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Broadgate: Weekly Briefing 2/3

2 March 2012

U.S. – The U.S. stock market reached a major landmark on Tuesday, in its journey back from lows hit during the financial crisis.

The Dow Jones industrial average closed above 13,000 for the first time since 19 May 2008, just four months before the collapse of Lehman Brothers.

Analysts say it reflects a growing confidence in the U.S. economy and solid profit reports from U.S. companies.

“Two months ago, we were talking about a double-dip recession. Now consumer confidence is growing,” said Ryan Detrick, senior technical strategist for Schaffer’s Investment Research.

“A major milestone like 13,000 wakes up a lot of investors who have missed a lot of this rally.”

Greece – Greece’s parliament has passed a further EUR3.2bn (USD4.3bn) of spending cuts, a move required before the country can start to receive a second bailout package.

With an extra EUR130bn (USD174bn) of loans available from the International Monetary Fund and fellow eurozone nations, MPs voted for new pension cuts and a reduction in the minimum wage.

Greece needs the fresh loans to be able to repay EUR14.5bn of bonds. These bonds mature on 20 March.

Portugal – Portugal has passed the latest review of its continuing spending cuts and economic reforms, the country’s Finance Minister Vitor Gaspar has said.

It paves the way for the government to receive the next EUR14bn (USD19bn) round of bailout funds from the European Union (E.U.), European Central Bank (ECB) and International Monetary Fund (IMF). Portugal is to get EUR78bn in total.

China – The World Bank has called upon China to overhaul its financial sector in a bid to secure sustainable economic growth.

A joint report by the World Bank and the Development Research Center of China’s State Council predicts China will become the world’s largest economy by 2030 but says a number of reforms are needed if the country’s growth rate is to be maintained.

Robert Zoellick, president of the World Bank, says: “Central to the report’s findings is the need for China to modernise its domestic financial base and move to a public financial system, at all levels of government, that’s transparent and accountable, overseen by fewer but stronger institutions.”

“China has an opportunity to avoid the middle-income trap, promote inclusive growth, without further intruding on the environment, and continue its progress towards becoming a responsible stakeholder in the international economy,” Zoellick adds.

Asia – China’s manufacturing expanded at a faster pace in February and a gauge for India showed sustained growth, indicating that Asian economies are maintaining momentum even as Europe’s debt crisis caps exports.

Thursdays’ data, along with a surprise gain in Japanese companies’ capital spending and South Korea’s biggest increase in exports in six months, add to signs that global growth prospects are improving as the U.S. recovery strengthens and Europe works to contain its debt crisis.

“Pent-up demand will produce an export-led bounce in Asian economic activity” now that Europe’s debt turmoil is receding, said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, which accurately forecast today’s China PMI result.

Commodities – The price of gold fell more than 5percent on Thursday as investors became more confident about the health of the global economy.

Gold hit a low of USD1,688.44 an ounce on Wednesday, after trading as high as USD1,791.49 an ounce.

Sentiment was boosted by comments from Ben Bernanke, the chairman of the U.S. central bank, who said the U.S. economy is continuing to recover. Analysts said hopes of a recovery in the U.S. economy may see an increased appetite for more risky assets.

Although the recent economic data from the U.S. had been encouraging, some analysts warned that the recovery remained fragile and any new concerns about growth may see investors turn back to gold.

Spotlight on: The potential of a China/U.S. trade war

China will endeavour to import more premium items and luxury goods this year to avoid a costly trade war but will not curb its own exports, predicted a former Chinese trade official in an interview with Reuters.

Disagreements between China and its trade partners over issues from solar panel subsidies to airline emissions fees are on the rise as the global economy slows and U.S. politicians sharpen their rhetoric ahead of a presidential election in the fall.

“We must prepare for a big trade war this year,” said Wei Jianguo, a former vice commerce minister who is now a government advisor. “But since Chinese consumers demand Western cosmetics and handbags, why can’t we greatly boost imports of such products?” he added.

Earlier this week, U.S. President Barack Obama signed an executive order creating a new government team to enforce trade rules, a step widely seen as aimed at China, and senior lawmakers want to push a bill that would allow the U.S. to impose duties on subsidised Chinese goods.

China has largely remained quiet about the Obama administration’s move to create the 50-60 person trade unit, suggesting its leaders hope to avoid a loud dispute with the U.S. in a year when China goes through its own sensitive leadership transition.

As for Europe, Wei said China should cut import duties to encourage more purchases by China’s affluent consumers, who enthusiastically buy Louis Vuitton handbags and Italian suits.

But in a reminder that China can also act tough on trade issues, local media reported on Thursday that China-backed Hong Kong Airlines Ltd has threatened to cancel an Airbus aircraft order over an EU airline emissions fee scheme, which has sparked strong opposition from China.

China has previously threatened to hold back on purchasing Airbus aircraft in retaliation against the plan.

China, the world’s largest exporter selling USD1.9tn worth of products to overseas markets in 2011, often uses big orders for American products, from Boeing aircraft to soybeans, as a way of deflecting U.S. anger over its huge trade deficit.

It is also the biggest target for anti-dumping charges (when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition.). Those cases increasingly come from emerging markets like India and Brazil, China’s key export markets for the future. “Developed countries will target us. Our friends, emerging markets, will also target us,” Wei said.

But while China faces increased protectionism, a trade war is less likely, said Chin Leng Lim, a professor of law and a trade expert at the University of Hong Kong.

“The protectionism issue is separate from fear of a trade war, there is some control over the fear of a trade war because it takes two hands to clap,” he said.

However the situation evolves, there is a consensus of opinion from many fund commentators that China will soon surpass the U.S. as the world’s largest economy, primarily through it exports and local consumption of foreign brands. Hansard has a number of unit funds that can best position your clients to take advantage of this growth, as part of a diversified portfolio.

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.