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CHINESE VICE PREMIER VISIT TO SPAIN and EUROPE
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As declared today to the Spanish Press the Chinese Vice Premier Li Keqiang reaffirmed his confidence in the Spanish market and supports the current measures taken by the Spanish Government. These statements can have a positive impact on the markets. While only half of Spanish debt is owned by foreigners, 20% of this is owned by Asian Investors and it is estimated that 10% is owned by the Chinese Government.

Given that the gap between Spanish and German bonds is raising Spain might take increase its investments in Spanish Debt.

I reaffirm that a default of Spanish debt is very unlikely to happen but the 20.7 unemployment in Spain, the highest in Europe, is worrying.

This year Spain has to raise 170 billion Euro and 30 billion by regional governments. As Investors are fairly negative on taking higher risks in Europe this might be problematic and further European support might be needed. Despite this fear I am confident that a further bail out will be avoided.

The Chinese visit in Europe is very significant: as Europe is the biggest export market for China, there are strong interests in avoiding further deterioration in the Euro zone.

An Euro in free fall will obviously make Chinese exports less competitive. The visit will certainly further enhance Sino-Spanish and Sino European relations.

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UK VAT INCREASE
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UK VAT hike that increase that comes into into force, will raise 13 billions for the Treasury.

With consumer confidence at a four month low in December, the current fiscal austerity measure that will cut costs across the board and increased now VAT from 17.5 to 20%, there is a risk that consumption in the UK will further deteriorate.

This might hurt the British economic recovery. The Centre for Retail Research recently released report that UK sales will drop 2.2£ bln as a direct result of the VAT increase. The centre estimates that the VAT increase will represent a 7.4% increase of disposable income for the average British household.

The pre-VAT increase period has produced record Christmas sales for several British supermarket chains like Waitrose that reported an increase of 5.4%.

Other European countries like Italy and Austria have a VAT of 20% while Germany has 19% and France 19.6%. Switzerland increased this year its VAT from 7.6 to 8%.

UK VAT increase will raise 13 billions for the Treasury

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NOT all Commodity Indexes are Equal
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As commodities can still report a good year in 2011 it is important to note that retail investors should carefully consider which commodity index will better reflect the increase in commodities in 2011. Not all commodity indexes are created equal: some enhanced indexes take into account the unique problems in commodities like contango. When possible physically backed funds (particularly relevant for precious metals but soon a copper backed ETF might also surface) will avoid the contango problem all together. For other commodity sectors where I am fairly bullish (e.g. Agriculture) I recommend broad and intelligent diversification through indexes that implemented an optimal rolling mechanism. Rare Earth metals like Lithium are also set to further increase in 2011.

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Summary:

- Chinese support to Spain and Europe is very positive but the 200 billion to be refinanced by Spain in 2011 might keep markets nervous in the first semester;
- UK VAT increase is a necessary step to reduce deficit and, while the increase might penalize retailers and consumers in the short term, it is still in line with other European countries VAT levels.
- Given the high volatility in the commodity markets I recommend caution in selecting the right commodity index with a reliable rolling methodology OR physically backed ETFs in precious metals.
- Demand for Technological products is set to raise in 2011 and an investment in rare earth companies like these extracting and trading Lithium might be a good investment.