iPredict Weekly Newsletter: Focus on Eurozone Crisis

11 May 2012

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Key Points:

• Greece set to return to the polls before August
• European Fiscal Compact not to be ratified by year’s end
• Social Democrats expected to win in Germany
• Kim Jong-un looks safe; unlikely to wage war
• World growth expectations and Fonterra payout forecasts down
• iPredict correctly forecasts French and London elections
• Labor doomed in Australia and National/NZ First government forecast for New Zealand

International politics remains a minefield

As the Eurozone crisis continues to unfold, iPredict is forecasting that the European Fiscal Compact will not be ratified in its current form by all 12 contracting parties before the end of the year. The market’s estimate of the probability that at least one country will announce it will depart from the Eurozone before 1 January 2013 has almost doubled in the past week, and now stands at 38%. If any country does depart, early trading suggests that Greece is most likely with a 37% probability. Greece is also likely to return to the polls, with a 74% probability of a new legislative election before 1 August 2012. Greek law-makers can console themselves that there is only a 9% probability that a coup d’etat will succeed before 1 August 2012.

In Germany, early trading suggests elections are expected to be held in Q4 of 2013, with the likely victor being the Social Democrats replacing Angela Mekel’s centre-right government.

Elsewhere in the world North Korean dictator Kim Jong-un looks safe until at least 2020, and there is now only a 40% probability his regime will detonate an atomic device in 2012. There is a 37% chance that the Korean peninsula will remain nuclear-test and conflict free in 2012, a 35% chance that North Korea will carry out a border incident in 2012, a 7% chance that North Korea will bomb South Korea in 2012, a 5% chance that North Korea will use nuclear weapons against South Korea in 2012, and just a 2% chance that North Korea will invade South Korea in 2012

World growth expectations for 2012 have reduced by 0.06% points to 3.20%.

Australian politics scandal bad news for Labor

In Australia, Prime Minister Julia Gillard appears doomed even prior to the next election, despite the tax cut package in this week’s Budget. She is now expected to depart (63% probability) as the Labor leader before the next Federal election though she’ll stick it out to at least 1 July 2012. Liberal Party challenger Tony Abbott is expected to stay as leader of his party (63% probability). First preference expectations remain Labor 37.0%; Liberal 31.0%; Greens 11.9%; Queensland Liberal National 10%; Australian National 6.5% and Family First 4.7% On a two-party preferred basis, the Coalition is forecast to win 51.7% of the vote and Labor 48.3%. Overall, the Coalition has an 83% probability of forming the next Federal Government.

Trading now indicates that the next Federal election will be in Q2 of 2013.

International Economics

Chinese growth expectations have improved to 2.02% for Q2 2012, 2.18% in Q3 2012, and 2.16% in Q4 2012.

There is a 40% probability the US Senate will formally approve a resolution of ratification of the Trans Pacific Partnership by July 2015

Early trading suggests the Australian economy will grow by 0.36% in the March 2012 quarter, 0.42% in June quarter, 0.42% in the September quarter, and 0.42% in the December quarter. Inflation is expected to be 1.55% for the March quarter, 2.05% in the June 2012 quarter, 2.00% in the September 2012 quarter and 2.05% in the December 2012 quarter, while unemployment forecasts are 5.10% for April 2012, 5.17% for May 2012 and 5.16% for June 2012. The country’s Cash Rate is not expected to be changed by the end of the year.

New Zealand Economics

Forecast Fonterra payouts have fallen for the next three of four years with the payout now expected to be NZ$6.73 per kilogram of milk solids in 2011/12 (down 1c compared with last week), NZ$5.79 in 2012/13 (down 3c), NZ$7.28 in 2013/14 (down 13c), and remains steady at NZ$7.50 in 2014/15. New stock has been launched for the Fonterra payout in 2015/16, and iPredict will report on it once trading volumes have increased.

New Zealand growth prospects have remained unchanged this week with growth expected to be 0.4% for the March 2012 quarter, 0.6% for the June 2012 quarter, 0.5% for the September 2012 quarter and 0.5% for the December 2012 quarter.

Unemployment figures have increased on last week, with unemployment expected to be 6.5% for the June 2012 quarter (up 0.2%), 6.4% for the September 2012 quarter (up 0.2%) and 6.2% for the December 2012 quarter (steady).

Inflationary expectations have remained unchanged over the past week. Inflation is forecast to be 1.3% for the June 2012 quarter, 1.4% for the September 2012 quarter, and 1.6% for the December 2012 quarter.

Petrol prices are expected to reduce as 91 unleaded petrol is expected to cost $2.17 per litre at the end of May and the end of June.

Overall, the Reserve Bank of New Zealand is not expected to change the Official Cash Rate (OCR) this year but there is a growing probability of 35% that it will cut the OCR by year’s end.

Current account deficit expectations are 4.56% to March 2012, 5.05% in June 2012, 5.45% in September 2012, 5.88% to December 2012 and 5.96% to March 2013.

Contracts have been extended out to December 2013 for GDP growth, unemployment, Inflation, and the current account deficit. Commentary on these stocks will be included as trading increases on the NZ Economics page.

There is a 53% probability New Zealand and South Korea will sign a Free Trade Agreement before 1 December 2014.

International Politics

iPredict continues to demonstrate its international forecasting power. Last week, iPredict’s traders gave strong backing (91% probability) to Boris Johnson who has been successfully re-elected Mayor of London. In France, iPredict also successfully forecast (87% last week) that Francois Hollande would be elected to power.

In the United States, Mitt Romney is now expected to win all remaining Republican Caucuses and Primaries, after Rick Santorum and Newt Gingrich withdrew from the race, and has a 97% probability of being his party’s candidate for President. Barack Obama has a 99% probability of being the Democrat’s nominee.

On election day, the Democrats are expected to win California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Maine (state), Maine’s Congressional District 1, Maine’s Congressional District 2, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin.

The Republicans are expected to win Alabama, Alaska, Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska (state), Nebraska’s Congressional District 1, Nebraska’s Congressional District 2, Nebraska’s Congressional District 3, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, and Wyoming.

Across the country, the Democrats are expected to win 55% of the share of the Electoral College vote, and 52% of the popular vote, with the Republicans winning 45% of the Electoral College vote and 43% of the popular vote. President Obama has a 67% probability of being re-elected despite trading that suggests that the US Supreme Court will rule his signature health reform policy, the individual mandate, unconstitutional.

In China, Wen Jiabao is expected to remain Premier of the People’s Republic through to 1 January 2013. Yang Jiechi is expected to remain Minister of Foreign Affairs and Chen Deming to remain Commerce and Trade Minister. However, Zhou Xiaochuan is expected to be replaced as Governor of the People's Bank of China by year’s end, as is Xie Xuren as Minister of Finance.

In the Middle East, Syrian dictator Bashar al-Assad is expected to remain in power until at least 1 December 2012 while the probability Israel will launch an airstrike against Iran in 2012 is steady at 28%.

A new indexed contract, currently offering trades from $0.59, asks how great the maximum 21st Century sea-level rise will be according to the next assessment report by the United Nations’ Intergovernmental Panel on Climate Change.

Other NZ Issues

Stocks have recently been launched forecasting who will be Trans Tasman’s CEO and Department of the Year. Early trading suggests that neither of iPredict’s shortlists will be selected, with “Other” the most highly valued for both categories.

As consistently forecast by iPredict, the ‘Urewera Four’ will not be retried. No Commission of Inquiry is expected into the 2007 police raids on suspected terror activities in the Urewera district.

John Banks is now looking secure as a Minister, and is not expected to be charged with an offence over the Dotcom scandal, however with a by-election now forecast in the Epsom electorate in 2012, Mr Banks’s political revival looks short lived.

After recent media speculation and impressive average trading, the “split” purchasing age of alcohol looks likely to be introduced as a result of the upcoming Alcohol Reform Bill with 77% probability. Other options including increasing the age to 20, and maintaining it at 18 look unlikely at 19% and 8% respectively.

Pengxin Group’s bid for Crafar farms has been pushed back, and is now predicted to become unconditional between 2 June 2012 and 30 June 2012. The market correctly predicted that a judicial review would be filed against the April Crafar Farm decision; however traders don’t expect the Court of Appeal will hear an appeal on the decision by 1 October 2012.

SkyCity is now not expected to be formally announced before 1 August 2012 though traders still predict the government to allow SkyCity to have more than 425 pokies.

iPredict also suggests that of the Bridgecorp directors not yet sentenced, Rob Roest, will receive 5 years, and Peter Steigrad 3 years 4 months sentances.

ACC Minister Judith Collins is no longer expected to file defamation proceedings against Labour MPs Trevor Mallard and Andrew Little before 12 May (with only a 10% probability she will) with the market giving her only a 22% probability of winning damages within five years.

Efforts by the US Government to extradite Kim Dotcom from New Zealand are not expected to succeed until 2014 at the earliest, while the Swedish Government is also expected to face problems with extradition in its case against Wikileaks founder Julian Assange who is not expected to head for Sweden by July.

The market predicts that both an employee of the Ports of Auckland Ltd (other than Richard Pearson, Rob Campbell, Wayne Thompson or Tony Gibson) and a contractor working for the port will be found to have leaked Cecil Walker’s details to blogger Whaleoil.

Despite recent media, early trading suggests that a Bill imposing plain packaging on cigarettes will not be given Royal Assent by 1 January 2012, though it could be implemented by 2014.

Georgie Pie still looks no closer to being re-introduced in New Zealand. There is only a 24% probability it will be re-launched in New Zealand by Christmas 2012, a 34% probability that it will be re-launched by Christmas 2013 and a 43% probability it will be re-launched by Christmas 2014.

Excise duties are expected to be increased on tobacco and alcohol in 2012/13, although the market suggests petrol excise won’t be increased.

At MFAT, John Allen looks secure in his role with a 74% chance that he will stay on as CEO. However early trading on MFAT appropriations for 2012/13, suggests there could be cuts of more than 5.00%. Traders no longer believe that the New Zealand Police will experience cuts in their appropriations for the 2012/13 budget.

The Defence Force isn’t expected to announce an outsourcing of their payroll administration before 2013. The Auckland Council is no longer expected to add a new bin for glass collection, and the market doesn’t believe there will be an increase in the waste levy rate.

Detailed New Zealand Election Forecasts

Party vote forecasts for the next New Zealand General Election are now: National 42.6% (steady); Labour 33.6% (up from 32.3%); Greens 10.0% (down from 11.1%); NZ First 5.1% (steady); Conservative 3.1% (steady), Act 1.5% (steady); Maori Party 1.4% (steady); Mana Party 1.3% (steady) and UnitedFuture 0.9% (steady). The Maori Party are expected to win two electorate seats, the Mana Party one seat, and neither Act nor UnitedFuture are expected to win any electorate seats.

Based on these results, Parliament would consist of: National 54 MPs; Labour 43 MPs; the Greens 13 MPs; New Zealand First 6 MPs; the Maori and the Mana Party 2 MPs each. There would be 120 MPs, requiring 61 to govern. The National Party would have 54 MPs while the Labour/Green/Mana partnership would have 58 MPs, making Winston Peters, with his 7 MPs the kingmaker in the next Government. With the market now expecting a National Prime Minister after the 2014 General Election, it appears Winston Peters will do a deal with National as the market forecasts that on balance, NZ First would use its position to support a National-led government.

iPredict is owned by Victoria University of Wellington. Details on the company and its stocks can be found at www.ipredict.co.nz. The weekly snapshot is taken at a random time each week. This week’s was taken on the morning of Friday 11 May.

ENDS

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