President Obama’s State of Union speech: no concessions to Republican’s

Australian consumer confidence rose by nearly 8% to 108.3, the highest since December 2010 and the 4th consecutive monthly increase, reports Westpack. Importantly, traders reduced the chances of an interest rate cut by the RBA next month by 10 points to below 45%, from above 50% ahead of the release. The A$ rose on the news. Pretty confusing data from Australia recently;

India’s January trade deficit widened to US$20bn, one of the widest ever and up from US$17.7 in December. A rise in oil prices is not helping. The Rupee was relatively flat on the news.

The Indian government is seeking to sell more assets in a bid to curb its budget deficit next fiscal year. Whilst for the wrong reasons, the outcome is great. The Indian government has exercised far too much control over large businesses;

Interesting comments by ECB President Mr Draghi in Spain yesterday. He praised the efforts of the Spanish government – well he had to say that. Much more importantly, he stated that the ECB’s OMT programme would only be used “if there are major problems in the transmission of monetary policy and if there is strict and effective conditionality attached to an appropriate European Stability Mechanism programme”. Hmmmmm. That suggests to me that countries who have been preparing to use the OMT programme (Ireland) won’t be able to do so, as there is no panic in the markets. In addition, the EZ has to impose a serious stability programme on the relevant country. It also suggests the yields will have to rise much higher for countries such as Spain and Italy before the ECB is to step in with an OMT programme. I sense a subtle, but I believe an important change, from that currently believed – markets have ignored Draghi’s comments;

German wholesale price index rose by +0.3% in January M/M, as compared with unchanged in December – oil price related?;

The Swiss government has ordered banks to hold additional capital to guard against rising property prices. Banks will have to hold a further 1.0% of risk-weighted assets, which are secured against residential property;

The French finance minister admitted that GDP growth forecasts would be reviewed, with the results announced on the 15th March.

The French Foreign Minister has also admitted that France is unlikely to meet its budget deficit target of 3.0% – interesting to hear such a comment from a Foreign Minister. Ah ha, another French Minister has popped up to say that France will meet its 3.0% budget deficit target.

The reality is that French GDP growth will be anemic (some say negative, but that seems unduly pessimistic at this stage), with the budget deficit almost certainly higher than the 3.0% target;

EZ December industrial production came in +0.7% higher M/M (-2.4% Y/Y), much higher than the +0.2% expected and the -0.3% in November;

The EU reports that negotiations in respect of a free trade agreement with the US could start in June and that, if implemented, could increase EU growth by +0.5%;

The BoE admitted that UK inflation will remain above 2.0% for the next 2 years. In addition, the January inflation rate of +2.7% may well rise to +3.0% later this year. The BoE has not met its inflation target for 4 years and now admits that it won’t for a further 2 years. Weaker sterling, together with higher oil prices have forced the BoE to increase its inflation forecast. The governor Mr King also stated that UK growth would be weaker than expected this fiscal year – coming in at +1.7%, rather than the forecast of +2.0% 3 months ago. Sterling got whacked on the news;

I have to admit to being totally confused as to intended message of the G7 communique yesterday. I suspect a number of you are equally perplexed. I have tried to read the tea leaves and heres my penny’s worth. The G7 understand that Japan needs to tackle its 15+ year deflation problem and clearly appreciates that will require a combination of monetary and fiscal policy measures. In addition, for geopolitical reasons, the US, the key member of the G7, want a strong Japan. However, the Japanese have been talking openly about Yen levels – that was considered completely out of order. The proposal to buy Yen 50 trn of foreign bonds to weaken the Yen (Mr Iwata’s proposal) was also deemed a foul by other G7 countries and the Japanese were shown the yellow flag – indeed, pretty close to getting the red flag, though the G7 members did not want to risk a major problem, given the current financial crisis. Setting negative short-term interest rates may also result in a red card. So we are down to fiscal stimulus measure and, once the new BoJ governor is in place, major purchases of Japanese assets, including longer term debt. Deposit rates that banks get from depositing funds at the BoJ may also be cut. We await the G20 meeting for further clarification. The confusion suggests that Mr Kuroda is even more likely to become the next BoJ governor – the only problem is that if he is chosen, the Japanese lose him as the head of the Asian Development Bank – important to Japanese politicians/bureaucrats, especially as a Korean may get the role. Overall, it still suggests continuing Yen weakness to little old me + VOLATILITY. However, I’ve cut my Yen short by 50% and may well close totally, as short term, there’s just too much uncertainty – its been a truly fabulous trade, but time to take profits.

Even more confusing Yen related comments today – better to wait for the G20 – hopefully there will be some clarification then. Personally, I don’t believe that the Japanese will be criticised publically by the major countries;

In his State of the Union speech, President Obama stressed the need for an increase in the minimum wage, additional capex expenditure and an US/EU free trade deal. He also pressed Congress to avoid the sequester, due to take effect on 1st March. However, he reiterated the need for revenue increases, by closing tax breaks for companies and individuals, whilst offering few spending cuts. The response by Mr Rubio accused President Obama of being in favour of big government. This, once again, is going to go down to the wire, but unless the Republican’s can gain some momentum for their arguments, the pressure looks like being on them. The public wants to cut the deficit, but also wants their entitlements. The military and the US defense industry are lobbying Republicans hard to reverse the automatic cuts on defense spending – half the proposed cuts. The odds of the sequester coming into effect on 1st March still seems the most likely outcome – however, I must say, recent comments suggest that a rethink may well be on the cards.

Interestingly, President Obama issued an executive order which would set voluntary standards for infrastructure companies, in particular, to protect against cyber-attacks;

US January retail sales came in at +0.1% M/M, in line with expectations, though well below the revised +0.75 in December. Ex autos, gas and building, retail sales came in +0.1%, as opposed to +0.2% expected.

US January import prices rose by +0.6% M/M, lower than the +0.8% expected;


The Nikkei closed lower with the weaker Yen, though it took half a day for it to weaken. European stocks are higher, with US futures indicating a better open.

The Yen is all over the place – currently Yen 125.88. The Euro is also pretty volatile – currently US$1.3469, though off its highs.

Spot gold is at US$1651, with April Brent at US$117.94 – is it just me concerned about the oil price, which seems to be feeding through into inflation globally.

Still believe that the risks outweigh potential rewards. Returns YTD have been great – no point risking them given heightened uncertainty. Will wait for a bit longer before deciding what to do – something which I must admit, I find exceedingly hard to do.

Kiron Sarkar
13th February 2013

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