher (Germany +1.0% up), with US futures suggesting a flat opening. The Euro is trading at US$1.3068, with the Yen at 82.35. The US$ is generally weaker.

Yields of Spanish and Italian bonds rose materially yesterday and are continuing to rise today (around 13/14 bps respectively) – in my opinion, Euro negative. I would be keen on Italy, if it were not for political considerations – Berlusconi is trying to get back as a player – unlikely, though. I continue to be extremely wary of France and will look to short in due course.

Spot gold is trading around US$1694, with Brent at US$108.85 – coming off at present.

Bought some equities in the energy, mining, financial, London based property, US/UK building materials stocks and some German industrial companies. Will increase the positions.

Remain positive on US/UK equities and certain European (German) equities.

Kiron Sarkar

6th December 2012

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