Last night the Federal Open Market Committee (FOMC) reaffirmed their historical low target for the federal funds rate. They cited short term inflation concerns, which have persisted below their longer-run objective, and are expected to remain subdued in the coming months as the result of recent global economic pressures and uncertainties. Improving labour market conditions no longer seem to be a constraining factor with “solid” jobs gains, averaging 220,000 per month over the past three months, and unemployment declining. But the statement is clear that the FOMC wish, and also expect, to see this trend continue as well as inflation picking up before their initial increase.
Jeremy Corbyn, the 200/1 rank outsider just a few short months ago, has made history by storming to victory in the Labour leadership contest. The left-winger took nearly 60% of the first round vote, his nearest rival, Andy Burnham took just 19% with Yvette Cooper taking 17% and Liz Kendall a distant 4th with 4.5%. It seems part of the reason for the landslide victory were new rules implemented by the last leader Ed Miliband which allowed a flood of non-party members and union affiliates to vote.
Brazil looks to be in the midst of a perfect storm. On our 2011 net foreign asset estimates, Brazil at 47 percent net foreign liabilities (NFL) as a percentage of GDP was within our cut off of less than 50 percent NFL; IMF research indicates levels above this threshold are associated with increasing risk of external crises. But we have avoided Brazil due to its deteriorating economic fundamentals. In the past seven trading days the yield on the USD 4.25% January 2025 Brazilian sovereign debt has backed up 44 basis points to 5.57% suggesting the market is rapidly losing confidence and last week Brazil cancelled a local government debt auction citing poor market conditions.
With public holidays in China over the next couple of days, along with tomorrow's non-farm payroll data, and Labor Day on Monday in the States the markets are relatively muted today. The main focus was on the European Central Bank. Today the ECB cut its forecast for inflation and growth due to lower oil prices and weaker global economy. It also unveiled a revamp of its QE programme allowing the ECB to buy up to 33% of a country’s debt stock, up from 25% previously. Mario Draghi, the ECB president said “Taking into account the most recent developments in oil prices and recent exchange rates, there are downside risks to the September projections,” adding “A cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis indicates the need to firmly implement the Governing Council’s monetary policy decisions.”
Just in case you forgot Greece is still imposing capital controls and will be hosting another leadership election at the end of this month. Their ongoing daily cash withdrawal limit of €60 has been active for a couple of months now, meaning any committed ATM user could have salvaged almost €4k in cash from their savings in preparation for what might lay ahead. Since Alexis Tsipras resigned, a fortnight ago, Greek creditors have been quietly on edge and markets have had other worries to busy themselves with in Asia and the rest of Europe. But does this mean that long term concerns over Greece have remained as subdued as they were when the deal was initially struck?
In yesterday’s Greek referendum on whether to accept the bailout deal presented by the Eurozone there was a divisive no vote. In a turnout of just over 62.5%, 61.31% voted no and 39.69% voted yes. The Greek Finance Minister Yanis Varoufakis said this morning that with the scale of the no vote Greece will call on its creditors to find some common ground adding the no vote is a big yes to a democratic Europe, then promptly resigned!! The self-proclaimed "erratic Marxist" said in a statement "I was made aware of a certain ‘preference’ by some Eurogroup participants, and assorted ‘partners’, for my... ‘Absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement". However German economy Minister Sigmar Gabriel later said it was hard to imagine talks on a new bailout programme with Greece.
This morning German Chancellor Angela Merkel travelled to Paris to discuss the referendum result with her French counterpart Francois Hollande with the heads of the European Commission, Donald Tusk, the ECB’s Mario Draghi and Eurogroup chairman Jeroen Dijsselbloem holding a conference call. There will also be an emergency Eurozone heads of states meeting tomorrow. After the morning meeting a spokesman for Merkel said “With regard to yesterday's decision by Greek citizens the preconditions for entering into negotiations over a new aid programme do not currently exist” however the door for talks was “always open”. He went on to say “Greece is a member of the Euro. It is up to Greece and its government to act so that this can remain the case”
On the back of the Greek vote currency markets were initially subdued. The euro did initially dip against the dollar to 1.0969 before rallying back to 1.1026. UK, French and German government bonds yields fell between 2.5 and 4.5 basis points (bps) whilst southern EU countries (Spain, Portugal and Italy) yields rose between 9.5 and 19 bps. Greek government two-year bond yields rose over 1450 bps to yield 48.26% with the ten-year yield rising 325 bps to 17.27%. European equity markets are down anywhere between 1 and 3%.
The next 48 hours will be a critical period for both Greece and the EU and could well shape both for many years to come.
With the situation in Greece still weighing heavy on investor sentiment, eyes turned to China who announced over the weekend that they would be taking steps to prop up the country’s equity market; which has been one of the best performing indices this year but has recently seen around USD 3tn in market value wiped out.
It all began when the market started to “overheat”, the Shanghai Composite Index (or A-Share Index) had gained over 150% in the 12 months to the peak on June 12, or a gain of roughly USD 6.5tn. The China Securities Regulatory Commission (CSRC) took steps to cool the market by cracking down on over-the-counter margin usage; which some reports suggest reached as much as 9.5% of the A-share’s market free-float. This then led to the aggressive unwinding of margin trading which quickly saw the market sell-off. Policymakers have since introduced a number of easing measures; the more recent interest rate and trading fee cuts have so far been unsuccessful in stemming the country’s recent equity market landslide.
Clearly further measures were required as the A-Shares index was down around 29% from the highs in June to Friday's close. So over the weekend Beijing announced a number of key measures to help support the equity market, these include: the collective pledge between China’s top 21 brokerages and asset managers to invest roughly RMB 120bn into a stock market stabilisation fund. In addition, the Shanghai and Shenzhen stock exchanges suspended 28 - already approved - initial share offerings or IPOs as a measure to ease any potential liquidity shock. Lastly, on Sunday the CSRC approved the broadening of liquidity support for China Securities Finance Corporation (CSF) via the People’s Bank of China (PBoC); the amount of registered capital will be boosted from RMB 20bn to RMB 100bn in order to “enhance its capacity to safeguard market stability.”
The market is showing signs of stabilising having dipped slightly this morning, year to date the Shanghai Composite Index is still up over 16% (at time of writing). There are obvious concerns surrounding the global ramifications of a China equity crash, but it is very clear that Chinese authorities will continue to support the market and will likely deploy further measures if necessary.
Hurrah the world is saved! After five months of disappointment there appears to be a deal on the table that European leaders and creditors are happy with and keeps Greece afloat until the end of the year, yes another six months. Greek stocks rallied over nine percent, the Dax had its fourth largest ever gain and the NASDAQ hit all-time highs. Credit has also celebrated with buyers coming in to join in the party. European sovereign markets saw yields fall with Italy -12bps, Spain -16bps, Portugal -24bps and Greece ten years -150bps. Of course safe havens such as Bunds, US Treasuries and UK Gilts saw yields up as the “risk on trade” found momentum.
However, the deal has yet to be signed but is rumoured to include a closing out of early retirement options, a wide ranging increase in VAT rates, cuts in defence, and an increase in corporation taxes for those firms earning more than €500mln a year in profits; but perhaps most importantly a broad-based increase in pension contributions. The deal is expected to be signed this week and will head off the payment due to the IMF at month end. So another short term fix, lending more money to pay back some of the money already owed, but what about a longer term solution? Surely the only way Greece can get back on track is to follow the examples of Ireland and Portugal and make the tough, no-nonsense changes that are required to cut debt and boost growth; unfortunately we doubt the Greek politicians have the will for this and expect a replay of these financial negotiations in a few months’ time.
While sanctions are certainly hindering Russia’s economic growth prospects, some business continues unaffected. BP Plc’s $750m Siberian oilfield purchase in the Taas-Yuriakh Neftegazodobycha LLC’s block near China’s northern border, purchased from OAO Rosneft last week, amounts to a 20% stake in the block. This purchase is to try and position BP to take advantage of Russia’s new found focus, due to the sanctions, on supplying China, the world’s biggest energy consumer with natural gas and oil.
The Taas-Yuriakh unit plans to increase oil production five-fold to 100,000 barrels a day by 2017. This focus from BP on Russia’s oil fields comes as world demand for oil appears to be slowing, recent data suggests the world’s oil consumption rose by just 0.9% last year with gas up just 0.4% the lowest demand since before 2009. This data is boosted by China’s demand for oil up 8.6% and Gas up 3.7% last year and explains the new found focus from BP and Russia as suppliers position themselves for an extended period of lower oil prices.