Fisher Investments Editorial Staff

Foreign Affairs

By, 01/18/2012

Chinese growth ahead?

Tuesday, China announced GDP grew 8.9% from a year earlier in Q4 2011, beating expectations of 8.7%. Although a deceleration from Q3’s 9.1% y/y growth and certainly not its fastest growth recently, the Q4 result was nevertheless strong.

We’ve written here before the Chinese government seems to apply throttles to speed the economy in party transition years (like 2012). To do so, it uses the same throttles used to slow the economy last year to prevent overheating and runaway inflation.

And it looks like that’s just what’s happening. December 2011 saw the first acceleration in loan growth since November 2010. Since September, China has also cut oil production and personal income taxes, raised power prices while limiting coal prices (incentivizing energy production—an important growth driver), cut banks’ reserve requirements, delayed the implementation of Basel’s stricter bank regulations and approved local governments to extend the maturity of bad debt. All of this should serve to goad growth and provide a tailwind to Chinese equities.

Hungary for change

On Tuesday, the European Commission launched official legal action against Hungary: Hungary must reverse central bank, judicial and media reforms within a month, or the European Court of Justice opens treaty-infringement proceedings. This, plus the IMF’s refusal to resume bailout negotiations unless Hungary will “engage on all the policy issues,” seems to have softened Hungary’s stance. “Hungary is ready to sort out all emerging issues … with the European Commission,” said Communications Minister Zoltan Kovacs, and the government issued a similar statement.

Sounds promising, but we’d suggest tempering enthusiasm. On Monday, after the Commission’s plans were leaked, Orban’s spokesman didn’t mince words: “The international left wants to launch yet another attack against Hungary … We will not allow the international left to accuse Hungary with lies and unfounded slander on the international stage.”

So which Hungary will come to the bailout negotiating table—conciliatory or flamingly nationalist? The rest of Kovacs’ statement suggests both will: “We don’t have an argument with the Commission on basic principles. The debate goes back to where it belongs: technicalities and legal arguments.” In other words, expect fluffy rhetoric about Hungary’s commitment to central bank independence, democracy, freedom and fundamental rights. And expect arguing about why Hungary thinks its new constitution underscores, rather than undermines, those tenets. But for the sake of Hungarians, hopefully nationalism doesn’t win out.

Eurozone bond auctions to S&P: “Meh.”

Perhaps S&P is experiencing a bit of an identity crisis.

After Friday’s blanket S&P downgrade of nine eurozone sovereigns, reiteration of a negative outlook on seven more and Monday’s downgrade of the EFSF from AAA to AA+, some might have expected fireworks in eurozone bond auctions to start the week. But that’s not what happened.

While US markets were closed Monday, now AA+ rated France offered a total of €8.59 billion in three-month, six-month and one-year debt. All three issues saw strong demand and lower yields. One-year yields fell the most, to 0.406% from 0.459%, at January 9’s auction.

Tuesday, now A-rated Spain sold €4.88 billion of 12- and 18-month debt to healthy demand. Twelve-month debt sold at average yields of 2.049%, fully two percentage points lower than the 4.05% average yield at the prior auction on December 13. Eighteen-month debt yields also fell sharply—to 2.399% from 4.226% a month earlier.

The EFSF also auctioned debt Tuesday, offering €1.501 billion of six-month debt. Investors bid for €4.6 billion—a bid-to-cover ratio of roughly 3.1, again showing strong demand. The resulting yields were 0.2664%, about four basis points higher than December 13’s first-ever six-month auction. Not a big move.

Since Friday’s announcement, eurozone leaders have been downplaying S&P’s decisions and criticizing the raters in general. But auction results seemingly show there’s little need for political hot air. After all, at auctions since S&P’s announcements, investors have overall shrugged their shoulders and bid for bonds.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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