Financial Market Snapshot September 10, 2017

Financial Market Snapshot September 10, 2017

Storm Warnings

Dollar weakness

Hurricane Irma that is devastating parts of Florida shortly after the weather disaster that inundated Houston is only one of the many calamities that have hit the United States since early 2017. With a President under fire from all sides, the dollar sliding and geopolitical conflicts on the rise, the situation has continuously deteriorated since the beginning of the year. 

While the stock markets are still holding ground, the U.S. dollar, however, sends a strong signal. Since January 1, 2017, the dollar has been down by over ten per cent. Since the beginning of 2017, the official currency index fell from 101 to 91 reaching its lowest level since January 2015. Financial markets wake up to the possibility that the American currency may no longer be a safe haven. Only the lack of an attractive alternative has held the dollar relatively steady over the past decade.

Euro strength

The Euro had been under pressure over the past couple years due to the Greek debt crisis. Additional pressures came from uncertainties about the effects of the United Kingdom to leave the European Union and fears that an openly anti-European candidate could win the French presidential election. Over the past couple of months, however, currency markets have seen a strong recovery of the euro. From a rate of 1.05 against the U.S. dollar in January 2017, the common European currency has risen to 1.2035 on Friday, September 8, 2017. 

General elections in Germany

On September 24, Germans will go to the polls to elect their federal parliament. It is very unlikely that the parties that officially support the incumbent Chancellor Angela Merkel win an absolute majority. Therefore, Merkel must find additional coalition partners beyond the CDU (Christian Democratic Union) and the CSU (Christian Social Union) in order to gain her third chancellorship. Merkel’s opponent from the SPD (Social-democratic Party of Germany) has campaigned poorly and instead of the expected gains in votes, the SPD will most likely lose public support. The big winner could actually be the right-wing AfD (Action for Germany). All other parties have ruled out a collation with this anti-immigration party. Thus all comes down to the point whether the liberal FDP (Free Democratic Party) can cross the five-percent clause in order to gain seats in the parliament. Depending on the strength of FDP various coalition models will emerge either with the Green Party or the left-wing “Linke” party.

Booming German economy

Although Chancellor Merkel is under pressure because of her very generous immigration policy, the extremely good performance of the German economy is her main asset. The German unemployment rate is currently at 3.7 per cent and the inflation rate down to 1.8 per cent. Germany’s annual gdp growth rate is 2.1 per cent. The employment rate has never been higher with a rate of 75 per cent while the current account surplus beats one record after the next and is currently above eight per cent. 

Macroeconomic Data in Comparison

Economic growth

Despite a series of detrimental factors and the precarious position of the American President, the U.S. economy is powering ahead. After a gdp growth rate of 1.6 percent in the second quarter of 2016, the growth rate has risen to 2.1 per cent in the second quarter of 2017. This good growth performance is accompanied by a growth rate of two per cent in Euro Area and 1.5 per cent in Japan. Even the United Kingdom, which is afflicted by the fallout from Brexit, obtained a growth rate of close to two per cent in the second quarter of 2017.

Inflation

Despite the continued policy of quasi-zero interest rate in the industrialized countries and the massive expansion of central bank money over the past couple of years, price inflation does not yet show up. For the Euro Area the figure is 1.2 per cent, while consumer prices in Japan increased by 0.4 percent. Only the United Kingdom is an exception, where, largely due to the Brexit, consumer prices are on the rise and the annual inflation rate reached 5.1 percent in July 2017.

Interest rates

Central banks in the industrialized countries continue with their zero-rate interest rate policies. Despite various announcements that the time has come to end “quantitative easing” and to raise rate finally, central bankers are still too scared to provoke an unwanted sharp economic downturn when rates rise. As a very problematic result of this policy, the global stock markets have obtained extreme valuations and show signs of a mega bubble.

Employment

In combination with the strong performance of the US economy, the unemployment rate in the United States is at a low of 4.7 percent. This rate is well below the level in the European Union, where the unemployment still stands at 9.1 per cent, particularly because of the ongoing economic weakness at the Area’s Southern fringes where unemployment rates are as high as 17.2 per cent (Spain) and 21.2 percent (Greece). Japan’s unemployment rate has been remarkably low despite relatively low growth over the past decades and currently stands at 2.9 percent.

Current Account

In the United States, the current account deficit amounted to 2.5 percent of the country's gross domestic product while Japan registered a current account surplus of four per cent and the Euro Area of 3.9 per cent in the first quarter of 2017. Due to recessionary tendencies after its Brexit vote, the British current account deficit fell from 5.4 percent in the first quarter of 2016 to 3.4 percent in the first quarter of 2017.

 Korea in the spotlight

Nuclear threats darken the outlook

Kim Jong-un, the leader of North Korea, is threating the world with his nuclear bombs. His foremost enemies are the United States and particularly the country’s neighbors, South Korea and Japan. Jong-un has an ally in the Peoples Republic of China and maybe even in Russia. The conflict over North Korea thus entails the potentials of new world war should the crisis go out of hand. China has made it clear that it does not want a unified democratic Korea at its Southern border.

Civil War (1950-1953)

The war broke out in 1950 with a communist invasion from the north that devastated large parts of the country and cost about three million deaths. In 1953, the Korean civil war had led to the separation of Korea at the 38th parallel with the establishment of a Communist North and a capitalist South.

Military dictatorship in North Korea

Since their separation, the economic performance of South Korea in comparison to the North has been extreme. While South Korea has transformed into an economic showcase with high income, the North has succumbed to a military dictatorship with a population suffering from hunger. Under the dictatorship of Kim Jon-un, North Korea has concentrated all available funds into a military program that now threatens its neighbors and the world.

Outstanding economic performance of South Korea

Since the separation of the country, South Korea has grown steadily. From a low of a per capita income of 944 US-dollars in 1960, South Korean gross domestic product per capita has crossed 25 500 US-dollars in 2016.

The South Korean economy ranks at the top of the world’s most innovative economies and counts with many world-renowned global companies.

Macroeconomic performance

The current economic growth rate of South Korea is 2.7 percent. The unemployment rate stands at 3.6 percent, while the inflation rate is 2.6 percent. Despite a heavy defense burden, South Korea’s debt ratio amounts to only 38.6 percent. In 2016, South Korea recorded a current account surplus of seven percent of its gross domestic product. While up to 2007, South Korea registered an amazing rise of its productivity, productivity has been stagnant since then – not different from what happened in Europe and the United States and in other industrialized countries.

Antony P. Mueller

September 10, 2017