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Daily Agenda: Markets Focus on Elections in Japan and Greece

A Greek election looms over European debt markets; Japanese Prime Minister Shinzo Abe’s coalition wins at the polls.

In the lead-up to the first round of Greece’s snap election on Wednesday, investors are revisiting concerns that the euro zone’s most fragile economies may represent unforeseen tail risks for markets. Most political analysts anticipate that voting will go to a second round but nonetheless, gaining in the polls is populist party Syriza, headed by opposition leader Alexis Tsipras. The possibility of a victory by a party with a stated course that could drive the nation from the euro has suddenly cast doubt on the work that the European Central Bank has done to bring yields down sharply for sovereign debt issued by nations in peripheral Europe. This sudden recalibration of risk assumptions for the debt markets of Europe has understandably unsettled investors. The real risks may be overstated, however. In a report issued this morning, Rob Bate, head of the European product management group, equities at Barclays, noted that the Eurogroup has proposed an extension of two more months for the present European Financial Stability Facility program, which was due to expire by the end of this year. According to Bate, “The political outlook remains challenging for the coalition government, but we interpret these events as modestly positive for the Greek government because they give it a chance to conclude the program review and obtain the last tranche from the European Union and the International Monetary Fund.”

Abe prevails at the Japanese polls.Japanese Prime Minister Shinzo Abe’s decision to call an early election paid off for his Liberal Democratic Party with a sweeping victory that secured more than two thirds of the lower house of the Diet, Japan’s parliament. In a post-election press conference Abe indicated that the outcome was a clear message of support for Abenomics, his economic policies. Tankan Large Manufacturer confidence data released today underscored the challenges that lay ahead for his administration and the Bank of Japan, with a December reading that was lower than both the prior month and consensus forecasts.

PetSmart to be acquired. In the largest leveraged buyout of the year to date, pet supply retailer PetSmart announced over the weekend that it had agreed to be acquired by a group of private equity investors led by London–based firm BC Partners. Valued at $8.7 billion, the deal represents a victory for activist investment manager Jana Partners which, with a nearly 10 percent stake in the company, had been lobbying for a sale since summer. The company had been approached by at least one other consortium prior to accepting this offer.

Falling ruble more pain for Putin. The Russian ruble sank to new record lows again this morning despite last week’s rate increase by the Central Bank of Russia as sanctions and low oil prices continue to erode confidence in the nation’s economy. Reports surfaced last week that the country’s central bank has begun to accept corporate debt as collateral in an attempt to prop up the financial sector under strain due to capital outflows.

U.S. data on deck. Industrial production data for November due out today is forecast to rebound from a month-over-month contraction in October, with capacity utilization also expected to rise. Also on the schedule for the day’s releases are data from the Federal Reserve on October Treasury International Capital flows. Analysts forecast increased inflows, as flight-to-safety concerns among foreign investors outweigh the yield compression of recent months in U.S. Treasury markets.

Portfolio Perspective: Japanese Election Confirms Confidence in AbeTakuji Aida, Société Générale

Prime Minister Shinzo Abe’s coalition won a landslide victory, reflecting voter confidence in the leader’s policy to “strongly reflate the Japanese economy” and lending his government a strengthened mandate to push ahead with Abenomics. The coalition will now be on an even firmer footing and it will be even easier for the coalition to override any opposition.

In our view at Société Générale, there are two main pillars of Abenomics: One is to reflate the economy by pushing up nominal gross domestic product in the short term, and the other is to raise the potential growth rate in the long term via the growth strategy. As a result, we expect the real GDP growth rate to rise to 2.3 percent in fiscal year 2015 and to 2.1 percent in fiscal year 2016.

Takuji Aida is the chief economist at Société Générale Securities in Tokyo.

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