Weekly Comment on the Markets, Politics and Economics by Alastair Winter, Chief Economist at Daniel Stewart.
- It looks like an uneasy week with the US closed on Monday while China returns from a week off. Europe’s heady gains in January have already largely dissipated and US equities may be hit by more shenanigans in Congress. Reaction to the Italian election will not come until next week.
- It may be bonds’ turn to wilt if traders start to think too much about Europe but, of course, no prospect of a deal in Washington would be paradoxically good for US Treasuries
- The G20 has given the green light to further selling of the yen and traders will be only too happy to add to their fat profits. The pound also looks in line for more punishment but, of course, that has nothing to do with official policy (perish the thought!). The euro’s immediate direction will depend on China, which despite providing a floor is not above a spot of profit-taking from time to time.Â On this basis the dollar should stay quite firm.
- The Republicans may have backed away from default and shutdown but they look increasingly like opting for sequester as the lesser ‘evil’. Meanwhile, the House Democrats are trying to tie Mr Obama’s hands on any cuts to entitlements. All this is dumb rather than disastrous.
- All ‘decent-minded’ people in Europe (e.g. President Napolitano, Mrs Merkel, Mr Rompuy, Mr Barroso, Mr Draghi, Mr Monti and journalists at the ‘Economist’ and ‘Financial Times’) remain in a tizzy over Mr Berlusconi’s prospects in next Sunday’s election. Help is coming from an unlikely source in the form of lurid coverage in the Italian media of the upheaval in the Vatican, which is side-lining ‘Il Cavaliere’.Opinion polls are not permitted at this stage but it looks as if the most he can hope for is a blocking majority in the Senate.
- In contrast the ‘right man’Â (see above),Nicos Anastasiades, is set to win the run-off next Sunday in the presidential election in Cyprus but that will only mean sorting its bust banks can be delayed no longer.
- The UK tops the data bill and the pound bashers will have to ignore another solid batch of Employment numbers and dismiss a Public Borrowing surplus in January as merely reflecting the tax collecting cycle. The MPC minutes may confirm, albeit in code, that Sir Merv has given up on monetary policy.
- The February IFO and ZEW and the flash PMI Manufacturing surveys from Germany are eagerly awaited for confirmation of January’s optimism to offset last week’s gloom.Â It is hard to see them being much better than before and that may disappoint. Not much can be expected from elsewhere in the EMU.
- From the US the latest FOMC may offer clues as to when Mr Bernanke is going to turn down, if not turn off, the printing press. The Gold market already fears that he will do so before the end of the year.
- Very soft economic data gave European equities a timely reality check, hitting Madrid and Milan hardest for a second consecutive week. The euro was less affected and bond yields had the briefest of wobbles before ending on a more optimistic note (German yields up and Spanish and Italian yields down).
- In the US, a leaked internal Walmart email on plunging sales stopped investors getting too excited over the latest weekly unemployment claims.
- China was closed but Australia carried on rocking (pun intended) while India struggled in the face of an austere budget expected on 28th February.
- Gold and silver took a fearful bashing as more investors reckon QE’s days in the US are numbered. The Great Soros is reported to be checking out, relatively unscathed no doubt
- Any doubts that the ramp-up in Oil prices was much more than speculation were dispelled by hedge fund managers’ claiming higher prices had encouraged new sources of supply, especially in the US.Â Gee, thanks guys! Forgive us, if the rest of us look forward to a plunge in prices similar to 2012 and 2011.
- The pound took over from the yen as the traders favourite victim, as conflicting signals came out of the US regarding Japanese policy. What will the traders do when Sir Merv is no longer around to talk it down? The euro prospered against both of them but could only spar with the dollar, which was itself held back by flows into ‘exotic’ currencies.
- President Obama was in no mood to compromise in his State of Union address. He may yet intimidate an increasingly fissiparous GOP and get a deal on the deficit in the next few weeks but may instead be looking to the mid-term elections in 2014 to break the deadlock.
- The G20 finance ministers seem to want to recover the solidarity of 2008 with solemn declarations on currency manipulation and tax avoidance but Japan has been given the green light for its latest yen-weakening policies. In contrast, the Brussels bureaucracy seems determined to press on unilaterally with the Tobin tax on financial transactions: not such a bad idea in itself but likely to be difficult to enforce.
- The latest nuclear tests by North Korea are as much of a provocation to China as to the US and may yet be the last hurrah of the Kim dynasty.
- The Q4 GDP and December Industrial Production figures from the EMU really were dreadful, with Germany’s providing the biggest disappointment. Things are supposed to be going better in this quarter. They could hardly be worse!
- Surprisingly (because of the BRC’s report last week) UK Retail Sales in January were quite poor, providing just the excuse needed to revive fears of a triple dip recession, especially if bad weather could be blamed. Only two days earlier the latest Quarterly Inflation Report from the Bank of England expressly ruled out recession in 2013. The Bank’s forecasting record is not brilliant but it is surely right on this point. In fact, this was the only bright spot in the Report, which predicts another two years of above target inflation, despite the better run of recent months. This was Sir Merv’s penultimate Report and in one of his biggest swerves yet he put the blame on government policies, oil prices and exchange rates in concluding that there was little more the MPC could do on either inflation or growth. The pound slipped further, perhaps out of habit whenever Sir Merv speaks, but the gilt market is inclined to wait for the new Governor.