For all the talk of multiple storms brewing in politics and financial markets it’s distressing to see and anticipate the devastation of actual storms barraging the Atlantic coast of the Americas. With Texas still in the aftermath of Hurricane Harvey, the first major hurricane to make landfall in the US since Hurricane Wilma in 2005, Hurricane Irma now thrashes through the Caribbean towards Florida with expected Hurricane Jose following shortly behind. Notwithstanding the human tragedy from such events, it’s also very hard to conceive of the economic destruction of such cataclysms.
Yesterday the euro rocketed past the 1.200 mark against the dollar; today it failed to maintain its recent momentum sliding back to around 1.195. Still that’s quite some gain year to date from the 1.05 level it begun the year on, and even further from the warnings of parity that were then forecast for 2017. Much of those previous expectations were based on hopes that Trump’s reforms would boost growth in America and at least one more political domino would fall in the Eurozone during the election season. It’s largely due to the failed-realisation of both of these that the dollar has weakened and the euro strengthened.
The 18th Sino-EU Summit concluded in Beijing last week, this was the first meeting between China and the EU since the Brexit announcement. Quite a critical meeting therefore required the attendance of European Council President, Donald Tusk, European Commission President, Jean-Claude Juncker and the EU high representative for foreign affairs and security policy, Federica Mogherini. China's leaders were no doubt keen to hear of the implications to Europe’s growth post-Brexit, and thus the subsequent effect to China’s economy. Not known for getting involved in Western politics, Chinese leaders had actually advised British voters to remain in the EU ahead of the referendum, stating the importance of its membership within the Union.
With high expectations for the BoJ to ease further after the recent strong rally of the yen and weak core inflation readings, the central bank left its three key easing tools unchanged catching some investors off guard. The central bank’s inaction did little to help the continued strength of the yen which breached the ¥108 level today (in London trading hours), soaring ~3% against the dollar.
Assessing the economic impact for a leap year is a question that still seems to be unanswered. In the UK the National Statistics Office adjusts GDP so that February is considered 28 and a quarter days long every year therefore avoiding any problems. In the States there is another problem with the leap year, the presidential election, with halls filled with voters and billions of dollars spent on getting to the winning line the Federal Reserve has to think carefully of any disturbances due to the various campaigns.
Over the last few months there has been a lot of negative press about the Chinese economy and we feel that it has been overly exaggerated. In 2015 Chinese GDP growth was 6.9%, and although this was the slowest annual rate in 25 years, it is still far greater than that of any major western economy, with the US coming in a distant second at 2.4%. Closer to home India did grow faster than China for the first time since 1999, with 7.5% GDP growth, however the Indian economy is less than 25% the size of China’s. To put this in perspective, the scale of the Chinese growth was the equivalent of adding an economy the size of South Africa’s to global GDP last year. To get the same results India would have to grow at 35% and the UK at over 20%. As Lord O’Neil, the UK’s commercial secretary, said in a speech a couple of weeks ago at the 48 Group’s New Year Gala dinner in London, “China’s growth is still the envy of any developed country”.
Is the US already in recession? This is a question we keep asking ourselves, although we are not yet sure we have the answer. However, with the US ISM yesterday recording a fourth consecutive reading below 50, the odds that we are either already in recession, or about to enter one, keep rising.
Some have described S and P’s recent move to downgrade Poland’s long-term foreign currency rating by 1 notch to BBB+ with a negative outlook (and its local currency rating to A- from A) as a ‘shock’ or a ‘surprise’. We would beg to differ: Poland fails our ‘wealthy nation’ test having a concerning level of net foreign liabilities (“NFL”) to GDP (82.2% in 2012 using Stratton Street’s estimates). We avoid investing in countries with NFL / GDP greater than 50%; IMF research indicates levels above this threshold are associated with increasing risk of external crises.
Russia is less constrained than some governments as the exchange rate can adjust to offset some of the weakness in oil prices and keep the balance of payments in surplus. Plus, it has sizeable reserves and sovereign wealth funds it can tap into; the Reserve and Wellbeing Funds were USD50bn and USD71.7bn respectively at the end of December and gold and foreign exchange reserves were USD370.2bn as of 8 January. But even so with Brent crude prices now languishing in the low 30s further cuts are needed to keep the fiscal deficit from exceeding 3 percent of GDP.