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Broadgate: Weekly Briefing 12/11

12 November 2012

China – China has reported encouraging economic data this week, indicating that growth in the world’s second-largest economy may be rebounding. Industrial production, retail sales and fixed-asset investment all rose more than expected in October, from a year earlier.

Meanwhile, the inflation rate fell, giving room to policymakers to employ stimulus measures to support growth. The numbers come as China’s growth rate has hit a three-year low.

Factory output rose 9.6%, while retail sales jumped 14.5%, indicating that domestic demand was holding up.

China – China’s President Hu Jintao has said the country will deepen its economic reforms and boost domestic demand to spur a new wave of growth. Opening the Communist Party congress, Mr Hu added that China needed to work towards a more “market-based” exchange rate for the yuan.

“We should step up efforts to transform to a new growth model and work hard to improve the quality and efficiency of the economy,” Mr Hu said. “We will continue to deepen our economic system reform and stick to the policy of expanding domestic demand.”

U.S. – The U.S. trade deficit has fallen to its lowest level in almost two years, as exports reached an all-time high, official figures have shown. The deficit in goods and services narrowed to $41.5bn in September, raising hopes of increased strength in the U.S. economy.

The figure was 5.1% lower than August’s $43.8bn deficit and the lowest since December 2010. Exports rose 3.1% to $187bn, driven by sales of aircraft and heavy machinery. Imports also increased in September, rising 1.5% to $228.5bn, led by consumer goods, clothing and toys.

U.S./Greece – U.S. markets posted heavy losses for the second successive day of trading on Friday, amid fears Greece is set to default on a EUR5bn debt payment due next week. According to the Financial Times, Greece, which was granted a EUR174bn bailout by the European Central Bank, is struggling to meet the EUR5bn debt obligation.

With Greece stalling, eurozone leaders now face a new round of negotiations on how to reduce Greece’s high debt levels.

As well as worries in Europe, U.S. lawmakers warned growth in the world’s largest economy would drop by 3% next year if the Bush-era tax cuts are not maintained or extended.

Europe – The European Commission has sharply cut its growth forecast for the eurozone, warning that the “difficult process of rebalancing will last for some time”.

It now projects the bloc will narrowly avoid recession next year, growing by 0.1%, compared with its previous estimate of 1% growth, and thinks the EU economy will shrink this year. Unemployment would also continue to rise next year, the Commission said.

“Having been fixated on the U.S. election and the preferred market outcome of an Obama victory, the initial morning feel good bounce (has fizzled out), as markets quickly moved on to the next potential banana skin,” said Michael Hewson at CMC Markets.

Companies – Sony Corp, the Japanese electronics maker reeling from four straight annual losses, had its credit rating cut to the lowest investment grade by Moody’s Investors Serviceb this week, citing falling demand for its televisions and cameras.

The long-term credit rating was cut one level to Baa3 from Baa2, Moody’s said in a statement on Friday, assigning a negative outlook. Sony, which unexpectedly reported a seventh straight quarterly loss earlier this month, had its short-term rating cut to Prime-3, also the lowest investment grade, from Prime-2.

“Overall earnings will stay weak due largely to prolonged operating losses in TVs and mobile phones, as well as significant declines in earnings from digital imaging products and games,” Moody’s said in a statement. “The company is not expected to reduce debt significantly without resorting to cuts in capital expenditure or the sale of non-core assets.”

Commodities – Gold traders are the most bullish in 11 weeks and investors accumulated record bullion holdings on speculation U.S. policy makers will add to stimulus following President Barack Obama’s re-election.

Twenty-five of 33 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further five were neutral, making the proportion of bulls the highest since Aug. 24. Investors boosted assets in gold-backed exchange-traded products to an all-time high of 2,596 metric tons on Thursday, valued at $144.9bn, data compiled by Bloomberg show.

Obama won the Nov. 6 election against Mitt Romney, who had criticized the Federal Reserve’s policies and said he’d replace Chairman Ben S. Bernanke, whose second term expires in January 2014.

Spotlight on: What Obama’s re-election means for markets

Barack Obama led the Democrats to victory in the U.S. elections this week, being appointed for a second four-year term as President, defeating his Republican opponent Mitt Romney.

Despite a close contest that saw many predict Obama would lose out – thanks to the high unemployment, sluggish economy and polls suggesting a lack of confidence in his leadership – he managed to edge out the Republican nominee.

Winning votes in Ohio and other industrial states in America were thought to have clinched the final vote for Obama, after the President announced he would bail out the Detroit car industry, to demonstrate economic fairness.

Even though Florida’s electoral vote are still undecided, Obama won by a comfortable margin with 303 votes to Romney’s 206.,

Asian markets barely responded to the news overnight as concerns over whether Obama and Republican-dominated Congress will be able to avoid a fiscal cliff, which will see nearly £375bn of tax increases and spending cuts his the U.S. economy in January.

The Nikkei 225 index ended the day flat, down 0.03% to 8,973 points, the Shangahi index was flat and the Hang Seng made a gain of 0.28% to 22,006.

President Obama’s second successive election win is a positive for both bond and equity investors, industry commentators have said.

Cormac Weldon, manager of the £2bn Threadneedle American fund, said: “President Obama has emerged victorious from one of the most polarised presidential campaigns of recent years.

“But despite the electoral rhetoric, Obama knows his scope for manoeuvre in the face of the ‘fiscal cliff’ and the budget deficit is limited. He has little choice but to address these challenges (as would a President Romney) by raising taxes and cutting spending.

“While markets may be volatile post-election, we believe over the longer term, U.S. equities will gain support from the fundamental strengths of the economy. America is benefiting from a revival in the housing market and an industrial renaissance based on relatively cheap energy supplies.

“Mitt Romney had pledged to remove Ben Bernanke as chairman of the Federal Reserve and was opposed to quantitative easing, which has proven supportive of both equities and the housing market.”

Tim Drayson, an economist for Legal & General Investments, said the election result matched his expectation, even if it was a bit more conclusive than he had anticipated.

“Attention now turns to the fiscal cliff, where a decision is really needed before Christmas. What we need is co-operation, but the political wrangling could get ugly.

“We still expect fiscal tightening of around 2%, which will materially effect the economy,” he said. Co-manager of the Henderson Horizon American Equity fund, Nick Cowley, said Americans have voted for the status quo.

“Obama’s victory does provide stability, particularly with respect to the Federal Reserve, and thus the risk of Romney meddling with Ben Bernanke’s loose monetary policy can now be eliminated.

“The recent quarterly earnings reports from U.S. companies have highlighted that the fiscal cliff is freezing the decision making process and thus holding back capital spending and new job creation. This runs the risk of derailing the positive progress that the U.S. economy is making, with notable signs of recovery in both the housing and auto sectors. Avoiding the fiscal cliff would allow this progress to continue and result in a compelling outlook for U.S. and global markets.”

Richard Lewis, head of global equities at Fidelity Worldwide Investment, said we will see some very intense negotiations pre-Christmas around the budget deficit and the negotiating stance of the two parties will start off poles apart.

“After a lot of wailing and gnashing of teeth, we are hopeful of a budget agreement along the lines of the Bowles-Simpson proposal which is based on a ratio of 3-1 spending cuts versus tax increases. Q4 activity levels will be low as a result and this will be exacerbated by the impact of Hurricane Sandy.

“On the basis that there will be a resolution before the first of January, we can expect a decent bounce-back in both economic activity and confidence early in the new year,” he added.

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.

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