Growth: Greece, Germany and the G20

<p>Greece’s New Democracy party might have got the majority of votes but it doesn’t guarantee the formation of a smooth, effective government. The process to […]</p>

Greece’s New Democracy party might have got the majority of votes but it doesn’t guarantee the formation of a smooth, effective government. The process to achieve that, or at least attempt to achieve, is now under way and the outcome might be as certain as the events leading into the election. A failure to form government could see another election called, something the market does not contemplate at the moment. Let’s assume the New Democracy party can overcome the current reluctance of third placed Panhellenic Socialist Movement, and together form government. All would seem well wouldn’t it?

Perhaps so, but on face value only. Something else has been keeping us interested over the past few weeks – the growing isolation of Germany throughout this whole process. The French and the Italians are forming an alliance which aims to bring growth aspirations forward and relax the German lead deep austerity which is now becoming more and more unpopular.

The European electorate is driving apart policymakers and forcing them to form new alliances. The G20 statement reinforces the growing German isolation – US President Obama for example has welcomed European’s willingness to move forward quickly to seek growth and investment. The word austerity is being pushed further back onto the backburner.

It’s unclear how that growth will be achieved but it does represent a major shift in the way Europe has been managed. Germany also knows that it cannot afford to see its major trading partners and the peripherals fall further into crisis, so it might warm to the growth push as its isolation grows – even though very reluctantly.

The net result will be positive for Chinese exports, or perhaps less negative than has been the case over the past year. The solvency of Europe will be deferred for a later day of reckoning. Should the emerging growth push coincide with the US Fed seeking to boost easing going into this year’s election, then the stage would be set for a nice bounce in commodities.

The bottom line for Australian investors is that resources and energy exposure is key to the way the ASX200 behaves. The underperformance over the past year has been a direct impact of the large and statistically significant resource names being weighed down by global sentiment.

We think the high A$ is only a side issue. We see copper testing US$3.60-65/lb over the next few months where it might find some resistance, but that should be high enough to see BHP recover to around $35 and drag the rest of the materials index with it. We see the current rally in the Euro fizzling out with EUR/USD testing 1.20 by the end of the year.

More on the Middle East
On Monday we spoke about the death in the Saudi Royal Family and the sensitive transition process in place. While most of the attention, in energy markets and among traders in the Middle East has centered on the Libyan war and Iranian tensions, we think the Gulf countries internal politics is more meaningful to supply concerns.

On the same day we reported the Saudi passing, Kuwait’s Emir suspended the country’s parliament for a month – a day before the interior minister was due to appear before parliament for a contentious questioning session. The move is part of a long running rift between elected parliamentarians and the ruling elite. Kuwait is important to oil markets, not just because of its proximity to Iran and the Strait of Hormuz but also due to the fact that it has the world’s fifth largest oil reserves – currently pumping 2.9m barrels of oil a day.

The rift in Kuwait and sensitive transition of power in Saudi Arabia means the two countries represent around 15% of total global oil exports. The two issues are worth watching and definitely don’t get their fair share of attention compared to other regional issues like Syria or Iran.

Putting this into context, Iran alone only represents around 3.5% of the total global export share. We don’t suspect any foul play in Kuwait or Saudi Arabia around export capacity but with Brent crude continuing to weaken around US$95 per barrel, traders should keep the developments on their watchlist. Kuwait was the subject of an invasion from Iraq which prompted the 1990 oil price shock. Prices went from US$21 per barrel at the end of July 1990 to a peak of US$46 per barrel by mid October 1990.

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