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Across the Spectrum - 5th January 2009

President-elect Barack Obama's economic stimulus package is to contain as much as USD 300 billion worth of tax cuts out of the total package of USD 775 billion, according to Democratic aides. Making such a high level of tax cuts within the package is likely to win approval from congressional Republicans. Senate Minority Leader Mitch McConnell said his party would support an immediate middle-class tax cut as part of any stimulus package. The plan would attempt to boost consumer demand by spending USD 140 billion on tax relief for individuals. By using the mechanism of tax relief rather than end of tax year rebates would get money to people immediately. Similar measures would be implemented for businesses. The remainder of the stimulus package would be used for spending on roads, bridges and other infrastructures to create or save 3 million jobs. Meanwhile the outgoing Bush administration has thrown a lifeline to the US's troubled car manufacturing industry, granting loans worth USD 13.4 billion to keep General Motors and Chrysler from bankruptcy for now.

Chinese economic growth, boosted by the government's 4 trillion yuan (USD 586 billion) stimulus package, will likely exceed 8% this year according to Citigroup's chief Asia Pacific economist, Huang Yiping. "Latest official statements confirm that 8% growth is now a political as well as economic policy priority." China needs growth of at least 8% to create enough jobs for the 20 million workers entering the urban workforce annually and ensure social stability. Strong growth in China compared with other economies worldwide will lead to gains in the yuan. The Chinese currency will appreciate more than 4% this year to 6.55 yuan per dollar, Huang said.

The Reserve Bank of India cut is benchmark overnight lending rate on 2 January to 5.5% from 6.5% and the government announced a second stimulus package to encourage economic growth and encourage overseas investors to boost holdings of local assets. The Indian finance ministry predicts the economy will expand as little as 7% in the year ending 31 March, the slowest pace since 2003.

The yen has fallen in the last three days against the euro on speculation that US fiscal stimulus and gains in global stocks will give investors confidence to buy higher yielding assets. The yen traded at 128.09 per euro in London earlier today down from 127.76 in New York late last Friday. It was at 92.00 versus the dollar from 92.42 on 2 January. The euro bought USD 1.3922 from USD 1.3921 and declined to 1.4969 Swiss francs from 1.5030. The pound fell to USD 1.4539 from USD 1.4548.

The dollar, yen and Swiss franc may weaken this year against 2008's biggest losers in the currency markets as the global economy starts to recover, the largest foreign-exchange strategists and investors say. The winners will be the Brazilian real, Indonesian rupiah and Polish zloty as investors return to higher-yielding assets, according to a Bloomberg news survey. The dollar may strengthen versus the euro and Japanese yen, while dropping against the pound. The Dollar Index that tracks the currency against six of the US's biggest trading partners fell 6% last month, the most since July 1985, after rising 18% from June to the end of November.

The steepest decline in crude prices on record may be setting up oil investors for a rally this year, if history is any guide. The so-called forward curve of futures contracts traded on the New York Mercantile Exchange suggests oil will rise 30% to USD 60.29 a barrel by December. The curve looks almost the same as 10 years ago, after Russia's default and the collapse of the Long-Term Capital Management LP hedge fund raised concerns that a global economic slowdown would reduce energy demand.

Fund managers have been making their predictions for 2009 with most in agreement that markets will rise during 2009. Predictions vary between fund managers but the most convincing fund managers are those who are realistic. Tim Steer, manager of New Star UK Alpha Fund, explains that some of the fall in share prices in 2008 was due to technical factors. "2008 was notable for a collapse in the link between company earnings and share price performance. Ordinarily, companies with good prospects that deliver solid earnings can expect their share price to rise. But in the latter half of 2008 many companies met or exceeded expectations but their share prices fell." He points out that de-leveraging has forced hedge fund managers, faced with redemptions, to sell their good stocks. "Normal investment analysis has therefore been thrown out of the window." But Steer believes the volatility will eventually end and "those investors who stick to their guns and continue to invest in companies with solid fundamentals will be proven right in the medium term, even if short-term de-leveraging creates erratic price movements."

Spotlight on Europe

Chancellor Angela Merkel's Social Democratic coalition partner has proposed a 40 billion euro (USD 56 billion) economic stimulus programme, as the ruling parties have narrowed their differences over steps to combat the recession. The SPD plans include infrastructure investment and tax relief for families, while rejecting calls by the Christian Social Union, Merkel's Bavarian allies, for direct income tax cuts.

Bank of England Governor Mervyn King may abandon his reticence to shore up the financial system as the UK economy moves further into recession. With the central bank set to cut the UK's key interest rate to the lowest in history this week, King may soon be forced to follow the US Federal Reserve and pursue other ways to inject money into the contracting UK economy. King's first course of action will probably be to expand the GBP 200 billion programme that allows banks to swap illiquid securities for government debt, economists say.

European investor confidence increased for the first time in seven months in January, rebounding from a record low on interest rate cuts and government measures to stimulate the economy. An index measuring euro-region sentiment rose to minus 34.4 from minus 42.3 in December, the steepest increase since August 2005, when the announcement of early German elections boosted morale, Germany-based Sentix research institute said today. "People realise that the measures put under way by ventral banks and governments will show some effect," Patrick Hussy, an economist at Sentix said. "The dynamic of the increase is promising and mustn't be underestimated. It came as a surprise but suggests the light at the end of the tunnel has appeared."

Slovakia has become the 16th member of Europe's monetary union and the first state from central Europe to make the switch to the euro. "The Slovak economy was able to fulfil all the conditions required to join the euro less than five years after the country entered the EU and this had required the political will and a very dynamic economy. Now its time to reap the benefits of sharing the same currency with 325 million Europeans in the 15-strong eurozone", said EU economy and monetary affairs commissioner Joaquin Almunia.The information set out herein has been obtained from various public sources and is published by way of information only. The Spectrum IFA Group can accept no liability of any sort in relation there to and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

 

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

 

This information is only provided as a guide and, if you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.

 


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