Sunday, July 2, 2017

Financial Market Snapshot July 2, 2017

Global Economic Overview
New Impulses for Europe
Elections and Trump change European landscape
The past couple of months brought significant changes in Western Europe and in its relation with the United States.  Before the French presidential election on April 23 and May 7, there were still many concerns prevalent that the European project could suffer a serious setback even more so that a British general election was to be held on June 9 at the initiative of the British prime minister who wanted a clear vote in favor of a “hard Brexit”. By end of May, at the NATO summit in Brussels, there were also apparent tentatives by the American president to drive a wedge into the ranks of the members of the European Union.
Pro-European candidate wins
Different from the expectations in some corners, things turned out quite differently. First, in France, Emmanuel Macron won the presidential election. He is an outspoken supporter of the European Union. Macron’s victory against Marine Le Pen gives him a clear mandate to move ahead with a deepening of the European Union. Secondly, the US-American president has inadvertently strengthened European unity and induced the German Chancellor Angela Merkel to call for deeper European cooperation because the United States could no longer be seen as a “reliable partner”. Thirdly, the UK general election has not led to a larger majority of Prime Minister May’s Conservative Party, but to a loss of seats.
Britain’s Conservative Party suffers losses in general election
The big winner of the UK’s general election was the Labour Party, which gained 32 new seats while the Conservatives lost 13 seats. Instead of having a strong majority, as it was expected, the Conservative Party must now line up with the Democratic Unionist Party in order to hold a slight parliamentary majority. Instead of a “hard Brexit”, which Theresa May had promised, the negotiations about the conditions of Britain’s departure from the European Union will now have to settle for a “soft Brexit” which means that the residential rights of EU citizens will remain intact. As to the economic consequences of Brexit, recessions and higher inflation loom in the UK, while the rest of the European Union reported rising business confidence, low inflation and higher growth prospects.
Improving  economic conditions in Europe
In June, the Economic Sentiment Indicator (ESI) increased strongly in the euro zone by almost two points to 111.1 and for the whole of the European Union by 1.6 points to 111.3. These numbers reached the highest levels since August 2007 before the global financial crisis.
By early 2017, economic growth rates of the Euro zone reached 1.9 percent on annual basis. With 1.3 percent, the inflation rate is getting closer to the target rate of the European Central Bank (ECB), which still sets its policy interest rate at zero percent as the ECB also continues with its expansion of its balance sheet.

U.S. and Japan - Macroeconomic Data in Comparison
Economic growth
The US economy expanded at an annualized rate of 1.4 percent in the first three months of 2017, while non-residential investment was revised lower and the drag from inventories was higher than expected. The Japanese economy grew only by one percent on an annualized basis following a 1.2 percent growth in the last quarter of 2016.
In the United States, consumer prices in the United States increased by 1.9 percent year-on-year in May of 2017, which is lower than the rate of 2.2 percent rise that was reached in April.  It is the lowest inflation rate since November last year.  Core inflation slowed to a 2-year low of 1.7 percent. In Japan, consumer prices in Japan increased by 0.4 percent year-on-year in May of 2017. Core inflation increased to 0.4 percent, which is the highest rate since March of 2015.
The US unemployment rate fell further to the rate of 4.3 percent in May 2017. This is the lowest jobless rate since May 2001. However, the US labor force participation rate, which is already quite low, fell further and stands now at 62.7 percent. In Japan, the unemployment rate rose to 3.1 percent in May of 2017, up from 2.8 percent in the previous 3 months. The figure marks the highest jobless rate since December 2016.
Since the beginning of 2017, the US dollar is weakening. On Friday, June 30, the US dollar index stood at 95.9900 points compared to 103 by the end of 2016. On Friday, June 30, the rate of Japanese Yen to the US-Dollar was 111.9350 Japanese Yen per US-Dollar compared to about 115 by the end of 2015.
Current Account
In the United States, the current account deficit amounted to 2.6 percent of the country's Gross Domestic Product in 2016 compared to 3,2 percent in 2010. Japan registered a current account surplus of 3.70 percent of the country's gross domestic product in 2016 compared to 3.9 percent in 2010
Public Debt
The United States registered a government debt of 106.10 percent of the country's gross domestic product in 2016 up from 101.2 percent in 2015. Japan recorded a government debt of 250.40 percent of its gross domestic product in 2016 up from 248 percent in 2015.
Emerging Markets Scenario
Latin America: Argentina, Brazil, Mexico - Macroeconomic Performance Scenario
Economic Growth
In Argentina, the economy expanded at an annual rate of 0.3 percent in the first quarter of 2017 after a decline of 1.9 percent in the previous period. In Brazil, the economy contracted 0.4 percent year-on-year in the first three months of 2017, following a 2.5 percent drop in the previous period. Mexico experienced a good growth performance with a rate of 2.8 percent in the first quarter of 2017 well in line with the average since 2010.
In May 2017, the annual inflation rate in Argentina amounted to 24 percent. In Brazil, the inflation rate continues to fall and stands now at 3.6 percent after over 10 percent at the end 2016. Mexico’s inflation rate rose to over six percent annually in May of 2017, following a 5.8 percent rise in April
Argentina’s official unemployment rate rose to 9.2 percent in the first quarter of 2017 from 7.6 percent in the previous quarter. In Brazil, the unemployment fell to 13.3 percent in May 2017 after a high of 13.7 percent in the first quarter of the year. The unemployment rate in Mexico decreased to 3.6 percent in May of 2017 from 4 percent a year ago.  Mexico’s unemployment rate averaged 3.8 percent from 1994 until 2017. The all-time high was 6.4 percent in September of 2009. 
The Argentinean Peso continues to devalue. Argentina’s currency reached an official rate of over 16 Pesos to the US-Dollar by the end of June. The Brazilian Real stood at 3.3082 on Friday, June 30, after having reached a rate of over 4 Real to the US-Dollar in January 2016. The Mexican Peso reached 18.1228 Pesos for the US-Dollar after having hit 22 at the beginning of the year.
Public Debt

In 2016, Argentina registered a government debt of 54.20 percent of the country's Gross Domestic Product. Brazil registered a new height of its government debt at 69.49 percent of the country's gdp in 2016, while Mexico’s public debt in percent of its gross domestic product rose to almost 48 percent in 2016 after 43.2 percent in 2015 and 30 percent in 2010. 

Antony P. Mueller
July 2, 2017