Economic Summary for the week ended 25th Jan 2013

Japan - The Bank of Japan (BOJ) has agreed to double its inflation target to 2% and ease monetary policy, meeting key demands of Japan's new government.

Japan's central bank has guarded its independence and there were fears it may resist Prime Minister Shinzo Abe's calls for it to do more to help growth, but the BOJ has gone further than many analysts predicted, offering to do open-ended asset purchases from 2014, expected to pump billions of yen into the economy.

"This is very good news," said Brian Redican, from Macquarie in Sydney. "For once, the BOJ has been more aggressive than the market expected. The government is clearly forcing the pace of change, which is no bad thing. The BOJ has talked about targeting inflation for years without any success, but these changes are more credible."

China - Manufacturing activity in China grew at its fastest pace in two years in January, according to data from HSBC.

The preliminary reading of the Purchasing Managers Index (PMI) was 51.9, compared with 51.5 in December. Levels above 50 indicate expansion.

China's leaders have taken steps to boost the country's growth, of which manufacturing is a major component. The data is the latest sign that the world's second-largest economy is recovering after a sharp slowdown.

"Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China's ongoing recovery in the coming months," said Qu Hongbin, chief China economist at HSBC.

India - India raised a cap on foreign investment in rupee-denominated bonds by $10bn to $75bn, the central bank said.

The nation boosted the limit on holdings of government debt to $25bn from $20bn while an ownership ceiling for corporate notes was increased to $50bn from $45bn, according to a statement on the Reserve Bank of India’s website.

Prime Minister Manmohan Singh’s administration has taken a series of measures since mid-September, including allowing more international investment in retailing and aviation, to revive Asia’s third-largest economy and avert a downgrade in the sovereign rating.

Spain - Spain's unemployment rate has soared to its highest level since measurements began in the 1970s as a prolonged recession and deep spending cuts left almost 6 million people out of work at the end of last year.

Spain's unemployment rate rose to 26% in the fourth quarter of 2012, or 5.97 million people, the National Statistics Institute said on Thursday, up from 25% in the previous quarter and more than double the European Union average.

Spain sank into its second recession since 2009 at the end of 2011 after a burst housing bubble left millions of low-skilled labourers out of work.

Germany - German investor confidence jumped surprisingly this month above its long-term average to a level not seen since May 2010, the ZEW Center for European Economic Research said on Tuesday.

The ZEW’s economic sentiment indicator, which gauges investors’ six-month outlook, surged by 24.6 points this month to 31.5. Analysts had expected a 12 point increase.

The report means that a significant majority of investors sees conditions improving after the fourth quarter’s estimated 0.5% quarterly decline in German GDP.

“The financial market experts seem to expect that the positive sentiment on the financial markets may soon result in companies realizing investments that had been postponed early on,” ZEW President Wolfgang Franz said. “However, the economic situation of important trade partners is rightly considered to still be weak. This suggests that the German economy will further grow at a moderate level in 2013.”

Companies - Apple Inc. more than doubled its iPhone sales points in China, which helped boost revenue by 67% in the world’s largest market for handsets.

Outlets in China selling the iPhone rose to 17,000 in the period that ended Dec. 29, from 7,000 a year earlier, Apple Chief Executive Officer Tim Cook said. That helped Apple boost sales in the Greater China region to $6.83bn, from $4.08bn a year earlier, the company said in statement that marked the first time it formally shared China data in its earnings release.

Cook needs a strong performance in China after Apple last quarter posted its slowest profit growth since 2003 and weakest sales gain in 14 quarters, amid rising costs and accelerating competition with Samsung Electronics Co. Apple expanded its own China retail stores to 11 from six over the past year, while the number of premium resellers doubled to more than 400 shops, said Cook, who visited China this month.

Commodities - Gold will rally this year and into 2014 as U.S. Federal Reserve policy makers will probably maintain asset purchases for two more years to buttress the recovery of the largest economy, according to Morgan Stanley.

Gold, which rose for a 12th year in 2012, may average $1,830 an ounce in the final quarter from $1,715 in the first, $1,745 in the second and $1,800 in the third, analysts Peter Richardson and Joel Crane said in a report. Prices will be supported by investment and central-bank buying, they wrote.

Spotlight on: China set for a mini bull market?

China exited 2012 with its economy accelerating hard out of a year in which it came closer to almost stalling than at any time since 1999, in a further tentative sign of recovery in global activity.

The country recorded its slowest full-year growth of this century, but the 12 month figure of 7.9% still beat consensus expectations of 7.7% in a Reuters survey of economists.

The Shanghai Composite index gained 1.41% on Friday, crowning a month which seems to have signalled a break-out from its two year bear run, gaining 17.16% since mid-December.

‘Should the Shanghai market gain another couple percentage points, a new bull market will be at hand, and it will certainly be a welcome relief for Chinese investors, noted Bespoke Investment this week.

‘Last month’s PMIs were upbeat and we think the recovery has a while yet to run,’ said Mark Williams, Asia analyst at Capital Economics.

The uptick was driven by a stabilisation of exports, industrial production, which was up 10.3% over 12 months compared to a figure of 10.1% in November, and retail growth, up 15.2% from 14.9%.

Two interest rate cuts and the approval of infrastructure projects, as well as the introduction of new leadership in November, have helped stabilise outlook and confidence.

Investors responded enthusiastically amid hopes the market has shrugged off its extended losing streak, but analysts were sceptical of how long China could maintain re-acceleration. They pointed out that household spending remained sluggish and that state intervention was still very much required.

‘As such, there must be a good chance of disappointment if incoming data fail to meet expectations,’ said Williams.

‘This will be an increasing risk as the year goes on if the recovery remains centred on infrastructure and real estate investment rather than consumption. Sustained stronger growth in China would require a turnaround in household spending.’

Bank of America Merrill Lynch’s China economist Ting Lu said he expected annual GDP growth to peak at 8.3% in the first half of 2013, before slowing again to 8% over the second.

‘Pro-growth policies will be extended into 2013, and aggressive stimulus will be avoided unless there is another global financial crisis,’ said Lu.

‘Within the year, policy will likely be marginally tightened towards the second half of the year on concerns of rising inflation and home prices, investment overheating and financial system risks. We expect no rate changes in 2013, and the People’s Bank of China will aim to deliver a stable interbank rate.’

Economic Summary for the week ended 18th Jan 2013

India - Indian economic growth may rebound in 2013 while falling short of the government’s 8% target, as inflation risks limit the extent interest rates can be lowered to spur consumption and investment.

Gross domestic product in Asia’s third largest economy will rise 6.5% in the year through March 2014, according to the median of 30 estimates in a Bloomberg News survey. That compares with a 10-year average of 7.8% and the Finance Ministry’s projection of 5.7% to 5.9% in 2012-2013.

Prime Minister Manmohan Singh revived stalled policy overhauls in September to stem a slowdown in expansion, steps that helped send stocks to a two-year high this week on bets that a recovery has begun. While inflation eased to a three-year low of 7.18% in December, it remains the fastest among the biggest emerging markets. A record current account gap is threatening to damp the rupee, adding to price pressures.

China - China's economy, the world's second largest, is showing signs of a rebound that could help it emerge from its worst economic period in 13 years.

According to the latest government figures, growth picked up to 7.9% in the final three months of 2012, from 7.4% in the previous quarter. This was driven by state investment in infrastructure projects and efforts to get consumers and companies to spend.

Economic stability is seen as vital for China as its new leaders take over.

"It is obvious that the slowdown in the Chinese economy has halted for the moment," said Fraser Howie, an economist and co-author of Red Capitalism. "But one has to be mindful that any recovery will be limited in its scope, not least because of the various headwinds that China is facing," he added.

Currencies - The world is on the brink of a fresh “currency war,” Russia has warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference on Wednesday in Moscow.

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it damages the competitiveness of other economies and provokes retaliation.

Colombia - Colombian Finance Minister Mauricio Cardenas says that when he travels next week to Switzerland for a meeting of the world’s richest capitalists, he won’t be lobbying for investment. After spending his first four months on the job trying to protect the economy from a currency rally, he doesn’t need more dollar inflows.

“I’m just going to tell a good story,” Cardenas, who will attend the World Economic Forum’s annual meeting in Davos, said in an interview on Tuesday in Bogota.

Foreign direct investment this year should surpass last year’s record USD16bn, Cardenas said, keeping pressure on manufacturers struggling to compete with a currency that outperformed all of Latin America in 2012. While the government can boost dollar purchases and take other steps to weaken the peso toward a “more natural” level of 1,800 per dollar, Colombia’s track record for market-friendly policies will make it attractive to investors for some time to come, he said.

Spotlight on: investors move from bonds to stocks

Global fund managers’ risk appetite has reached a nine-year high as the ‘great rotation’ from bonds towards equities continues to gather pace, Bank of America Merrill Lynch (BofA ML) research shows.

According to the bank’s Global Fund Manager Survey, the proportion of asset allocators taking higher-than-normal risk reached its highest level since January 2004 at the start of the new year.

Furthermore, the number of fund managers taking out market protection dropped to its lowest point since the first quarter of 2008. Cash levels also fell for the sixth month running, moving from a high of 5.3% in June 2012 to their present 3.8%.

A net 51% of asset allocators are now overweight equities - the most bullish stance seen since February 2011. The underweight to banks that has persisted since February 2007 also ended as investors moved overweight on the sector.

Within equities, managers have shifted towards cyclicals, with technology and industrials becoming the favourite sectors, and away from defensives. The weighting to telecoms, for example, has fallen to its lowest since December 2005.

Allocations to bonds dropped to their lowest since May 2011, with a net 53% of managers underweight when it comes to fixed income. In further evidence that a great rotation is in its early stages, 49% of investors now expect to sell government bonds to purchase higher-beta equities.

Investor confidence has improved markedly in recent months. The US fiscal cliff remains the leading tail risk among fund managers, cited by 37% of respondents. But this is down from 47% in December and 54% in November.

Meanwhile, a net 59% expect the global economy to strengthen over the coming year - up from a net 40% one month ago. China is a particular bright spot, with a 63% of allocators expecting the world’s second largest economy to secure a stronger recovery this year.

Michael Hartnett, chief investment strategist at BofA ML Global Research, said: “Following the resolution of the US fiscal cliff, sentiment has surged.

“Half of investors now tell us that they would sell government bonds to buy higher-beta stocks, which is consistent with increasing growth and inflation expectations and with our call for a ‘great rotation’ to start in 2013.”

Ecomonic Summary for the week ended 12th Jan 2012

Global - European shares consolidated close to two year highs on Friday after Europe's Central Bank expressed cautious optimism on the euro zone's prospects.

Strong Chinese trade data on Thursday also helped lift economists' expectations of a steady global recovery this year, pushing the MSCI index of world shares to a new eight-month high.

"People are starting to come back to the stock market because they don't have any other option," said Edward Page Croft, managing director at Stockopedia.

"Equities are very overdue a rest but that shouldn't make people throw in the towel in my opinion as they will continue to be supported by central banks' very accommodative policies."

Japan - The Japanese government has approved a fresh 10.3 trillion yen ($116bn) stimulus package in an attempt to spur a revival in its economy.

The package will include infrastructure spending, as well as incentives for businesses to boost investment. Tokyo estimates that the stimulus will boost Japan's economy by 2% and create 600,000 jobs.

Japan's economy has suffered a dip in exports amid slowing global demand and subdued domestic consumption.

The world's third-largest economy is currently in a recession, having contracted for two quarters in a row.

China - China has reported better-than-expected trade data, adding to optimism that growth in the world's second-largest economy may be rebounding.

Exports, a key driver of expansion, rose 14.1% in December from a year earlier. Most analysts had forecast a figure closer to 4%. Imports also rose, climbing 6% and indicating stronger domestic demand.

There have been worries about the state of China's economy after growth fell to a three-year low.,

"The export data especially is very good news as it shows that external demand for Chinese products is picking up," said Dariusz Kowalczyk, a senior economist at Credit Agricole-CIB in Hong Kong.

Emerging Markets - Emerging-market equity funds recorded their biggest-ever weekly inflows as the U.S. budget deal and China’s economic rebound fuelled investor demand for riskier assets.

The funds attracted a net $7.4bn in the week ended Jan. 9 and assets under management reached an all-time high of $781bn, according to Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley in Hong Kong. Developing-nation debt funds lured their second-largest inflows of $2bn, Garner said, citing data compiled by research firm EPFR Global.

Mutual fund purchases have helped spur a 22% rebound in the benchmark MSCI Emerging Markets Index from last year’s low on June 4. While big inflows tend to foreshadow short-term market declines, Garner said the combination of global monetary stimulus, accelerating economic growth and an improving outlook for earnings will support share prices. His year-end target for the MSCI index is 14% higher than Thursday’s close.

Greece - The latest unemployment rate for Greece has risen to 26.8%, the highest figure recorded in the European Union.

The official Greek data for October sees Greece overtake Spain as the country with the highest unemployment rate in Europe.

So far, the European Central Bank, International Monetary Fund, and the European Commission have pledged a total of 240bn euros ($315bn) in rescue loans, of which Greece has received more than two thirds.

It is thought that the unemployment rate will move higher still, following the introduction of further austerity measures in 2013.

Commodities – U.S. oil production will jump by a quarter by 2014 to its highest level in 26 years, figures suggest. This is mainly because of the discovery of vast reserves of shale oil.

The Energy Information Administration (EIA) in the U.S. also forecast average global oil prices would fall from $112 a barrel in 2012 to $99 in 2014.

It said U.S. oil imports would fall by a quarter between 2012 and 2014, because of rising domestic production and the discovery of shale gas.

Many have hailed shale gas as the saviour of the U.S. energy market. In fact, the International Energy Agency (IEA) has said it expects the U.S. to overtake Russia as the world's biggest gas producer by 2015 and to become "all but self-sufficient" in its energy needs by about 2035.

Spotlight on: Seeking out BRIC market growth opportunities

The factors underpinning the rapid growth of the so-called BRIC nations may weaken further in the coming years, recent research by Capital Economics suggests.

In its Emerging Markets Economic Outlook report, the macroeconomic forecasting consultancy highlighted a number of medium-term challenges facing Brazil, Russia, India and China.

The near-term outlook for emerging markets as a whole has improved in recent months, the group said. Capital Economics’ emerging markets GDP tracker suggest that growth bottomed out in the fourth quarter of 2012 and most emerging nations started 2013 with positive momentum.

However, the consultancy added that growth in the BRICs is likely to slow over the coming five years, with part of this slowdown being the result of permanent rather than temporary factors.

China’s recovery is expected to peter out later in 2013 and the country’s new leadership has yet to announce any concrete steps to move the world’s second largest economy away from its reliance on investment spending and towards domestic demand, the report noted.

In India, policymakers also face the challenge of pushing through reforms that will allow the economy to maintain its strong growth rates of the past. “The package of reforms announced in late 2012 has raised hopes of a new approach, but these look likely to founder in the face of political opposition,” Capital Economics said.

The consultancy argued that Brazil is approaching the limits of its consumption-led growth model, adding: “Growth over the next decade will need to be driven more by investment, but this will require difficult structural reforms.”

Capital Economics also said the above risk applies to Russia. Meanwhile, resources-rich Brazil and Russia may both find that commodity prices fail to prop up their spending as they have done over the past ten years.

However, the forecaster said some emerging markets outside of the main names could expect to see healthy growth rates in the years ahead.

“While the BRICs look set to slow, the outlook for other emerging markets is improving,” the report concluded.

“In Latin America, we think Mexico will outperform Brazil over the next five years. In Asia, we are bullish on the Philippines and Indonesia. Finally, in Africa, while South Africa is likely to struggle, we are upbeat on the prospects for Nigeria, Kenya and Ghana.”

Of course, identifying the markets that are predicted to deliver outperformance for BRIC markets in the future is the role of the fund manager. In turn, however, identifying the fund manager that is best positioned and able to act upon their convictions is the role of the end-client’s advisor.

Economic Summary for the week ended 4th Jan 2013

U.S. - U.S. politicians have been urged to do more to resolve the budget by the two largest credit rating agencies.

The warning comes despite the U.S. narrowly agreeing a deal to stave off the U.S. "fiscal cliff" of spending cuts and tax rises worth $600bn.

Rating agency Moody's said lawmakers would need to take additional steps to lower the ballooning budget deficit. Rival agency Standard and Poor's added: "Washington's governance and policymaking had become less stable."

The deficit has topped $1tn in each of the past four years. Moody's said that if it failed to cut the deficit, the government's top credit rating could be at risk.

The fiscal cliff measures - $536bn of tax rises and $109bn of spending cuts - had been due to come into effect at midnight on Monday, but Congress agreed a deal to avoid the worst of the measures late on Tuesday.

The total amount of debt that the government can borrow is currently set at $16.4tn and the government is set to run out of money in the next two months if this limit is not raised by Congress.

Emerging Markets - Emerging-market stocks rose for a ninth day on Thursday, the longest gaining stretch in more than 14 months, as data showing expansion in Chinese service industries and U.S. manufacturing bolstered confidence in the global economy.

The MSCI Emerging Markets Index added 0.1% on Thursday, having climbed 2.1% to a 10-month high on Wednesday. Commodities and stocks worldwide rallied on Wednesday, following U.S. lawmakers passing a bill that undone tax increases for most households.

“Economic indicators in China and the U.S. are raising optimism that the global economy is on a steady path of recovery,” said Budsares Yunniyom, a fund manager at Asset Plus Fund Management Co. in Bangkok, which oversees about $800mn of assets. “That may support further gains in emerging-market equities as most investors are willing to raise holdings in risky assets.”

Latin America - The two biggest financial markets in Latin America swapped their long-held positions in 2012, with Mexico surging ahead and Brazil lagging, catching many U.S. fund investors in the region off guard.

Stocks in Brazil, which had benefited over the past decade from a fast-growing consumer class and Chinese purchase of commodities, suffered as the government increased regulation of key sectors of the economy and Asian demand waned. In the third quarter of 2012, Brazil's economy grew only 0.9% from a year earlier, while Mexican growth was 3.3%.

Mexico's fortunes rose partly because of its closer ties to modest U.S. growth and hopes that the new Mexican government will undertake major reforms that could boost the economy.

"This time last year most folks were quite positive on Brazil and it was quite a crowded trade," said Adam Kutas, manager of Fidelity's Latin America fund. "Mexico had underperformed in the region for eight or 10 years, so it was under-owned."

China - The service sector in China has expanded at its fastest pace for four months, adding to evidence that an economic rebound might be sustained.

The non-manufacturing purchasing managers' index (PMI) rose to 56.1 in December from 55.6 in November. A reading above 50 indicates expansion.

The data also showed that the construction sector had seen strong growth in new orders. Singapore - Singapore's economy has averted a technical recession, as it reported better-than-expected growth data for the fourth quarter.

The economy expanded 1.1% in the October to December period, from a year earlier, advance estimates showed.

On a quarter-on-quarter basis, the economy grew 1.8%. That is up from a 6.3% contraction in the third quarter.

Growth was boosted by a rebound in the services industries, which include retail, finance and insurance sectors. For the full year, the government said it estimates the economy to have grown by 1.2%, that is lower than its forecast of around 1.5% annual growth for 2012.

India - Global fund holdings of Indian debt jumped 26% last year to a record high, leading Schroder Investment Management to suggest that Asia’s highest-yielding investment-grade bonds are worth buying in 2013.

International funds poured $6.9bn into local-currency government and company securities, boosting ownership to $32.94bn, according to exchange data. Investments touched an all-time high of $32.99bn on Jan. 1 and have jumped more than fourfold since 2009. A December offering of bond-purchase quotas to foreigners by the market regulator was oversubscribed.

Schroder sees “good” returns in 2013 after Prime Minister Manmohan Singh unveiled India’s most-aggressive policy changes in a decade to improve public finances and spur growth. Ten-year bonds in India yield 7.99%, compared with 3.56% in China and 5.14% in Indonesia.

Germany - Chancellor Angela Merkel has warned that the German economic climate in 2013 will be "even more difficult".

In her new year message, she also cautioned that the eurozone debt crisis was far from over. However, she did say that reforms designed to address the roots of the problem were beginning to bear fruit.

Germany, Europe's largest economy, has been the paymaster in the eurozone crisis, a move unpopular with many German voters and some conservative MPs in Mrs Merkel's coalition.

Analysts say most Germans remain wary of eurozone bailouts but generally approve of Mrs Merkel's handling of the crisis. In October, the German government slashed its forecast for economic output in 2013 to 1.0%, compared to 1.6% previously anticipated.

Spotlight on: Fiscal cliff resolution.....?

Nouriel Roubini, an American economist also known as ‘Doctor Doom’ following his anticipation of the collapse of the U.S. housing market and the worldwide recession which started in 2008 and ended in 2009, has warned that the market euphoria surrounding the U.S. fiscal cliff deal is unsustainable, arguing the longer-term outlook for the world’s biggest economy remains "bleak".

Writing for the Financial Times, the prize-winning economist described the U.S. deal struck by the Democrats and Republicans as "mini" and "no victory".

With U.S. policymakers stopping short of including spending cuts in the deal, another crisis is around the corner, stated Roubini.

"If no action is taken by March 1, $110bn of spending cuts will commence, and at about the same time, the U.S. will hit its statutory debt limit, known colloquially as the debt ceiling," he said.

"Later in 2013, a bigger debate on medium-term fiscal consolidation will begin. This will lead to another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it."

Roubini is even more pessimistic about the U.S.' longer term fiscal outlook, arguing middle class citizens should pay higher taxes to support a stronger economy.

He said the fiscal cliff deal will translate into a 1.2% drag on GDP this year, which will push the U.S. economy dangerously close towards another recession, given that growth is currently running at around 2%.

"The longer-term picture is bleaker still. The reality is that America is yet to wake up to the full extent of its fiscal nightmare," he said.

"Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich.

"A deal that extends unsustainable tax cuts for 98% of Americans is therefore a victory that will ultimately end in defeat for Mr Obama." Roubini said.

Economic Summary for the week ended 20th Dec 2012

China - The World Bank has raised its growth forecast for China, saying stimulus measures and approval of infrastructure projects will help boost growth.

It added that the pick-up in factory output and investment "suggested that China's economy was bottoming out". The bank said it now expects China's economy to grow by 8.4% in 2013, up from its earlier projection of 8.1%.

A slowdown in China's growth in recent months had prompted policymakers to announce various stimulus measures.

The bank also raised its forecast for the developing East Asia region, excluding China. The grouping, which includes Thailand, Philippines, Indonesia and Burma, is now projected to grow 5.7% in 2013, up from the previous forecast of 5.5%.

The bank said that the region was likely to benefit from Thailand's recovery from last year's floods and strong growth in the Philippines.

Outlook - With less than two weeks left in 2012 a recent survey suggests that half of people around the world think the global economy will improve in 2013 and many plan to ring in the New Year with family and friends and improve their finances and health.

The Ipsos poll released on Tuesday revealed that Indians, Brazilians and Indonesians were the most optimistic that the economy will improve next year, with more than three quarters having a positive outlook.

But less than a third of Belgians, Spaniards, French, Poles and Italians were confident the global economy will get better.

"There is a great amount of optimism for the future," said Keren Gottfried, research manager at Ipsos Public Affairs, adding that the number had jumped 8% since last year.

And while many still had doubts about the world economy, 80% of the 18,500 people questioned in 24 countries for the survey believed 2013 would be a better year for them personally.

Europe - The E.U. and Singapore have agreed a free-trade agreement (FTA), the second such deal between the 27-nation bloc and a major Asian trading partner.

Last year E.U./Singapore trade was worth approximately USD97bn.

Singapore is the second largest Asian investor in the E.U., after Japan. The E.U. Commission says the deal, not yet signed by politicians, will help E.U. exports of cars and financial services. The E.U. is Singapore's second biggest trade partner after neighbouring Malaysia. The plan is to initial the FTA in early 2013.

Europe - European stocks climbed to their highest level in 19 months on Wednesday, as German business confidence rose more than forecast and optimism mounted that U.S. policy makers will reach an agreement on next year’s budget (so-called ‘fiscal cliff’ discussions).

The EuroStoxx 600 index climbed 0.5%. The equity benchmark advanced to its highest level since May 2011 after Standard & Poor’s upgraded Greece’s debt. The gauge has rallied 15% this year as the European Central Bank (ECB) announced an unlimited bond-buying plan and the Federal Reserve began a third round of asset purchases.

“The market is still focused on the fiscal-cliff talks in the U.S., in which investors seem to expect an agreement relatively soon,” said John Plassard, vice president at Mirabaud Securities LLP in Geneva. “News such as the upgrade of Greece’s credit rating is positive, albeit not a big surprise, helping to continue a year-end rally. Sentiment at the beginning of 2013 will be cautious as we face some political risk.”

Spain - Bad loans as a proportion of total lending at Spanish banks climbed to a record 11.23% in October, as the country’s economic slump led more companies and homeowners to miss credit payments.

The proportion rose from 10.71% in September as EUR7.4bn of loans defaulted in the month, to take the total of doubtful credit in the banking system to EUR189.6bn, the Bank of Spain said.

Spain’s economic slump, now in its fifth year, continues to drive defaults to record highs as lenders report rising impairments of corporate, home and consumer loans as well as those linked to real estate. Doubts about the ability of Spain’s weaker lenders to withstand mounting impairments of loans linked to real estate helped push the country to seek a European bailout for its banking system in June.

“It’s clear that these levels of bad loans are going to keep rising,” said Juan Pablo Lopez, an analyst at Espirito Santo Investment Bank. “The flows of entries into default are still very high.”

Greece - Standard & Poor's has increased its rating of Greece's sovereign debt by six notches, following efforts by its eurozone neighbours to keep it in the currency union.

The ratings agency said there has been "strong determination" within the eurozone to help Greece remain a member state. S&P has increased Greece's rating from 'selective default' to 'B-minus'.

The agency also praised the continuing efforts by Greece's government to cut its spending. Greece is currently receiving the second of two bailouts.

Spotlight on: Current fund manager sentiment

More investors than ever say they are bullish about China’s economic outlook, and more favour European rather than U.S. stocks for the first time in two years, a Bank of America monthly survey showed.

67% of money managers, who together oversee USD503bn, predicted that China’s economy will grow at a faster rate next year, the highest reading since the survey data started in 2003. Some 7% hold more European stocks than appear in benchmarks, the poll showed.

“Investor anxiety has been successfully sedated by central-bank liquidity policies in recent months,” Michael Hartnett, chief investment strategist at Bank of America’s Merrill Lynch unit, wrote. “Risk appetites are higher and hopes for economic activity have picked up, especially for Chinese growth.”

Optimism that the world’s second-largest economy will accelerate may help to offset concern that potential budget cuts and tax increases in the U.S. will curb global growth. A survey showed China’s manufacturing industry may expand for a second month in December, underscoring optimism the economy will recover following a seven-quarter slowdown.

40% of respondents said the global economy will improve, the highest reading in 22 months, while a net 11% said profits will increase, the most bullish result in 20 months.

U.S. Budget

The poll showed 47% of money managers rated America’s budget outlook as their top concern, compared with 22% who cited the euro area’s debt crisis. U.S. President Barack Obama and House Speaker John Boehner are trying to reach an agreement to prevent more than USD600bn in tax increases and spending cuts from coming into force in January.

Even as investors became more sanguine about global growth, allocations to equities remained unchanged from November, BofA said. Hedge funds were an exception, with net investment in shares jumping to 45%, the highest since August 2006.

“While bullish rhetorically, the lack of follow through in actual positioning suggests moderate conviction at best,” BofA said in the report to investors.

Average cash levels fell to 4.1% from 4.2% in November, BofA said. A net 41% said they hold fewer bonds than benchmarked, the lowest in eight months, whilst 5% said they hold more commodities than appear in indexes.

Overweight Europe

The share of respondents who said they are overweight in European equities) meaning they hold more of the region’s shares than are represented in global benchmarks), rose from 5% last month, the survey showed. Those saying they are overweight the U.S. fell to 5% from 11%, with the country falling behind Europe in investors’ favour for the first time since November 2010.

Investors remained underweight on Japan and the U.K., the survey showed. A majority are now under-invested in energy companies, for the first time since January 2009, BofA said.

A record high net 64% of respondents said companies are not investing enough, BofA said. A net 45% of investors now prefer companies to use idle cash to increase capital spending, the highest reading in 20 months, instead of paying back debt or returning it to shareholders.

Economic Summary for the week ended 14th Dec 2012

China - China's economic growth rate may be gathering pace again, as the government released strong industrial output and retail sales figures.

Industrial production rose by 10.1% in November, compared with a year earlier, according to the official data from the National Bureau of Statistics. This was better than expected, and the strongest performance since March.

At the same time, China's retail sales increased by 14.9%. This was also the best showing for eight months.

"The Chinese economy is in the sweet spot now with rebounding GDP growth, rebounding earning growth and low inflation," said Lu Ting, China economist at Bank of America Merrill Lynch.

U.S. - Christine Lagarde has urged U.S. leaders to reach a deal to avoid the "fiscal cliff", warning that the uncertainty is damaging the global economy.

The head of the International Monetary Fund said that the U.S. had a duty "to try to remove uncertainty and doubt as quickly as possible".

The fiscal cliff refers to U.S. tax rises and spending cuts set to automatically come into force in January.

She added: "The U.S. is about 20% of the global economy. If the U.S. suffers as a result of the fiscal cliff, a complete wiping out of its growth, it is going to have repercussions around the world. If the U.S. economy has 2% less growth there will be 1% less growth in Mexico and China… there will be ripple effects outside of the U.S."

U.S. – Meanwhile, the U.S. Federal Reserve has said it plans to keep interest rates at close to zero at least until the U.S. unemployment rate falls below 6.5%.

The Fed previously had a date-driven target, rather than a data-driven one.

The Fed also said it will continue to buy $85bn a month of government bonds and mortgage-backed securities to try to boost the economy.

But changes in the way it does this will mean more money is pumped into the economy.

"The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions," the Fed said in a statement.

Emerging Markets - Emerging-market stocks rose for a seventh day on Thursday, led by technology companies, and currencies strengthened after the U.S. Federal Reserve expanded its bond- buying program and the outlook for display makers improved.

“There is optimism that a global economic recovery will boost consumer demand and that is driving technology stocks higher,” Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India) Pvt. in Mumbai, said. “Emerging-market equities have run up quite a bit now and investors will keenly watch the U.S. fiscal-cliff negotiations and corporate performance in the upcoming earnings season for more cues.”

The MSCI Emerging Markets Index has advanced 14% this year, compared with a 13% increase in the MSCI World Index.

Europe - The European Union reached a landmark deal on Thursday to make the European Central Bank the bloc's top banking supervisor, giving E.U. leaders greater confidence that they are gaining the upper hand over the euro zone's debt crisis.

E.U. finance ministers forged a deal on the single supervisor in the early hours of Thursday after lengthy talks. Leaders will give their stamp of approval at a summit starting later in the day, their last of 2012, and also discuss closer fiscal ties for their troubled currency area.

After a year of crisis management, during which Greece had a close brush with the euro zone exit, getting an agreement on the first stage of a banking union is a victory for the E.U. and represents a bold step towards pooling sovereignty.

Japan – Revised growth figures for Japan have suggested that the world's third-largest economy is in recession.

The economy shrank by 0.9% in the July-September quarter, while the April-June quarter was revised from 0.1% growth to show a contraction of 0.03%.

That means that Japan is technically in recession, having contracted for two quarters in a row.

Spotlight on: Equity outlook in to 2013

Dominic Rossi, chief investment officer of equities at Fidelity, presents the case for and against a strong run for the asset class next year, and highlights the sectors and regions he expects to shine.

Next year will be another challenging and event-driven one for equity investors to negotiate. Markets face a number of risks with binary outcomes, not least the imminent fiscal cliff facing the U.S. economy.

While the prospects for earnings growth in most developed equity markets are now more modest, a positive case can be made for a re-rating of equities, yet this is dependent on progress being made against some powerful headwinds.

The positive case for equities rests on three supportive factors:

Equity valuations are reasonable relative to history, with price/earnings (PE) ratios of around 13 to 14 times trailing 12-month earnings. While this is not extremely low, the relative attractions of equities are enhanced when valuations are compared with sovereign and investment grade bonds.

We have seen sustained outflows from equities in the last few years, so much so that institutional levels of equity ownership are now at 30-year lows. Equities are an unloved asset class and there is growing scope for a reversal of this trend.

Volatility has subsided. I have always believed a reduction in volatility is a prerequisite to any re-rating in equities. Encouragingly, the VIX (a broad index measure of market volatility) has fallen back to around 15%, having remained below 20% since July.

While these factors make a re-rating possible, there are some considerable hurdles to be overcome that could prevent it. In my view, there are three key risks facing equity markets in 2013:

Lack of a resolution to the U.S. fiscal cliff would throw the U.S. and global economies into recession. The likelihood of going over the cliff, and detracting around 4% from GDP, is being underestimated given the ideological divide in Congress.

The economic, sovereign and banking crisis in Europe remains unresolved despite central bank promises having had a favourable impact. With politics in peripheral countries becoming radicalised, there is the potential for more flare-ups. Unfavourable debt dynamics and poor economic fundamentals suggest further deterioration is likely.

Geopolitics, particularly in the Middle East, could pose a significant and unpredictable risk in 2013, this being the year that the confrontation between Israel and Iran over nuclear facilities is likely to come to a head.

So what can investors do? With government bonds failing to provide a store of value after inflation, investors will continue to search for yield, particularly in short-duration assets.

In this respect, equity income remains an attractive story given the dividend yields available on equities compared with government bonds.

In Europe, investors can expect yields of around 3% to 4%, except in financials where many dividends have been scrapped.

Balance sheets are healthy, cash-flow is solid and payout ratios are low with scope to grow. I think we will see earnings and dividend growth of 4% to 5% in 2013, particularly at large high-quality companies.

So, if you combine 3% to 4% dividends and estimated growth of 4% to 5%, we can generate attractive total returns of 7% to 8%, which should support further flows into equity income funds.

In terms of sectors, I expect the leadership we have seen over the last year to continue. Quality will remain a powerful theme and stocks with high returns on invested capital will continue to attract a premium.

I think selected healthcare, technology and consumer stocks remain attractive. There are high-quality stocks available with strong franchises benefiting from structural tailwinds; many of these are also returning cash to shareholders, such as Nestlé, Unilever, and Sanofi.

With these strong multinational companies, investors can be fairly confident that they will get their money back and in the meantime, they receive a higher income than they would from investing in sovereign bonds. Some pharmaceutical companies are on single-digit PE ratios despite having among the highest returns on capital.

Among technology companies too, there is good scope for dividend growth: some of the large technology stocks have matured into stable, lower-growth businesses that offer attractive total returns.

While the estimated 3.5% yield on Microsoft may seem a little low, this is covered about four times by cash. This means that it has the potential to grow dividends in the future significantly ahead of earnings.

The Chinese economy is well placed to have a rebound in 2013; inflation has been brought under control and the leadership transition is now out of the way, suggesting policy can be accommodative. Investors appear to have discounted economic growth rates in the 6% to 8% range and the market should perform relatively better now that these headwinds have passed.

In developed markets, the U.S. looks attractive if the fiscal cliff can be successfully navigated. The housing market is recovering, which is a key bellwether for the broader economy, and consumer confidence is also picking up.

In energy, the U.S. could become the largest producer of both gas and oil thanks to the exploitation of its shale reserves. But it is the broader effect of cheap energy costs on the economy that is particularly supportive; this will give the U.S. a competitive advantage among advanced economies and play a central role in the renaissance of U.S. manufacturing.

Economic Summary for the week ended 4th Dec 2012

U.S. – U.S. output per worker grew by its fastest rate since 2010 in the third quarter of this year, according to official data. The Labour Department said that productivity among non-farm workers rose by an annual rate of 2.9% in the third quarter of this year.

The rise suggests companies are finding ways of getting employees to work harder, rather than hiring extra staff.

Consumer spending remains weak in the U.S. and the output is being driven by companies building up stocks.

India - India's government has won a crucial vote in parliament on its controversial plans to open the retail sector to foreign competition.

After a two-day heated debate, MPs in the lower house approved the plan to allow foreign investment of up to 51% in multi-brand retail.

Parliament, which was deadlocked over the issue, resumed business this week after the government agreed to a vote.

It is hoped that the agreement will help the government push ahead with further economic reforms.

Argentina - Fitch has downgraded the credit rating of Argentina and admitted the country will probably default.

The ratings agency has cut its long-term ratings for Argentina by five notches from B to CC and its short term rating from B to C.

Argentina is appealing against a U.S. ruling ordering it to pay $1.2bn to foreign creditors holding bonds that it defaulted on in 2001. The government has until 15 December to reimburse the hedge funds, which declined two previous debt swaps. Argentina defaulted on $100bn of bonds in 2001, a record amount at the time.

Companies - Apple Inc. plans to spend more than $100mn next year on building Mac computers in the U.S., shifting a small portion of manufacturing away from China, the country that has handled assembly of its products for years.

“Next year we’re going to bring some production to the U.S.,” Chief Executive Officer Tim Cook said in an interview. “This doesn’t mean that Apple will do it ourselves, but we’ll be working with people and we’ll be investing our money.”

Apple, which until the late 1990s made and assembled many products in the U.S., moved manufacturing to Asia to take advantage of the region’s lower labor costs. The planned investment makes up a fraction of Apple’s $121.3bn in cash, and probably won’t significantly affect profit margins. Still, it reflects pressure on companies to create even a modest number of domestic jobs as the unemployment rate hovers near 8% and the economy rebounds from the recession that ended in 2009.

Europe - European stock markets hit fresh 2012 highs on Thursday and some traders eyed more rallies after equity indexes broke key resistance levels.

Technical analysts said the fact that the Euro STOXX had at one stage managed to clear the 2,610 level pointed to more potential rallies, provided it could close above that level.

"The potential for this symbolic formation which has been building for about a year now extends out to next spring, and could see the index climbing towards the 3,000 points zone, or 15% plus upside," said Societe Generale chartist Loic De Galzain.

Greece - Greece is perceived to have the most corrupt public sector of all 27 EU countries, a new global survey reveals.

Worldwide, Denmark, Finland and New Zealand were seen as the least corrupt nations, while Afghanistan, North Korea and Somalia were perceived to be the most corrupt.

Transparency International's 2012 Corruption Perceptions Index gathered views on 176 countries worldwide.

Greece's global ranking fell from 80th in 2011 to 94th in 2012, reflecting the country's continuing economic turmoil and widespread tax evasion.

"Governments need to integrate anti-corruption actions into all public decision-making", said Huguette Labelle, chair of Transparency International (TI), a body set up in 1993 to expose and tackle countrywide corruption.

Germany - German factory orders surged almost four times as much as economists forecast in October, driven by foreign demand.

Orders, adjusted for seasonal swings and inflation, jumped 3.9% from September, the Economy Ministry in Berlin said. It revised September’s drop to 2.4% from 3.3%. The increase in October is the biggest since January 2011.

“The music is playing outside the euro region, where the label ‘Made in Germany’ is enjoying everlasting popularity,” said Mario Gruppe, an economist at NordLB in Hanover. “That’s good news for the economic outlook. We’re in for a cold winter but not a recession.”

Spotlight on: Commodity views in to 2013

Gold, silver and corn will outperform other raw materials next year as a weaker dollar and rising investor demand bolster precious metals while supply curbs aid grains, Morgan Stanley said this week, listing top picks for 2013.

Silver will track gold, which is poised to gain on low real interest rates, buying by central banks and geopolitical uncertainty, analysts including Peter Richardson and Hussein Allidina wrote in a report, reiterating an October call. Corn and soybeans should benefit from harvest delays in South America, they said. The bank is bearish on aluminum, sugar, nickel and uranium as supplies are set to outpace demand.

Commodities as tracked by the Standard & Poor’s GSCI Spot Index are down 0.4% this year, led by declines in coffee, cotton and sugar. The gauge almost doubled in the three years to 2011 as central banks and governments around the world took action to boost their economies dented by the global financial crisis in 2008. Morgan Stanley joins Goldman Sachs Group in predicting the so-called super-cycle isn’t over.

“Higher prices in recent years have brought both a supply and demand response, bringing many to call for the end” of the super-cycle, they wrote. “We view this as too simplistic. Commodities are cyclical but the elasticity of supply and demand, as well as the length of the cycle, vary significantly.” Gold may average $1,853 an ounce in 2013, while silver may be $35 an ounce, Morgan Stanley said. That compares with gold’s average of $1,668 so far this year and $31.1542 for silver.

Overweight Call

Goldman reiterated an overweight call on commodities, on Wednesday, forecasting prices will return 7% in 12 months, Jeffrey Currie, head of commodity research, wrote in a report.

“With commodity-supply constraints easing, Chinese growth slowing and producer-company returns normalizing, it is tempting to say the super-cycle is over”, Currie wrote. “Current developments are simply the next phase of a commodity-investment cycle that began in the late 1990s. We therefore view the current transition as a renaissance, rather than an end.”

Goldman, backing crude, corn and copper, expects gold to peak in 2013 on a recovery in the U.S. economy. In contrast, Morgan Stanley called for higher prices on low nominal and negative real interest rates, as well as risks in the Middle East and central-bank buying. So-called negative real interest rates describe savings rates that are lower than inflation.

Central Banks

Spot gold, up 8% in 2012, is rallying for a 12th year as central banks join investors buying bullion to diversify assets. South Korea, Brazil and Russia are among those adding to gold reserves this year. Holdings in exchange-traded products are at a record, data compiled by Bloomberg show.