ZEW (German Investor Confidence Index) Soars in February

The RBA, the Australian Central Bank has stated that the stimulative effects of lower interest rates was being seen in the Australian economy. The governor added that there was further scope to “ease policy further, if that becomes necessary”. However, expectations were for a more dovish statement. The A$ rose;

The Australian Green party has announced that its agreement with the Labour party had ended. However, the Greens added that they would not bring down Ms Gillard’s government, which should enable the government to continue through to the elections scheduled for mid September. Sounds like abandoning a sinking ship, though buying time, to help improve their chances in the elections;

Minutes of the January BoJ meeting reveals that “a few” members supported extending the maturities of bonds owned by the BoJ, from 3 to 5 years. However, buying longer dated debt seems to have been the preferred option. 2 of the 9 member BoJ board opposed increasing the inflation target to 2.0%, which was, however, agreed to at the meeting. (Source Reuters). The outgoing BoJ governor Mr Shirakawa warned that policies which restricted Central Bank independence would raise long-term bond yields – sure will, Mr S. Mr Shirakawa added that the BoJ would not monetise debt.

As expected, the Japanese Finance Minister stated that Japan would not buy foreign currency bonds in an attempt to devalue the Yen – they were told that such a policy was a complete no, no by the G7/G20. In addition, Mr Aso stated that the government would not change the BoJ law. The Japanese PM, Mr Abe has however threatened, only recently, to consider buying foreign bonds and to change the BoJ law !!!. A bit of confusion out there, it seems. The Yen appreciated on the BoJ/Minister of Finance comments;

China has published rules which allow brokers to sell mutual funds to the public. Such a policy will, in due course, allow for a much needed institutional market to develop in China. In additional, such investments represent an alternate form of savings and may limit increases in property prices, though it is well known that the Chinese generally love the property sector. Regulation well, based on past history, it’s likely to be too little too late – hope that changes this time around.

There are conflicting stories as to whether Chinese authorities are to put in place measures to curb property price rises – the FT talks about measures to limit the availability of credit generally. A month or so, the authorities denied such stories. On balance, it looks as if the Chinese authorities are indeed concerned about rising property prices and are tentatively trying to limit price rises through limiting the availability of credit. The Shanghai market closed -1.9% lower, with Hong Kong just over -1.0% lower, as well;

The Indian Finance Minister, Mr Chidambaram, is trying to cut back on expenditure and, in addition, raise revenue through the sale of assets. He is worried about a potential downgrade to junk by S&P and Fitch, who have both warned of such a possibility. He certainly is purposeful and is trying, through its a tough ask. Mr Chidambaram is due to present his budget on the 28th February;

The outcome of Italy’s impending general election remains highly uncertain. No polls are available at present due to Italian law. Analysts report that a coalition comprising Mr Bersani and Mr Monti is the most likely outcome – with Mr Bersani set to gain a majority of the seats in the Lower House, in accordance with Italian electoral procedures, if as expected, he gains the largest share of the votes. However, before the restrictions on polls, we were aware that Mr Berlusconi was gaining support and, it may be the case that his support is even greater than reported, as voters do not want to admit publicly (or to pollsters) that they will vote for him. Mr Berlusconi, together with others could, as a result, gain a blocking minority in the Upper House, the Senate, ensuring a political stalemate. The activist Mr Beppe Grillo (a former comedian) has been busy on the internet and the press say successfully so. Mr Bersani party, if it wins, will owe a lot to the unions, of which the CGIL is the most radical –  it has around 5.5mn members. Mr Monti’s Civic Choice party will hardly agree with the radical demands of the CGIL. Getting dodgy. (Source FT)

Just to add spice to the situation, Br Berlusconi stated today that he was a realist as to the potential breakup of the Euro !!!;

The EU Parliament is threatening to veto the 7 year E960 bn budget deal negotiated recently by the EU Heads of State. If its not approved, the 2013 budget would be rolled over. However, longer term projects would be impacted, as continued financing would not be secure. The EU Parliament states that E960bn is not enough. EU countries are facing austerity, but EU politicians believe that they should be exempted. Hmmm;

The ZEW February economic sentiment index soared to 48.2 M/M, well above the 35 expected and the 31.5 in January, the highest reading since April 2010. The index suggests that economic activity in Germany will pick up in coming months, as it tries to predict the situation 6 months ahead. However, the current conditions component declined to 5.2 from 7.1 and well below the forecast for a reading of 9. The latest monthly Bundesbank report stated that the German economy “has improved relatively quickly and in a remarkable fashion in the past 3 months”, a reversal from the somewhat downbeat tone late last year. Please note that the IFO survey (manufacturing survey) is far more important than the ZEW survey (investor confidence). However, the January IFO survey was also positive last month (improving for the 3rd consecutive month) and should, once again, be positive when the February data is released this week.

The Euro rose on the news, briefly, though gave up most of its gains subsequently.

EZ December construction output fell by -1.7% M/M or -4.8% Y/Y. For the EU as a whole, construction output in December declined by -2.7% M/M, or -8.5% Y/Y. A pretty unhealthy set of numbers;

The New York Times (NYT) is running a story which alleges that a US cyber-security firm has confirmed that the Chinese military (the PLA) has been responsible for a number of hacking attacks in the US and elsewhere. The New York Times was itself hacked recently. Chinese authorities have denied the allegations, which are pretty detailed and specific;


Chinese and Hong Kong markets closed lower though Asian markets generally were flat to slightly higher. European markets are sharply higher following the much better German ZEW survey results. US futures suggest a flat open.

The Euro is marginally higher at US$1.3360, with the Yen firmer following the comments by the Finance Minister Mr Aso. Its currently trading at Yen 93.49 against the US$.

Spot gold is flat at US$1610, with April Brent at US$116.76, marginally lower on the day.

I continue to believe that markets remain far too complacent and remain cautious to negative, especially in the short term. Theres just too much uncertainty around in my humble view, though I appreciate that funds are receiving material inflows. However, historically, markets have tended to peak when inflows, especially from the retail sector, increase. I used the improvement in markets to sell down marginally and am now roughly where I want to be.

Still prefer to concentrate on the currencies at present – increased my short Euro/US$ position modestly.

President Obama is due to speak on the sequestration later today, but both sides remain far, far apart.

Kiron Sarkar
19th February 2013

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