Market Update: “Abenomics” Working

Week 13 - 17 May 2013

Japan´s economy expands at the fastest pace among G7 countries in first quarter, Eurozone still stuck in recession, Greek upgrade, Germany putting brakes on eurozone banking union.

Due to Whit Monday, JGAM will be closed Monday, 20 May.

Mr. Shinzo Abe was elected as prime minister of Japan less than five months ago. Today, Japan seems like a changed country. Since the election the stock market has risen 55% and GDP growth in first quarter was 0.9% or 3.5% in annualized terms. By flooding the economy with cash Mr. Abe has helped to push down the Japanese yen (JPY) helping manufacturers become more competitive. Even the Japanese consumers who have been in hibernation for years have woken up and begun to spend.

Wednesday the eurozone published its GDP figures. The economy in the eurozone as a whole declined by 0.2% in the first quarter compared with the last quarter of 2012 when it shrank 0.6%. According to Mr. Simon Tilford economist at the Centre for European Reform “it’s pretty shocking data.” The Italian and Spanish economies shrank 0.5% while France contracted 0.2% The German economy only grew by 0.1%. It was the sixth consecutive quarter of decline the longest record for the eurozone. The European Central Bank (ECB) cut interest rates at the latest meeting but said it is ready to act further if the situation warrants action. Fitch unexpectedly upgraded the Greek creditworthiness by one notch Tuesday with bond yields falling to just below 8%.

The link between banks and their sovereigns has increased dramatically since the start of the financial crisis. Banks today hold much more government bonds than before the crisis. In Spain, banks today hold euro (EUR) 288 billion of their government bonds and Italian banks hold EUR 389 billion of sovereign debt. The European Commission is due to present a plan for a single bank resolution agency and rescue fund the so called banking union. A single EU banking authority would centralize powers and this is what Germany and the German Finance Minister Mr. Wolfgang Schäuble questioned in an article in the Financial Times this Monday. According to Mr. Schäuble a single EU bailout fund and rescue fund would be untenable and “tampering with the rule of law” if pushed through without change to the EU treaty.

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