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Broadgate: Weekly Briefing 6/4

6 April 2012

Global – World stock markets fell on Thursday after a weak Spanish bond auction inflamed concerns about the European debt crisis and hopes faded for more help for the U.S. economy from the Federal Reserve.

Benchmark oil rose above USD102 per barrel while the dollar rose against the euro but ebbed against the yen.

The debt crisis in Europe flared after a disappointing auction on Wednesday of government debt in Spain signalled investor confidence in the country’s finances is weakening. That compounded worries that arose on Tuesday, when minutes released from the March meeting of the U.S. Federal Reserve’s Open Market Committee gave no hint of a third round of bond purchases, dubbed quantitative easing III or QE3, to support the U.S. economy.

China – China, the world’s second-largest economy, is looking to increase investment and competition in its financial and banking sectors.

On Tuesday, it almost tripled the amount that international fund managers can invest in China to USD80bn. At the same time, Premier Wen Jiabao told China National Radio that the monopoly of state-owned banks needed to be broken.

It is hoped that the shift may boost growth and create a more international Chinese currency.

Analysts have long said that opening up its financial markets was key to Beijing’s efforts of pushing the yuan as an alternative to the U.S. dollar as a global reserve currency.

Spain – Spain is cutting EUR27bn from its budget this year as part of one of the toughest austerity drives in its history. Changes will include freezing public sector workers’ salaries and reducing departmental budgets by 16.9percent.

The government says it will raise EUR12.3bn this year, aided by an increase in tax for large companies. Deputy Prime Minister Soraya Saenz de Santamaria said the nation was in an “extreme situation, our top priority is to clean up public accounts,” she said.

“This is a moment that demands serious efforts to reduce spending but also structural reforms to cause the economy to grow and create jobs.”

But economists are questioning whether the cuts will be enough to satisfy Spain’s European partners.

Europe – European Central Bank President Mario Draghi said policy makers are prepared to act against inflation threats if needed, while assuring investors that the ECB doesn’t plan to withdraw emergency stimulus any time soon.

“All the necessary tools are available to address upside risks to price stability in a firm and timely manner,” Draghi told reporters in Frankfurt after the ECB held its benchmark rate at a record low of 1percent on Thursday. At the same time, it’s premature to talk about the ECB’s exit strategy, Draghi said, adding that the economic outlook is subject to downside risks and inflation will remain contained in the medium term.

Commodities – Gold fell to a 12-week low on Thursday, on signs that the Federal Reserve won’t provide more U.S. economic stimulus, boosting the dollar and eroding the appeal of precious metals as alternative investments.

The Fed will hold off on increasing monetary accommodation unless economic expansion falters, according to minutes of a March 13 policy meeting released on Wednesday.

“The market has decided that yesterday’s statement is probably the final nail in the coffin” for additional Fed stimulus, Frank Lesh, a trader at FuturePath Trading in Chicago, said.

Spotlight on: China’s growing dependence on domestic consumption

Drip by drip, the financial data coming out of China is leading some to ask serious questions about which way this economy is heading. Purchasing managers are reporting falling factory activity, banks are reporting rising bad debts, and the property market is cooling dramatically. There are still plenty of “China bulls” around of course, those who think the economy will continue its ever-upwards, breakneck trajectory.

However, according to some commentators, there are a number of reasons why the bearish, negative voices are growing louder.

One place to look for troubling signs is China’s factory sector, a part of the economy of course that has been at the heart of its recent success story, sending cheap goods around the world and creating jobs at home.

The tried and tested formula of Chinese manufacturing is being forced to be re-visited. A fall in demand and higher costs (most notably labour and materials) has meant that orders for many factories are moving to other countries such as Vietnam, Cambodia and India.

It is this kind of experience that is leading many, China’s government included, to question whether the tried and tested model for growing the economy needs to change.

Booming exports and massive infrastructure spending have allowed the Chinese economy to expand by 9percent or more, for the best part of a decade, oblivious it seems to the global financial crisis. But just as the going is getting tougher for China’s factories, so it is for the construction industry, the other main engine of growth, as property sales fall in cities across the country.

The recent batch of gloomy economic statistics, falling factory activity, falling property sales and falling earnings at key commodity producers, has rekindled the debate between China’s bulls and bears. Which view is proved right in the end will depend on how successful China is in one particular regard.

If it can no longer export or build itself to prosperity then it needs to find salvation in its own people’s pockets.

So the number one priority for this year is to stimulate domestic demand.

While that is easier said than done, we should of course keep things in context. Even the most bearish of predictions would still have the economy growing by 3percent or 4percent a year.That is a long way short of what China has become accustomed to, but an expansion that would, nonetheless, be the envy of any western country.

The government’s own lowering of the growth target to 7.5percent (from the 8percent target in place since 2005) is an admission that things are changing. But it would be more than enough growth to satisfy those trying to do business in China.

Aston Martin is a luxury brand, one would think, unlikely to be opening car showrooms in China if it thought this economy was in for a hard landing.

Matthew Bennett, the company’s regional director, spoke of their confidence in the domestic market at the opening of their brand new showroom in Pudong, Shanghai. “This is the largest showroom that Aston Martin has in the world,” he said “It’s a real statement of our intent and the dealer’s intent on the long term future of our market in China,” he adds.

Whatever dark clouds might be looming on the economic horizon, it seems China’s car-loving millionaires do not see any reason to stop spending just yet.

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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