Comment on the Markets, Politics and Economics by Alastair Winter, Chief Economist at Daniel Stewart
The week ahead
- Equity markets look like continuing to diverge as investors (shock! Horror!) pay more attention to both individual stocks and wider fundamentals . This should underpin prices in the US and emerging markets while holding back those in Europe.Â Japan is closed on Monday and China until Friday.
- Divergence is also likely in bond markets with increasing appetite for exotic issues and wariness towards Spain, Portugal and Italy. Yields on ‘safer’ issues may well settle down despite all the talk of ‘rotation’ into riskier assets.
- Day-traders may decide it is time to cash in profits on Brent Crude after the strong but speculative start to 2013 and also to test taking Gold lower after its less lustrous start.
- In the FX market the yen and pound still look vulnerable and the euro, after its strong run, may join them, all of which points to a firmer dollar.
- Clues should emerge as to whether Mrs Merkel’s split with France at the latest Summit is part of a strategy to make the notion of a ‘transfer union’ within both the EU and EMU the battleground in the forthcoming German federal elections. The leaking and briefing should start this week and the SPD and Greens will eventually have to say where they stand.Â Meanwhile Mr Hollande will be plotting his revenge.
- EMU finance ministers meet today to lock horns again on Cyprus, Portugal and, believe it or not, Greece. Some of them go on to the G20 meeting in Moscow, where they probably will not agree much either.
- Time is running out for a budget deal in the US and the Republicans seem increasingly to favour sequester, despite the implicit savage cuts in defence spending, over any compromise package that involves higher taxes.Â This would disappointingly result in the short-term in a hit to GDP and endless wrangling (possibly until the mid-term elections in November 2014) without resolving the fundamental problems. President Obama is set to raise the stakes in his State of the Union Address on Tuesday.
- In the UK the government is due to announce today its first steps to tackle the cost of social care for the elderly. This is quite some nettle to grasp but this looks like only the first step in a long and expensive process.
- The UK will stay centre stage with the Bank of England’s Quarterly Inflation Report on Wednesday, preceded by the January Inflation data and followed by the official Retail Sales figures. While not sharing in the generally negative expectations I suspect that both the headline annual CPI and RPI will nudge higher because of the sharp fall last January but will fall back later in the year.
- The latest numbers on Consumer and Industrial sectors should add to the picture of steady recovery in the US.
- Q4 GDP numbers from Italy and France should confirm that the former is still mired in recession and the latter somehow just avoiding it. Germany, however, will limit the damage on the overall EMU figure.
- I did suggest that equity markets would take a breather last week, which with the notable exceptions of Shanghai and Sydney they duly did. Solid economic and earnings data helped US prices recover very quickly but renewed political and banking jitters zapped European (including the UK on this occasion) prices.
- The EMU jitters also pushed up yields on Spanish, Portuguese and Italian government bonds while those on German bunds tightened.
- Brent Crude rose another 1.8% to make it 7% so far in 2013, allegedly because of tighter sanctions on Iran and new demand from China but more likely just traders’ enjoying themselves. There was much less fun to be had with Gold and more investors seem to be losing interest.
- A word of concern from the mighty Supermario Draghi on the dangers from an over-strong euro was enough to end the rally that arguably started way back in the summer. This also gave the yen and the pound a respite and helped the dollar pull back some of its recent losses to the Mexican peso, rupee, rouble and rand.
- There is no doubt that the northern block, rather than just the UK, won the battle of the EU budget, although the European Parliament may yet try to foil them. As the European economy deteriorates the divisions get wider: northern vs. eastern as well as southern and now the rivalry of right vs. left has undermined the Franco-German axis.Â Mr Cameron did have a good Summit but the key dynamic was that his new less disruptive approach appears to be winning over Mrs Merkel.
- Accusations of financial misdeeds by politicians has drawn unwelcome attention to the wider problems facing Spain and Italy and sparked the latest round of euro-jitters. The latest and last-permitted opinion polls before voting reinforce the chances that Mr Berlusconi will do well enough to make trouble even if he is unlikely to win a majority in the lower house of deputies. His Northern League allies are raising the stakes with talk of a northern Italian currency to operate in parallel with the euro.
- One good piece of EU news was that the Irish government finally plucked up the courage to replace on much more favourable terms its Promissory Note to prop up Anglo Irish Bank……and got away with it, albeit rather grudgingly on the part of the ECB. This will ease the austerity measures and speed up Ireland’s exit from its bailout programme.
- The charm and open-mindedness shown by Governor-Elect Carney in his first grilling by MPs could hardly have been in greater contrast to the prickly self-righteousness of Sir Merv, who is not called ‘the Swerve’ for nothing. More importantly, he indicated (very tactfully, as he is not yet in office) that he thinks that monetary policy can and should do more to help the economy. This suggests he will be less concerned in the short-term about the 2% inflation target and inclined to follow the US’s FOMC in making explicit how long rates will be kept low and (possibly) purchasing assets other than government bonds.
- Meanwhile and as expected, Sir Merv and his MPC colleagues kept interest rates and the QE programme unchanged. Also as expected, the ECB and RBA kept their rates unchanged and avoided any talk of tightening.
- The Trade figures together with that Services PMI/ISM surveys in US, China and Germany confirmed that these locomotive economies are picking up speed, albeit held back by the rest of Europe.
- With UK data topping the bill, the doomsters have more explaining to do after a week of data that suggested a pick-up in activity from December in manufacturing, oil and gas production, services and exporting. GDP in Q1 is now even more likely to show growth and Q4 of 2012 could well be revised higher: i.e. no triple dip.