Monday, October 28, 2013

Financial Market Snapshot November 2013

Financial Market Snapshot November 2013

Cash & Currencies
Economic Growth & Prices
In the second quarter of 2013, economic growth picked up in the major economies of the world. From the first to the second quarter of 2013, growth rates rose from 1.3 % to 1.6 % in the United States, from 0.1 % to 1.3 % in Japan and from 0.2 % to 1.35 % in the United Kingdom. Germany, which had a negative growth rate of 0.3 % in the first quarter of 2013, registered a positive rate of 0.5 % in the second quarter. The Euro Zone as a whole could reduce its negative growth rate from 1.2 % to 0.6 % and seems to be on its way to recovery.
Despite these changes towards more economic growth, the rates are still much too low for bringing about a return to the growth trend of the past. The world economy suffers from a lack of dynamics. Economic growth, which feeds on itself, is nowhere to be seen. It is symptomatic of the situation that central banks continue with their policy of extremely low interest rates. The US central bank announced that it will not yet stop with its policy of monetary stimuli (“quantitative easing”) and the European Central Bank has made its program of “outright monetary transactions” (OMT) a regular part of its policy.
Data of industrial production show that economic growth in the major economies of the world is not yet robust but hangs on the lifesaver of monetary stimuli. In the United States, industrial production has wakened in the second quarter of 2013 from 2.4 % to 1.9 %. The rebound in the other major economies is very weak, as they remain stuck in negative territory outside of Germany, which registered a positive rate of growth of industrial production of 1.1 % in the second quarter of 2013. Japan is still in negative territory albeit the rate changed from -6.2 % in the first quarter to -2.9 % in the second quarter of 2013. For the Euro Zone as a whole, the rate changed from -2.3 to -1.1 % from the first to the second quarter of 2013.

International Trade, prices and interest rates
The United States continues to register a current account deficit of 2.5 % of its gross domestic production in the second quarter of 2013, only slightly different from the previous numbers. The same holds for the United Kingdom whose current account also remains persistently in negative territory, although the highly critical number of -6 % of the current account balance to gross domestic production, which the country registered in the first quarter of 2013, has become more tolerable at minus 3% in the second quarter of 2013. The situation also did not very much change for Germany that continues to accumulate extremely high current account surpluses in the range of 6 % and more. For the Euro Zone as a whole, the current account balance (in percent of gross domestic product) remains positive and stood at 1.4 % in the first quarter of 2013, while Japan moved back to a surplus of 1.3 % in the first quarter of 2013.
The interest rates for the US dollar, the euro and the yen are all still extremely low. From June 2013 to September 2013, the 6-months LIBOR rate for the US dollar fell from 0.41 % 0.37% while the rate for the euro declined slightly from 0.23 % to 0.22% and remained steady for the Yen at 0.26%. The U.S. central bank has furthermore brought down its policy rate (“federal funds rate) from 0.05 % in March 2013 to 0.01 % in September 2013.
How long can this policy continue? Over the past years, the world economy has become overly dependent on extremely low interest rate. Yet as the decades-long example of Japan shows, these policies of monetary and fiscal stimuli are not very effective in bringing the economy out of the slump in a significant degree.

Exchange rates & commodity prices
One of the most amazing features over the past couple of years is the high stability of the euro-dollar exchange rate. Despite all the turmoil that came with the global financial crisis since 2008, the exchange rate of the dollar held steady at about 1.30 to the euro. More or less the same can be said about the British pound and more recently of the Japanese Yen and the Chinese Yuan. A large part of this stability, however, is not the result of market forces, but due to outright currency management or ad hoc interventions. It remains to be seen whether the trend of stable currency rates can continue while massive changes happen at the level of the real economy along with possible divergences in prices and debt. Part of the explanation of a relatively stable currency system can be found in the fact that the major economies (US, euro zone, Japan) suffer from similar ailments and pursue very similar policy strategies. The US, Europe and Japan all suffer from high debt burdens, low growth and pursue expansive monetary policies trying to overcome their economic malaise. With no immediate threat showing up in the statistics for the price level and the prices for commodities, central banks in these countries feel encouraged of continuing their stimulus policies.
The price of gold, which some observers take as an early indicator for inflation as it reflects current price expectations, has maintained its lower level since it came down from 1771.1 dollars per ounce in September 2013 to 1223.7 dollars per ounce in June 2013. The figure of 1326.5 dollars per ounce of September 2013 does not yet signal a significant return to higher inflationary expectations. This perspective is confirmed by the price for crude oil, which cost 108.4 dollars per barrel, not much less than a year before when oil was quoted at 112.4 dollars per barrel. Most of the other commodities have fallen over the past months yet with the exception of corn only in moderate form.

Antony P. Mueller