Tuesday, September 6, 2016

Financial Market Snapshot September 2016

Global Scenario September 2016

INDUSTRIALIZED COUNTRIES

Economic growth remains fragile
Neither the United States nor Japan nor Europe show robust growth. Expectations of a rate hike by the American central bank have receded. The expectation that there will not be an imminent rise in interest rates has given a boost to the stock market, driven bond prices higher and slightly weakened the US-dollar. 

U.S. -employment in ambivalent situation
While the unemployment rate has fallen in the United States, there has also been a deterioration of the overall employment situation as it is shown by the fall in the labor participation rate. This fact reveals that a significant part of the labor force has given up looking for work and is no longer part of the active labor force. This rings the alarm bells for the future in the case that the economy should finally strengthen at some point. Rising wage rates would be the consequence along with a rising price level to follow - leading to the scenario that scope for a strong and broadly based recovery of the US economy will be limited.

Deflation fears plague central banks
Over the past eight years, since the onset of the financial crisis, the major central banks have tried to prevent deflation in a desperate attempt to reflate the economy. Despite a massive policy of quantitative easing, which drove base money to extreme heights, neither inflation nor a vigorous economic rebound has been achieved. It is more an act of despair than a well thought-out strategy when central banks fabricate negative interest rates. While the effect is largely nil for output, financial assets experience a boom that will inevitably end in a bust when monetary policy will change.   

Europe feels the Brexit blues
The shock of the British Brexit vote has given place to a widespread feeling of low mood – not only in Britain but also in the whole European Union (EU). There are fears that other countries may follow the British example and leave the EU. Yet the British move has also shown that leaving the Union is not easy. In fact, the British government has not yet made the decisive move to trigger “article 50”, which would mark the start of the process of separation. Uncertainty about the future of the Union paralyzes the decision-making bodies of the EU at a time when decisive action would be required – from the refugee crisis to the ongoing economic problems of Europe’s Southern periphery.

EMERGING MARKETS

G20 meets in China
The “Group of Twenty” (G20) which is composed of the 19 major economies of the world with an extra seat for the European Union that is represented by the European Commission and the European Central Bank, holds its annual meeting this year on September 4 and 5 in China. The group, which represents roughly 85 % of the world economy, will meet under the theme: “Towards an innovative, invigorated, interconnected and inclusive world economy”. Additional areas of discussion that require a global response include climate change, migration, and the refugee crisis.

Brazil concludes impeachment and removes President Dilma Rousseff from office
The long-lasting uncertainty about the Brazilian government has ended with the definitive end of the presidency of Dilma Rousseff and the take-over of the presidency by Michel Temer who is said to hold the office until the next presidential election in 2018. It remains to be seen whether the government will succeed to re-establish confidence and move the country out of its deep recession.

The economic crisis in Venezuela deepens
Without a regime change, there cannot come an improvement of the Venezuelan economy. The inflation rate has hit more than 180 %, the annual growth rate stands at a negative 7.1 % and the currency is in a free fall. At any moment, the ongoing political unrest could lead to a confrontation at the scale of a civil war with consequent effects for the whole of the South American subcontinent.

China on the rise, despite temporary slowdown to the Chinese economy
The slowdown of the rate of growth of the Chinese economy from over ten percent in 2010 and 2011 to the current rate of 6.7 % is a move to a more sustainable level. Inflation is under control, the unemployment rate low and the currency relatively stable.

The Middle East and North Africa hit by unrest and war
The Middle East and North Africa are stuck in the turmoil of war, social unrest, and terrorism. After the failed military coup in July of 2016, Turkey’s incumbent president Erdogan could fortify his power by establishing an authoritarian regime. While Turkey’s role as a regional player will increase, the economy will suffer.

THE CONTINENTAL ECONOMICS INSTITUTE
Antony P. Mueller, September 6, 2016

Sunday, July 10, 2016

Financial Market Snapshot July 2016


THE CONTINENTAL ECONOMICS INSTITUTE
FINANCIAL MARKET SNAPSHOT
July 2016

-         Brexit vote shocks markets
-         negative interest rates are here to stay
-         macroeconomic policy hits the wall

Brexit vote shocks markets

The result of British referendum about of leaving the European Union (EU) has hit financial markets like a shock. The so-called Brexit has brought market turmoil and will bring uncertainty to the international arena for years to come.
As if the series of other worriers has not already been enough, Brexit will weaken not only the position of the United Kingdom (UK), but the European Union as a whole.
The immediate fallout has been a drastic fall of the British pound (see chart. At the political front, Prime Minister Cameron declared his resignation and the opposition leader in the British Parliament suffered a vote of non-confidence. The independence movement in Scotland is gaining new momentum.
Some of the longer-term consequences for the economy of the United Kingdom are already visible:
-          Consumer confidence has started to plunge
-          Investment spending is on hold
-          Import prices are on the rise
-          Real estate prices have begun to contract
-          Banks cut hiring and plan to move staff to other locations

Chart 1
British pound/US-dollar December 2015 – July 2016















Are negative interest rates the “new normal”?


Official interest rates in the United States, Japan and the euro area are close to zero or already negative. How long can this go on and what are the effects?
The low interest have come into existence because of the policies of “quantitative easing”, which means that central banks buy financial assets in exchange for money. Asset prices rise and consequently returns tend to fall.
The secondary effect of quantitative easing is an asset bubble. This, in turn, leads to a deterioration of wealth distribution.
Negative rates will exacerbate the situation. Along with accelerating the drive for riskier in search of return, negative rates on government bonds will also motivate the accumulation of more public debt.
An unsustainable situation is in the making.
A return to normality - with interest rates in the industrialized countries at their historical rates of the second half of the 20th century - would require a massive downward revaluation of financial assets and of property.
Central banks rightly fear the effect of higher interest rates. Yet by postponing any correction, they make matters worse.

Chart 2
Negative interest rates of the German 10-year government bond





Macroeconomic policy hits the wall

With interest rates at historic lows and with public debt at critical levels, the conventional policy measures of monetary and fiscal stimuli have reached their limits. In many countries, private debt, too, is close to becoming unsustainable. Steps to promote more free trade also meet obstacles. The Brexit campaign in Britain and the presidential election process in the United States indicate a surge of populism.
International political tensions are also on the rise. Relations of Western countries with Russia have reached a new low point, while China is on its way of asserting itself not only commercially but also in the monetary area and militarily.
For investors, there are no safe havens. The so-called BRICS-countries, first of all Brazil, have disappointed as the potential new motors of the world economy.
The euro area suffers from the weakness of its countries at the Southern periphery, including Italy. Almost unilaterally is it up to Germany to accumulate the surpluses of the other countries’ trade deficits.
With the proposed exit of the United Kingdom from the European Union, additional factors of concern have come into play. For years to come, uncertainty will tend to hamper any substantial economic recovery – not only in Britain but throughout the European Union.
Economists have begun to talk about the coming of a period of “secular stagnation”. Strong headwinds confront the world economy. Even in the United States, productivity rates have slowed down.
A gigantic mass of international liquidity is desperately on the search of returns. A large part of this financial capital exists in assets of pension funds. Large parts of the population depend on the returns of these assets for their retirement. While low interest rates favor the financing of debt, they represent a huge burden for the savers. As the positive effect of low interest rates on the valuation of stocks may diminish in the time to come, the return of financial market assets will come under even more pressure.
Monetary and fiscal policies have run out of options. As a sign of their desperation, macroeconomic policy authorities have begun to discuss even more extreme measures irrespective of the fact that their earlier unconventional policy measures such as the so-called “quantitative easing” have failed to bring about a solid economic recovery.
With plans to extend the program of central banks of purchasing financial asset on the open market beyond high-quality government bonds, the trust in the present monetary system will continue to erode.



Antony P. Mueller
The Continental Economics Institute
July 11, 2016

Monday, February 15, 2016

Financial Market Snapshot January 2016


Things to consider for 2016

-        End of Bretton Woods II
-        Contraction of China’s economy
-        Economic implosion of Brazil
-        Economic collapse of Greece
-        Dissolution of the Euro Zone
-        Global deflationary depression
-        Negative interest rates
-        A new cold war with Russia
-        Massive terrorist attack in Europa and the US
-        Did I miss something?
-        Ah, 
yeah, the US election
-        and 
yes, of course, buy gold.

Monday, September 21, 2015

Financial market snapshot September

Why are financial markets so scared about a quarter percentage point increase of the Federal Funds Rate? Because the hikes would not stop at + 0.25, but mark the beginning of new cycle of rising interest rates that may reach three or four percent just as its "normal" level. However, as there has been an overshooting downwards, there will also be an overshooting on the way up. When will the Federal Funds Rate reach five or six percent or even more? That is the question that troubles the markets. Financial market operates are scared because an interest rate back to normality of 3 to 4 percent would already imply an asset price contraction of 75 percent.

Financial Market Snapshot August

Why are global markets so scared about China? It is not 
economic growth per se that’s causing the fear but the risk 
that an enduring economic weakness of the Chinese 
economy could provoke the repatriation of asset from 
abroad, particularly a reduction of the Chinese holdings of 
US treasuries.
Any significant shift towards less dollar asset accumulation 
would provoke higher US interest rates irrespective of any 
FED actions. A surge of interest rates provoked by 
Chinese asset reallocation has global implications.
Such a change would not only be poison for the US bond 
and stock market, it could mark its arrow of death for US 
financial assets and a global meltdown.

Wednesday, April 8, 2015

Financial market snapshot April 2015

THE CONTINENTAL ECONOMICS INSTITUTE
FINANCIAL MARKET SNAPSHOT APRIL 2015
Growth
While Japan is still struggling, the other major economies and regions are in full recovery with the United States and the United Kingdom well ahead with growth rates of over two per cent in 2014. Over the past five quarters, the G20 has attained good growth rates in the range between 3.3 and 3.7 per cent. These rates are not exceedingly high and point to solid recovery so far. Even the Euro Zone with its host of countries suffering from debt problems managed to remain in positive territory with its growth since the end of 2013. Germany had a strong first quarter in 2014 that did not continue but the economic growth rate held above one per cent.
It is obvious that some part of this growth performance is the result of the immense monetary stimuli, which all major central banks have been applying over the past couple of years. There are signals that the American central bank will raise interest rates in the middle of this year and it remains to be seen whether growth is already robust enough to withstand such a rise.
Industrial production is relatively strong in the U.S. and Germany yet highly uneven in Japan. While the rates for the growth of industrial production have been steadily rising in the U.S., they have shown a falling trend in Germany, while in Japan the rate, which stood at 7.6 per cent in the first quarter of 2013, has shown negative rates in the second and third quarter of 2014.
Industrial production has been relatively strong in the United States where it rose from 3.3 per cent by the end of 2013 to 4.6 per cent in the second quarter and to 4.5 per cent in the third quarter of 2014. The other major industrial countries, however, continue showing a relatively poor performance.

Current Account
As in the years before, the current account deficit of the United States remained negative and even deteriorated somewhat from 1.8 per cent in the first quarter of 2014 to 2.7 percent in the third quarter of 2014. The Euro Zone maintained its solid surplus over the past quarters in the a range of 2.1 per cent to 3.5 per cent with Germany having extremely high surpluses of over eight per cent at the end of 2013 and only slightly lower surpluses of 6.8 and 6.4 in the first and second quarter of 2014. The United Kingdom could lower its deficit from 2013 to 2014 yet remains at a high level of 5.3 per cent in the fourth and 3.6 per cent in the first semester of 2014. Japan is about to maintain a balance current account on average that oscillated between a deficit of 1.2 per cent in the fourth quarter of 2013 to a surplus of 1.3 per cent in the third quarter of 2014. The same tendency as in Japan holds for China which is about to steadily reduce its surplus which stood at 0.3 per cent in the first quarter of 2014. Germany continues registering excessively high current account surpluses of over six percent in the first two quarters of 2014.

Interest rates
There has been little change regarding interest rates. In all major economic areas, the rate is below 0.5 per cent. The Libor dollar rate fell to a historical low of 0.35 per cent in December 2013 as it happened likewise with the Libor euro rate. Only the Libor rate for the yen rose slightly to 0.35 per cent. 

Exchange rate
The dollar got stronger not only against the Brazilian real but also to the Euro, the Pound Sterling and other currencies. The dollar/euro rate fell from 1.36 in January 2014 to 1.23 in January 2015. In the same period, the dollar/pound sterling rate fell from 1.65 to 1.51. The Yen held relatively steady as 103.94 had to be paid for one dollar in January 2014 and 111.31 yen in January 2015. The value of the Brazilian real began to weaken from 2.38 Real per U.S. dollar in January 2014 to 2.63 real in January 2015. The exception of the trend of a stronger US dollar is the Yuan that remained well in a small range between 6.10 yuan per dollar and 6.17 yuan per dollar from the first quarter of 2014 to the first quarter of 2015.

Commodities
In the area of commodities, the big surprise was oil. Its price had been steady over a long period of time within a range between 90 and 100 dollars per barrel when in November 2014 it suddenly plunged to 70.2 dollar only to fall even further to 62.6 per cent in February 2015. This gives one more signal that the commodities boom is over. Not only oil fell in price, likewise so did corn, which receded from 457.5 cents per bushel in February 2014 to 384.5 cents per bushel in February 2015. In the same time span, coffee fell from 179.8 cents per pound to 136.8 cents per pound and soya from 1414.3 cents per bushel to 1030.8 cents per bushel.
Sugar fell only slightly from 16.5 cents per pound in February 2014 to 13.9 cents per pound in February 2015 while in the same period wheat fell from 599.0 cents per bushel to 517.5 cents per bushel.
Despite the turmoil on the financial markets and the overall strength of the US dollar, golds prices did not move much. The gold price fell from 1321.6 dollars per ounce in February 2014 to 1175.2 cents per pound in November 2014, but recovered to 1231.1 dollars per ounce in February 2015.



Monday, January 27, 2014

Financial Markets Snapshot January 2014



Financial Markets Snapshot January 2014
Cash & Currencies

Economic growth is back in the industrialized countries. In the third quarter of 2013, the U.S. economy grew 3.3 % on an annualized basis, while Germany registered 2.8 % and Japan 2.1 %. Current estimates say that economic growth will continue at that level or even get higher in 2014. As a remarkable feature, it has shown up recently that the growth rates in the industrialized countries tend to exceed those of the emerging markets. Brazil, in particular, is well below the rate that were necessary to move this country into the group of the rich countries. It is also worthwhile to note that economic growth has returned irrespective of whether government and central banks pursued expansive policies or whether there has been more austerity. This way, both the US and Japan - where highly expansive monetary and fiscal policy were installed - register economic growth just as Germany and the United Kingdom do, where macroeconomic policy leaned more to austerity.
One caveat in this rosy picture, however, comes from industrial production whose growth rate is much weaker than that of Gross Domestic Product and still negative in the Euro Zone and the United Kingdom. This may indicate that the driving force of economic growth is not yet investment but rather consumption and government demand. If this is the case, the recovery would be short-lived because it would mean that the current economic expansion is the consequence of a temporary catching-up to foregone consumption in the past couple of years.
Macroeconomic policy can do nothing other than wait. There are signs that confidence is coming back. Consumer optimism in on the rise but what counts is employment. In this respect, the situation is still dire in many countries, even in the United States. While the unemployment rate has fallen in the U.S., employment is still significantly below the level before the crisis.
America’s current account deficit is finally receding from above three percent to the range of two the three per cent. As of now, there seems to be the possibility that global imbalances can adjust in a smooth way so that China and other surplus countries can reduce their trade surpluses without much disruption, while the US continues to bring down its trade deficit. In Europe, there is the curiosity that Germany continues to register extremely high current account surpluses while the current account of the United Kingdom is deeply in the red. Part of the explanation comes from international competitiveness, the other part of the explanation are exchange rates. In the wake of the euro crisis, the British pound served temporarily as a safe haven and at the height of the euro crisis, even ordinary citizens moved their money out of the euro into other currencies, among these preferably the British pound. With the panic over, reallocation is getting in place and the outlook for Britain’s foreign trade may be improving.
Interest rate continue at their extremely low level. The Libor rate for the US dollar even fell slightly more from 0.51 % to 0.35 % over the year from December 2012 to December 2013. Even lower that the rate for the US dollar, is the LIBOR rate for the euro, which stands at 0.21 % in December 2013. Among the major currencies, it only for the yen that the LIBOR rate is rising. This rate stands at 0.35 % in December 2013 up from 0.26 % in June and September.
The US prime rate has remained steady at 3.25 % throughout the past year, and the Federal Funds Rate remains close to “zero bound” in a range from 0.01 to 0.04 per cent.
In February 2014, Janet Yellen will become the new chairperson at the American central bank. As of now, there are no indications that the US central bank will change its stance. 
The international currency system has remained amazingly stable over the past year. Exchange rates showed little alterations and volatility remained in check. There has been a tiny appreciation of the euro against the US dollar from 1.33 in January to 1.36 in October 2013. As to the pound, the exchange rate has returned to its level of October of 2012 at 1.61 when it reached the same value in October 2013. The Japanese yen continues to weaken, yet the pace is moderate and runs smoothly. The same holds for the Chinese Yuan, where the monetary authorities implement a controlled appreciation, which so far has brought the Yuan/dollar exchange rate from 6.31 in October 2012 to 6.14 in October 2013.
Among the commodities, gold has experienced a remarkable fall over the year, plunging from 1675.6 in December 2012 to 1202.3 in December 2013. In part, this price move reflects that the turmoil in the international financial markets has calmed down and the outlook for either massive inflation or deflation has receded. The move out of gold may also be consequence of expectations that no defaults of major economies are in pipeline and that the euro zone will not blow apart.
The price of oil has been very stable over the past year. Over the past year, only marginal fluctuations have taken place within a range of 102.2 and 111.1 US dollar per barrel.
The trend towards lower prices of commodities was not only visible in gold, but in almost all major commodities. From December 2012 to December 2013, the price of corn fell from 698.3 to 422.0 cents per bushel; coffee fell from 143.8 to 110.7 cents per pound. Soya and wheat became slightly cheaper and stand now at 1312.5 cents per bushel and 605.4 cents per bushel. Sugar continues to get cheaper as its price fell from 19.5 cents per pound to 16.4 cents per pound.

Antony P. Mueller
The Continental Economics Institute