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
