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