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
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