Good morning,

Markets are called flat this morning. This is what's happening this morning:

  • China’s factory output and retail sales rose last month at the fastest pace since March, topping economist forecasts, reports showed yesterday. Exports grew less than expected, according to data today;
  • Japan’s economy shrank at an annualized rate of 3.5%, contracting for a second quarter, according to revised figures from the Cabinet Office;
  • Italy’s Monti said he’s lost support in Parliament and intends to resign, while his predecessor, Silvio Berlusconi announced he will run for the premiership to roll back Monti’s budget rigor – Elections will take place in February;
  • European Union leaders meet Dec. 13-14 to debate a road map for the overhaul of the 17- nation currency bloc. The euro fell 0.2% to $1.2900 after touching $1.2877 on Dec. 7, the weakest since Nov. 23;
  • Italian 10-year debt is yielding 4.519%, 10-year Spain is yielding 5.438% and 10-year Portuguese debt is yielding 7.453%;
  • Brent is trading at $107.64;
  • Gold is trading at $1708.30/ t oz;
  • Apple closed the session at $533..25

Not much good news for the markets this morning. Today it's all about Italy and Monti's resignation. Mario Monti said on Saturday that he will resign after the 2013 budget is passed. However, more likely than not, the Berlusconi government will not pass the budget. The decision from Monti came after Berclusconi (who was an ally of Monti) turned against him. It would be interesting to see how the markets will react to the news this morning, particularly the yield on Italian paper which can down drastically after Monti was elected. Monti, in a year managed to bring the 10-year yield from over 7% to 4.5%. The best analysis of the situation I came across this morning was in 'The Economist'. Quoting from the financial magazine, 'However understandable his decision, Mario Monti’s announcement of his intention to resign as prime minister will inflict serious, short-term damage. It means his government will come to an end in a premature, probably disorderly and possibly chaotic fashion.'

There is a possiblilty that Monti will contest the elections and this is seen as a positive. However what is worrying the markets is that Monti is not like by the people becuase he increased taxes and reduced expenditure. Berclusconi most probably will come out with a campaign that promotes government spending and tax cuts. And this is what worries investors. Will Italy go back to its old ways of doing things? Italy have a debt/GDP ratio of 125%! The battle for government is expected to be between Monti and Berlusconi.

This week, at a summit in Brussels on Dec. 13-14, EU heads of state and government will debate a road map for the overhaul of the euro area, including increased powers to intervene in national budgets and the establishment of a single banking supervisor. Finance ministers will meet first, on Dec. 12. Finding consensus may become more difficult without Monti, who overcame German resistance at an EU summit in June to broker a common pledge to aid members in financial distress.

Given the severe delays in the creation of the Single Supervision Framework, Citigroup expect that the Heads of States will not meet their self-imposed initial ambitious target to present a roadmap “towards a genuine economic and monetary union” able to restore confidence in the EMU project. The likely underwhelming outcome of the Council meeting is partly due to the reduced need for action, as market pressure has eased in recent months, mainly as a reaction to the ECB’s announcement of the OMT.

Citigroup expect that over time we will get a fundamental reform of the EMU governance and political accountability framework, the introduction of more far-reaching financial integration (‘banking union’), and limited fiscal integration aimed both at more effective prevention of fiscal unsustainability and more rapid and effective remedies for excessive sovereign debt and deficits. These measures most likely will prevent a break-up of the euro area but not multiple sovereign debt restructurings.

Mixed data coming out of China. China’s exports rose less than forecast in November, underscoring the need to accelerate a shift toward domestic demand as the nation confronts a jobless rate newly estimated at almost double the official figure. Overseas shipments increased 2.9% from a year earlier and imports were unchanged, contrasting with industrial production and retail sales figures yesterday that exceeded estimates. Industrial output climbed 10.1% in November from a

year earlier and retail sales growth accelerated to 14.9%, while inflation was 2%.

In Japan, government data indicated today that the nation has entered a technical recession, defined as two consecutive quarters of contraction. Q312 GDP shrank at an annual pace of 3.5%.

Alot of digest after the weekend and alot of things happening this week. Whereas I don't think Monti's resignation will trigger a sell of till the end of the year, I would make sense to revisit postions at the beginning of 2013 before elections take place in Italy in February. With these new uncertainties coming to the table I remain of the opinion that gold will be a winning commodity in 2013.

Stock to watch: Bunge (Price $72.14, Price Target $105)

Citigroup Comments: Our $105 target price utilizes a 12.5x-13.0x multiple range on our 2014 EPS estimate of $8.40, predicated on our belief that while Bunge's earnings are likely to continue growing due to the tight global grain environment, which should benefit Bunge’s grain merchandising operations.

Over its history Bunge has traded within a multiple range of 5x-21x forward earnings, with an average P/E of about 12x. Thus, we believe our multiple choice is appropriate given the solid outlook that we hold for the firm’s earnings due to a solid global agricultural environment.

For further information on contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli