Better Chinese services data

The South Korean finance ministry announced that it is to spend 72% of its 2013 budget in H1 this year, with 45% in Q1, citing economic uncertainties;

Governor Shirakawa seems to be more willing to work with Mr Abe, who has announced that the BoJ must increase its inflation target and ease monetary policy materially. However, pre Christmas, Mr Shirakawa seemed somewhat reluctant – Abe must have sent the heavies to visit Mr Shirakawa over Christmas. The BoJ announces its decision on 22nd January, with Mr Abe urging that the BoJ announce that it is prepared to move ahead of the meeting. Whatever, the Yen looks as if it will weaken further, though a risk off move, in response to the impending political fight in the US, could provide the currency with some support. However, I remain short the Yen;

China’s non-manufacturing December PMI came in at 56.1 M/M, higher than the 55.6 in November and the fastest pace in 4 months. Construction services reported the largest increase, confirming the improvement of activity in the sector. Transportation was weak, suggesting that the export sector remains under pressure;

Surprisingly, Spanish unemployment declined by 59.1k in December, significantly better than the rise of 62.5k expected and the increase of 74.3 in November. The decline was the 1st in 5 months. Can’t understand the reasons for such a sharp improvement – it does not make sense;

Austerity fatigue in Portugal. The Portuguese President has ordered a legal inquiry into the austerity measures implemented by the current administration. Countries such as Portugal have seen the much better deal offered to Greece and not surprisingly want the same. this year, pressing further austerity will result in push back from peripheral countries and, indeed, may well result in material social unrest starting in Spring. Furthermore, the impact of fiscal multipliers suggests to me that an austerity only policy will just make the situation worse in these countries – unemployment has risen to 16.3%, from 13.7% at the start of last year. GDP is expected to decline by -1.8% this year, according to the OECD (I believe by over -2.25%), with debt to GDP rising to over 135% – unsustainable. Growth policies will be needed. Budget deficit targets for a number of these countries will not be met and the country’s debt will need to be restructured. (Source Daily Telegraph);

German unemployment increased by just 3k to 2.942mn in December M/M, lower than the 10k increase expected. The seasonally adjusted unemployment rate remained at 6.9%, in line with expectations. Whilst in the short term unemployment may rise marginally, I believe that unemployment will decline this year as German exports rebound and the domestic sector, including construction, remains firm;

UK December construction PMI came in at 48.7, lower than the 49.5 expected and 49.3 previously and the weakest since June 2012.

A BoE survey reports that it will be easier for borrowers to access mortgage financing. Should be positive for the UK residential construction and building materials/home improvement sectors;

Moody’s warns that they will assess the US credit rating once the outcome of the proposed spending cuts and the proposed increase of the US$16.4tr debt ceiling are know. They added that further deficit reduction measures were necessary to avoid a downgrade;

BoA is to increase mortgage and corporate lending this year, according to its CEO. I believe that US banks generally will increase lending to both businesses and consumers, whilst reducing tight lending standards. The access to credit will be a major boost for the US economy and will support the housing sector, as well. I remain positive on US financials, ex likely declines in the short term due to the next fight between Republicans and Democrats over spending cuts and the need to increase the debt ceiling;

The ADP December report reveals that 215k jobs were created, much higher than the 140k expected and the upwardly revised 148k in November.

However, initial jobless claims rose to 372k, higher than the 360k expected and the upwardly revised 362k. Continuing claims rose to 3.245mn, higher than the 3.21mn expected and 3.201mn previously;

Brazil’s 2012 trade surplus came in at US$19.4bn, the lowest since 2002. Exports declined by -5.3%, with imports -1.4% lower.

HSBC PMI declined to 51.1, down from 52.2.

With inflation likely to rise, Brazilian interest rates, currently at a record low, will have to rise. The Real looks as if it will weaken further. I am bearish on Brazil;


Asian markets closed higher following yesterday’s rally in the US, though China and Japan were closed. European markets are lower, following yesterday’s surge. Concerns over the impending discussions over further spending cuts and measures to increase the debt ceiling in the US are weighing on markets. US futures suggest that markets will open lower.

The Euro is particularly weak, declining to around US$1.3112. The selling seems overdone, though I certainly don’t share the bullish Euro calls (up to US$1.45) by a number of analysts for the current year.

Spot gold is trading around US$1678, with February Brent weaker at US$111.86 – still way too high in my view.

Having been particularly bullish in anticipation of a deal in respect of the US fiscal cliff, I believe that uncertainty over the next round of particularly contentious negotiations by the US Congress over the next 2 months will weigh on markets. I will look to reduce my equity holdings over the next few weeks.

Kiron Sarkar

3rd January 2013

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