Poland

How effective have the sanctions been in moderating Iran’s behavior up to now? Current indications are not much, despite the damage inflicted on the country’s economy. On 9 January Iranian President Mahmoud Ahmadinejad said that Iran should establish more processing industries in the oil and gas sectors to reduce dependency on exports of crude oil and that the budget plan for the next Iranian year of 1392 (to start on 21 March) envisaged less dependence on crude oil revenues as the government intends to replace crude oil exports with oil derivatives to allow the nation’s economy to participate in the oil sector’s lucrative downstream industry.... A regime that has weathered more than three decades of tumult in its efforts to construct an Islamic society seems unlikely in an energy-starved world to ameliorate its behavior solely to please the dictates of Washington, Brussels, the UN and Canberra. And oh, on 14 September 2012 the United States exempted Belgium, Britain, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland, Spain, and Japan from complying with the sanctions for another 180 days, a list that was expanded on 8 December to include China, India, South Korea, Malaysia, Singapore, South Africa, Sri Lanka, Turkey, and Taiwan.

The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.

The upcoming week is comparatively less loaded with policy events, though the ongoing fiscal cliff negotiations in the US remain one of the key developments to follow. Important is also the FOMC meeting on Wednesday, where Goldman and everyone else now expect the Fed to increase their monthly asset purchase target under the QE3 program to $85bn per month, up from $45bn per month; this will keep the pace of asset purchases constant after the Operation Twist expires at the end of December, as Zero Hedge predicted the day QE3 was announced. There are is a handful of other central bank meetings in emerging economies (Russia, Indonesia, South-Korea, Philippines, Chile) although consensus expects no change to the base-rate in most cases. On the data front industrial production numbers for October will be released around the world including in the Euro-area, US and China. We also get the US retail sales number and December flash PMIs for the Euro-area and China.

“The euro has profound economic advantages and is the most powerful symbol of European integration,” said 11 EU foreign ministers. What were they smoking?

2012 was a tough year for some European government bond markets (Spain +100bps). Even with the rallies of the last few months, we remain dramatically wider than at the beginning and primary issuance is becoming increasingly reliant upon domestic bank reacharounds and/or ECB handouts. UBS expects 2013 to be similar in terms of gross supply to 2012 (around EUR 772bn) and aggregate net supply to fall slightly to EUR 208bn. However, these modest improvements overall (driven by drops in France, Germany, and Holland gross issuance) hide the biggest concern. Spain's gross (and net) issuance is likely to rise to EUR 124bn in 2013 (up 20% over 2012!) and Italy's net supply will rise notably next year (even with significant redemptions). Portugal, also faces a very significant increase in net supply in 2013.

"With EUR now at 1.2773 versus 1.2816 just before the announcement there is probably more downside till the kneejerk reaction is out of the way. But on the whole it seems likely that this more reflects an already existing reality than new information for the market so the downside should be relatively limited, and nothing that could not be cured by an aggressive Fed indication on balance sheet expansion."

The upcoming week comes less loaded with policy events. The only major one is the Eurogroup meeting on Monday, however EU officials have already confirmed that no decision on the next Greek aid tranche will be made before the Troika’s next report on Greece’s adherence to the bailout conditions. Greece has scheduled an auction for Tuesday in order to roll over €3.1 bn in T-bills expiring by the end of the week. Additionally, in the US, the President has invited leadership of both parties for a first round of talks on the fiscal cliff. The data calendars also look lighter, with the publication of the FOMC minutes on Wednesday, and US Philly Fed on Thursday.

"Pinball Wizard" (Bunds 1,38% -5; Spain 5,68% +4; Stoxx 2486 -1,8%; EUR 1,276)

Mr NeoCon USA...

While we have largely resumed ignoring the non-newsflow out of Europe, as it has reverted back to one made up on the fly lie after another, or just simple rumor and political talking point innuendo in the most recent attempt to get hedge funds starved for yield (and chasing year end performance) to pursue every and any piece of Italian and Spanish debt (at least the until euphoria ends and the selling on fundamentals resumes) the latest development from the FT bears noting as it has major implications for Europe's make it up as you go along "recovery." According to the FT: "A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis. A paper from the EU Council’s top legal adviser, obtained by the Financial Times, argues the plan goes “beyond the powers” permitted under law to change governance rules at the European Central Bank." The punchline: "The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission."

The majority of Americans seem OK with just waddling through life, accepting the lies and misinformation blasted from the boob tube and their various iGadgets by their owners, gorging themselves to death on Twinkies and Cheetos, paying 15% interest on their $10,000 rolling credit card balance, and growing ever more dependent on the welfare/warfare state to provide and protect them from accepting personal responsibility for their lives. A minority of critical thinking people have chosen to question everything they see and hear being spewed at us by the propagandist mainstream media. What do 'we, the people' want? As it seems the entitlement “free shit” mentality permeates our culture. The question is whether we will stand idly by, fiddling with our gadgets, tweeting about Honey Boo Boo, or will we regain our sense of duty to the future generations of this country.

What can be said? Rinse, repeat, rinse, repeat.

Everyone basking into the market truce provided by Super Mario. And taking some easy time off… 

Friday afternoon Periphery squeeze barn stomp