On Thursday last week the Organization for Economic Co-operation and Development (OECD) downgraded its 2018 and 2019 forecast for economic global growth, warning the lower growth prediction was in a large part due to increased global uncertainties. In its latest interim economic outlook report, the OECD stated that ‘Global growth is projected to settle at 3.7 percent in 2018 and 2019, marginally below pre-crisis norms, with downside risks intensifying’ adding ‘Policy support and strong job growth continue to underpin domestic demand, but some emerging market economies are facing significant headwinds from rising financial market pressures’.
Brent crude continues to look to test the USD 80 per barrel level helped by the US sanctions on Iran which are due to take effect in November but are already hitting crude export volumes out of Iran. Thus, the market is starting to look to the OPEC and non-OPEC producers’ 23 September meeting in Algiers for guidance: given potential supply constraints from Iran and Venezuela and seeming pressure from the US to avoid a spike in prices ahead of the midterm elections some action or talk to maintain prices in the USD 70-80 range looks likely.
In the ongoing tit-for-tat saga in the US-China trade dispute, the Chinese government is planning to cut import tariffs and to open up its internal markets with most of its major trading partners. In a meeting of foreign executives in Tianjin, known as Summer Davos, Premier Li Keqiang announced that China would not only cut both taxes and fees, however also looked towards allowing financial companies that are foreign-owned to hold full licenses in China.
Less than 24 hours after the US administration imposed tariffs on another USD200bn of Chinese goods, China responded with levies of 5 - 10% on USD 60bn of imports from the US. The lower figure reflects the fact that the US exports far less to China than China exports to the US. Reinforcing the idea of a ‘war’, Commerce Secretary Wilbur Ross commented that China is 'out of bullets' as US exports to the Asian nation are roughly a quarter of the size of China’s exports to the US.
The so called ‘Leader of the Free World’ Donald Trump carried out his weekend threat to China and imposed tariffs on another USD200bn of Chinese goods overnight, starting on the 24th September at 10% then increasing to 25% in 2019, it seems to allow US industry to adjust their supply lines to alternate countries. In a statement accompanying the tariff announcement Trump said ‘We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly’ adding ‘But, so far, China has been unwilling to change its practices’.
In a move that will put pressure on both the Labour leadership and the path the opposition party takes to the current Brexit negotiations, Sadiq Khan, the Mayor of London, has called for the British public to be given another vote on whether the United Kingdom stays in the EU. The Prime Minister’s handling of the current talks has become ‘mired in confusion and deadlock’ he says. Khan believes that as things stand, there are now only two possible outcomes for Britain in the current negotiations, either a no-deal scenario, so a hard Brexit, or in his opinion, the UK signs up to a bad deal, both of which are ‘incredibly risky’.
Campaigning is underway for Brazil’s October Presidential election which is already proving eventful with Luiz Inácio Lula da Silva being barred from running by the Electoral Court due to his conviction for corruption. Plus, far-right candidate Jair Bolsonaro has ended up in hospital after being stabbed at a campaign rally which is likely to curtail his campaign appearances.
Lula has called on voters to back the former São Paulo Mayor Fernando Haddad who is now the Workers’ Party (PT) candidate and with Lula’s support Haddad should stand a good chance of reaching the run-off stages.
It’s another one of those central bank days today, with the European Central Bank, Bank of England and not forgetting the TCMB (the Turkish Central Bank) announcing policy decisions this afternoon. Although the last decision to raise rates in the UK was unanimous, and subsequent relatively strong data has supported their decision, today the Bank unanimously decided to hold its policy rate at 0.75% (and may remain the case until after Brexit) signaling continued caution over the near-term uncertainties of leaving the EU.
With the number of recent leaks, the Trump Administration and Apple Inc could both seemingly give Thames Water a run for their money. The suspicion within the White house has now gone so far as to persuade Vice President Mike Pence to offer undergoing a lie detector test to prove he’s not the author of the anonymous New York Times piece. The scathing op-ed highlighted the “adults in the room” making a “quiet resistance” against Trump’s “amorality” and lack of “any discernible first principles that guide his decision making”; it publicised “the internal workings of a chaotic and divided administration and to defend the choice to nevertheless work within it” to further the “bright spots” of the administration’s accomplishments in “deregulation, historic tax reform”... The hype is almost enough for one to forget Trump faces the threat of Special Counsel Mueller’s investigation.
Over the past few weeks we have been focussing on the “PAINTBRUSH” countries that we highlighted back in February 2014 as being particularly vulnerable. Recently we have highlighted the Polish Zloty as being particularly exposed, given the country’s high level of indebtedness.
The second letter in our acronym is ‘A’ for Australia. Unlike Poland, which is indisputably an emerging country with a GDP per capita of under USD 14,000, Australia is often considered to be a wealthy, advanced economy.
Yesterday the Swedish went to the polls for the most anticipated election in years, with the possibility of the far-right Sweden Democrats, at least according to some commentators, having a shot at being the largest party in the country. In the end the far-right party ended up a distant third, with just under 18% of the vote. However this was enough to expand their power in parliament and shape the agenda going forward.
Earlier this week, Jean-Claude Trichet, the former President of the ECB between 2003 and 2011 and Governor of the Bank of France from 1993 to 2003, made some interesting comments in an interview with AFP. He said "There is now agreement that the excessive debt level in advanced economies was a key factor in the triggering of the global financial crisis in 2007 and 2008," and that "The growth in debt, especially private debt, in advanced countries has slowed, but this slowdown has been offset by an acceleration of emerging country debt." In Trichet’s opinion: "This makes the entire global financial system at least as vulnerable as it was in 2008, if not more so."
In a rather lacklustre trading day yesterday some interesting comments from Fed member Bullard who warned that “financial market information suggests that current monetary policy is neutral or even restrictive today” and “specifically, the yield curve is quite flat”. He opined that his “best guess would be that it would invert later this year, sometime next year” and “continuing to raise the policy rate in such an environment could cause the FOMC to go too far, raising recession risk unnecessarily”. However, he also said most of his colleagues at the Fed see a high chance of a September hike and yesterday the probabilities of a further December hike moved to 64%.
Bad things come in threes, so they say, and this week began with expectations of (at least) a third Emerging Market domino: following Turkey’s and Argentina’s continued fall from grace. Right on schedule, South Africa stepped up, entering its first recession in nine years, then the following day bolstering the disappointment with factory output data down the most in over two years. The slowdown in the agricultural sector was a major driver of the economic weakness, but political and policy uncertainty were also major unquantifiable factors.
With 60% interest rates, a currency which fell 25% just last month against the US dollar and CPI released yesterday at 30% year on year, Argentina’s attempt to balance the budget by 2019 appears rather optimistic.
The emergency measures announced yesterday with about $9bln in export taxes, follows a government hiring freeze and reduced subsidies on utilities but the big test will be the coalition’s ability to enact cuts to public spending in the 2019 budget which will go before congress later this month. This will further anger the population that has become frustrated by rising prices at the same time as stagnant wage growth.
On Friday the ratings agency Fitch cut Italy's sovereign debt outlook to negative, whilst reaffirming the Mediterranean country’s rating at BBB, stating expectations that the new coalition government's fiscal loosening may leave the country's high levels of debt more exposed to potential shocks. Italy’s new populist government, made up of the far-right League and anti-establishment 5-Star Movement, was of a ‘new and untested nature' and contributed to the decision according to Fitch.
Earlier this week S&P published a report highlighting the importance of a large stock of liquid government assets in supporting a sovereign rating: ‘when government assets exceed 100% of GDP, the positive effects are visible throughout our analysis, and this is currently the case for only seven sovereigns we rate. Topping that group is Kuwait, followed by Norway and Abu Dhabi.’ The report goes on to note: ‘Our ratings on Kuwait and Abu Dhabi remained stable at 'AA' throughout the recent slump in oil prices, underlining the rating stability provided by having large liquid assets.‘
Yesterday the Argentine peso sank over 7% to a new record low after President Mauricio Macri publicly announced that the South American country needed the International Monetary Fund (IMF) to speed up bailout payments to stop it going deeper into debt. The fall was the biggest one-day decline in the peso since the currency was allowed to float in December 2015. So far this year the peso has lost approximately 45% of its value against the US dollar, making it the worst-performing emerging market currency of 2018.
“None of them” was Russian President Vladimir Putin’s response to questions regarding his preferred pension reform option, “Why? Because [raising the retirement age] cannot be pleasing to the overwhelming majority of our citizens”. Indeed, they have proven to be very unpopular. Public outcry against proposed pension reforms – that include raising pension ages from 60/55 to 65/63 for men and women respectively – has been pronounced with tens-of-thousands at various protests since their announcement in mid-June; Putin opinion polls are at their lowest in years. Some indicators put his approval ratings at the lowest in almost four years following the recent sharp drop from above 80% to now ‘just’ 67%.
Yesterday President Trump announced he had reached a deal with Mexico to revise some key agreements of the North American Free Trade Agreement (NAFTA) and that the details would be finalised within days. Promoting the initial agreement with Mexico as a replacement for NAFTA, Trump announced ‘They used to call it NAFTA’ adding ‘We’re going to call it the United States-Mexico Trade Agreement’. The glaring admission to the new deal is that Canada has been left by the wayside