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The world’s markets are still in a quandary over the direction of the US FED. Signals from over the pond had indicated a winding up of its financial stimulus of quantitive easing and keeping interest rates at record low levels. However they have “delayed” this decision which has had an impact on markets across the world as they guess where things go from here. The FED, like the Bank of England, is committed to keeping interest rates low while unemployment remains high, but this uncertainty on policy is bound to harm investment going forward.
According to Purchasing Managers’ Index (PMI), China’s manufacturing sector has produced encouraging figures, which are an indication on the health of the world’s other economies as more exports are ordered.
Likewise the UK’s PMI remains high at 56.3 indicating a continued growth which has led to a boost in the labour market.
In a recent US treasury report, or a fit of jealousy, claims that Germany’s “export driven” economy is hurting not only the Eurozone but the wider economy. This is countered, quite rightly, by Germany as them just being competitive and a global demand for “quality goods.” The US is worried that the German’s trade surplus is risking deflation in the Eurozone, which with inflation hovering just above 0% at 0.7% is maybe not that far fetched.
Raghuram Rajan, the new governor of the Reserve Bank of India has denied that the country is in crisis. In an interview with the BBC he stated that the country has reserves of £175bn and that external debt was only at 22% of GDP (a figure some governments only dream.) Full interview: http://www.bbc.co.uk/news/business-24740842
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The Office of National Statistics released its latest UK data today which showed that UK economic output was up 0.8%, up from 0.7% during the April-June period and is the best growth in 3 years.
The service sector lead the charge with growth of 0.7% raising it to pre crisis levels.
Eurozone news
The Eurozone’s growth slowed and unemployment has increased for the 22th month on the trot although showing slight glimmers of positive growth.
Spain’s central bank has declared that the country is showing signs of life with GDP growing by 0.1% between July-September boosted in part by growing exports.
Other News
Australia is to raise its national debt ceiling from 300bn Australian dollars to 500bn to prevent a similar situation to the US when the country reaches its current ceiling in December.
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UK Market news
UK inflation has stuck stubbornly at 2.7% from August into September, this is despite a sharp fall in fuel prices over that period, according to the CPI rate. This was attributed to a slower fall in air fares. Using the RPI rate inflation fell slightly from 3.3% to 3.2%. This could have some serious bearing on UK interest rates as the Bank of England has stated it will not raise rates unless unemployment falls below 7% OR inflation is still above 2.5% in 18 months time.
During his trip to China George Osborne has announced changes to VISA requirements and bank regulations to help establish the UK as the main hub from Chinese finance in Europe.
Europe
Europe saw a surprise increase in industrial output of 1% during August which is higher than expected. Portugal led the way with a 8% increase.
The Republic of Ireland is expected to have completed its Eurozone bailout by the end of this year and is on course to not only meet all of its obligations but beat them by reducing its deficit by 0.3% over target.
Asia
The Chinese unit of currency renminbi or yuan reached an all time high against the dollar as continued stalemate in the US weakens the dollar. The currency reached 6.1415 per US dollar.
India’s rate of inflation continues to soar as it reaches 6.46% despite the government recently raising interest rates to 7.5% to stem the rise. The stalling economy continues to have an effect.
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The world continues to wait the outcome of the stand-off in the US but positive noises coming out of Washington over night point towards a deal finally being reached on the government’s debt ceiling.
As the US deal appeared closer markets in Asia rallied and the Yen fell off against its peers as it is no longer seen as a stop-gap safe haven while the uncertainty continued.
The Aussie dollar rallied for the second week in response to a resurgence in orders from China, their biggest export partner. The Kiwi dollar also gained but on the back of continued high inflation in the country.
Other market news
On the back of the IMF raising the UK growth forecast from 0.9% to 1.4% they have cut the growth for the world economy from 3.2% to 2.9% on the back on further signs of weakness from the emerging markets.
Elsewhere China has overtaken the US as the world’s largest importer of oil at 6.3m per day due to the rising manufacturing and the country’s increase of car ownership.
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This week is dominated by the current stand-off in the US in regards to the raising of the debt ceiling which has paralysed the government and put the rest of the world on alert.
However news in the UK is more encouraging with the UK’s service sector seeing the fasted growth for over 10 years and 30% of manufacturers looking to recruit which is the highest in over 20 years. The only blip was that UK retail sales fell for the 2nd consecutive month which has got analysts worried about the potential knock on effect for the all important Christmas trade. This flurry of good news has seen the pound rally from recent low of $1.48 to the pound back in July to over $1.61 today.
In the Eurozone the European Central Bank has yet again held rates at 0.5% and their President Mario Drahgi added that they would remain at these levels for an “extended period.” This boosted the euro which rose 0.6% to a 12 month high against the dollar to$1.36. However Mr Drahgi did add a note of caution by stating that he believe the Eurozone recovery to be “weak, fragile and uneven.”
In Asia the World Bank has cut its growth forecast for East Asia from 8.3% to 7.5% due the continued uncertainty in the US, a continued slow down in China’s economy and a falling commodities market.
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Uncertainty is the market’s worst enemy as bean counters love to know what to expect in the short term at least. So the US heading towards yet another budget showdown this afternoon and with no resolution in sight the rest of the world suffers as it waits.
In Italy the coalition seems to be on the edge of collapse as five ministers from Silvio Berlusconi’s party removed themselves from the coalition in protest of the proposed hike in VAT. Italy’s borrowing costs have rocketed, unemployment is rising and the economy is set to decrease by 1.4% this year. This has seen the Euro fall against safe havens such as the Swiss Franc.
Meanwhile in the UK the Governor of the Bank of England Mark Carney has ruled out any more QE (quantitative easing), as he states that the economy has “strengthened and broadened,” pointing out his believe that not only has we turned a corner but are developing a more balanced economy going forward.
All the resulted in the pound gaining 1c to 1.6132 against the dollar on Friday.
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Late last week we had mirrored news from both sides of the pond which sent the financial markets into overdrive. Against analysts expectations the FED in the US failed to reign in its quantitive easing program which sent the US and UK stock markets soaring, although there has been some profit taking since, as the actual value of US assets are lessened due to the new money entering the market.
On the flip side the flood of encouraging financial data in the UK has led the Bank of England committee hardening their stance on QE (quantitive easing) which following the governors long-term stance last month has caught analysts on the hop.
Other global news effecting currency markets:
- As the Indian Central Bank continues its efforts to curb the outflow of money from their economy they have raised their interest rates from 7.25% to 7.50%, inflation in the country is running at 6.1%, so this should have a result in slowing this rise down.
- UK borrowing was £0.8bn down on forecast according to the Office of National Statistics and the tax take has been 2.8% higher last month compared to the same month last year, this has led the Bank of England to up its growth forecast from 0.5% to 0.7% for the third quarter.
- Ireland has officially emerged from recession in the last quarter with growth of 0.4%. Much of this was put down to the many multi national companies that reside in Ireland due to their competitive tax rates for companies, as domestic consumer spending was only up 0.7%.
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UK inflation measured by CPI (consumer price index) has fallen to 2.7% in the year to August, from 2.8% in July. This has been put down to a slower rise in fuel costs. However RPI (retail prices index) rose to 3.3% in August from 3.1% in July. RPI takes into account mortgage payments etc.
The bank of England has stated that it could raise rates if it sees inflation remaining above 2.5% for the foreseeable future.
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His very first official act as the new Governor of the Bank of England, Mark Carney stated that UK interest rates would stay at the current record levels as long as unemployment levels remain above 7%. He then went on to state that he didn’t see this event happening before 2016.
However less than 3 months into the job and that statement is starting to look a little premature. With the UK economy improving and manufacturing and confidence levels returning to pre crisis levels, unemployment is starting to fall (from 7.8% in May to 7.7% in July). The Governors prediction could still prove correct and is still backed up by several large investment banks, but this data does counter the whole idea of long distance forecasts steadying the market.
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The Japanese celebrated their Olympic win with a boosted index and a falling YEN in anticipation of inward investment in the build up to the 2020 games in Tokyo and the £5Bn that is expected to be spent on local infrastructure. This should help in the governments continued effort to boost the countrys growth and fend off the constant threat of deflation.
Closer to home the UK’s cost of borrowing has risen above 3% for the first time in over 2 years. On the face of it this seems like a vote of no confidence, such as with the struggling economies of the Euro zone, but this is actually a pat on the back as the markets aknowledge the efforts of the UK government to turn the economy around and that improved gorwth figures point to fiscal measures stopping in the near future. Across the pond is very much the same story as US employment figures improved by nearly 170,000 which takes it back to 2008 figures of 7.4%.
The dependence of Germany on the Eurozone was highlighted this week as figures show that exports for July fell 1.1% against an expected rise of 0.7% which was blammed on a slow down in orders from their Eurozone neighbours.
Meanwhile the BRICS (Brazil, Russia, India, China and South Africa), who have had a torred time over the past few weeks as money flowed back to the established economies have announced they are to set up a $100bn to protect against any future financial shocks.
