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Broadgate: Weekly Briefing 25/1

25 Janunary 2013

Japan – The Bank of Japan (BOJ) has agreed to double its inflation target to 2% and ease monetary policy, meeting key demands of Japan’s new government.

Japan’s central bank has guarded its independence and there were fears it may resist Prime Minister Shinzo Abe’s calls for it to do more to help growth, but the BOJ has gone further than many analysts predicted, offering to do open-ended asset purchases from 2014, expected to pump billions of yen into the economy.

“This is very good news,” said Brian Redican, from Macquarie in Sydney. “For once, the BOJ has been more aggressive than the market expected. The government is clearly forcing the pace of change, which is no bad thing. The BOJ has talked about targeting inflation for years without any success, but these changes are more credible.”

China – Manufacturing activity in China grew at its fastest pace in two years in January, according to data from HSBC.

The preliminary reading of the Purchasing Managers Index (PMI) was 51.9, compared with 51.5 in December. Levels above 50 indicate expansion.

China’s leaders have taken steps to boost the country’s growth, of which manufacturing is a major component. The data is the latest sign that the world’s second-largest economy is recovering after a sharp slowdown.

“Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months,” said Qu Hongbin, chief China economist at HSBC.

India – India raised a cap on foreign investment in rupee-denominated bonds by $10bn to $75bn, the central bank said.

The nation boosted the limit on holdings of government debt to $25bn from $20bn while an ownership ceiling for corporate notes was increased to $50bn from $45bn, according to a statement on the Reserve Bank of India’s website.

Prime Minister Manmohan Singh’s administration has taken a series of measures since mid-September, including allowing more international investment in retailing and aviation, to revive Asia’s third-largest economy and avert a downgrade in the sovereign rating.

Spain – Spain’s unemployment rate has soared to its highest level since measurements began in the 1970s as a prolonged recession and deep spending cuts left almost 6 million people out of work at the end of last year.

Spain’s unemployment rate rose to 26% in the fourth quarter of 2012, or 5.97 million people, the National Statistics Institute said on Thursday, up from 25% in the previous quarter and more than double the European Union average.

Spain sank into its second recession since 2009 at the end of 2011 after a burst housing bubble left millions of low-skilled labourers out of work.

Germany – German investor confidence jumped surprisingly this month above its long-term average to a level not seen since May 2010, the ZEW Center for European Economic Research said on Tuesday.

The ZEW’s economic sentiment indicator, which gauges investors’ six-month outlook, surged by 24.6 points this month to 31.5. Analysts had expected a 12 point increase.

The report means that a significant majority of investors sees conditions improving after the fourth quarter’s estimated 0.5% quarterly decline in German GDP.

“The financial market experts seem to expect that the positive sentiment on the financial markets may soon result in companies realizing investments that had been postponed early on,” ZEW President Wolfgang Franz said. “However, the economic situation of important trade partners is rightly considered to still be weak. This suggests that the German economy will further grow at a moderate level in 2013.”

Companies – Apple Inc. more than doubled its iPhone sales points in China, which helped boost revenue by 67% in the world’s largest market for handsets.

Outlets in China selling the iPhone rose to 17,000 in the period that ended Dec. 29, from 7,000 a year earlier, Apple Chief Executive Officer Tim Cook said. That helped Apple boost sales in the Greater China region to $6.83bn, from $4.08bn a year earlier, the company said in statement that marked the first time it formally shared China data in its earnings release.

Cook needs a strong performance in China after Apple last quarter posted its slowest profit growth since 2003 and weakest sales gain in 14 quarters, amid rising costs and accelerating competition with Samsung Electronics Co. Apple expanded its own China retail stores to 11 from six over the past year, while the number of premium resellers doubled to more than 400 shops, said Cook, who visited China this month.

Commodities – Gold will rally this year and into 2014 as U.S. Federal Reserve policy makers will probably maintain asset purchases for two more years to buttress the recovery of the largest economy, according to Morgan Stanley.

Gold, which rose for a 12th year in 2012, may average $1,830 an ounce in the final quarter from $1,715 in the first, $1,745 in the second and $1,800 in the third, analysts Peter Richardson and Joel Crane said in a report. Prices will be supported by investment and central-bank buying, they wrote.

Spotlight on: China set for a mini bull market?

China exited 2012 with its economy accelerating hard out of a year in which it came closer to almost stalling than at any time since 1999, in a further tentative sign of recovery in global activity.

The country recorded its slowest full-year growth of this century, but the 12 month figure of 7.9% still beat consensus expectations of 7.7% in a Reuters survey of economists.

The Shanghai Composite index gained 1.41% on Friday, crowning a month which seems to have signalled a break-out from its two year bear run, gaining 17.16% since mid-December.

‘Should the Shanghai market gain another couple percentage points, a new bull market will be at hand, and it will certainly be a welcome relief for Chinese investors, noted Bespoke Investment this week.

‘Last month’s PMIs were upbeat and we think the recovery has a while yet to run,’ said Mark Williams, Asia analyst at Capital Economics.

The uptick was driven by a stabilisation of exports, industrial production, which was up 10.3% over 12 months compared to a figure of 10.1% in November, and retail growth, up 15.2% from 14.9%.

Two interest rate cuts and the approval of infrastructure projects, as well as the introduction of new leadership in November, have helped stabilise outlook and confidence.

Investors responded enthusiastically amid hopes the market has shrugged off its extended losing streak, but analysts were sceptical of how long China could maintain re-acceleration. They pointed out that household spending remained sluggish and that state intervention was still very much required.

‘As such, there must be a good chance of disappointment if incoming data fail to meet expectations,’ said Williams.

‘This will be an increasing risk as the year goes on if the recovery remains centred on infrastructure and real estate investment rather than consumption. Sustained stronger growth in China would require a turnaround in household spending.’

Bank of America Merrill Lynch’s China economist Ting Lu said he expected annual GDP growth to peak at 8.3% in the first half of 2013, before slowing again to 8% over the second.

‘Pro-growth policies will be extended into 2013, and aggressive stimulus will be avoided unless there is another global financial crisis,’ said Lu.

‘Within the year, policy will likely be marginally tightened towards the second half of the year on concerns of rising inflation and home prices, investment overheating and financial system risks. We expect no rate changes in 2013, and the People’s Bank of China will aim to deliver a stable interbank rate.’

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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