The (Chinese) Year of the Snake = volatility, aparently

The G20 meeting was a waste of time, as usual. The countries attending, in effect, have allowed Japan to pursue its proposed expansionary fiscal and monetary policy, though has shown it the yellow card in terms of overtly talking about weaker Yen levels. No great surprise. The next item on the agenda is the selection of the new BoJ governor, with the potential candidates being announced by the end of the month, according to the Japanese Cabinet Secretary. I would have thought it was Kuroda, but Japanese Press suggest its Mr Muto. No word on the ultra aggressive (monetarily) Mr Iwata. The PM, once again, raised the prospect of amending the BoJ law, if the Central Bank does not play ball. I have closed my Yen shorts and will wait for the next opportunity to short – I continue to believe that the Yen will weaken further in due course. S&P left Japan’s credit rating unchanged today. The Nikkei was up over 2.0% today, as Japan was not singled out at the G20 and as the Yen has weakened;

The Indian Central Bank governor, Mr Subbarao warned that the ability to reduce interest rates further was hampered due to inflation risks.  He added that increases of coal and electricity prices would increase inflation in coming months. The Finance Minister is to announce the 2013/4 budget on the 28th February. He has promised to curb this years budget deficit to 5.3%, and even lower (4.8%) for the 2014/5 fiscal year. It is understood that the Finance Minister has persuaded his political colleagues for the need to implement further spending cuts to avoid a credit downgrade, in spite of a general election, which is due in 2014 at the latest. The economy is expected to grow by +5.0% this year, below the +6.2% last year, increasing to 6.0% next fiscal year;

Saudi Arabian oil exports declined in December (the lowest in well over 1 year), explaining (at least partially) the recent increase in oil prices. Production was down -4.8% M/M in December to 9.03mn bpd and the Saudi’s cut exports by 1.3%, to 7.06mn bpd, according to official statistics, which I have to say, must be treated very carefully, as the Saudi’s are not known for their transparency in such matters;

The Conservative Mr Anastasiades gained the largest % of votes (45.4%) in last weekend’s Presidential elections in Cyprus, but failed to gain the 50%+ needed for an outright victory. He faces Mr Malas, the Communist Party leader in the second round, which will be held on the 24th February, with the winner being the person gaining the largest number of votes. However, he handily beat Mr Malas in the 1st round, who gained just 27%, in an election with high voter turnout (over 80%). The 3rd place candidate was Mr Lillikas, a nationalist and a former Foreign Minister, whose votes should be cast mainly for Mr Anastasiades in the 2nd round. Discussions over the proposed bailout of Cyprus will take place thereafter. Its not going to be easy, due to concerns by the Germans over alleged money laundering etc by Cypriot banks and, in addition, as the IMF wants haircuts to ensure that future Cypriot debt will be sustainable. However, Mr Anastasiades election will be a major help, in particular for the Germans;

The German’s have reacted angrily to the not too subtle hints by France (from President Hollande and the Finance and Foreign Ministers) that they will not meet their budget deficit target of 3.0% this year. German officials, together with the German representative on the ECB executive board, Mr Asmussen, have stated that France has a special responsibility to set an example in the EZ. Well, yes they have, but it is also clear that the French, unless they embark on painful austerity measures (which is highly unlikely), will not make the targets. Watch this space. The French Finance Minister stated today that France would advise on their GDP growth targets, together with their forecast budget deficit in a week or so. The EZ announces its revised forecasts this Friday;

Bankers in the EU are deeply concerned. The EU looks like imposing severe measures to curb bonuses, which includes restricting bonuses to one times salary – the UK are proposing to increase the cap to two times salary, with the backing of a supermajority of shareholders. The UK has been resisting this pressure, but looks as if it will lose the argument. The UK Chancellor does not want to be seen as a friend of the bankers – political suicide. Whatever you may think, more EU interference is bad news. (Source FT);

The normally conservative German Central Bank, the Bundesbank, has stated that Germany will post positive GDP growth in Q1 – it had previously forecast a flat Q1. As you know, I believe that German growth will materially exceed current predictions this year;

Will the Euro weaken against the US$ – that’s the question. Personally, I believe that its only a matter of time. I list below some of the reasons.

• US short term Treasury yields (2 year) are +10 bps higher than equivalent German bunds;

• Uncertainty will increase as we head towards the Italian elections this weekend, though a positive result ie no Berlusconi, will clearly be a significant positive – it is currently impossible to assess the situation, as there is no polling data available during the last 2 weeks ahead of an election, in accordance with Italian law. However, may I remind you that before further polling was restricted, Mr Berlusconi was gaining in the polls – a definite oops;

• Spain is facing continuing problems, as a result of the corruption allegations involving the PM, Mr Rajoy and the disastrous economic conditions in the country – the outlook remains bleak;

• The peripheral countries of the EZ continue to face hard times, with a number of the core countries eg France, Holland, for example suffering as well;

• There may well be civil disorder in the EZ come spring;

• France will have to downgrade its 2013 GDP forecasts (currently +0.8%, though the EZ is at +0.4% and is rumoured to announce a change in its forecasts in the next week – clearly lower). It is also close to impossible for France to meet its proposed budget deficit target of 3.0% of GDP this year. President Hollande (finally) admitted as much last week, as has the French Finance Minister;

• The EZ has to deal with Cyprus – no easy political task, even though the size of the bailout is relatively small – allegedly E16bn though in reality the final cost will be (materially?) higher;

• I believe that the ECB will cut rates, especially if the Euro appreciates and, in particular, if EZ inflation heads to 2.0% or lower, which, subject to high oil prices, it looks as if it will be the case;

• US growth prospects are better than that of the EZ;

• US financials are far healthier than their EZ counterparts.

• The latest CFTC Commitment of Traders report revealed a reduction in net long Euro positions last week – a trend, I believe will continue.

I’m sure there are many, many other reasons. However, China seems to be buying the Euro, as have the Japanese in the past, though I believe that the Japanese may well have to limit such purchases in the future – buying foreign bonds to weaken your currency is deemed a no no by the G7/G20.  In addition, a larger than expected repayment of LTRO 2 could help the Euro, week after next. Timing for a weaker Euro – well, markets move in mysterious ways and as a friend of mine stated “patience grasshopper”. Very sound advice, but I will be watching uber carefully;


Asian markets closed generally higher (ex China and Hong Kong), with a much stronger Nikkei, as Japan was not reprimanded at the G20. European markets are flat to lower. US markets are closed for Presidents day.

The Euro was trading higher, but has drifted lower to US$1.3352. The Yen is weakening – currently Yen 93.93, having been above Yen 94 earlier. Sterling, as usual is being crushed – currently US$1.5473.

Spot gold and April Brent are relatively flat at US$1611 and US$117.77.

Basically a quiet market as the US is closed.

I continue to be cautious to negative on equity markets.

Kiron Sarkar

18th February 2013

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