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Broadgate: Weekly Briefing 13/7

13 July 2012

Spain – Spanish Prime Minister Mariano Rajoy has set out a new raft of austerity measures aimed at balancing the budget. His speech comes as hundreds of Spanish miners arrived in Madrid this week to protest against government cuts to subsidies.

Mr Rajoy said there would be a EUR3.5bn cut in local authority budgets. He is also expected to increase VAT.

The measures are in return for a eurozone bank bailout and an extension to Spain’s deficit reduction targets.

Eurozone finance ministers have agreed to provide EUR30bn for Spain’s troubled banks by the end of the month and to give Madrid an extra year, until 2014, to hit its budget targets.

Europe – The European Central Bank’s (ECB) move to cut its deposit rate to zero this week has had an instant impact with banks, more than halving the amount of cash deposited there overnight.

The ECB hopes that its unprecedented move, which means banks will now get no return if they deposit spare cash there, will nurture more significant interbank lending by encouraging banks to look for more profitable options beyond the ECB.

U.S. – Federal Reserve officials are open to the possibility of a new round of asset purchases, though the U.S. economy may need to get weaker before any further action is taken.

Minutes of the U.S. central bank’s June meeting showed “a few” of the 12 policy makers thought further policy stimulus was likely to be necessary.

“Several others” thought extra policy would be necessary if things got worse.

Brazil – Brazil’s central bank has cut the country’s interest rate for the eighth straight time to a new all-time low, as policy makers struggle to kick-start growth in Latin America’s biggest economy.

The Banco Central do Brazil reduced the benchmark Selic lending rate by 50 basis points to 8% late on Wednesday, hoping to bring to an end the country’s year-long easing cycle.

China – China’s trade surplus widened in June as import growth weakened, underscoring worries about both the domestic and global economy. The trade surplus grew to USD31.73bn, up 42.9% from the same month last year, the customs bureau said.

The main contributor was weak imports which grew by 6.3%, about half the pace analysts had been expecting.

The latest trade data, released on Tuesday, also highlighted recent concerns that slowing demand from Europe and the U.S. will hurt the Chinese economy.

Commodities – Corn prices jumped close to all-time highs on Wednesday after the U.S. government slashed its production forecast due to “persistent and extreme” dry and hot weather in late June and early July.

The U.S. Department of Agriculture surprised investors and traders by cutting its corn yield forecast to 146 bushels an acre, down 20 bushels from its June estimate, and lowered its predicted size of the crop to 12.9bn bushels. In June the USDA forecasted 14.79bn bushels of corn crop.

Commodities – Merrill Lynch has added its voice to a growing number of market commentators who have been predicting that gold bullion will hit USD2000 an ounce this year.

Francisco Blanch, Head of Global Commodity & Multi-Asset Strategy Research at the investment bank, says he expects the Federal Reserve to initiate an asset-purchasing program of as much as USD500bn in the second half of the year, which will drive spot gold much higher by the end of the year.

Spotlight on: a healthy attitude towards volatility

A recently published report by Nielsen (a global leader in client surveying & research, with over 34,000 employees worldwide) shows that Asian consumers are more likely to stay invested in the market during the current uncertain, volatile times. What’s more, they are also more likely to put their cash in so-called high-risk assets than their peers in Europe and the U.S.

Nielsen’s Global Consumer Confidence Survey on investment attitudes shows 48% of consumers in the Asia Pacific region said they were invested in the markets or used investment services. That compares to just 27% in North America, 21% in the Middle East and Africa, 16% in Europe and 13% in Latin America.

Asia’s appetite for risk is also seen in investors’ ability to withstand market volatility. Oliver Rust, the Managing Director of Nielsen says Asian investors tend to trade more aggressively and more frequently than their European counterparts.

More than half (57%) of Asia Pacific consumers say they’re willing to accept fluctuations of more than 10%. Only half of investors in the U.S. will tolerate such swings and just 45% in Europe.

Rust says Asian investors tend to have a higher proportion of disposable income allowing them to take more risks.

Disposable incomes in Asia are higher because a growing working population has led to more households with singles, or couples without children in Asia, according to a report by Euromonitor. In fact, it says disposable income per household from 1995 to 2010 grew 13.2% in the U.S., while in China it surged 230%.

Mark Konyn, Chief Executive of Cathay Conning Asset Management says Asia’s risk-taking also has to do with attitudes. “In a Western context, taking risk is often viewed as speculation, rather than investment. In Asia’s high growth economies, investors typically look for higher return opportunities and tend to have shorter time horizons.”

Shan Han, a sales trader at IND-X securities adds that inflation is another factor. He says “higher inflation has also meant that hoarding cash has not been a good strategy for savings because of negative real deposit rates,” prompting Asian consumers to seek higher returns.

Han cites Hong Kong as an example. During most of the 1990s, annual inflation averaged 8.5%, while 12-month bank deposit rates averaged 6%. That means investors who stashed their cash in the banks were losing 2.5% of their savings each year.

Within Asia, Hong Kong consumers tend to be the biggest risk takers. 55% of Hong Kong consumers are financial investors, outweighing the global average of 33%.

Rust says that has to do with “new money”. “First generation wealth holders tend to focus on capital growth, whereas second or third generation wealth holders tend to focus more on capital preservation,” he says.

That explains why a larger number of Asian consumers pick stocks as opposed to other asset classes such as precious metals and bonds. Almost three-quarters of respondents in Asia picked equities, even though they’re often seen as the riskiest assets class. In North America, only two-thirds picked stocks, and in Europe, less than half did.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.