Nothing is weaker than strong Brussels rules

usmiaty_draghiThe Governing Council of the ECB decided that main interest rates will remain unchanged. The reasons behind the decision were facts as repayment of 22% of the LTRO program which reflects to improvements in financial market confidence, weak GDP outcomes in 2012 and anchored inflation with estimation of 1.8 percent in February.

The Bank of England held its target for bond purchases at $ 564 billion or in other words the bank policy did not change as well. The policy could be changed by the new coming governor of the bank Mark Carney. David Cameron already called for a new monetary activism of the BoE which must support recovery of the country which probably means that the BoE will purchase government bonds on bigger pace than today.

It seems that the strong German hands will lose its squeeze. Italy’s election, France’s refusal to make budget cuts and anti-austerity protests across southern Europe; these are just a few reasons why rules crumble like a house of cards. And the wording behind is so excellent. “If our rules are intelligent, they are also flexible. We have to find the right rhythm and the right balance without weakening the little growth left,” said French Finance Minister or “We must leave the austerity cage,” told Pier Luigi Bersani responding to Italy’s election outcome by up-end his pre-election program. It is more than clear that we have two blocks in the EU – austerity block lead by Germans supported by Finland, Austria or Luxemburg and anti-austerity block lead by France supported by Spain, Italy, and Portugal. Who win? What do you think?

The Fitch has downgraded Italy’s to ‘BBB+’ from ‘A-‘ with negative outlook which could have also future impact on the ESM rating because Italy is one of the shareholders. The reasons behind were election outcome and consequently higher probability of week government reactions to economic shocks, recession in Italy and Europe, and estimate of bigger debt close or over 130 % of GDP.

What is the most dangerous investment in China? Housing project. Do people of China realize that? Of course not. The situation about the real estate market in China has started to be on the radar of mainstream media and rightfully. China building industry represents 20 to 30 percent of the whole economy. They are able to build 12 to 24 new cities every single year. It was the government that has spent more than $2 trillion to get these cities built. Outcome? Emptiness. And if you want to see how empty shopping malls, apartments or whole cities looks like just watch video below:

There is one crucial point in the video. The bursting of the bubble is described in a way as so called Austrian school explains the business cycle as malinvestment process. New investments are not finished because of lack of funds which slowly caused bigger unemployment and first bankruptcies.

The new governor of Bank of Japan meets with expectations and maybe goes beyond. He introduced what he means by monetary easing on Monday. He told that the BOJ’s current policies were not powerful enough to boost inflation to 2 percent and he thinks that the best way to ramp up the central bank’s stimulus for the economy would be through huge purchases of longer-dated government bonds as soon as possible without waiting to the scheduled start date of 2014. If Kuroda’s nomination is approved, his first regularly scheduled policy review would be on April 3-4 so until that day we could just speculate about real monetary measures of the BoJ.

The U.S. nonfarm payroll employment increased by 236,000 in February (more than expectations 165,000), and the unemployment rate was down to 7.7 percent according to the U.S. Bureau of Labor Statistics. This was the lowest unemployment rate since December of 2008. And Americans have to be now absolutely appeased. It is not only better unemployment data. The U.S. largest bank companies have passed by hypothetical stress tests. They are allegedly in a much stronger position than before the financial crisis. The stress tests consist of scenarios as unemployment rate of 12.1 percent, a 50 % drop in equity prices, 20 % decline in housing prices or projected loses of total $462 billion during the nine quarters of the hypothetical stress scenario. But hopefully they will not experience the scenario in reality very soon.

Matúš Pošvanc

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