All face ongoing problems, varying from fiscal cliffs to deflation and the euro burden. The question is will they be lucky this time and be able to settle their respective issues, once and for all?
They cannot be serious…
As usual, capital markets have delivered their verdict early by signalling that the doomsayers are wrong. Chinese equities for example, which we consider to be among the leading indicators, have performed particularly well (up 20% since November).
Just before the New Year, politicians in the US retreated from what Fed Chairman Bernanke famously labelled the fiscal cliff. Nevertheless, commentators pointed out that all kinds of natural laws, including harsh economic ones, were pushing them back to the edge. It was particularly disconcerting that, according to Speaker of the House John Boehner, President Obama told him: “We don’t have a spending problem”. And on the other hand, Republicans thought that "the tax issue is finished, over, completed”, according to Senate Minority Leader Mitch McConnell.
However, another stand-off-at-the-not-so-OK-fiscal-corral seems to have been avoided, now that the Republicans have agreed to extend the debt ceiling by another three months in order for a complete 2013 budget to pass, something the Democrats agreed to in turn. Whether this bipartisan spirit will be maintained for the remainder of the year (let alone Obama’s term) remains to be seen.
In any case, since the end of the third quarter the S&P500 has outperformed the US seven-to-ten-year bond index by roughly 4%. Underlying fundamentals include, perhaps first and foremost, the improving housing market. Inventory levels continue to decline with housing supply approaching pre-crisis levels; from the 12-month peak in July 2010 to the current five months.
A recent reading showed that the median price of existing homes increased by more than 10% year on year. Recent developments on mortgage policy, including the settlement on claims against mortgage servicers and Fannie Mae’s ‘reimbursement’ by Bank of America, provide more clarity for mortgage lenders which could lead them to loosen credit constraints.
Political pressures
In Japan, economy minister Amari had to back down from his comments last month that a weaker yen could lead to higher import prices. In short, more powerful forces in Abe’s government have decided the yen needs to weaken further. Data suggests that for the yen versus the US dollar there is plenty of room to return to the long-term average. And although there is less scope for the yen to weaken against the euro, somehow we doubt that the recent strengthening of the latter is what the periphery nations in the EU need right now.
Talking of Europe, in Germany Angela Merkel is the most popular politician and her policies enjoy popular support. Still, the coalition between Merkel’s CSU/CDU and the FDP surprisingly lost the recent regional election in Lower Saxony to the combined forces of the SDP and the Greens.
Although the consensus remains that she will get re-elected, this election result shows that it may be a tighter race than earlier expected.
As far as the euro is concerned, Merkel’s U-turn in July (when she decided that keeping Greece in the EU was of paramount importance) combined with Draghi’s “whatever it takes” statement, turned the euro crisis into a euro burden. In short, the policies enacted imply this burden will be shared among all members and that the countries in the EU will consequently have to integrate further.
This trend of shifting power to Brussels has of course been going on for a while. It is, for example, something the eurosceptics in the UK Tory party object to and has now led to Prime Minister David Cameron’s recent speech in which he promised to hold a referendum on UK membership of the EU.
Coming back to Germany, the level of integration is already showing in slowing industrial production. So although it is spreading, the true amount of the burden will only become clear over time, and this year’s election in Italy (with demands to cut its 100%-plus deficit) as well as surveys on Spain’s banking restructuring, may trigger renewed doubts on the commitments made.
