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Broadgate: Weekly Briefing 17/4

17 April 2012

Germany – Germany’s economic expansion is increasingly home-grown, according to latest research.

Unemployment at a two-decade low, wages accelerating out of years of restraint and falling borrowing costs are spurring consumers in Europe’s linchpin economy to spend more. Showcased by rising property prices, that’s at odds with the rest of the euro area, where austerity and the bursting of debt-fuelled asset bubbles are forcing households to cut back.

Economists from HSBC Holdings Plc and BNP Paribas are responding by raising forecasts for German growth and declaring that domestic demand is emerging as a rival to exports as the economy’s driver. The rejuvenation may help strengthen and rebalance the rest of the euro area, even as it makes it tougher for the European Central Bank (ECB) to set a ‘one-size-fits-all’ monetary policy.

Spain – ECB Executive Board member Benoit Coeure triggered speculation that the bank will revive its bond-purchase program to lower Spain’s borrowing costs as the region’s debt crisis threatens to boil over again.

Spanish “market conditions are not justified,” Coeure, who heads the ECB’s market operations division, said. “Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”

The euro rose and Spanish bond yields declined on Wednesday as Coeure’s comments reassured investors that the ECB will act again if needed to stem the crisis. With Spain’s three-month-old government struggling to reduce the budget deficit and crack down on overspending by regional administrations, borrowing costs have surged, nearing the levels that precipitated bailouts for Greece, Portugal and Ireland.

China – China’s trade data for March has unveiled a mixed picture of growth in the world’s second-largest economy. Exports grew by a more-than-expected 8.9percent during the month from a year earlier, indicating that global demand may be picking up.

However, imports grew by 5.3percent, down from a 39.6percent jump last month, raising fears about slowing domestic demand. The data comes as China has been trying to boost domestic consumption in a bid to rebalance its growth. “There is some evidence that domestic demand is showing signs of moderation compared to last year,” Rajiv Biswas of IHS Global said. “Growth momentum has moderated due to monetary tightening last year and we are still feeling its impact on the economy.”

India – India’s economy may grow at near the slowest pace since 2009 this year as investment remains subdued, the Asian Development Bank (ADB) said.

Gross domestic product will expand 7percent in the year through March, the Manila-based lender said in its Asian Development Outlook 2012 report today, lower than a September forecast of 8.3percent. Investment is set to stay “lackluster for some time” after new project announcements fell, it said.

“The global environment remains fragile and a worsening of the situation in the euro zone would have a significant adverse impact,” the ADB said. “A poor monsoon, fiscal slippage, or a continued policy stalemate to resolve some of the longstanding issues would also prove detrimental to growth.”

U.S. – U.S. Federal Reserve Chairman Ben Bernanke has said the U.S. economy is yet to fully recover from the impact of the global financial crisis. Mr Bernanke said that more regulatory action was needed to ensure the stability of the financial markets.

However, he warned that as these procedures were put in place new risks might emerge. Mr Bernanke’s comments come amid calls for a tighter control of the sector to avoid a repeat of the financial crisis. “Even as we make progress on known vulnerabilities, we must be mindful that our financial system is constantly evolving and that unanticipated risks will develop over time,” Mr Bernanke said.

Commodities – Rising concerns about Spain’s creditworthiness will trigger a fresh wave of interest in gold, spurring investors to buy a record quantity this year, a top precious metals consultancy has predicted.

Investors have lost enthusiasm for gold in recent months, as upbeat economic data from the U.S. have helped equities rally and damped hopes of further quantitative easing. The metal last week touched a three-month low of USD1,611.80 a troy ounce and on Wednesday was trading at USD1,659.

But Thomson Reuters GFMS said that gold would probably touch its lows for the year in the next few months. In its annual survey of the gold market, the consultancy predicted that gold bullion, which has surged more than 500percent in the past decade, would resume its upward trajectory in the second half of this year, hitting a record above USD2,000 within the next 12 months.

Spotlight on: Why a market correction is not on BlackRock’s radar

Fears of a significant correction in equity markets are unfounded, according to BlackRock’s Chief Equity Strategist for Fundamental Equities, Bob Doll, who says that there hasn’t been enough poor economic data to cause a slump.

The FTSE and S&P 500 have fallen by 3.5 and 2.6 percent respectively since mid-March this year, prompting fears that the 2012 rally has already come to an abrupt end.

However Doll, chief equity strategist at BlackRock, believes a pull-back in equity prices will be modest at the very worst.

“We do not believe that fundamental macro conditions have changed enough, or at all, to warrant a downgrade of our view towards equities,” he explained.

“For a couple of months now we have been suggesting that the strong advance in equity prices that occurred from last fall through mid-March may mean that markets were overdue for some sort of consolidation period.”

“However, beyond the short-term choppiness, our constructive outlook boils down to the fact that monetary authorities remain accommodative even while leading economic data has improved.”

“Given the current backdrop, we believe share price turbulence is more likely to reflect the consolidation of prior gains rather than the start of some sort of large downturn.”

Doll says that although markets have been consistently volatile over the past three years, investors can take comfort from relatively low maximum losses during this time.

“Since the current bull market began in early 2009, we have seen many short-term corrections of around 5 to 7percent that have occurred without any serious worsening of fundamentals, so that range represents a possible starting point for any sort of near-term correction,” he explained.

Last week saw the release of a disappointing U.S. labour market report for March, with payrolls growing by a less than expected 120,000. That said, the unemployment rate fell to 8.2per cent, its lowest level in over three years.

However, Doll believes markets have overreacted to this data, and says that at this point any pullback should be viewed as a potential buying opportunity, particularly for those with a long-term view.

He commented: “It is hard to deny the improvements we have seen in the global macro backdrop over the last several months. Notwithstanding March’s slowdown, improvements in the labour market have suggested that the U.S. economy has appeared to be transitioning to a more sustainable trajectory.”

“Additionally, despite the headlines last week over a troubled Spanish debt auction that renewed concerns over the situation in Europe, policymakers do appear to be moving down the correct path.” While Doll acknowledges that various challenges remain, including the knock-on effect of a worse-than-expected recession in the eurozone, and a further hike in oil prices, he remains upbeat overall.

“On balance we continue to believe that the positives outweigh the negatives,” he finished.

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.