Market Watch from www.legalandfinancial100.co.uk

The European Central Bank shocked financial markets on Thursday by signaling that an interest rise throughout the single currency zone could be as soon as next month, in order to stop inflation from spiraling out of control.

 

Officially, Friday's European summit was to discuss proposals for a "competitiveness pact", a controversial first draft of the pact that was presented by German chancellor Angela Merkel and French president Nicolas Sarkozy last month. This would have allowed Europe's giant Financial Stability Facility to fund Portugal in exchange for the other eurozone member states accepting more harmonised structures for economic policy and issues like corporation tax, wage negotiations and the retirement age. The rest of the bloc reacted furiously to the Franco-German proposals, which they saw as threatening their sovereignty, which of course it did. Individual country sovereignty will have to weaken if the union is to function correctly. As no one wants to give up the level of sovereignty required for the orderly running of the eurozone then the project in my view is ultimately doomed. In Irelands case it wants to hang on its ultra-competitive (low) 12.5% corporation tax rate and although a compromise proposal has been drawn up that will be discussed at this week's summit, I and many remain concerned that it fails to tackle the real issues. Since the start of the credit crunch, European leaders have struggled to co-ordinate a convincing response to events, eventually being forced to act by financial markets. Without solid proposals for a Portuguese bailout and a wider debt restructuring, the eurozone will be left stumbling towards its next crisis. After this weeks summit there Is another major summit on 24 March, but by then time will have very nearly run out for Portugal. Two former Presidents of the EU Commission, Jacques Delors and Romano Prodi, and a former Belgian Prime Minster, Guy Verhofstadt writing in the FT over the weekend called for the EU to adopt a ‘Community Act’ rather than a competitiveness pact as proposed by France and Germany. This would aim to further economic convergence and governance and they want it to be overseen by the European Commission rather than by heads of states as the latter have proved reluctant to enforce policies or control their peers under the stability and growth pact. Their proposal as set out in the FT contain no reference to debt and deficit levels nor then speed of convergence in these fields which was one of the factors causing more controversy in the Franco-German plan.The euro-zone sovereign debt crisis could intensify if both policy goals and market expectations aren't met, Fitch Ratings warned Thursday. While the European policy response, national austerity and reform programs, and economic recovery could mark "the beginning of the end" of the crisis, failure to deliver fiscal consolidation will exacerbate concerns about solvency and probably lead to sovereign ratings cuts, Fitch said, adding that it is "imperative" that this month's summits of Euro group and European Union heads of state "outline credible and concrete measures to address the current crisis and strengthen economic and fiscal governance across the euro area." Fitch said in the case of Portugal, if the March summits don't produce the comprehensive strategy for the debt crisis that markets want, "there is a risk that Portugal could be closed out of the market," which could damage its rating, currently A+ with a negative outlook. Regarding Greece, which has already received external aid, Fitch said the country's sovereign credit rating could come under significant pressure unless the government is able to regain access to term finance towards the end of this year or it receives "clear and timely statements of additional support from official creditors." If that doesn't happen, Greece's rating "could fall sharply." Fitch rates Greece BB+ or one-notch into sub-investment grade territory. The outlook on the rating is negative

 

Germany, Holland, and Finland, where the eurosceptics are surging in polls all oppose a cut in the penal rate on bail-out packages,

which the new Irish government is aggressively after, fearing moral hazard and the risk that others will be tempted to tap the fund. Ireland is paying 5.9pc on the EU part of its loans, above the EU funding cost of 2.6pc and Mr Kenny's problem is that broad German public opinion is not on his side. His other problem is what happens as recovery pushes up bond yields across the board, lifting rates on Ireland's loan package. His trump card is to threaten 'haircuts' on senior bank creditors if the EU refuses to compromise on interest, a move that might set off EMU-wide contagion and inflict big losses on German and other European banks, potentially another Lehman moment for the global economy. To play such a card would enrage Europe, but not to play it might test the patience of an aggrieved Irish nation. Merkel poured cold water on the incoming Irish government's hopes of significantly renegotiating the terms of the 85 billion euro rescue it received from the European Union and the International Monetary Fund in December and told Portugal on Wednesday that it should go further with economic reform. New mortgage arrears figures released on Monday the Irish Central Bank reported that 6% of the country's households are now in mortgage arrears and 44,508 homeowners have not made a monthly payment for more than 90 days. This compares with 28,603 in arrears the previous year to the end of December 2009. On top of this there are a further 35,205 who have done private deals with banks to pay interest only or get mortgage holidays. That's 80,000 in total who are in arrears or have restructured mortgages, meaning 10% of the total mortgage population are in trouble and underline just how real the prospect of a second wave of debt default is for the country. The average interest rate Ireland pays to the International Monetary Fund for its emergency loan will fall following an initial 50% rise in the contribution the country makes to the IMF, the fund said Thursday. The IMF said that based on the current interest rate for the Special Drawing Right, the fund's special lending unit called the SDR, "the average lending interest rate at the peak level of access under the arrangement will be 3.04% on credit outstanding less than three years, down from 3.17%, and 3.85% on credit outstanding longer than three years, down from 4.04% In order to get a lower interest rate, Ireland had to boost its contribution to the IMF to roughly $1.98 billion from around $1.32 billion. The IMF said after new quota reforms come into place, expected next year, the interest rate Ireland pays could fall even further. The EU has begun a new round of stress tests of its banks. The process, led by the new European Banking Authority, will not present results until June and follows the failure of previous tests to unearth problems at Irish banks that later had to be rescued. The Last tests were a whitewash and the second attempt looks to be heading in a similar direction. Although the latest examination of banks' balance sheets is supposed to be much stricter, regulators have yet to agree a methodology, including whether to consider a government debt default. The Broad principles for the bank tests will not be published until April. A major criticism of the previous stress tests was their failure to include a formal debt default by a European government. This would require banks to write down the value of government bonds that they hold for the long term potentially rendering a number of European banks insolvent. I expect Greece and the Irish Republic and possibly others will have to restructure their debts, ultimately forcing lenders and bondholders to take losses, so not including this in the stress tests is not a true representation and will be seen by the Market as yet another European fudge in order to buy time. Sweden registered its fastest quarterly economic growth on record in the last three months of last year. The 7.3 per cent year-on-year expansion will increase pressure on the country’s central bank to raise interest rates further amid concern over possible overheating. The Riksbank has increased rates five times since last July, when Sweden became the first European Union member to tighten monetary policy since the start of the global financial crisis. Australia kept interest rates unchanged at 4.75 percent Tuesday, saying its "mildly restrictive stance" was appropriate and inflation remained under control despite catastrophic floods. Reserve Bank of Australia governor Glenn Stevens said the floods that hit eastern Australia in recent months would impact some areas of the economy, but the effects were likely to be temporary.

 

The euro zone's unemployment rate fell to 9.9% in January from 10.0% in December, marking its lowest level in 13 months

, official data showed Tuesday. There were 72,000 fewer unemployed in the 17-nation currency bloc in January than December, the European Union's Eurostat agency said. As in previous months, the highest rates were recorded in the member states at the centre of the euro zone's debt crisis, such as Spain and Ireland, suggesting they will continue to be a drag on growth in the single currency area as larger nations like Germany and France forge ahead. Economists were expecting the unemployment rate to be unchanged at 10.0%. There were a total of 15.8 million unemployed people across the currency bloc in January, little changed from the corresponding month in 2010. Despite the decline in the number of jobless people, the euro zone's unemployment rate remains relatively high, having risen from 7.2% in early 2008. That suggests there is unlikely to be a swift recovery in consumer demand. The European Commission raised its eurozone growth forecast to 1.6 percent for 2011 on Tuesday and warned that markets remain fragile and unrest in the Arab world threatens to drive up inflation. The European Union's executive arm, which last November had forecast 2011 growth of 1.5 percent, said the improved outlook was supported by better prospects for the global economy and upbeat EU business sentiment. Recovery however is expected to remain uneven among the 17 nations that share the euro with the export-driven German economy leading the group while debt-stricken southern countries lag as they slash public spending. The eurozone economy expanded by 1.7 percent in 2010 after the global financial crisis caused it to shrink by a record 4.1 percent in 2009. The German economy is expected to expand by 2.4 percent against a previous estimate of 2.2 percent while France will see growth of 1.7 percent instead of 1.6 percent, according to the new forecasts. Britain will record 2.0 percent growth, slightly lower than previously estimated. By comparison, Mediterranean countries with higher deficits and debt will see growth of 1.1 percent in Italy and 0.8 percent in Spain. The commission raised its growth forecast for the 27-nation EU, which includes Britain and Poland, by 0.1 percentage points to 1.8 percent. The commission also hiked its 2011 inflation forecast for the eurozone from 1.8 percent to 2.2 percent, above the European Central Bank's 2.0 percent threshold for price stability. Inflation in the eurozone rose to 2.3 percent in January, lower than previously estimated but still above the European Central Bank's comfort zone, official data showed on Monday. for the second month in a row Inflation exceeded the ECB's 2.0 percent threshold for price stability after hitting 2.2 percent in December, this was lower than last month's flash estimate of 2.4 percent inflation for January. Consumer prices have reached their highest level in the 17-nation single currency area since October 2008, when they hit 3.2 percent as oil hit record levels. The number of unemployed in Germany dropped sharply last month as warmer temperatures and strong order books drove job creation in Europe's biggest economy, official data showed on Tuesday. When seasonally adjusted the number of unemployed dropped by 52,000 to 7.3 percent of the workforce, the lowest level since 1991, just after east and west Germany were reunited, much better than a revised decline of 18,000 in January and analyst forecasts for a drop of 15,000. In January, the adjusted unemployment rate stood at 7.4 percent.

 

Spain announced on Tuesday that it had narrowly beaten its target for cutting the public deficit in 2010, which is critical if the Eurozone’s fourth largest economy is to regain the confidence of the world’s financial markets. The figures showed Spain's painful cost-cutting lowered the public deficit from 11.1 percent of annual economic output in 2009 to 9.24 percent in 2010. The results were just below the official target of 9.3 percent. Spain has vowed to drive its public deficit down below the European Union limit of 3.0 percent of gross domestic product by 2013. The size of its economy is twice that of Greece, Ireland and Portugal combined and an economic and financial rescue for Spain would be far bigger than anything seen to date in Europe, with most observes believing it would be beyond its resources to do so. An April rate increase is possible as the European Central Bank continues its mission to control inflation, ECB Executive Board member Jose Manuel Gonzalez-Paramo said in an interview published on Sunday. Asked about the impact of a rate hike for Spain, whose economy is recovering at a slower pace than others in the euro zone, Gonzalez-Paramo said the ECB must think about the euro zone as whole rather than individual countries." It’s not about responding to higher oil prices, but about preventing a second round of effects," Gonzalez-Paramo told Spanish newspaper El Mundo, echoing comments by ECB President Jean-Claude Trichet. Fitch Ratings confirmed Spain's sovereign credit rating Tuesday but downgraded its outlook to negative, blaming a weak economy, banking woes and spendthrift regions. The rating was left at AA-plus, reserved for borrowers of "very high credit quality", but the outlook was switched to negative from stable, reflecting the risk of a rating cut ahead. Fitch, one of the three top agencies that assess how creditworthy borrowers are, warned that an EU summit March 24-25 could make things worse for Spain if it fails to produce a "credible and comprehensive" response to the debt troubles of the 17-nation euro zone.

 

Standard & Poor’s, the rating agency, says Portugal will be forced to seek an international bail-out if the country’s sources of external financing remain as restricted as they are now. The agency also warned that it would downgrade Portugal’s credit rating if European Union policymakers decided this month to make bail-out loans conditional on debt restructuring. The warnings came ahead of a meeting between José Sócrates, Portugal’s prime minister, and Angela Merkel, the German chancellor, in Berlin on Wednesday to discuss measures to deal with the eurozone debt crisis. Portugal's 9.2 billion Euros refinancing issue is in spring and is viewed as Pivotal point for any bailout. On the plus side the country has been able to raised about a third of the 20 billion Euros it needs this year, greatly helped by the European Central Bank's bond purchases, which it is estimated have total at least 20 billion Euros since last May. Prime Minister Jose Socrates is resisting a bailout as he knows politically it would be the end of his government suicide. Portugal has some headroom as its overall funding costs will remain below 5 percent if it has to keep rolling over medium-term debt at 7 percent until 2013 and bailout funds could be cheaper after European finance ministers meet this month to discuss reforming the rescue mechanism. But hopes for much lower rates are declining. German Chancellor Angela Merkel's hands are tied by her electoral agenda, and outright bond purchases by the euro bailout fund, of the kind that Socrates seems to want, look out of the question. Those expecting Portugal to ask for help point out that yields on ten year debt have been above 7 per cent for 20 trading days. Greece was helped after 13 days above this level and Ireland took aid after 15 days. The government has pre-funded a third of its needs, and raised another €1bn on Wednesday in 12-month money, at just slightly more than it paid a month ago. It pays only an average of 3.6 per cent on its outstanding debt, making a market rate above 7 per cent sustainable for longer. Standard & Poor thinks Portugal needs to borrow more than twice its current account receipts this year and Funding that at current rates will hurt the economy, already suffering from cuts. Given the fragility of the minority government, if European politicians fail to come to an agreement later this month then it will only put more pressure on Portugal’s ability to fund itself in the market and indeed would likely be the final straw form bond investors.

 

In the UK, the service sector weakened last month according to a closely watched index, adding to fears that the largest part of the economy is in poor shape, even before accelerated cuts in public spending hit. The Purchase Managers Index for Services fell from 54.5 in January to 52.6. The figure is now well below its long term average of 55.1 and suggests that after rebounding in the first month of the year from a snow hit December, private service companies have returned to the weaker trends seen since last summer. The service sector was the key force behind the surprise decline in gross domestic product in the fourth quarter of the year. The weaker services PMI figures follow more robust numbers for the manufacturing and construction sectors. The UK manufacturing sector continued to grow at its fastest rate in the last 19 years in February, accompanied by a further rise in inflationary pressures according to a survey by Markit economics and the Chartered Institute of Purchasing and Supply on Tuesday. The Purchasing Managers Index for Manufacturing held steady at 61.5 in February, the joint highest since the survey began in 1992, after January’s figure was revised down to 61.5 from 62. Economists had been looking for a reading of 61.1. Activity in the UK construction sector grew at its fastest rate in 8 months in February, beating expectations for a modest slowdown. The Purchase Managers Index for Construction on Wednesday showed an increase to 56.5 in February, from 53.7 in January. Economists had expected a slightly lower number of 52.8 in February for the construction PMI after January’s particularly strong reading following the rebound after December’s poor snow-induced numbers.

 

In a report to the Treasury Select Committee, Bank of England policy maker Charles Bean and Deputy Governor of the Bank of England, said consumer price inflation had been much higher than he had expected since February 2010, with the Consumer Price Index rising 4 per cent in January, double the Bank of England’s 2 per cent target. In January the RPI Index grew by 5.1 per cent. He believes that the Bank under-estimated the effect of the past depreciation in sterling, whilst rising commodity prices had been higher than expected. He added that he also misjudged how much spare capacity there was in the economy, i.e. unused factory potential and unemployed workers, and how this would bear down on inflation. Speaking on Tuesday, he also said that he has become more concerned that elevated inflation may persist for longer than he originally thought and the risk of inflation moving upward had risen. On Thursday, speaking to the Association of British Insurers, Mr Bean however gave few signs that he was about the join the 3 members of the 9 strong Monetary Policy Committee who voted for a rate increase this week. Pay awards in the UK private sector, rose in the 3 months to January. A development set to raise concerns at the Bank of England, as the Central Bank tries to ward off an inflationary spiral. Income Data Services, an employment consultancy said on Thursday that the medium pay rise was 2.8 per cent, up sharply from 2.2 per cent in the previous 3 months. The rate setting committee has warned that higher inflation could become entrenched if workers are given pay rises to compensate for price growth and such a move would be a significant factor in their decision to increase UK interest rates.

 

According to what I regard as the most reliable guide on house prices, the Land Registry has said that house prices in England and Wales rose slightly in January but suffered their first annual decline in more than a year.

A rise of 0.2 per cent in the month also brought a 0.9 per cent fall over the past year, the first negative reading since October 2009. According to Government figures, the average price for a home in January was £163,177. On Friday the Halifax suggested that house prices fell more sharply than expected in February, reversing a similar rise in January and suggesting the market is set to continue to decline. House prices fell 0.9 per cent in February from the previous month after a 0.8 per cent rise in January; economists had been expecting house prices to fall by 0.4 per cent on the month. According to the Halifax, average prices fell on average 2.8 per cent in the 3 months to January from a year earlier, a deeper decline that the 2.4 per cent drop in the 3 months to February. Economists had predicted a 2.5 per cent drop. The Halifax numbers differ to those from the Nationwide, who earlier in the week had announced an unexpected modest bounce in February prices. According to the Nationwide Price Index for February, prices rose 0.3 per cent, compared with a decline of 0.1 per cent in January. The Nationwide also passed comment that there continues to remain a shortage of first time buyers, so vital to the housing market. With the average deposit demanded by lenders now around 21 per cent, it would take an average worker on average earnings, saving 15 per cent of take home pay, 8 years to build up a sufficient deposit to buy the average house which, according to the Nationwide, costs £161,183.

 

Britain risks another financial crisis unless it undertakes fundamental reform of the banking sector, the governor of the Bank of England has warned.

Mervyn King said "imbalances" in the banking system remained unresolved and were "beginning to grow again". He criticised high street banks for routinely exploiting their customers and urged them to take a longer-term approach to their business rather than simply trying to "maximize profits next week"." We allowed a [banking] system to build up which contained the seeds of its own destruction," King told the Daily Telegraph over the weekend. "We've not yet solved the 'too big to fail' or, as I prefer to call it, the 'too important to fail' problem. The concept of being too important to fail should have no place in a market economy. King also criticised the culture of short-term profits and bonuses in the banking system, suggesting that traditional manufacturing industries had a more "moral" way of operating." They care deeply about their workforce, about their customers and, above all, are proud of their products," he said. The governor argued that good businesses "keep a clear vision of who their customers are and are run by people who don't think they should simply maximise profits next week". Banks face a period of over-regulation caused by public outrage over lax supervision that led to the global financial crisis, OECD chief Jose Angel Gurria said on Friday. Ever since the 2007-2008 slump, regulators worldwide have moved to strengthen supervision of large banks and other financial institutions. "We blew it so badly that right now there is a pendular movement toward too much regulation," Gurria told 600 senior financiers attending the spring meeting of the Washington-based Institute of International Finance. According to numbers released by the Bank of England, UK banks wrote off £1.18 billion worth of credit card debt during the last 3 months of 2010, up from £740 million in the previous quarter. The figure also revealed a 22 per cent increase in cancelled mortgage debts, with £163 million written off during the 3 months. Overall, banks wrote off a total of £9.71 billion of secured and unsecured debt during the whole of last year. Responding to a warning against becoming too political made by the shadow chancellor, Ed Balls, King said: "It is inconceivable that the governor has no view on the size of the deficit and the need to reduce it. It would be a dereliction of duty for me not to warn. You need a credible plan to reduce it, over the lifetime of a parliament. But it is for ministers, not for me, to say how this should be done." Asked about the likelihood of an interest rate rise, potentially as early as next week, King said there was a "perfectly reasonable case for doing it now". But he added that increasing rates too soon would be a "futile gesture".

 

China is to increase its defence budget in 2011, amid fears in the region that its military might is growing. Spending will increase by 12.7% to 601.1bn Yuan ($91.5bn; £56.2bn)

up from 532.1bn Yuan last year, although a number of analysts believe China's actual spending on defence is far higher than the government reports. The defence budget was increased by 7.5% in 2010, after double-digit jumps in previous years. The announcement came a day before the annual National People's Congress, at which the Communist Party outlined its 12th five-year plan. Over the weekend when delivering his state-of-the-nation address at the National People's Congress, the annual meeting of the ruling Communist Party, Premier Wen Jiabao said there is an urgent need to rein in inflation and boost the incomes of working class Chinese people, farmers and pensioners. The state will increase spending by 12.5pc this year, to provide more money for education, the health service, pensions and social housing. He also proposed an increase in the minimum wage and taxes on top-end real estate. The government also said that tackling inflation is its top priority this year, and that it will take step to narrow the gap between rich and poor, in order to prevent the sort of protests seen in the Middle East from happening in china. Inflation in China has been at around 5pc for the last few months, but the price of some staple goods has jumped by double that amount. The Chinese government appears increasingly nervous about online calls urging the population to stage peaceful rallies every Sunday, the same as the gatherings which led to the overthrow of autocratic leaders in Tunisia and Egypt. Beijing has seen an increasing police presence since the messages started appearing online more than two weeks ago and The Beijing Daily, a Communist Party newspaper, issued a rare front-page editorial on Saturday warning people not to be fooled into joining protests that would wreck China's prosperity. Mr Wen expects China's economy to keep growing strongly for at least the next five years, saying the factors which have driven rapid expansion in recent years are still in place. China's economy has grown by an average 11pc a year for the past five years and on Friday the Chinese government issued a target growth rate of 7% for the next five years.

Manufacturing activity in China fell to a seven-month low in February as overseas orders weakened, but rising cost pressures added to inflationary concerns, an independent survey showed Tuesday. The HSBC China Manufacturing PMI, or purchasing manager’s index, fell to 51.7. A government survey also showed factory production fell to a six-month low of 52.2 in February from 52.9 in January, the China Federation of Logistics and Purchasing said in a statement. The figure confirms that the growth of China's manufacturing sector is cooling as tightening measures by the government bit. The central bank has hiked interest rate three times in four months and increased the amount of money banks must have in reserve, hoping to keep a lid on soaring prices. HSBC said that input costs accelerated to a three-month high with purchasing managers blaming rising raw material and fuel prices, which were passed on to customers, fanning inflation in the broader economy. The CFLP said its input price sub-index rose to 70.1 percent in February from 69.3 percent the previous month, adding that Costs were likely to rise further due to a drought in China's wheat producing regions and soaring crude prices triggered by unrest in the Middle East and North Africa.

 

India's left leaning government on Monday unveiled a budget focused on helping the poor and rural masses with pledges to hike social spending by 17 percent and fight food inflation.

Finance Minister Pranab Mukherjee, announced government plans for the financial year from April 1, upping spending for farmers, fertiliser subsidies, food programmes, education and rural employment. Total funds earmarked for social spending made up 36 percent of the total budget. Using the strong tax income due to strong economic growth, he announced a 24 percent rise in education spending to 520 billion rupees (11.5 billion dollars) and a 20 percent rise in funds for health to 267 billion rupees. He also pledged measures to help bring down food inflation, which at nearly 11.5 percent is causing huge hardship to the hundreds of millions of poor who are his party's core supporters. The government will also introduce a long-awaited food security bill, guaranteeing subsidised food for low-income families, in a move aimed at helping the rural poor who re-elected The party and its allies in 2009.The government, which faces five state elections this year and is suffering from corruption scandals, is very aware that spiraling living costs can be a trigger point for political discontent in India. About 40 percent of the 1.2 billion population, in Asia's third-largest economy, live on less than $2 a day. He predicted "double-digit growth in the near future" and forecasted economic growth of 8.6 percent for the current fiscal year and nine percent for the year to March 2012. These are despite figures showing growth in the final three months of 2010 slipped to 8.2 percent year-on-year from 8.9 percent in the previous quarter, a larger decline than forecast by analysts. Revenues of 400 billion rupees from part-privatisation of state firms will help the public purse, meaning the public deficit would be cut from 5.1 percent of Gross Domestic Product to 4.6 percent next year. He also announced another increase in military spending, upping it 11.6 percent to 1.65 trillion rupees. In is understood that Fidelity has put on hold its plan to launch a closed-ended India fund. The asset manager had a successful investment trust launch recently when it floated Fidelity China Special Situations overseen by veteran fund manager Anthony Bolton. The new fund was expected to be run by Nitin Bajaj. Other India-themed closed-ended funds have also found it difficult to attract investors. Kotak India Infrastructure, which at the beginning of the year won the backing of Investec, was forced to pull the plug on its initial public offering (IPO) on 16 February. Kotak had hoped to raise £100 million to invest in a portfolio of 40 to 60 listed or ‘to-be-listed’ equities with exposure to the infrastructure sector in India.

Brazils Finance Minister Guido Mantega has announced that Brazil has overtaken both Britain and France to become the 5th largest economy in the world after reporting 7.5% growth in 2010.

 

Japan's industrial output rose for a third straight month in January on stronger overseas demand, but the pace was slower than expected and high energy costs amid the Mideast crisis spell fresh risks

. Factory production rose 2.4 percent month on month, according to the Economy, Trade and Industry Ministry, supported by carmakers and semiconductor-manufacturing devices. Although it represents the third gain in a row the figure was down from December's surprise 3.3 percent jump and also lower than the predicted 3.8 percent. Most economists expect Japan's economy to expand in the January-March period after gross domestic product contracted by an annualised 1.1 percent in the previous quarter. Japan's unemployment rate held firm in January but consumer spending slipped for the fourth straight month, data showed on Tuesday, reflecting problems facing the country's export-led recovery. The jobless rate held steady at 4.9 percent in January, in line with forecasts, although the ratio of jobs-to-applicants rose to its highest level since January 2009 in a further sign of economic recovery. South Korea's inflation rate has hit a 27-month high in February, caused by rising food and fuel costs. The consumer price index rose annually by 4.5% in February, more than the central bank's maximum target of 4%. It is thought that this will cause the central bank to raise interest rates. Brazil's central bank has raised its key interest rate a half a percentage point to 11.75pc as it tries to control inflation, with another increase in April expected. The increase, which takes base rates to their highest in the G20 group of developed and emerging economies, was expected as inflation is running at 5.9pc and is above the government’s target of 4.5pc. In the Ivory Coast the Threat of full scale civil war has escalated. The UN has reported that electricity and water supply to the North of the country, the region traditionally opposed to incumbent President Laurent Gbagbo, have been cut off. Additionally western radio stations such as the BBC and Radio France International have been taken off the air. The UN now estimates that close to 200,000 people have left the country and that that over 350 have been killed. Commercial operations in many parts of the country have ceased as western companies pull staff and employees out. Currently there are 9,000 UN peacekeepers in the country.

 

Gold climbed for the sixth straight week, the longest rally since September 2007. On March 2, the metal reached a record of $1,441 an ounce. Gold futures for April delivery increased $12.20 on Friday to close $1,428.60 an ounce. Gold had hit a new record of $1,432.57 an ounce on Tuesday. The metal rose 1.4 percent this week.

 

Oil futures closed above $104 a barrel on Friday posting a weekly gain of nearly 7% as investors worried that turmoil in Libya could disrupt global supplies

. They also found support in the week after a U.S. government report on Wednesday showed an unexpected decline in crude-oil inventories for the week ended Feb. 25. Crude for April deliver closed up $2.51 on the day at $104.42 a barrel on the New York Mercantile Exchange. The contract finished the week 6.7% higher than at last Friday’s closing level of $97.88. Brent crude for April settlement closed Friday at $116.20 a barrel, its fifth weekly gain, on the ICE Futures Europe exchange in London. UK Petrol prices could reach £2 a litre if Middle East instability escalates, Government minister Alan Duncan has warned. The international development minister said, in a worst case scenario, where terrorists bombed oil tankers or Saudi reserves, the price of oil could rise to $250 dollars a barrel. That figure would mean motorists in the UK paying around £2 a litre for petrol. In an interview with The Times newspaper, he suggested it is possible the price of crude oil could easily top the current record price of $147 a barrel reached in July 2008. In the U.S., pump prices have climbed 11 per cent in the past month to $3.43 a gallon, and are expected to soon top $3.50. In California, prices have topped $4 a gallon. Federal Reserve chairman Ben Bernanke warned on Tuesday that a "sustained" rise in oil prices could threaten US growth and spark dangerous price rises, as he commented on the turmoil in Libya. He told Congress he believed unrest in the Middle East would result in "temporary" and "modest" increase in US prices, but acknowledged greater risks remain. Bernanke vowed the central bank would "monitor developments closely" and would respond if necessary, to ensure the economic recovery remains on track. World food prices have hit record highs and oil price spikes could push them even higher, the UN food agency warned on Thursday. The UN said meat prices rose by 2% in February and Cereals went up 3.7% because of lower global supply of wheat and maize there was a slight fall in the price of rice. The Food Price Index, which monitors average monthly price changes for a variety of key staples, rose to 236 points in February from 231 points in January, the UN's Food and Agriculture Organisation (FAO) said. The highest level since FAO began monitoring prices in 1990. It was the eighth consecutive monthly rise, with dairy prices up 4.0 percent from January and cereal prices up 3.7 percent due to increased maize demand and lower supply. Meat prices meanwhile rose 2.0 percent from January, while the price of oils and fats rose only marginally and sugar fell slightly.

 

Manufacturing activity in the U.S. turned in its best performance since May 2004 last month. But factory operators faced a big jump in raw materials prices,

with indications that companies will start passing through those costs to their customers. On Tuesday, the Institute for Supply Management's manufacturing index increased to a very strong 61.4 from 60.8 in January. The overall index had been expected to come in at 60.9. In the details of the report, the ISM said that inflationary pressures continued to mount, with the prices index at 82.0, compared with 81.5. Factory operators are facing rising input costs from commodities, as well as from energy prices. The U.S. non-manufacturing sector expanded further in February, according to data released on Thursday by the Institute for Supply Management, but cost pressures continue to squeeze service providers. The ISM's non-manufacturing purchasing managers' index edged up to 59.7 last month from 59.4 in January. Forecasters had expected the February PMI to slip to 59.0. The ISM said last month's business activity/production index increased to 66.9 from 64.6 in January. But the new-orders index slowed to a still-high 64.4 last month from 64.9. The ISM employment index rose to 55.6 from 54.5 in January. The number of Americans signing contracts to buy previously owned homes fell in January; a sign the industry that triggered the recession was struggling at the start of 2011. The index of pending home resale’s dropped 2.8 percent after a revised 3.2 percent decrease the prior month that was initially reported as a gain, figures from the National Association of Realtors showed on Monday, a 2.3 percent decrease had been expected. US Consumer spending fell more than forecast in January as rising food and fuel prices caused Americans to cut back. Purchases rose 0.2 percent, the smallest gain since June; economists had forecast a 0.4 percent rise in spending. The US Commerce Department revised the December spending figure down to 0.5 percent from a previously reported 0.7 percent gain. The U.S. jobs market rebounded in February and unemployment fell below 9% for the first time in nearly two years. Nonfarm payrolls rose by 192,000 last month as private-sector employers added 222,000 jobs, the Labour Department said on Friday. The January number was revised to show an increase of 63,000 jobs, from a previous estimate of 36,000. The unemployment rate, which is obtained from a separate household survey, fell to 8.9% last month, the first time it dipped below 9% since April 200, with About 13.67 million people actively looking for a job. The improvement follows a mixed report in January, when payroll numbers were distorted by bad weather. Economists had forecast payrolls would rise by 200,000 and that the jobless rate would increase to 9.1% from the previous month's 9.0%. Federal Reserve Chairman Ben Bernanke told lawmakers in the week that despite some positive signs, the Fed still expects unemployment to range from 7.5% to 8% at the end of 2012 as the economy only slowly regains the 8.75 million jobs lost in 2008 and 2009. The Fed’s Beige Book reported that overall economic activity continued to expand across all districts since the last report, with solid growth in manufacturing production, also noting increased activity in nonfinancial services. Six of the twelve districts noted that severe weather conditions had a negative impact on retail activity in January, while all districts reported some degree of improvement in labour market conditions. On Wednesday he said that a Republican spending cut plan would not cause a big dent to U.S. economic growth and could cost around 200,000 jobs over two years, different to the 700,000 cited by Democrats and the forecast of job gains by the Republicans. He also said that a $60 billion cut along the lines being pursued by Republicans in the House of Representatives would likely trim growth by around two-tenths of a percentage point in the first year and one-tenth in the next year.

 

The Bank of England holds its latest rate setting meeting on Thursday and the general consensus is that rates will be left on hold with any increase likely to be in May. On Friday we expected to see a big rise in producer input prices, pushing the annual rate of increase up by about 14 per cent. On a positive front, Thursday’s official figures on UK manufacturing are expected to show an increase on January and on the same day the National Institute of Economic and Social Research are likely to say that GDP grew in February following a 0.6 per cent rise in January. The Trade Deficit number on Tuesday, however, are likely to remain very poor, but should show a small decline on December’s huge £9.2 billion gap in goods traded. The numbers, however, are likely to show that imports are growing almost as fast as exports, which will be seen as disappointing in light of the Bank of England’s aim of trying to rebalance the economy. The week ahead will be devoid of major US economic data up until Friday, when the Commerce Department releases its monthly sales report. Economists expect a 1.4% rise for February, which would bring the year-on-year total up 9.3%, the fastest pace of growth since March 2000. On Thursday, the Bank of Korea will meet, and economists expect another interest-rate rise after the latest consumer price index reading. February CPI climbed to an annual rate of 4.5%, the fastest pace in more than two years, above the Bank of Korea’s 2%-4% target range. Korea surprised markets in January by raising its key rate by 25 basis points to 2.75%. Also on Thursday, the Reserve Bank of New Zealand will reveal its latest policy decision, and could cut interest rates after last month’s devastating Christchurch earthquake. Economists expect a cut of 50 basis points to 2.5%. Before the latest earthquake, a majority of economists predicted the key rate would stay at 3% through the first rate rise in September, with rates at 3.75% by the end of the year.

 

Friday brings what has been billed as a ‘Day of Rage’ protest in Saudi Arabia, which has so far, has escaped the unrest rolling across the Mideast and North Africa.

In many ways, Saudi Arabia is OPEC. It’s the world’s second-largest producer after Russia and it sits on one-fifth of the world’s known reserves, any hint of unrest here would make the recent rise look like a blip

. Dissidents, presumably including its restive Palestinian population, are anonymously calling for a "day of rage" on March 11 and March 20. But this isn’t Egypt or Libya and whilst the country has a large and underemployed generation of young people the 80-year-old King Abdullah II has tried hard to keep his people happy, but ultimately they do not have the political freedom taken for granted in the west. Saudi Arabia is understood to be drafting in up to 10,000 troops for the north eastern Muslim Shia provinces ahead of mass protests planned this week, as it try's to subdue mass uprisings against the House of Saud. King Abdullah is also reported to have told neighboring Bahrain that if they do not put down their own ongoing Shia revolt, his own forces will. The Saudi stock market, the largest Arab bourse, rebounded on Saturday after falling 15 percent of its value last week, as fears of uprisings spreading shook regional financial markets. The Tadawul All-Share Index, or TASI, closed 7.26 percent up on Saturday, hitting 5,706.9 points, after ending Down 3.9 percent on Thursday, its 13th consecutive session in the red. The recovery came after Finance Minister Ibrahim al-Assaf said in a televised interview that the Saudi economy was in "great" shape and that he himself bought stocks last week. All Gulf markets fell last week, led by Saudi Arabia, Qatar and Dubai, with Kuwaiti stocks at their lowest for more than six years and the Dubai Financial Market Index hovering around a seven-year low. In Yemen, President Ali Abdullah Saleh has rejected an opposition peace proposal and ordered troops to fire on demonstrators, he rejected opposition proposal that would have brought demonstrations to a standstill in return for a promise to step down by the end of the year.

 

During the week the European debt crisis, while worsening, was overshadowed by difficulties in the Middle East and the fact that the WTI oil benchmark remained above $100 a barrel for the full week, with Brent trading at around $115. There are serious inflation implications for the world and my fear remains that oil prices are heading higher, particularly as political instability continues to heighten. The Libyan situation is clearly of grave concern, as a civil war there is likely to push the oil price further towards $150 a barrel, whilst in Egypt; the removal of the interim Prime Minister is a sign that the population is unhappy with the speed of transition. Saudi Arabia remains the main country to watch and difficulties in its adjoining neighbour Bahrain in the week were troubling. Whilst in Saudi Arabia the only sign of unrest so far has been a spate of petitions published by activists and academics calling for reforms; various websites have called for a ‘day of rage’ on March 11th and March 20th. If this call for a day of rage is well supported I expect jittery markets to react accordingly. The US in the week managed to ensure that the Federal Government did not stop due to it reaching its debt ceiling, although politicians have only been able to negotiate a 2 week period of grace. On Wednesday the White House accepted a $4 billion reduction in spending, when Obama signed a temporary spending bill that will keep the US government running until March 18. This was the fifth short-term spending bill this fiscal year, which began Oct. 1. My worry continues to be that the debt bubble is continuing to get bigger and bigger and ultimately, at some stage, like all bubbles it will burst, causing serious problems. The central problem as I see it is that many people are continuing to confuse sustainable economic activity driven by savings, investment, innovation and high employment with unsustainable economic activity driven by cheap credit, extreme levels of debt and deficit spending. Whether or not it is the escalating oil price or some other event, the West is very close to reaching its debt ceiling. A sharply rising oil price will only reduce this figure. Therefore, the politics of the Middle East will be the key to the West’s economic performance in a desperately important period. Politicians are relying on strong growth in the next 2 to 3 years to do much of the heavy lifting out of the credit crunch whilst at the same time, actually increasing the amount of underlying debt that we carry. Even under the coalition’s plans and the austerity measures prescribed, UK national debt is set to double over the next 5 years and if growth does not materialise, then even harsher public spending measures and tax increases will have to be prescribed. This scenario plays out across the whole of the Western world, with the UK being one of the better financial positioned. Without fiscal discipline, there is no confidence, without confidence there is no growth, and without growth there is no employment. The west must get it's fiscal house in order before the bond market forces individual countries to so, because waiting until there is a true crisis will leave us with only very bad choices. Currently our choices are merely very difficult and in order to achieve sustainable prosperity, particularly in Europe, it is going to require either real compromise, which today seems very sadly lacking, or political courage that is equally all too rare. Only then will we avoid the very bad choices and long-term destruction that another crisis will inevitably force upon us all.

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