Global Roundup - RBC Wealth Management

Coming up: International Securities
Transactions (Dec 17); Retail Sales (Dec 20);
Gross Domestic Product and Consumer Price
Index (Dec 21).
Europe
The banking agreement between EU fi nance
ministers is a meaningful deal in that it resolves
a long-held disagreement between Germany
and France over how far the ECB’s supervisory
powers should stretch. The ECB will have direct
oversight of banks with over €30 billion of assets
or balance sheets accounting for 20% or more
of national GDP, or around 200 banks. Smaller
banks, like Germany’s savings banks, will be
looked after by national supervisors, though the
ECB will have power to step in.
Key points, however, have been left
unaddressed. How exactly will the ECB be able
to override national supervisors of smaller
banks? What is the timing of this agreement
translating into direct recapitalisation of
troubled banks by the European Stability
Mechanism (the eurozone rescue fund)?
With this unclear, it is too soon to claim the
agreement is a game changer.
Moreover, and crucially, while the ECB will
now be in a position to identify problem banks
and demand action, the responsibility of
fi xing the problem remains with the member
states. A true banking union would include two
elements—a single resolution fund to clean
up failed banks and a single deposit-insurance
scheme to prevent bank runs. This is the only
way to break the vicious circle between weak
sovereigns and weak banks. The agreement is a
step in the right direction, but doesn’t address
the key issues.
In other news, Bank of Canada Governor Mark
Carney, who will take the helm of the Bank of
England (BoE) in June 2013, spoke in Toronto
on “Central Bank Policy Guidance.” According
to Carney, when conventional monetary policy
Global Roundup
70%
60%
50%
40%
30%
Source - IMF World Economic Outlook, October 2012, RBC Wealth
Management
Actual data for 1980-2011, IMF estimates for 2012- 2017. Advanced
Economies comprise the 35 most-developed nations.
targeting infl ation has been exhausted after a
long time of unprecedentedly low nominal rates,
other monetary tools should be explored.
Although at pains to explain that his comments
were generic and not aimed at any one economy
in particular, his speech was widely taken
to suggest that the BoE should abandon
infl ation targeting in favour of nominal GDP
targets. Nominal GDP targets are no holy
grail of monetary policy, however, as they may
overlook credit growth and, thus, may not be
consistent with fi nancial stability. Nevertheless,
Mr. Carney’s novel, thinking-out-of-the-box
approach should serve the Bank of England well
when he takes over next year.
Coming up: UK CPI (Dec 18); BoE minutes,
Germany IFO (Dec 19).
Asia Pacifi c
Share of World GDP 1980-2017
Developing economies are projected to account for
more than half of world GDP beyond 2012.
Advanced Economies
Other Economies
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Positive Chinese data and speculation about
state institutions buying back shares helped
the Shanghai Composite post its largest daily
gain in three years on Friday, rising by 4.3% to
2,150, the highest level since August 10. Trading
volume was double the average over the
previous 30 days.
November’s Chinese industrial output climbed
10% over the prior year, while retail sales grew
14.9%. Chinese exports increased 2.9% in
November, below the 9% forecast. However,
with 2012 almost over, Chinese exports have
risen by 7.3% year to date. The State Information
Centre, a leading Chinese government think
tank, forecasts exports and imports to rise by
8% and 7.8%, respectively, in 2013. HSBC’s
Flash December Manufacturing PMI for China
came in at 50.9, indicating modest expansion in
factory output. November’s 50.5 reading was the
fi rst time the index surpassed 50 in over a year.
These data points suggest Chinese economic
activity continues to stabilize and support our
view of China achieving 8.3% GDP growth in
2013.
Indonesia’s central bank maintained its reference
interest rate at 5.75%, a record low, for the 10th
straight meeting.
Mergers and acquisitions news in the Energy
sector dominated headlines. Chinese energy
companies’ interest in Canadian assets
continues. The Canadian government approved
CNOOC’s (0883.HK) $15.1B acquisition of Nexen
and Petroliam Nasional Bhd.’s $5.2B takeover
of Progress Energy Resources. Following the
decision, which outlined future limitations on
takeovers of Canadian energy fi rms by foreign
state-owned companies, PetroChina (0852.
HK) announced it intends to purchase $1.2B,
or 49.9%, of an Alberta-based shale formation
owned by Encana.
Coming up: China’s November property prices;
Chinese foreign direct investment growth
(expected -3.1%); Japan’s All Industry Activity
Index (expected 0.2% growth); Japanese general
election; Bank of Japan Target Rate (consensus:
unchanged at 0.1%).
4 GLOBAL INSIGHT WEEKLY – DECEMBER 14, 2012