Weekly Comment on the Markets, Politics and Economics by Alastair Winter Chief Economist at Daniel Stewart
The week ahead
Â· It seems that most investors have yet to take on board that even if Italy is able to carry on funding itself for a while the ?rules? mean it cannot be bailed out by the ECB if it does not toe the line on austerity. As that realisation spreads, the euro, Italian bonds and bank shares (and those in the other ?peripheral? countries will continue to wobble and German bund yields firm.
Â· The shadow of a US government shutdown on March 27th has been lifted, so US equities will be able to respond to the continuing stream of good economic and company news. This looks like the safest place in what could be a tough week for equities.
Â· Trading has already started in Asia and both Shanghai and Hong Kong have been hit hard by proposed new curbs on property speculation. At first sight it looks overdone.
Â· Meetings of four central banks (EMU, UK, Canada and Australia) will probably be of most interest to the FX market (and economists) with the pound likely to be under the cosh again ($1.50 has already been tested once) while the dollar can expect another good week.
Â· Although the focus will be on Italy, the next step of the EMU crisis may not be triggered by its funding challenge but rather new problems with Greece, Portugal, Spain or even Cyprus. Social unrest is mounting in those countries to the point where the respective governments dare not impose further austerity, especially now that Italian voters have spoken. The current EMU rules say ?no austerity, no bailout? so there could be moves, led by France, to relax the rules. The northern block of countries and the ECB will resist at least until (or if) Mrs Merkel loses the September election. Accordingly, the next but not necessarily final step towards EMU break-up will occur sooner rather than later in the form a funding crisis in one of the southern countries.
Â· Meanwhile, in Italy itself both the Centre Left and Centre Right are so terrified of M5S winning a majority in an early re-run that they will try to reach an accommodation whereby Mr Bersani forms a minority government with a programme to reverse some of Mr Monti?s spending cuts and tax increases. Both parties will also, separately and possibly covertly together, try to find ways to disrupt and undermine M5S but Mr Grillo is not going to give up and go away. Moreover, President Napolitano is so far refusing to accept a minority government. What a mess!
Â· It looks like a long haul on sorting the deficit in the US but Mr Obama is sounding more purposeful now that sequester has actually started. Some Republicans are clearly unhappy with the stand-off and the President seems to want their help in persuading his fellow Democrats to engage in negotiating a longer-term deal.
Â· In the aftermath of the Eastleigh disaster, senior Tories insist there will be no changing of course, which means that is exactly what will happen. The first sign is talk of repealing the Human Rights Act, which will be opposed by Labour and the Lib Dems and by Brussels and take years to effect but is intended to take the wind out of the UKIP sails. More immediately, the Budget on 20th March is likely to be even more ?pro-growth?.
Â· Central banks will get a lot of attention but none of them may well end up announcing any changes this time round. Sir Merv will surely get a majority for more QE before he departs and it is touch and go whether it will be this week. Similarly, Mr Draghi may want to hold back on a rate cut for just one more month but it is a very close call.
Â· The Non-Farm Payrolls on Friday top the bill in quite a busy week for data and, together with the ADP private sector payrolls on Wednesday, should keep up the flow of better news in the US.
Â· The ISM/PMI survey cycle moves on to Services and not much can be expected from Europe or the UK. The updated GDP figures for Q4 from the EMU, Japan and Australia will probably not bring any cheer.
Â· In the UK the February figures from the British Retail Consortium should show some consumers are still willing to shop, probably mainly in London.
Â· On Saturday the latest monthly numbers from China will surely avoid bad news that might embarrass the new leadership.
Â· The Italian election results, especially as the early leaks turned out to be wrong, gave rise to some volatility around the world but by the end of the week the unholy trinity of Italian equities, government bonds and the euro were the only significant casualties.
Â· US equities started out in unsettled mode but were both unfazed by sequester and soothed by Mr Bernanke?s testimony to Congress. The Dow, however, was not quite able to reach its pre-crash high of 14164.5.
Â· The Nikkei greeted warmly the nomination as Governor of the BoJ of Haruhika Kuroda, President of the Asia Development Bank and an outspoken advocate of monetary easing, together with Kikuo Iwata, a harsh critic of BoJ policies, as one of his deputies. Unfortunately for them, the FX market was more concerned about the euro and the yen?s slide was halted, perhaps only temporarily but you just can never be sure of FX punters.
Â· Worries from some punters about the euro was also enough to give the pound a bit of a reprieve. Moody?s downgrade continued to be a non-event.
Â· Despite Messrs Bernanke and Kuroda and Sir Merv?s eagerness to print more money more and more punters seem to be giving up on Gold. Oil remains in favour for day-trading although the trend at the moment is to sell.
Â· After spending much of the last two years insisting that the EMU leadership would ensure that the EMU survived, I am no longer convinced that they are able to do so. However, many investors who initially wrote off the euro seem to have moved in the opposite direction. What has changed for me is that a majority of voters in a major EMU country have rejected austerity, which will encourage others, while also opening the door to an Italian exit. Governments everywhere will ignore this fact at their peril. This is not enough to forecast the end of the euro but it is a first step towards it.
Â· The brinkmanship shared by the White House, Democrats and Republicans prior to the start of sequester was so well-flagged that it actually started with barely a whimper. However, the protagonists have agreed on a temporary patch to allow the federal government to carry on functioning after March 27th.
Â· US data was largely encouraging apart from a sharp fall in Personal Incomes in January as tax rises held back Spending, despite a bounce in Consumer Confidence.
Â· In contrast, UK data was not good, especially Business investment and the Index of Services. However, the official statistics continue to struggle for credibility and it is beginning to look as if not only is a triple dip unlikely but, as I suggested might happen, the double dip in GDP is being revised away and it now seems clear that the economy did not contract in 2012 as a whole . The Markit/CIPS Manufacturing PMI was disappointing but there is always an element of going with the herd in these surveys.
Â· In Europe, it was once again Germany vs. the rest, especially in respect of Unemployment which is already a huge social problem in southern countries.
Â· As expected, the data from Japan is still very soft but the two Manufacturing PMIs in China and GDP in Canada surprised on the downside.