Market Watch from www.legalandfinancial100.co.uk

The FTSE 100 Index started the year on an upbeat note, recording a gain of around 2% on the first full trading day in 2012.  Optimists, however, may want to take note that the market performed a similar trick in 2011, only to end the year down by 5.5%.  If anything, this year is likely to reflect the volatility that was seen in markets last year, when the FTSE 100 peaked in early February at just short of 6100 and recorded a low, albeit intraday, of 4750 in early August. The annual internal RB broker survey suggests that the FTSE 100 will end the year at 5823, whilst the highest level of index will be 6172 and the lowest level will be 4841. The Investment Strategy Group, which has a handful of members including myself, have set our sights a little lower than the Firm’s internal survey, predicting a 2012-year-end consensus for the FTSE 100 of 5660, a high point of 5990 and a low point of 4590, giving a top-to-bottom range of 1400 points. The FTSE 100 will shrug off the continuing economic malaise to rebound by almost 8% in 2012, according to the average forecasts of ten leading market commentators surveyed by the Times. Such gains, expected to be driven by investors’ appetite for undervalued stocks and international exposure, would mean that the FTSE will regain all the ground lost during the past year. Only one forecaster, Morgan Stanley, at 5,000 points, predicts that the FTSE will finish the year lower than it started at (5,572.28). Most analysts are targeting a move above the 6,000 level. However, investors should not be too enthusiastic about the largely bullish forecasts, given that every analyst polled last year by the Times panel was far too optimistic, with an average year end of 6,560 for the end of 2011, nearly 988 points too high.

 

The credit crunch and the fortunes of Europe will be central to our prospects and according to a report issued by Deloitte during the week, of the 94 chief financial officers survey in early December, a third cited the Eurozone debt crisis as the greatest risk their companies will face in 2012.  A further 31% said a UK recession linked to the crisis was their greatest fear.  The 17 countries that share the euro are the UK’s largest export market and with the government’s austerity program crimping demand at home, many businesses had been looking to exports as an alternative source of demand and growth.  Faced with the increasing nervousness of bond investors, a growing number of Eurozone governments have also embarked on austerity programmes, as the current area’s fiscal crisis has weakened consumer and business confidence just at a time that the banks are finding it difficult to raise new funds and so have in turn cut credit.  The CFO’s believe a collapse of the euro would cause a new credit crunch which will drive big swings in exchange rates.  They also expressed concerns that the value of their overseas assets and liabilities if national currencies are reintroduced.  To a lesser extent they worry about weaker demand for their goods and services in the wake of a breakup, as well as interruptions to their supply chains.  The survey suggests that business investment and hiring will be restrained in 2012, as consumer spending is also likely to remain weak as a result of rising unemployment.  The survey found that 42% of CFOs intended to focus on cutting costs and 37% on increasing cash flows and only 34% see launching new products or expanding into new markets, as a priority for 2012. 

 

The UK economy looks set to defy concerns that it could slip back into recession in the fourth quarter, after the service sector recorded activity at a 5 month high last month.  The Markit/CIPS Services PMI, a measure of economic activity in the sector, rose to 54 in December from 52.1 in November, indicating growth.  The reading beat market expectations of 51.5 and signals the fastest growth in the service sector since July last year.  The figure is likely to prove significant in determining overall growth in the final quarter of 2011.  This is because the service sector accounts for a significant proportion of the UK Gross Domestic product.  Hopes of improvement amongst services businesses were also raised by positive readings from smaller manufacturers and the construction sector in the week.  On Tuesday the equivalent reading for manufacturing, which accounts for around 26% of GDP, rose from 47.7 in November to 49.6 last month.  Whilst still shrinking, the pace of manufacturing slowdown was reduced and again beat market expectations of 47.3.  Construction output rose in December, rather than contracting as most economists had expected, and for the first time in 9 months all three categories of building showed a rise in activity according the Markit/CIPS survey of purchasing managers.  The sector index rose to 53.2 in December from 52.3 in November.  Economists had expected a decline to 52.  Whilst upbeat, however, the numbers remain below the historical long term average and confidence about future business prospects remains subdued.  The fastest growing sector was civil engineering, often the most volatile category of construction, because projects are generally very large with long leading times. Car registrations fell 4.4% in 2011 to 1.94 million,  the lowest number of registrations in more than a decade, as The fall in demand for new cars, which again fell in December by 3.7% contrasted with a strong rise in UK car production in the last six months. The fall in demand in 2011 was exaggerated by a boost to 2010 car registrations from the government's car scrappage scheme, which subsidised new car purchases. Car registrations remain 25% below their peak of 2.58 million, recorded in 2003, but The overall 4.4% fall in demand last year was not quite as sharp as expected according to the SMMT, which had been predicting a total of 1.92 million. The SMMT predicted sales would remain stable this year and start to rise more strongly from 2013.The weak sales in the home market contrasts sharply with the number of cars produced. In 2011, an estimated 1.35 million cars were made in the UK, up from less than a million in 2009and this is forecast to rise as Eleven of the global volume manufacturers have bases here and last year they committed to invest £4bn in their UK operations. Diesel cars increased their market share to 50.6%, the first time they have taken a majority share.

 

According to the Bank of England mortgage approvals rose to a 2 year high in November, defying increased funding pressures on the banks caused by the Eurozone crisis.  The data showed mortgage approvals for house purchases rose to 52,900 from 52,800 in October, which was the highest level in 23 months.  Economists had been expecting a fall to 52,500.  Despite the rise, however, mortgage approvals remain significantly below the 88,000 monthly average since 1993.  Net mortgage lending came in below expectations, halving to £600 million in November from £1.2 billion in October.  Economists had been forecasting a modest fall to £900 million.  The number of loans for remortgaging declined for the second month in a row to reach 31,154, worth £4.1 billion overall.  This was the lowest figure since June last year. The Halifax has reported that UK house prices fell in the final month of 2011 and finished the year mildly lower than they were in January and looking ahead it expects little overall change over 2012 amid the continued uncertain economic climate as the euro zone crisis rolls on. The monthly Halifax house price index reported on Friday that house prices fell 0.9% on the month in December and were 1.3% lower than a year earlier, similar to the declines of 0.9% on the month and 1.0% on the year recorded in November. For the three months to November the lender said house prices declined just 0.1% compared with the three months to September. "If the U.K.can avoid recession, we expect broad stability in house prices in 2012. There is, however, considerable uncertainty regarding the prospects for the U.K.economy which will, to a large extent, depend on how events in the euro zone unfold... The outlook for house prices is also uncertain," Halifax economist Martin Ellis said. The Bank of England's David Miles said in November that the UK housing market may never look the same again, transformed by the collapse of the mortgage market which differentiates this downturn from previous ones and this is pushing the UK towards a lower rate of owner-occupation and bigger rental sector. "In the longer run this is not likely to be a source of major net losses. To the extent that it offsets tax distortions and creates a more stable housing market, it will create some gains,” In the bank’s quarterly credit conditions survey, banks warned that their higher funding costs, due to the Eurozone crisis may hit lending in the first three months of 2012.  The survey showed that small businesses demand for credit had plummeted in the fourth quarter and that banks expect credit demand to fall across the board.  The Central Bank noted that the survey also pointed to tighter credit supply conditions going forward, as banks are expected to apply stricter criteria.  The Chancellor, George Osborne, announced a scheme of credit easing on November 29th, aimed at boosting lending to small and medium sized firms and further details on this are awaited.  The numbers showed that default rates amongst large and medium sized companies picked up for the first time in 2 years at the end of 2011 and banks expect a further increase.  The banks said that demand for mortgage lending, as well as unsecured lending, had fallen in the fourth quarter and are set to fall further.  The amount borrowed on credit cards was broadly unchanged in November, whilst other loans and advances rose by £400 million, which economists suggest could be due to stress borrowing in the run up to Christmas. David Cameron said on Sunday that he would veto a European-wide financial transaction tax unless it was imposed globally, deepening a confrontation with European Union heavyweights France and Germany. He said France should be free to go it alone and introduce a financial transactions tax if it wished. Paris and Berlin want an EU-wide tax on financial transactions but Britain, fears it will damage the City of London, a global financial centre where much of the tax would be raised. Cameron's threat to block the tax comes after he angered EU partners last month by vetoing a new EU treaty on greater fiscal integration in the euro zone, aimed at defusing the euro debt crisis. Critics said his move risked leaving Britain isolated from the other 26 EU members. French President Nicolas Sarkozy vowed Friday to push ahead with a new tax on financial transactions, also known as a Tobin tax, even without France's EU partners, in the face of stiff British resistance. The tax will be discussed when Sarkozy and German Chancellor Angela Merkel meet on Monday in Berlin and then at a meeting of the European Council in Brussels on January 30.

 

French borrowing costs rose slightly when the euro zone’s second-largest economy sold debt for the first time this year on Thursday, but demand was solid despite concerns the country could lose its triple-A credit rating. France, which has a slowing economy and a presidential election looming in April, is seen by many to be at greatest risk from ebbing investor confidence. It sold €7.96-billion of 10- to 30-year bonds at the auction, after receiving total bids for nearly €15-billion. France’s top-notch credit rating is hanging by a thread due to its slowing economy, high structural deficit and banking exposure to the euro zone’s most troubled debtor states. Last month, Fitch put France’s rating on a negative outlook and Standard and Poor’s, which placed 15 euro zone countries under review, singled out France as the only triple-A country facing a possible two-notch downgrade. S&P announced on December 5 that it was reviewing the ratings of France and other euro zone countries for possible downgrade. In the interview in the week in Le Parisien daily, S&P France president Carol Sirou and S&P's Europe economist Jean-Michel Six said that downgrades did not have to translate into higher debt refinancing costs. Six also suggested the financial market impact of any rating change in France's case might be limited. "Despite its triple-A, investors are treating France right now as if it was rated triple-B," he was quoted as having told the newspaper. BBB is eight notches below AAA and just two notches above junk. France plans to issue up to €178-billion in medium- and long-term government debt, net of buybacks, this year, down only slightly from €184-billion in 2011, despite the threat to its rating. With its economy expected to enter recession in the first quarter of this year, France will need more painful austerity measures to reach a deficit target of 4.5 per cent of gross domestic product this year, but the impending April election may complicate that. Adding to investors’ concerns, Socialist election front-runner François Hollande, who leads Mr. Sarkozy by a wide margin in polls – has pledged to renegotiate any fiscal deal being agreed by the European Union, potentially complicating efforts to solve the debt crisis. The German labour market shrugged off the eurozone debt crisis and unemployment dropped to its lowest level in 20 yearslast year, new data showed on Tuesday. Taking 2011 as a whole, the jobless total fell by 263,000 to 2.976 million in nominal or unadjusted terms, equivalent to 0.6-percent decline in the jobless rate to an annual average 7.1 percent.  Both the jobless total and the jobless rate were therefore at their lowest level since unification in 1991, noted German Economy Minister Philipp Roesler. The day before, the national statistics office Destatis calculated that the number of employed people in Germany hit a new record of 41.04 million in 2011, with more than half a million jobs created last year. It was the first time the number of people working in Germany has risen above the 41-million mark, Destatis said. The population of the country is nearly 82 million. German factory orders dropped the most in almost three years in November as the euro region economy edged toward a recession and global demand weakened. Orders, adjusted for seasonal swings and inflation, slipped 4.8 percent from October, when they had risen by a revised 5 percent, the Economy Ministry in Berlin said in the week. It was the biggest drop since January 2009 and ahead of a forecasted decline of 1.8 percent. A collapse of the euro and break-up of the European Union would have catastrophic consequences for the global financial system, billionaire investor George Soros has warned. “Today, the euro is potentially endangering the political cohesion of the European Union,” Soros said in Hyderabad. “If the common currency were to break down, it will lead to the break up of the European Union itself. And this will be catastrophic not only for Europe but also for the global financial system.” The euro zone crisis is “more serious and more threatening than the crash of 2008”, he added. In the near term, some of the euro zone countries may have to take more austerity measures because of the imbalances between the “creditor and the debtor countries,”  “Unfortunately, they haven’t yet solved the acute financial crisis and that is causing the situation to deteriorate...and (it) is not at all clear it will have a solution,” he said.

 

Mario Draghi has risked provoking anger in Berlin after appointing a Belgian to head up the economics division of the European Central Bank, overlooking the German candidate for the first time. The ECB named Peter Praet as the new head of economics, defying calls from Berlin that the tradition of a German holding the post to be upheld. He replaces Juergen Stark, who resigned in September in protest against the ECB's sovereign bond buying policy. The Belgian, who was formerly a board member of the Belgian central bank and is a specialist in financial regulation, will be the first non-German to hold the position since the ECB was founded in 1988. The European Central Bank, after cutting interest rates for the past two months, is unlikely to do so again this month, but more cuts could still be on the cards later this year. The bank at its first meeting of 2012 on Thursday is expected to wait and see how its past moves to prevent a credit crunch and boost the economy in the 17 countries are working. Last month, on the same day that EU leaders met in Brussels in what was seen as a make-or-break crisis summit, the ECB brought eurozone borrowing costs back down to their previous historical low of 1.0 percent, effectively reversing the year's two earlier rate hikes. In addition it offered banks in the region an unlimited pool of liquidity by loosening collateral rules, cutting the minimum reserve ratio and launching new three-year loans at super-cheap rates. Euro zone inflation dropped below 3 percent for the first time in three months in December. Official Eurostat figures estimated that consumer prices in the 17 countries sharing the euro rose 2.8 percent year-on-year in December, down from 3.0 percent year-on-year rises in November, October and September. Eurozone unemployment surged to a fresh record late last year as economic confidence tumbled to a two-year low. Seasonally-adjusted eurozone unemployment rose from 16.33m in October to 16.37m in November, the highest level since the euro’s launch in 1999, according to Eurostat, the European Union’s statistical office. The jobless rate remained stable at 10.3 per cent in November, compared with 8.6 per cent in theUS calculated on the same basis. Showing the unbalanced nature of the region divergence across the bloc was significant with the joblessness in Germanyrelatively low. Germany reported a fall to 5.5 per cent in November and By contrast, the debt-laden eurozone “periphery” saw a further deterioration.Unemployment in Portugal rose from 13 per cent to 13.2 per cent and in Spain from 22.7 per cent to 22.9 per cent. Euro zone retail sales fell and economic sentiment weakened at the end of 2011, pointing to recession in the months ahead.  The euro zone, which accounts for about 16 per cent of the world economy, will struggle to grow in 2012 and could contract by as much as 1 per cent, with its impact reverberating around the Globe. Retail sales for the bloc fell a worse-than-expected 0.8 per cent in November from October, data from the European Union’s statistics office Eurostat showed. Economists had forecast a monthly fall of just 0.2 per cent. The volume of sales fell by 0.9 per cent in Germany, the euro zone’s top economy, and was down 0.4 per cent in France and 0.7 per cent in Spain. Pointing to the cautiousness of European households even in the run-up to Christmas, the busiest shopping time of the year, the European Commission said that in December, consumer confidence fell 0.7 points in the 17 countries sharing the euro. The downturn in the eurozone service sector slowed in December. The Markit eurozone service purchasing managers' index (PMI) was 48.8 in December, a three-month high and follows a better-than-expected manufacturing survey of 46.9, up from 46.4 in November. However, Markit said the survey results still indicated the eurozone risked falling into recession again. The survey also found an increasing gap between the stronger eurozone economies, such as Germany and weaker countries such as Spain. Business activity improved in Germany and stabilised in France, but fell sharply in Italy and Spainwhich are struggling with large deficits and austerity measures.

 

The Irish Sunday Business Post has reported that Senior Irish government figures have discussed the possibility of the president asking the Supreme Court to rule on whether Europe's plans for fiscal union would require a referendum. Irish citizens are entitled to vote on any major transfer of powers to Brussels and the country's European minister has said that there is a 50-50 chance of a vote being needed once the pact is finalised in March. Irish ministers are keen to avoid a referendum after voters only agreed to the two most recent treaty changes having first rejected them and any decision not to hold a vote would be open to a Supreme Court challenge. Ireland's tax revenues finished last year 873 million Euros ) behind target, with a fall in sales taxes, the government's main tool for raising additional funds in 2012, deepening in December, data showed on Wednesday. But Dublin said it had still met fiscal targets set as part of its EU/IMF bailout due to a tight control being kept on spending, which was 1 percent below budget. Overall, Ireland's budget shortfall widened to 24.9 billion Euros at the end of December from 18.7 billion Euros a year ago, largely due to capital injections for the country's banks. Stripping out the near 11 billion Euros in capital funnelled to the banks and including a 1 billion Euros gain from the sale of part of the state's share in Bank of Ireland, the underlying deficit fell by 2.75 billion Euros. Under the terms of its bailout, Ireland must shrink its deficit to 8.6 percent of gross domestic product this year from an estimated 10.1 percent in 2011. Ireland ended 2011 with a shrinking services industry and average unemployment close to a 20-year high, data showed, leaving the government with an uphill task to engineer a long-awaited economic recovery. Bailed out by the EU/IMF in late 2010 and midway through a punishing eight-year austerity drive, Ireland recorded an unemployment rate last year of 14.2 percent, its highest since 1993 and more than three times the level of 2007. The Numbers claiming jobless benefit - including part-time, seasonal and casual workers - dropped by 3,300 in December to put the seasonally adjusted total at 443,200, the lowest level since April. But this is partly down to jobseekers leaving the country and there is little hope that an unemployment rate that remains double that ofGermany will fall any time soon. The government sees unemployment dropping to 14.1 percent by the end of this year before falling back to 13.5 percent next year and 11.6 percent by 2015, significantly above the 4.5 percent recorded in 2007 before the country's fiscal and banking crises took hold. Ireland's services sector shrank for the first time in a year in December as global economic turmoil undermined confidence and new orders fell sharply, a survey showed on Thursday. Markit's Purchasing Managers' Index for Irish services fell to 48.4 from 52.7 in November, slipping below the 50 mark that separates growth from contraction for the first time since December 2010. Managers surveyed said the decline was due to fragile economic conditions and poor business confidence, which fell to its lowest since Ireland signed up to an EU/IMF bailout in November 2010. New orders among services companies, including IT and telecoms firms, fell to 47.4 from 52.6 in November, the seventh decline in eight months.

 

Spain’s new economy minister Luis de Guindos said in the week that he expected its banks to have to set aside up to €50bn in further provisions for bad loans, this exceeds the €26bn capital shortage for Spanish banks found by the European Banking Authority in its latest round of stress tests. The new Spanish government will not go down the route of setting up a bad bank; instead Mr de Guindos said he expected further consolidation among the savings banks.  In the EBA stress test results Spain’s banks were deemed to have the largest shortfall at €26bn, Italian banks needed some €15bn, German banks €13bn, French banks €7.3bn and Austria were short of €4bn. The individual banks which showed the largest capital shortfall in the latest stress tests were: Santander €15.3bn (though about €8.5bn of this covered by mandatory convertible bonds which also reduce the overall Spanish numbers above), UniCredit Spa €8.0bn, BBVA €6.3bn, Commerzbank €5.3bn, BPCE €3.7bn, Banco Monte dei Paschi €3.3bn, Deutsche Bank €3.2bn. Figures from Eurostat, in the week, revealed that Spain's unemployment rate has hit 22.9%, with the country accounting for at least one in five of Europe's jobless. The figures came just days after officials admitted the social security system had slipped into the red for the first time since 1999 and new finance minister Luis de Guindos warned that the welfare state was under threat, just as Spain enters the second part of a double-dip recession. The Workers' Commissions trades union has said the fight is now to avoid unemployment rising from five million people to 5.5 million, or one-third of all the unemployed in the euro zone. Measures to rein in a runaway budget deficit of around 8% will almost certainly push unemployment higher as the new conservative government of Mariano Rajoy attempts to tax and cut its way out of trouble. Rajoy has already hiked income tax, with some top earners now paying 56%, making Spain a rival for Sweden and Denmark as Europe's biggest taxer of the rich. Further measures to shrink the state are expected to be introduced, with a partial sell-off on the cards of both airports and the lottery system. But the tax rises and spending cuts announced to date account for less than half of Rajoy's target of reducing the deficit by up to €40bn (£33bn), leaving it at 4.4%, this year in order to meet European Union-set targets and calm bond markets. The black economy is estimated at between 20% and 25% of GDP and the new government has said it will introduce limits on cash transactions as a way of battling tax fraud.

 

The Greek government has stepped up the pressure on its eurozone paymasters by warning that unless a new bailout for the recession-hit country is agreed within the next three months it will be forced out of the single currency. Pantelis Kapsis, a spokesman for the new coalition government led by former central bank chief Lucas Papademos, said negotiations with the "troika" of the International Monetary Fund, Brussels and the European Central Bank over the coming weeks would "determine everything". Greece was promised a second emergency bailout worth €130bn in October after it became clear that the first rescue package, agreed in May 2010, was not enough to stabilise its debts. But talks about this second deal, including a write-down for Greece's private-sector lenders, are still continuing. Kapsis told Greek television: "This famous loan agreement must be signed, otherwise we are outside the markets, out of the euro and things will become much worse.” the next bailout has to happen before a €14bn Greek bond matures at the end of March. The next €5 billion instalment for Greece that was originally scheduled to be paid in December 2011 is now to be paid out in March 2012 and A further €10 billion that Greece was originally to receive in March this year will now be paid in June. All of those sums can also be delayed if inspectors judge that Athens is failing to deliver promised fiscal reforms later this month. Late last year in the last IMF report, the fifth on Greece, they said that the situation had "taken a turn for the worse." The economy was supposed to contract by 4.5% in 2011 but the outcome was estimated at 6%. The aim was to run a budget deficit of 7.5% but the result was 9%. reports continue to circulate that the IMF is arguing privately that haircuts for bondholders need to be greater than 50% to get overall Greek debt back to a level that can be deemed sustainable. If those reports are correct, then the problem may be getting out of control as achieving near full participation of 65% or even 75% haircuts might prove impossible. Having started at 21% last July, investors could easily conclude that they're only one step away from 100%, especially as proposals to take haircuts on the total amount of debt do not involve the bonds which have increasingly been bought by the ECB, as other investors rush out and get what little money they can get back from the only real buyer in the market. German magazine Der Spiegel reported on Saturday that The International Monetary Fund is losing confidence in Greece's ability to clean up its public finances and work off its mountain of debt, Citing an internal IMF memo, it said that the body considered Greece's current readjustment programme insufficient and that new measures would have to be taken if the country is to avoid default and meet targets agreed with creditors. Earlier on Saturday, an adviser to Germany's finance minister Wolfgang Schaeuble told a Greek newspaper that a 50 percent write-down on Greek debt holdings, part of Greece's debt swap deal, is not enough to put the country on a viable path. Banks and investment funds have been negotiating with Athens for weeks on the scheme, which aims to cut Greece's debt-to-GDP ratio from 160 percent to a more manageable 120 percent by 2020 and is a key part of the country's second, €130 billion bailout. Der Spiegel, believes that the 120 percent target is now in question, stating that the IMF had strongly criticised Athens' for sluggish structural adjustment, especially regarding tax collection and state asset sales. The IMF's top economist said on Friday that banks holding Greek debt could be forced to take larger write downs than planned because of Athens' weaker-than-expected finances. Olivier Blanchard told CNBC television that write downs of some 200 billion Euros ($255 billion dollars) worth of Greek sovereign debt held by private investors could be more than 50 percent, the level agreed late last year, to ensure Athens can balance its books. Belgium will freeze more than a billion Euros in spending for several months after the European Commission raised concerns, the country's budget minister said on Saturday. The commission has rejected Belgium's 2012 budget as overly optimistic, and demanded it shave off 1.2 billion to 2.0 billion Euros to avoid breaching the three percent deficit threshold. Under new rules agreed in December that give the commission added powers to enforce budgetary discipline, infringement of the three percent deficit ceiling can set off a quick train of action including fines and judicial penalties. The commission last year singled out Belgium and four other EU nations -- Hungary, Poland, Cyprus and Malta -- as possibly failing to meet the target and issue a statement on January 11. The Belgian budget, based on a 0.8-percent growth rate, forecasts a 2.8 percent deficit after sweeping cuts of 11.3 billion Euros aimed at avoiding a no-policy-change deficit that could have run up to 4.6 percent of gross domestic product. But commission experts believe Prime Minister Elio Di Rupo's government was over-optimistic on expected savings, notably in healthcare, and on expected revenues from the fight against tax evasion.

 

The Hungarian government says it is working hard, after a policy upturn last week, to secure a vital loan of up to £17bn from the International Monetary Fund and the EU, as it is caught in the international crossfire, sharply criticised by western governments and the European commission, whilst also being hit by a credit downgrade to junk status, as Fitch has become the third ratings agency to cut Hungary's credit rating to junk status. The agency blamed "unorthodox policies" for its decision to cut the country's rating from BBB- to BB+. The Hungarian currency, the forint, hit record lows last week, and the crisis could cost the Prime Minister, Viktor Orban, or at least the economy minister, Gyorgy Matolcsy, their jobs. The government has been subject to huge criticism, at home and abroad, for passing two financial laws at the end of last year that could be used to interfere with the independence of the Hungarian central bank, the MNB.  Hungary needs the new loan, which it calls a "safety net", by July at the latest. But some suggest that after the downgrade and the sharp drop in the forint's value, an outline of a loan agreement now needs to be reached within two weeks.  The conservative Fidesz government came to power in spring 2010 with a promise to create 1m jobs in 10 years, in a country that has the lowest employment rate in the EU. Only 55% of the working-age population work and pay tax; the rest either survive on disability pensions or via the black economy. But joblessness remains steady at 11%, and a range of new taxes, including the increase of VAT to an EU record of 27%, is leading to layoffs rather than job creation. Austrian banks, which dominate the market in Hungary, have also been cutting back on the money available to their subsidiaries inEastern Europe, making it even harder to borrow. One of the biggest challenges facing the country is the large amount of foreign-currency mortgages, particularly those denominated in Swiss francs, which have been taken out by home-buyers in recent years. Hungarians were attracted by the cheap interest rates available, but face impossible debt repayments as the Hungarian forint loses value.

 

The Minutes from the most recent FOMC meeting revealed that the Committees decision to modify its monetary policy communications with the aim of enhancing clarity and transparency. Starting in January projections by each participant will be included in the Summary of Economic Projections, with are published four times a year, and will detail their projections of the appropriate level of the federal funds rate in the fourth quarter of the current year and the next few calendar years, as well as their expectation of the likely timing of the target rate given their projections of future economic conditions. The Minutes also indicated that a number of Committee members remained open to further policy action should it prove warranted. US manufacturing grew at its fastest pace in six months in December. The Institute for Supply Management's index of national factory activity hit its highest level since June, coming in above forecasts at 53.9, giving further evidence that the U.S. economy picked up steam in the fourth quarter. Another report on Tuesday showed U.S. construction spending neared an 18-month high in November. The pace of growth in the dominant U.S. services sector quickened a bit in December, an industry report showed on Thursday, suggesting continued improvement in the economy. The Institute for Supply Management said its services sector index rose to 52.6 last month from 52.0 in November. The reading was below an expected 53.0, but was above the 50 mark that indicates expansion. But at 49.4, the employment component was still below the 50 line between expansion and contraction. Total US payrolls rose by 200,000 in December beating forecasts of a 170 000 gain, as Private hiring, which excludes government agencies, rose by 212,000, whilst government employment contracted by 12,000. This pushed the jobless rate down to 8.5 per cent, from an upwardly revised 8.7 per cent in November. With A surge in Internet holiday shopping over the past three years, this again is likely to have prompted the change. Delivery companies such as FedEx and United Parcel Service added 42,200 jobs to payrolls in December; about a fifth of the total for all employers last month and History indicates the gain will be followed by a similar-sized loss in January. Last years detail showed a 46,300 jump in payrolls at courier and messenger companies in December 2010 which gave way to a 48,700 drop the following month. A year earlier, the pattern was similar with a 30,100 gain then seeing a 40,800 drop. Consumer prices in Brazil rose 6.5 percent in 2011, reaching the upper limit of the government target and the highest hike since 2004. The government had set an annual inflation target of 4.5 percent, with a ceiling of 6.5 percent. Prices were up 0.5 percent in December, following a half percent hike in November, with the announcement coinciding with a downward revision of GDP growth in Latin America's leading economy as a result of the eurozone debt crisis. The government said the economy would expand around 3.0 percent this year, sharply lower than the 7.5 percent recorded in 2010 amid expectations of a gradual drop in inflation due to the global economic slowdown. The Central Bank said inflation this year should dip to 4.5 percent in line with the official target. The increase in food and beverage prices dropped from 10.4 percent in 2010 to 7.2 percent last year.

 

The EU is set to impose sanctions on oil imports from Iran on January 30 while the US is set to impose petroleum-related banking sanctions onIran. The European measures against Iran's oil industry will complement U.S. sanctions announced on New Year's Eve that aim to make it impossible for most countries' refineries to buy Iranian crude. A European Union embargo on Iranian crude oil imports could take a few months to start because some EU capitals want a delay as they say they need to protect their debt-stricken economies, even though EU states have agreed in principle to an embargo on Iranian oil, part of the latest Western effort to ratchet up pressure on Tehran over its nuclear programme.  Greece, which depends heavily on Iranian crude, is pushing for the longest delay, with Britain, France, the Netherlands and Germany wanting a maximum grace period of three months. Iran is the second-largest producer of oil, after Saudi Arabia, in OPEC, producing around 3.5 million barrels per day. EU countries buy about 500,000 barrels per day of Iran's 2.6 million bpd in exports, making the bloc collectively the largest market for Iranian crude, matching China.Greece imports a quarter of its oil from Iran, with Italy about 13 percent and Spain nearly 10 percent.  Tension in the oil shipping lanes of the Gulf looks set to intensify following news that Iran, Israel and the US will hold military exercises designed to test weaponry and tactics. As the US and European Union press ahead with oil sanctions on Iran, Tehran’s defence minister announced on Friday that the Iran will hold large-scale exercises in the Strait of Hormuz and the Gulf next month. The exercises, called “the Great Prophet”, will take place in February and will be more extensive than Iranian naval exercises that ended last week. The Iranian announcement came as it became known that the US and Israel are getting ready for a major missile defence exercise in the next few weeks. The drill, called “Austere Challenge 12”, is designed to improve defence systems and co-operation between the US and Israeli forces and will test multiple Israeli and US air defence systems against incoming missiles and rockets which are designed to intercept Iranian missiles in the stratosphere, far from Israel. A growing number of experts are concerned that the growing amount of military activity in the region could lead to an incident that triggers a conflict. The International Energy Agency, has said isn’t planning an immediate release of emergency oil stockpiles in response to the tension in the Middle East. The IEA’s last emergency release of government and industry stockpiles was in June, when about 60 million barrels of crude and oil products were made available in response to the slump in supply fromLibya. It also made supplies available during the 1991 Persian Gulf War and when Hurricane Katrina damaged oil rigs and refineries in the Gulf of Mexico in 2005. It is believed that The IEA has prepared a plan to release as much as 14 million barrels a day if Iran were to close the Strait of Hormuz. The waterway carries about 17 million barrels of oil a day, according to the U.S. Energy Department. That’s about 19 percent of global consumption. The West it is understood to have an assurance from Saudi Arabia that it will make up any shortfall from Iran, but as analysts have highlighted, this would use up virtually all of the spare capacity from the world’s biggest producer.  The last time this happened and there was no spare capacity, oil climbed to almost $150 a barrel.  The expectation in Western capitals is that the threat of sanctions will bring Tehran into line, although there is little evidence of this happening just yet.  It is understood that Iran is negotiating with China in the hope of finding a market for its crude oil, although, as one expects, the Chinese will be driving a hard bargain, particularly on price.  WTI Crude for February delivery closed at $101.56 a barrel on the New York Mercantile Exchange. On the week, however, oil rose 2.8%, which comes on the heels of a 8.2% gain in 2011.

 

According to a Bloomberg survey precious metals are forecast to gain 27% or more in 2012 and industrial metals at least 17% lead by emerging markets growth. The same survey suggests Gold may hit a new high one US$2140 an ounce. Gold will recover from its weakness and hit a new record high in excess of $2,000 a troy ounce in 2012, according to an annual survey of industry predictions by the London Bullion Market Association. The forecasts are from 26 of the largest bullion-dealing banks and trading houses, with all but three predicting that gold will go above the nominal record high of $1,920.30 touched in September, and most said that it would exceed $2,000. According to the predictions collected by the LBMA, gold will trade between $1,443 and $2,055 this year, averaging $1,766. Despite the general bullishness, however, several analysts have recently downgraded their gold forecasts in recent weeks in response to the sharp fall in prices towards the end of the year. with Barclays lowering its forecast from $2,000 to $1,875. UBS, which was the most accurate gold forecaster both last year and in 2010, predicts that gold will average $2,050 over the course of the year and reach a peak of $2,500. Gold hit a six-month low of $1,521.94 in December and On Friday gold traded at $1,621.90, up 6.5 per cent from its mid-December low.

 

The global economy could withstand widespread disruption from a natural disaster or an attack by militants for only a week as governments and businesses are not sufficiently prepared to deal with unexpected events, believes the respected Chatham House, the London-based policy institute for international affairs. Events such as the 2010 volcanic ash cloud, which grounded flights in Europe, Japan's earthquake and tsunami and Thailand's floods last year, have showed that key sectors and businesses can be severely affected if disruption to production or transport goes on for more than a week.” One week seems to be the maximum tolerance of the 'just-in-time' global economy," said the report. The current fragile state of the world's economy leaves it particularly vulnerable to unforeseen shocks. Up to 30 percent of developed countries' gross domestic product could be directly threatened by crises, especially in the manufacturing and tourism sectors, according to the think-tank. Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, just as most facing a rise in borrowing costs. Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion last year, according to data compiled by Bloomberg.  The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. The eurozone rescue fund saw relatively strong demand for new bonds on Thursday. The European Financial Stability Facility sold €3bn in three-year bonds, with orders for €4.5bn, yielding 1.77 per cent or 0.149 per cent above German Bunds. The money raised will go towards the rescue of Portugal and Ireland. The fund plans to raise a further €21bn this year for the bail-out of Lisbon and Dublin. Christophe Frankel, deputy head of the EFSF, said: “The continued support from our investors shows that the EFSF has established itself as a quality supranational issuer.” The International Monetary Fund will make a “fairly substantial” cut to its forecast for global economic growth this year, Olivier Blanchard, the IMF’s chief economist, said in the week. In September, the Washington-based fund lowered its forecast for global growth to 4 percent in 2012 and warned of “severe” repercussions ifEurope failed to contain its sovereign debt crisis. Overall world growth will probably be “not very far” from 3 percent to 4 percent, he said, adding Europe is “very close to zero at this point” while the U.S. is in better shape than many other nations. The fund will publish revised forecasts on Jan. 24 or Jan. 25that are “consistent with reality,” Lagarde told reporters. The European crisis will create serious problems for the rest of the world this year and Global growth is set to slow rapidly and by the end of this year, we may be happy that there was any growth.

 

2012 is likely to be a pivotal year, as the Europeans will need to address the issues which have brought the single currency zone to near collapse and could lead to very a sharp global economic slowdown. The euro has dropped to its lowest rate against the dollar and pound in 16 months, as concerns continue over the health of Europe's banks. The euro fell as low as $1.2780 against the dollar and was at an 11-year low versus the yen. Against the pound, it fell to 82.52p, the lowest since September 2010. Any further delaying in making important decisions will not be tolerated by investors in a backdrop where global governments are expected to want to borrow trillions this year, largely in order to rollover existing maturing debt.  The ability to borrow will focus on individual country’s credit ratings and it is highly likely that a number of European governments, which are financially stretched and which will see economies fall into recession will also see their credit ratings cut further and this will increase the requirement for more government spending cuts. Over many decades economic growth has largely been funded by borrowing and this is no longer possible as a growing number of creditors are unwilling to relend.  France appears the most likely AAA rated Eurozone country to be downgraded, with commentators believing that a downgrade before the end of the month is likely, although this is already being factored into the market.  Whilst oil cartel OPEC is pumping more crude oil than at any time since 2008, oil prices rose sharply as we entered the New Year on fears following sabre rattling within the Gulf between Iran and the West.  European nations are to place an oil embargo on Iranian crude oil buying, whilst other sanctions, largely by the Americans, have seen banking relationships frozen. Whilst the Iranian issue may well be sabre rattling, it has already pushed up oil prices and has the potential to cause a severe economic shock to the global economy if the Iranian situation escalates rapidly.  This could well lead to a deep global recession in 2012, irrespective as to what happens in Europe, as anybody with a reasonably long memory will know, on each and every occasion since 1973 a recession has followed a sharp increase in the cost of crude oil.  I continue to believe that our outlook remains so turbulent and difficult that retaining cash in order to buy into in the sell offs, which look inevitable in 2012, is the most prudent policy in a world which, more than ever, remains at a very difficult economic cross roads. There are just too many issues and it's inevitable that at least one sell off will occur during the next twelve months to make current valuations look expensive. I also believe that at some point, maybe not this year, Greece and possibly others will leave the single currency because I ask my self one simple question. Will the Greeks become debt slaves, working for an entire generation at reduced wages (i.e. below the European average) to pay back their debt and remain in the eurozone, or will they leave and suffer very large currency losses and the loss of access to the credit markets? I have taken the view that the latter will be chosen at some stage and delay will only make the necessary adjustment pain worse. When this happens gold is likely to be heavily converted, as it remains nobody’s liability.