Weekly Comment on the Markets, Politics and Economics by Alastair Winter, Chief Economist at Daniel Stewart
The week ahead
- Equities face a trickier week than last as the US sequester looms larger and the fretting continues over the future of QE3. However, there are precious few monthly profits to cash in and a major sell-off is unlikely, given the underlying strength of the US economy and solid Q4 corporate earnings.
- Voting in the Italian election results continues into early Monday afternoon but it is hard to see much rapid upside in either Italian equities or bonds unless Mr Bersani gets a majority in both chambers. Nerves will be jangling outside Italy too.
- In contrast, the sun continues to rise on Japanese equities with a strong start to the week in expectation of aggressive monetary easing. The triumph of hope over experience, perhaps?
- The pound is still looking like a sitting duck: the Moody’s downgrade is another handy excuse for selling while ignoring any good news. It may look like a ‘good old-fashioned’ sterling crisis and it does carry inflationary risks but it is far from disastrous as gilts and equities are already showing.
- As the March 1st deadline for the initial sequester tranche off $85bn in 2013 approaches, it seems both sides are not really trying very hard to find a compromise. The Republicans can foil new tax increases (albeit at the expense of major cuts in their beloved defence spending) while the Democrats can ‘escape’ without major cuts to entitlements spending. Unless, a deal is subsequently put together US GDP could be halved in 2013 to around 1%.
- Sadly, none of the more probable outcomes in the election will be good in the short-term for the Italian people. There is unlikely to be a clear winner amongst the parties but the bandwagon to end austerity, abandon structural reforms and leave the EMU may have gained unstoppable momentum.
- In the UK, the Eastleigh by-election looks like being won by the local Lib Dem machine, which would be bad enough for the Tories but a big vote for UKIP would hammer another nail into the coffin seemingly inevitably waiting for Mr Cameron in 2015.
- In India, a general election is due next year but on Thursday the Budget is likely to be full of……er……. austerity , structural reforms, public spending cuts. There is no doubt that this is necessary but there will be talk of ‘political suicide notes’.
- While the politicians fiddle, the US economy has not been ‘burning’. On the contrary, very probably the latest data will bring an upwards revision to Q4 GDP, subdued Inflation and solid numbers for Personal Incomes and Spending and the ISM and PMI surveys. Lucky old them!
- There may well also be an upwards revision to Q4 GDP in the UK with the second cut revealing progress in Consumption and Business Investment. The PMI Manufacturing survey and Consumer Credit should be better too. This will, of course, do nothing to silence Mr Osborne’s critics.
- There will be further health checks on the German (Consumer Confidence, Unemployment) and Canadian (GDP) economies, which currently seem to be going in opposite directions. It is still too early to expect much from data from Japan.
- The reaction of US and emerging market equities to the slightest possibility of a variation in QE3 shows just how much macro day-traders are in charge at the moment. Calmer heads, however, prevailed in the US Treasury market.
- European equities were hit at first by an unedifying cocktail of Italian ‘comedians’, poor EMU-wide economic data and the latest bad news from banks but another round of optimistic surveys from Germany helped to rally the DAX and, more puzzlingly, the CAC 40.
- Sir Merv managed to disconcert most commentators with the revelation in the MPC minutes that he had after all voted in favour of more QE on February 7th and even contemplated other ‘loosening’ ideas. This followed his apparent giving up on further monetary measures at his press conference on the 13th. One way or the other, he is determined to talk down the pound as the key to rebalancing the economy and the punters are only too happy to oblige.
- Back from the New Year revels, Hong Kong and Shanghai took fright at the prospect of tightening in both China and the US, probably overdoing it. There are also rumours of sweeping government ministerial changes when Mr Xi finally gets to sit on the throne.
- As expected, the punters have started to cash in their profits on Oil as the rumours on demand from China and supply from OPEC wore thin. Many punters had already reduced their positions in Gold and the merest mention of an end to QE3 was enough to accelerate the rush to the exit but not yet the diehards.
- The pound was already punters’ favourite whipping boy, especially as some got nervous about shorting the yen, and the rout continued. Just to make matters worse, the euro slipped too on jitters of its own, taking the pound even lower vs. the dollar and other majors.
- Unprecedented foreign intervention, especially from Germany, in the Italian election could well prove counter-productive: Italians are as bloody-minded as anybody (I should know!) and anti-German sentiment dating back to WW2 is never far from the surface. The blackout on opinion polls added to the panic amongst EMU luminaries and, of course, they are not known for wanting to leave things to ordinary voters. Mr Berlusconi is likely to be the main beneficiary.
- Moody’s sneaky or tactful (take your pick) announcement of the UK’s downgrade (outlook stable, please note) late on Friday has unleashed a fresh torrent of abuse on the Coalition, much of which is hypocritical as the last thing Moody’s is advocating is a splurge in current public spending and rising debt. In fact, the downgrade is not at all surprising: more are on the way and not just for the UK.
- Reaction to the FOMC minutes may be overdone but it makes sense to wonder how QE3 can be unwound quickly without huge losses as and when the Committee itself raises interest rates. The answer, of course, is it cannot and, therefore, the process will take at least 10-15 years, unless rates fall back again in that time. Nevertheless, notice has been served that the current monthly level of $85bn new purchases will not continue beyond this year.
- Just as the FOMC contemplates the end of QE, the MPC is considering another round. Sir Merv is probably preparing the ground for Mr Carney rather than planning much for his own final months in office. The latest minutes show that cuts to both the Base Rate itself and the rate paid on deposits at the Bank are being considered as well as purchases of assets other than gilts. They also confirm that the Committee has given up on inflation.
- Better than ever UK unemployment and employment data seems to be baffling many economists, who seem reluctant to accept that people would rather take home less pay than have no job at all or that firms are willing to conserve their workforce through to the recovery rather than fire and re-hire. It’s something called Supply and Demand, folks!
- In Europe, the EU Commission’s Winter Forecast (no relation) was all about gloom: recession lasting most of the year, even higher unemployment and missed fiscal deficit targets. Apart from German economists and businesses, everyone else seems to share in this gloom. Not, of course, that the day traders are interested!