China Vs. Italy: From The Sublime To The Ridiculous

The dichotomy of fortunes between the Eurozone and the Far East was shown in sharp contrast over the weekend following a slew of strong data from China and the pantomime of Italian politics.

Chinese industrial output and retail sales both hit 8 month highs, further solidifying expectations that the soft landing in China has taken place and the beginning of 2013 will see a continual recovery in Chinese fortunes. Industrial output grew by 9.6% since November while retail sales were 14.9% higher than they were this time last year.

It seems that the loose monetary policy of Q2-Q3 has finally started to kick in, although the fact that this is government action and not that of the private sector does give us cause for concern going forward. Fiscal spending has come on strong from Beijing as well in the past few months, with infrastructure projects such as highways and railways being signed off readily; how able the private sector is able to pick up the slack will determine how strong the recovery is in 2013.

And so from the sublime to the ridiculous. Silvio Berlusconi, in his role of Chief Clown has climbed back into the cannon and is threatening to fire himself back into the “Big Top” that is Italian politics. Add in the fact that Mario Monti has announced plans to resign as soon as vital Budget legislation is passed which will likely be before the end of the year. This could bring in the prospect of an early election with Berlusconi angling for a campaign on an anti-Europe ticket.

For a market reaction to this you only have to look at the reaction in peripheral bond markets. Italian yields have gone ballistic and are at 3 week highs following the announcement. You can guarantee that every Berlusconi comment will see the yield only creep back towards 5% and above, despite the protection afforded by the ECB’s OMT program.

The euro has remained strong despite these developments with markets focusing on the good news from China and not the bad news from Italy. This morning’s poor French industrial and manufacturing production figures have tickled risk a little lower this morning with similar figures from Italy at 9am and GDP at 10am closely viewed.

Over the weekend the chatter around the Fiscal Cliff has been broadly positive with Obama and Boehner restarting talks yesterday. More and more Republicans seem to be disobeying the leadership and admitting that a tax increase on the wealthy finally needs to happen. Boehner has so far been intransigent on that fact