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Broadgate: Weekly Briefing 4/7

4 July 2013

U.S. – U.S. manufacturing recovered in June from an unexpected dip in May, according to an industry survey, although the level of hiring in the sector was the weakest for nearly four years.

The index of national factory activity as recorded by the Institute for Supply Management (ISM) rose to 50.9 in June from 49.0 in May (a reading above 50 indicates growth).

Earlier, a separate survey for the eurozone manufacturing sector showed activity there at a 16-month high.

Japan – Japan was the only market to perform positively on the S&P Global Broad Market Index in June, gaining 1.42% in the month.

Japan was able to outperform 45 other markets, as well as the wider developed markets sector which saw a loss of 2.66% over June.

Last week investor sentiment took a hit from Federal Reserve chairman Ben Bernanke’s suggestion that the U.S. could start to ease its quantitative easing programme. Additionally fears of a liquidity crunch in China caused further concern among investors.

S&P Dow Jones Indices senior index analyst Howard Silverblatt says: “In Japan, prospects for growth via new stimulus created rapid gains in the market (and a declining yen), which eventually came into conflict with reality caused by too much expectation too fast.

“However, after some pullback, Japan managed to side with growth (and a weaker yen), posting the best result of any market for June – and the only one positive one for that matter.”

China – Chinese Premier Li Keqiang said that the conditions for the world’s second-biggest economy to achieve its growth targets are in place, China Central Television reported on Tuesday.

The conditions exist for China to realize its economic targets for this year and for sustainable, healthy development, CCTV cited Li as saying in a meeting with leaders from central and eastern Europe.

The comments come after Goldman Sachs, China International, Barclays and HSBC altered their growth projections this year to 7.4%, below the government’s 7.5% goal disclosed at the March conference at which Li became premier.

Europe/Portugal – Portugal’s borrowing costs have risen sharply amid fears of a growing political crisis in the country.

Yields on the country’s benchmark 10-year bonds moved above 8% for the first time since November in early trading, the main stock market also fell more than 6%.

Earlier this week, two leading ministers resigned from the coalition government, which has been in charge since Portugal requested a bailout in 2011.

It received a bailout worth more than EUR78bn ($102bn) in May 2011, on the condition it implemented austerity measures.

The sharp rise in bond yields suggests investors are less confident that Portugal will be able to repay its international debts.

Brazil – Ibovespa futures dropped after a report showed Brazil’s manufacturing slowed more than forecast in May, adding to signs that growth in Latin America’s largest economy is faltering.

“Brazil may experience a recession by the end of this year,” Nomura Holdings Inc.’s analysts including Tony Volponwrote in a note to clients, citing the negative impact that tighter monetary policy in the U.S. might have on Brazil’s economy.

Malaysia – Malaysia is well poised to achieving ‘high-income’ status by 2020, based on the county’s economic performance thus far, said the World Bank chief economist Kaushik Basu.

“Malaysia’s target to become a ‘high-income’ country by 2020 is possible, and the country is capable to be more ambitious by aiming for per capita income of US$20,000 by 2025,” said Basu. The World Bank predicts Malaysia’s economy will grow 5.1% this year.

Basu said Malaysia has shown robust economy growth over the years and has continuously diversified its economy by spending the revenue derived from commodities into various sectors (e.g., manufacturing).

“If Malaysia continues its efforts in diversifying its economy and moving into high-end manufacturing, as well as continue to stress high education and human capital formation, then it is capable to achieve its high-income nation targets,” he said after the bank launched its “June 2013 Malaysia Economic Monitor: Harnessing Natural Resources” report recently.

Forecasts – BNY Mellon chief economist Richard Hoey says the rise in interest rates brought about by the Federal Reserve’s plans for QE tapering marks the start of a five year “cyclical normalisation”, rather than the beginnings of a bear bond market.

Hoey explains that the recent spike in interest rates following speculation over when and how the Fed will taper QE is “cyclically appropriate”, given the outlook for global and U.S. GDP growth.

He says: “We continue to expect the current soft patch in economic activity to be followed by an acceleration of U.S. and global GDP growth in late 2013 and in 2014.

“The Fed’s contemplation of future actions to taper its quantitative easing program and the recent rise in intermediate-term and long-term interest rates appear to be cyclically appropriate.”

Commodities – The price of U.S. light crude oil has risen above $100 a barrel for the first time since September 2012 on concerns over political turmoil in Egypt.

U.S. light crude rose more than 2% to $101.80 a barrel in Asia trade. Brent crude also rose 1% to 105.20 a barrel.

Egypt’s President Mohammed Morsi has rejected an army ultimatum to resolve the turmoil by Wednesday, triggering concerns that the crisis may escalate. There are fears this may dent oil supplies through the Suez Canal.

“The turmoil in Egypt has caused the market to inject some premium into oil futures,” Victor Shum, a vice president at IHS Energy Insights, told the BBC.

Commodities – UBS AG , Switzerland’s biggest bank, has started storing gold for wealth-management clients at a facility in Singapore, citing interest from investors in the region even after the metal recently slumped into a downward trend.

The leased vault in the Singapore FreePort is available for clients in the city-state and Hong Kong, according to Peter Kok, regional market manager for wealth management in Singapore and Malaysia. While bullion is heading for the first annual drop in 13 years, client interest persists, Kok said.

“Notwithstanding the drop in gold prices, we are still receiving queries on the offering from clients who are keen to reap the benefits of asset and geographical diversification,” Kok said.

Spotlight on: Positive signs for Japan

The latest Tankan report, the main economic indicator of the Bank of Japan, recorded its first positive reading since September 2011, meaning that optimists outnumbered pessimists, and the 12-point rise pushed the index to its highest level since March 2011.

The positive sentiment among large manufacturers was reflected further in plans to boost capital spending by 5.5% in the current financial year, eclipsing a 2.9% Reuters forecast, according to the quarterly survey.

The findings not only defy recent market turbulence but also appear to vindicate Shinzo Abe, the prime minister, and his so-called “Abenomics” policies of kick-starting the world’s third largest economy via aggressive monetary stimulus and fiscal spending.

The report’s positive findings came only a week after other recent data confirmed a similarly upbeat shift in Japan’s economic mood.

Factory output has risen by the most significant amount since December 2011, retails sales have increased and a six-month slide of core consumer prices has halted, according to government figures.

The property industry has also received a confidence boost with the number of housing starts having risen 14.5% in May compared to a year earlier, reflecting the ninth consecutive month of increases, according to the land ministry.

“Companies are becoming pretty confident about the economy’s outlook,” Yoshiki Shine, chief economist at Dai-ichi Life Research Institute in Tokyo, told Bloomberg. “They still have scope to revise upward their profit forecasts and capital investment plans.”

Taro Saito, senior economist at NLI Research Institute in Tokyo, added: “The improvement in big firms’ sentiment was largely driven by yen weakness, which supported exports, and the recovering economy overall.”

The administration of Mr Abe is at a critical crossroads in terms of his drastic stimulus policies attempting to reverse 15 years of deflation and economic stagnation.

When Mr Abe first unveiled his “Abenomics” policies after coming to power last December, there was an immediately positive effect, with the yen weakening and the stock market soaring.

However, the positive market sentiment wavered towards the end of May fuelled by concerns relating to reduced stimulus from the U.S. Federal Reserve while a slowdown in China also caused jitters.

The future of his economic policies also hinges on the success of his ruling Liberal Democrat Party at critical Upper House elections later this month, with official campaigning kicking off this week.

While the recent Tankan findings combined with other positive data are likely to be welcomed by Mr Abe’s administration as reassurance that his high-profile and aggressive policies are paying off, analysts remained more cautious.

“While manufacturers continue to anticipate a steady recovery, non-manufacturers remain cautious on the outlook,” said Shuichi Obata, a senior economist at Nomura Security Co.

“Large upward revisions to fixed investment plans indicate that companies are increasingly keen on capex, and with U.S. dollar and Japan yen assumptions still cautious, i.e. erring toward a stronger yen, we see room for plans to be raised further.

“Our focus is on whether improved sentiment and bullish capex plans will steadily filter through to the real economy.”

BWB

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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