Italian voting intentions unpredictable

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Australia: RBA governor Mr Stevens suggests that the A$ was not seriously overvalued (though he was “surprised” that it had not declined by more) and that a higher rate would be necessary for some kind of intervention. He also hinted that Australian interest rates were on hold for the moment (he stated that they are at an “appropriate level”), as the RBA believes that the impact of recent rate cuts has not fully flowed through the economy. Finally, Mr Stevens was more upbeat on the Chinese economy. The A$ rallied on his comments to a Parliamentary Committee today;

Australia: Ms Gillard’s Labour Party had once proposed to achieve a balanced budget, though the Treasurer Mr Swan now admits that the revenue shortfall this year will amount to A$5.9bn (US$6.0bn). A definite whoops. Current polls suggest that the Labour Party is at 44%, with the Liberal-National party coalition on 56%. Labour, for the present, is losing support. General elections have been called for September, an incredibly long notice period – quite probably designed to stop a premature collapse of the Labour government earlier. (Source Bloomberg);

Japan: A Reuters article asks “what do you buy the nation that already seems to have everything”. Well, its Japan they are talking about, unsurprisingly. Japan is planning to spend US$107bn over the next 15 months (yep US$107bn in the next 15 months – no typo). The Japanese PM wants to spend the money on infrastructure, basically yet more bridges to nowhere – Hmmmmm. Japanese infrastructure is already amongst the best in the world !!!! For comparison purposes, Reuters adds that US$107bn is approximately 25% of the worlds infrastructure spending needs annually. However, total Japanese spending is proposed to be much more than the US$107bn and if Abe has his way (will not happen), he proposes to spend US$2.16 trn over 10 years !!!!!. Someone has been at the Saki bottle for far too long, me thinks. The Nikkei closed +0.7% up today;

China: Chinese new home prices rose in 53 of the 70 cities tracked in January M/M, marginally below the 54 in December. Prices in 10 cities declined, while prices were flat in 7 cities. On a Y/Y basis, prices rose in 53 cities in January, as opposed to just 40 in December

China: There is some evidence (as yet unconfirmed) that the slowdown in China last year was more severe than thought initially and that the rebound from late last year somewhat weaker than thought. I will be writing on this issue in coming months – I must admit, I’m getting more and more concerned about China, in particular in H2 this year. Mr Stephen Green, the economist at Standard and Chartered Bank, suggests that Chinese growth last year may well have been some 2 percentage points lower than the official number – he suggests around 5.5%. There is much debate about this issue, though its more of a speculative nature, at present. Whilst still impossible to prove, a number of us have believed for quite some time that Chinese official GDP data is “overstated”, mainly due to over-optimistic reporting by the regions, which admittedly the Central authorities do try and correct. The Shanghai Composite closed some -0.5% lower today and nearly -5.0% this week. Time to become cautious, I believe;

Italy: Italian elections are coming up this Sunday/Monday. The situation remains highly uncertain. The newswires suggest that more and more Italians may decide to support the former comedian Mr Beppe Grillo, as a protest vote – he has suggested that Italy establishes a 20 hour working week by the way !!!!. Furthermore, he is apparently taking more votes away from the left leaning parties, rather than from the right. Mr Berlusconi has also focused on Mr Grillo recently, suggesting that Mr Grillo may indeed be a threat. Once again, just too much speculation, rather than informed comment around at present to be able to form a view. However, the result of the election will move markets;

Spain: The EU has forecast that Spain’s budget deficit will come in around -10.2% last year, declining to -6.7% this year (the previous target was just 3.0% for this year by the way), though rising to -7.2% next, unless the government implements further austerity measures – some chance (the PM is proposing to introduce some fiscal stimulus), especially following the corruption allegations which the Spanish PM and the ruling party are facing. Debt to GDP is expected to rise to 95.8% this year and to 101.0% next !!!!. Pray tell me how Spain repays this level of accumulated debt. I can’t see it I must say, without a debt restructuring of some sorts. The Spanish PM, Mr Rajoy, had reported that Spanish debt to GDP would come in below 7.0% for 2012 – this number excludes bank bailout costs. However, I recall that in 2011, Spain final budget deficit came in much higher than the initially announced number – as I result, I will wait for a while – Spanish data has proven to be somewhat “variable” shall I say;

Germany: The (most important) German February IFO index (business confidence index) came in (you guessed it) much better than expected, at 107.4, as opposed to 104.2 previously and 104.9 expected, a 10 month high. All elements of the IFO index exceeded expectations. The current conditions component rose to 110.2, from 108.0 previously, with the business climate index at 107.4, as opposed to 104.0 previously. Analysts continually forecast lower numbers for Germany. The reality is that German industry has successfully managed to export to non EU markets, including EM’s, in particular. In addition, little discussed amazingly, a large inflow of immigrants are flooding into Germany, supporting construction activity and domestic consumption. My well informed German friends tell me that net immigration into Germany could amount to 500k per annum over the next few years.

The head of the IFO institute, Mr Sinn suggests that German GDP will rise by +0.7% this year, almost double a number of other forecasts. However, I believe that Germany will do even better – GDP in excess of +1.0% is certainly possible (+1.25%?). The Euro spiked following the IFO data, though has pared its gains – I continue to be bearish the Euro and am short the Euro against the US$. The EU released its revised 2013 GDP and debt forecasts subsequently (see below);

EZ: The EU’s latest EZ 2013 GDP forecast was lowered materially to a recessionary (yet again) -0.3%, from a marginal growth of +0.1% forecast previously – the 2nd consecutive annual GDP decline and the 3rd in the 5 years. 7 EZ counties are expected to contract this year, namely Portugal, Italy, Spain, Greece, Cyprus, Slovenia, and the (currently AAA rated) Holland. The forecast suggests that it is much more likely that Holland will be downgraded this year.

The details are hugely important. German 2013 GDP is expected to be just +0.5%, lower than the +0.8% previously (wrong in my humble view – it will be better), with France barely growing – the EU’s forecast is +0.1%, from +0.4% previously. The French outlook looks much more problematical and a contraction in French GDP this year is becoming increasingly more likely. Aggregate EZ debt to GDP is expected to rise to 95.1% this year, the highest since the Euro was introduced. Once again France looks bad. The French budget deficit is expected to rise to +3.7% this year (the current target is 3.0%, though the French have admitted that they will not meet it) and, furthermore, is forecast to rise to +3.9% in 2014 !!!!.

EZ unemployment is expected to rise to +12.2%, from +11.8% previously forecast and +11.4% last year. Greek and Spanish unemployment is set to rise to around 27% this year, with Portugal around 17% !!!!!

The Euro declined (surprisingly modestly at present, though admittedly most expected a downgrade) following the announcement. Lets wait to see how France responds (though we all know that they will not stick to their original commitment of a budget deficit of just 3.0% of GDP this year), with the inevitable German backlash. Relations between Germany and France are going to deteriorate much, much more. The EU is to set up a Commission to decide whether France should be given more time. Off course the Commission will give France more time – they have already accepted that a number of other EZ countries will miss their targets. Standard EU bureaucratic nonsense;

EU: Fines imposed by the EU are set to rise to US levels. The EU warns that it could impose fines amounting to 10% of a bank’s global turnover if a bank is found to be guilty of rate rigging in respect of the LIBOR scandal, which has expanded into rate fixing allegations in respect of Yen, Euro interbank rates and Swiss franc denominated swaps. Going to be painful for banks worldwide, but as is always the case with the EU, this issue will take time and yet more time to resolve – maybe, there will be a surprise this time, but don’t hold your breath;

EU: European banks (356 of them) are to repay just E61.1bn back to the ECB in respect of the 2nd LTRO, much lower than the E120bn to E150bn expected. The ECB lowered collateral requirements ahead of the 2nd LTRO which, as a result, meant that weaker banks borrowed in the 2nd round, as opposed to the 1st – the most likely explanation for the lower repayment. The news should be Euro negative as it implies less of a tightening than expected. In addition, the lower than expected return suggests that weaker banks are still finding it a problem to borrow in the wholesale market, though the impending Italian elections (and the possible resulting uncertainty) could have forced banks (particularly Italian banks) to become more cautious;

UK: The BoE and the PBoC are in discussions to agree a 3 year Sterling/Yuan swap agreement to help trading in the currency. Good news for London, which will become an offshore Yuan trading hub;

US: A majority (54%) of Americans want Congress to postpone the implementation of the sequester. However, 40% are in favour of the sequester taking place – surprisingly large. US polls, commissioned by Bloomberg also reveal that public support for President Obama is improving (55%), rather than for the Republicans (35%). Politicians should be sensitive to such polls. Does that mean some sort of deal/fudge is likely? (Source Bloomberg);

US: January existing home sales rose by +0.4% (+9.1% Y/Y), to an annualised rate of 4.92mn units. The median price of a single-family existing home rose by +12.6% Y/Y. The number of existing homes available for sale declined to 1.71mn, the lowest since December 1999. I continue to believe that the US residential home sector will continue to improve, which will positively impact the US economy;

US: The US Government confirmed the US Department of Agriculture forecasts that corn, wheat and soybean prices, in particular, could decline following last years drought. Corn prices could decline by around ⅓ rd, with soya 25% lower. The forecast is subject to weather conditions remaining benign. If food prices decline materially, EM’s, in particular, will benefit, as their inflation basket is materially impacted by food (and energy) prices, in particular;

Canada: Canadian retail sales declined by -2.1% M/M in December, much worse than the decline of -0.3% expected and the marginally upwardly revised +0.3% previously. Pretty weak numbers.

Canadian January CPI rose by just +0.1% M/M, as opposed to +0.2% expected and -0.6% previously.

As retail sales are weak and CPI coming in below expectations, rates should be on hold;


Asian markets recovered from yesterday’s sell off (ex Chinese markets), as have European markets. Interestingly French and Italian markets are outperforming their EZ counterparts. US markets are around +0.5% higher.

The Euro, having tried to rise, is back below US$1.32 – currently US$1.3170. The short term (2 year) US Treasury/German bund differential has increased to around +12 bps higher for US Treasuries, which will favour the US$.

The Yen is flat at Yen 93.26.

Sterling continues to recover somewhat and is currently trading around US$1.5261.

The A$ is firmer at US$1.0311, following Mr Stevens comments today.

Spot gold is trading around US$1577, with April Brent up to US$114.36 – still far too high.

I continue to believe that the Italian elections will move markets next week and remain cautious to negative the equity markets, given the increased uncertainty. However, Italian markets are outperforming other European bourses today !!!!. Normally its bad to bet against the locals. Just too risky to play the markets though. In addition, some info I’m getting relating to China makes me cautious.

Have a great weekend.

Kiron Sarkar

22nd February 2013


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