Back from the brink

By Mike Peacock
September 19, 2013

Pulling back from the brink. The Federal Reserve certainly has and so has Silvio Berlusconi (so far).

Not much to say about the Fed directly, except that it’s surely still only a matter of time, but it certainly takes the pressure off the central banks meeting in our region today. German Bund futures have leapt about 1-1/2 points and Italian bond futures are up more than a full point. We can expect emerging market assets to climb sharply too – the Turkish lira is up three percent, for example, giving its embattled central bank some breathing space.

Further out though, what this has done is create more uncertainty rather than giving investors a firm direction of travel. Presumably, Bernanke and co. are somewhat alarmed about the durability of U.S. economic recovery, which should give everyone pause for thought.

The Swiss National Bank, Norway’s Norges Bank and the South African Reserve Bank all have policy meetings.

South Africa’s rand has not been hit quite as badly as the lira or rupee in recent months, but hit it has been. No change is expected in policy, particularly after the Fed sat on its hands, but also because the SARB doesn’t have the firepower to prop up the currency and inflation is running above six percent, too high to cut rates from an already four-decade low of 5.0 percent.

The SNB’s cap on the Swiss franc has held remarkably comfortably since it was imposed two years ago. If anything the franc might weaken from here but the SNB’s constant vigilance over the currency does mean an interest rate rise, which could have become a talking point given surprisingly strong growth in the second quarter, is a difficult proposition.

The Swiss government has just raised its 2013 and 2014 growth forecasts to 1.8 and 2.3 percent respectively. Inflation is pretty much absent, however.
Norway has a newly-elected centre-right government intent on tax cuts and more investment at home while annual core inflation surged to 2.5 percent in August, from 1.8 in July, quashing any hopes of a rate cut and – unless it proves to be a blip – heralding an earlier start to policy tightening.

Norges Bank said in June there was a 50 percent chance it would cut rates in September as the economy was slowing and inflation would not rise to target for years to come. But the target is 2.5 percent, so it’s already there. Rate hike expectations are being brought forward to early 2014 from the end of that year.

Egypt’s central bank, which has said its focus is boosting growth, also meets and is expected to cut rates by up to a full point following a 50 basis point reduction in August.

French and Spanish bond auctions will show if there are any jitters in the euro zone. Presumably, the Fed has quashed those for now too, notwithstanding S&P putting Portugal on warning of a possible credit rating downgrade yesterday evening.

Berlusconi seems to have pulled off the same trick as Ben Bernanke – eschewing dramatic action but leaving a pall of uncertainty in the process. Contrary to the warnings of some of his allies, he did not last night threaten to pull down a shaky coalition government but instead pledged to stay in politics despite his expected expulsion from parliament for a tax fraud conviction.

That doesn’t necessarily mean the threat has gone away. After his video message was broadcast, senators voted down a move by his party colleagues to try and prevent his looming ejection from the upper house of parliament, paving the way for what is expected to be his formal expulsion by the end of next month.
Angelino Alfano, the secretary of his PDL party, has said his leader would make a final decision on the government’s survival only after the vote in the Senate, where Prime Minister Enrico Letta’s Democratic Party says it will support his ejection.

Markets have not been overly rattled by this saga throughout and maybe with good reason. There are strong incentives for all the parties not to want to hasten unpredictable elections. February’s poll produced a shock result and the party that brings down a government tends to suffer. But Berlusconi is nothing if not unpredictable. There is also a potential new flashpoint developing within the coalition over plans to raise the rate of VAT in October.

We also get final opinion polls ahead of Germany’s Sunday election with Angela Merkel’s CDU by far the largest party but still uncertain whether its FDP coalition partner will win enough votes to continue in power which, if it doesn’t, will probably necessitate a grand coalition with the centre-left SPD.

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