A quick overview of the weekend: The Chinese growth story is proceeding at a much stronger rate than previously expected and Chinese inflation levels seem well contained. The global equity markets have opened higher as the China’s surging growth has given a boost to the risk-on crowd. We are not big fans of the Chinese data releases. We are and will be suspect of official data from a country that seeks to harness what its populace can read. We also are not surprised by Chinese strength as the copper and energy and grain markets have been telling us for months that the Asian upturn is real. The slack demand in the the developed world has be more then replaced by emerging global boom.
The Turkish elections have added more power to tonight’s risk-on profile. The elections went better than expected for Turkish Prime Minster Recep Tayyip Erdogan and gave him even more latitude for reforming the Turkish polity to further meet European legal standards. Turkey’s equity and bond markets viewed this a positive as the consistency of reforms is what the markets are most desirous of pursuing.
There is also news from Basel that the Basel Committee on Banking Supervision agreed to the provisions of Basel III and though is means higher capital requirements, the new standards will not be phased in until 2013 to 2018, which gives the markets some breathing room. One of the more positive aspects will be based on what Bill White has called leaning into asset prices and acting in a countercyclical manner. As economies heat up capital ratios will rise for banks, thus acting to curtail out of control asset appreciation. This is a very good regulation and will act to head off future “irrational exuberance.” It will be awhile before its full effect is felt but it is an acknowledgement that BUBBLES need to be deflated in the incipient stages.
We will also be watching the DPJ election that takes place Tuesday in Japan. The intra-party battle between Ozawa and Kan can have a very big outcome for YEN valuation. If the old warhorse OZAWA were to gain the party leadership–and the Prime Minister post–the YEN will weaken in the initial anticipation that Ozawa would move to weaken the YEN. We will certainly report more about this as events unfold, but there were several stories written about the Japanese unhappiness in regards to the Chinese purchases of JGBs putting unwanted bid to the YEN. Some Japanese are even suggesting that China has ulterior motives and wishes to keep the YEN unduly strong to further its own trade advantage. This is merely “speculation,” but it certainly adds to the heat on possible intervention. We don’t know the outcome but pay attention as Ozawa ‘s victory could move him to action.