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Brazil sounds the warning bell as pressure grows on Europe

Sep 3, 2012 at 7:15 pm in Market Commentary by City Insider

IT’S a good time to be a construction worker in Brazil at the moment with the football world cup less than two years away and the 2016 Olympic Games and $500bn worth of infrastructure projects also in the pipeline.

With the deadlines drawing closer, FIFA officials have warned the country needs a “kick in the backside” in order to be ready to host the tournament in 2014. The country’s laid back nature is being put to the test as I found out during a visit to South America last week, when Brazilian policy makers told me it was time for Europe to act before its debt crisis starts to seriously impact Brazil’s economic growth.

My economist friends tell me there is a huge expectation that Mario Draghi, president of the European Central Bank, will provide more detail about his bond buying plans this week which will be driven by the need to provide urgent assistance to Spain. Germany will probably maintain its opposition, but with Spain on the brink of a sovereign bailout it might not be enough in this instance to derail Mr Draghi’s ambitions.

China has expressed its own concerns about the eurozone’s fixation with austerity at the expense of growth, as the region’s crisis deals an increasingly powerful blow to the world’s second largest economy.

It’s not exactly all about the festival spirit in Brazil either, where interest rates are being cut in an attempt to stimulate growth. The economy there has so far failed to pick up as much as expected, but at least authorities have signalled clearly that they are prepared to announce additional measures to change that. I am told further rate cuts are possible by the end of the year if growth fails to pick up.

In the US, Ben Bernanke has been dropping heavy hints that the Federal Reserve may be about to get the printing presses rolling again with more quantitative easing.

Back in Britain, news that the economy shrank by 0.5pc and not 0.7pc as originally feared was welcome, but did nothing to change the picture of an ailing economy in the midst of a double-dip recession. Economists I know are expecting more quantitative easing from the Bank of England in the coming months, but also expect pressure to mount on the Coalition – and George Osborne in particular – as politicians return after summer recess. There is a growing sense that a fresh, long-term vision for growth is needed urgently.

In commodity markets, it’s all about the weather at the moment. Soybean prices hit a record high at the end of last week on fears of US crop damage from hurricane Isaac. Brazil is expected to harvest a bumper crop of soy and get high prices – benefiting at the expense of the US. However, this means the rally is unlikely to be sustained for long, so don’t go chasing.

High corn prices have also stirred grumbles about the size of the US corn ethanol market, as the country continues to burn food for vehicle fuel. Exports of Brazilian ethanol, made from sugar cane, are likely to grow.

The gold price jumped at the end of last week but future direction depends on which way the QE3 wind is blowing. Gold bugs got very excited about Mr Bernanke’s speech at Jackson Hole last week, with the price spiking after he wouldn’t rule out further bond purchases to boost economic growth.

I’m not so sure if QE3 is imminent, but Mr Bernanke would be foolish if he didn’t.

Until next time…

To give our clients a different and uniquely informed perspective on the financial markets, Capital Spreads introduces “The City Insider”, a fortnightly view from a City expert, with a senior network of influential bankers, investors, economists and analysts. The identity of the Insider is anonymous – and a closely guarded secret – in order to allow our expert to express forthright, personal views and to protect the identity of the City figures upon whose opinions the Insider draws.

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