The result of the Iowa caucus is Romney – Santorum – Paul, with Romney clinching victory by just eight votes, according to ABC News. Iowa’s is a non-binding caucus — i.e. no delegates to the Republican convention that chooses the candidate are awarded on the basis of this vote. But it has symbolic importance, and Romney’s win can only be a good thing for those of us who are both sane and liberal (in the true sense, not in the American sense of “socialist”). There are three more votes to come in January, all primaries with real significance, in New Hampshire, South Carolina and Florida. The whole dreadful business could technically drag on until June, but one hopes a clear leader will emerge before that time. In the national race, Romney is just ahead of Gingrich, according to Gallup’s latest poll. Romney leads by a wide margin in New Hampshire, Gingrich leads in South Carolina, and the two are neck-and-neck in Florida after a large fall in Gingrich’s support, according to various regional polls.

Iran has made an implied threat against a US aircraft carrier, should it return to the Gulf (it recently left Dubai). This kind of thing is within my expectations. I argued on 21st December that Iran has an incentive to maximise political tension over the proposed sanctions, and that is what it seems to be doing. Whether it is responding to incentives or simply barking mad is a moot point — there will be no real test until incentives and insanity pull in different directions. From what I have read, which is not much, an actual attack on the US carrier seems unlikely. Nightwatch argues that recent training exercises in the Iranian navy would make a major operation unfeasible at the present time, although that does not preclude action by commandos or similar forces.

Japanese equities are trading near 25-year lows (the Topix first touched its present level in 1983), and that has prompted me to have a look at the Japanese market. My first observation concerns its performance relative to the S&P 500. One might assume that the TPX underperformed the SPX (on a total-return basis) through the 2000’s, but that is not the case. After underperforming up to the start of 1999, the TPX remained in a flat range relative to the SPX until mid-2009, when it started its present period of underperformance. I do not have a clear view of why this pattern should obtain. My second observation is that its latest period of weakness has taken the TPX to a forward P/E of around 13x, which is comparable to that on other markets. Japan’s long-overvalued market seems to have rejoined reality at last, and I wonder whether the ratio will stabilise at this new, low level. This de-rating of Japanese stocks in presumably what has kept the Japanese market from rallying strongly since 2009. It is tempting to think that Japan now offers genuine value, but since I do not have a good explanation for why the long-awaited de-rating has happened now, I am cautious of asserting that conclusion.

Data:

ISM PMI 53.9 b.e. and rose. As I said yesterday, I expected a number in the mid-50’s.
French consumer spending -0.1% d.e. Nov.
EZ final services PMI 48.8, revised up from the flash estimate.
UK construction PMI 53.2 b.e.
UK M4 is still falling, and the pace increased in November, despite renewed QE. Repeat after me: base money is not the money supply.
UK mortgage approvals remained near the top of their post-crisis range in November.

Next 24 Hours:

US factory orders
German retail sales
UK services PMI
Eurozone industrial new orders

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