Monday, January 27, 2014

Financial Markets Snapshot January 2014

Financial Markets Snapshot January 2014
Cash & Currencies

Economic growth is back in the industrialized countries. In the third quarter of 2013, the U.S. economy grew 3.3 % on an annualized basis, while Germany registered 2.8 % and Japan 2.1 %. Current estimates say that economic growth will continue at that level or even get higher in 2014. As a remarkable feature, it has shown up recently that the growth rates in the industrialized countries tend to exceed those of the emerging markets. Brazil, in particular, is well below the rate that were necessary to move this country into the group of the rich countries. It is also worthwhile to note that economic growth has returned irrespective of whether government and central banks pursued expansive policies or whether there has been more austerity. This way, both the US and Japan - where highly expansive monetary and fiscal policy were installed - register economic growth just as Germany and the United Kingdom do, where macroeconomic policy leaned more to austerity.
One caveat in this rosy picture, however, comes from industrial production whose growth rate is much weaker than that of Gross Domestic Product and still negative in the Euro Zone and the United Kingdom. This may indicate that the driving force of economic growth is not yet investment but rather consumption and government demand. If this is the case, the recovery would be short-lived because it would mean that the current economic expansion is the consequence of a temporary catching-up to foregone consumption in the past couple of years.
Macroeconomic policy can do nothing other than wait. There are signs that confidence is coming back. Consumer optimism in on the rise but what counts is employment. In this respect, the situation is still dire in many countries, even in the United States. While the unemployment rate has fallen in the U.S., employment is still significantly below the level before the crisis.
America’s current account deficit is finally receding from above three percent to the range of two the three per cent. As of now, there seems to be the possibility that global imbalances can adjust in a smooth way so that China and other surplus countries can reduce their trade surpluses without much disruption, while the US continues to bring down its trade deficit. In Europe, there is the curiosity that Germany continues to register extremely high current account surpluses while the current account of the United Kingdom is deeply in the red. Part of the explanation comes from international competitiveness, the other part of the explanation are exchange rates. In the wake of the euro crisis, the British pound served temporarily as a safe haven and at the height of the euro crisis, even ordinary citizens moved their money out of the euro into other currencies, among these preferably the British pound. With the panic over, reallocation is getting in place and the outlook for Britain’s foreign trade may be improving.
Interest rate continue at their extremely low level. The Libor rate for the US dollar even fell slightly more from 0.51 % to 0.35 % over the year from December 2012 to December 2013. Even lower that the rate for the US dollar, is the LIBOR rate for the euro, which stands at 0.21 % in December 2013. Among the major currencies, it only for the yen that the LIBOR rate is rising. This rate stands at 0.35 % in December 2013 up from 0.26 % in June and September.
The US prime rate has remained steady at 3.25 % throughout the past year, and the Federal Funds Rate remains close to “zero bound” in a range from 0.01 to 0.04 per cent.
In February 2014, Janet Yellen will become the new chairperson at the American central bank. As of now, there are no indications that the US central bank will change its stance. 
The international currency system has remained amazingly stable over the past year. Exchange rates showed little alterations and volatility remained in check. There has been a tiny appreciation of the euro against the US dollar from 1.33 in January to 1.36 in October 2013. As to the pound, the exchange rate has returned to its level of October of 2012 at 1.61 when it reached the same value in October 2013. The Japanese yen continues to weaken, yet the pace is moderate and runs smoothly. The same holds for the Chinese Yuan, where the monetary authorities implement a controlled appreciation, which so far has brought the Yuan/dollar exchange rate from 6.31 in October 2012 to 6.14 in October 2013.
Among the commodities, gold has experienced a remarkable fall over the year, plunging from 1675.6 in December 2012 to 1202.3 in December 2013. In part, this price move reflects that the turmoil in the international financial markets has calmed down and the outlook for either massive inflation or deflation has receded. The move out of gold may also be consequence of expectations that no defaults of major economies are in pipeline and that the euro zone will not blow apart.
The price of oil has been very stable over the past year. Over the past year, only marginal fluctuations have taken place within a range of 102.2 and 111.1 US dollar per barrel.
The trend towards lower prices of commodities was not only visible in gold, but in almost all major commodities. From December 2012 to December 2013, the price of corn fell from 698.3 to 422.0 cents per bushel; coffee fell from 143.8 to 110.7 cents per pound. Soya and wheat became slightly cheaper and stand now at 1312.5 cents per bushel and 605.4 cents per bushel. Sugar continues to get cheaper as its price fell from 19.5 cents per pound to 16.4 cents per pound.

Antony P. Mueller
The Continental Economics Institute

Monday, October 28, 2013

Financial Market Snapshot November 2013

Financial Market Snapshot November 2013

Cash & Currencies
Economic Growth & Prices
In the second quarter of 2013, economic growth picked up in the major economies of the world. From the first to the second quarter of 2013, growth rates rose from 1.3 % to 1.6 % in the United States, from 0.1 % to 1.3 % in Japan and from 0.2 % to 1.35 % in the United Kingdom. Germany, which had a negative growth rate of 0.3 % in the first quarter of 2013, registered a positive rate of 0.5 % in the second quarter. The Euro Zone as a whole could reduce its negative growth rate from 1.2 % to 0.6 % and seems to be on its way to recovery.
Despite these changes towards more economic growth, the rates are still much too low for bringing about a return to the growth trend of the past. The world economy suffers from a lack of dynamics. Economic growth, which feeds on itself, is nowhere to be seen. It is symptomatic of the situation that central banks continue with their policy of extremely low interest rates. The US central bank announced that it will not yet stop with its policy of monetary stimuli (“quantitative easing”) and the European Central Bank has made its program of “outright monetary transactions” (OMT) a regular part of its policy.
Data of industrial production show that economic growth in the major economies of the world is not yet robust but hangs on the lifesaver of monetary stimuli. In the United States, industrial production has wakened in the second quarter of 2013 from 2.4 % to 1.9 %. The rebound in the other major economies is very weak, as they remain stuck in negative territory outside of Germany, which registered a positive rate of growth of industrial production of 1.1 % in the second quarter of 2013. Japan is still in negative territory albeit the rate changed from -6.2 % in the first quarter to -2.9 % in the second quarter of 2013. For the Euro Zone as a whole, the rate changed from -2.3 to -1.1 % from the first to the second quarter of 2013.

International Trade, prices and interest rates
The United States continues to register a current account deficit of 2.5 % of its gross domestic production in the second quarter of 2013, only slightly different from the previous numbers. The same holds for the United Kingdom whose current account also remains persistently in negative territory, although the highly critical number of -6 % of the current account balance to gross domestic production, which the country registered in the first quarter of 2013, has become more tolerable at minus 3% in the second quarter of 2013. The situation also did not very much change for Germany that continues to accumulate extremely high current account surpluses in the range of 6 % and more. For the Euro Zone as a whole, the current account balance (in percent of gross domestic product) remains positive and stood at 1.4 % in the first quarter of 2013, while Japan moved back to a surplus of 1.3 % in the first quarter of 2013.
The interest rates for the US dollar, the euro and the yen are all still extremely low. From June 2013 to September 2013, the 6-months LIBOR rate for the US dollar fell from 0.41 % 0.37% while the rate for the euro declined slightly from 0.23 % to 0.22% and remained steady for the Yen at 0.26%. The U.S. central bank has furthermore brought down its policy rate (“federal funds rate) from 0.05 % in March 2013 to 0.01 % in September 2013.
How long can this policy continue? Over the past years, the world economy has become overly dependent on extremely low interest rate. Yet as the decades-long example of Japan shows, these policies of monetary and fiscal stimuli are not very effective in bringing the economy out of the slump in a significant degree.

Exchange rates & commodity prices
One of the most amazing features over the past couple of years is the high stability of the euro-dollar exchange rate. Despite all the turmoil that came with the global financial crisis since 2008, the exchange rate of the dollar held steady at about 1.30 to the euro. More or less the same can be said about the British pound and more recently of the Japanese Yen and the Chinese Yuan. A large part of this stability, however, is not the result of market forces, but due to outright currency management or ad hoc interventions. It remains to be seen whether the trend of stable currency rates can continue while massive changes happen at the level of the real economy along with possible divergences in prices and debt. Part of the explanation of a relatively stable currency system can be found in the fact that the major economies (US, euro zone, Japan) suffer from similar ailments and pursue very similar policy strategies. The US, Europe and Japan all suffer from high debt burdens, low growth and pursue expansive monetary policies trying to overcome their economic malaise. With no immediate threat showing up in the statistics for the price level and the prices for commodities, central banks in these countries feel encouraged of continuing their stimulus policies.
The price of gold, which some observers take as an early indicator for inflation as it reflects current price expectations, has maintained its lower level since it came down from 1771.1 dollars per ounce in September 2013 to 1223.7 dollars per ounce in June 2013. The figure of 1326.5 dollars per ounce of September 2013 does not yet signal a significant return to higher inflationary expectations. This perspective is confirmed by the price for crude oil, which cost 108.4 dollars per barrel, not much less than a year before when oil was quoted at 112.4 dollars per barrel. Most of the other commodities have fallen over the past months yet with the exception of corn only in moderate form.

Antony P. Mueller

Tuesday, September 3, 2013

Financial Market Snapshot

The Continental Economics Institute’s Financial Market Snapshot
September 3, 2013
by Antony Mueller

Economic growth and monetary conditions
The period of relative tranquility on the international financial markets over the past couple of months is ending.  Major changes have already taken place, many more are about to happen. In the United States, the American central bank is about to end its monetary policy of quantitative easing. The effects of this change have already led to a shift in international capital flows. Money moves out of the emerging markets. This way not only the Brazilian real has weakened, but devaluation also hit hard the Indian rupee. In Europe, the announcement of its “Outright Monetary Transactions” program by the European Central Bank (ECB) last year has tranquilized financial markets and lowered the risk perception of international investors of the creditworthiness of the European crisis countries. Growth is picking up in the United States and in Japan. Over the past couple of years, the major central banks have swamped the globe with liquidity. If economic recovery should continue, a new tough job already awaits central bankers: how to avoid worldwide inflation.

There are signs that the super cycle in commodities is not yet over. There is little reason to expect the oil price to fall. On the contrary, the tensions in the Middle East are rising. Conflicts that are even more violent seem inevitable. This way oil and gold are set for rebound. Other commodities will benefit when global economic recovery will continue. There are signs that Europe is moving out of its slump and that the United States and Japan are back on their growth paths. Latest figures of the Brazilian gross domestic product indicate the end of the economic downturn of this country. The Chinese hunger for natural resources is still unbroken. With these demand factors well in place and given the immense liquidity overhang in the financial markets, the failure by central banks to curb excessive monetary growth can rapidly transform into a wave of price inflation.

International trade
One of the good signs over the past couple of years has been the fact that the international economic and financial crisis has not provoked protectionist measures. Except by some leaders of emerging economies, there has been no threat of protectionism among the major industrialized countries. Even in the face of persistently high trade deficits, the United States did not bring up protectionism. Nevertheless, the global macroeconomic constellation has remained unsustainable. It cannot go on forever that China and other Asian emerging economies as well as countries like Brazil and other emerging economies will continue to finance the American trade deficit in its present dimensions. The problem with postponed necessary adaptations is that these eventually tend to take place in vehement and uncontrolled manner.

The monetary policy of the past couple of years with its extreme expansion of the monetary base comes back now to haunt central bankers for years to come. Solid economic recovery is under threat because the gigantic liquidity overhang threatens price stability. Much earlier and stronger than otherwise - if there had not been a monetary expansion - central bankers will now have to raise interest rates in order to avoid price inflation. Soon we may hear from the policy makers that it was due to their action that the recovery finally has come. They will assert that the threat of price inflation is a completely different matter with no link to earlier monetary policy. In reality, however, things are quite the opposite of what these statements will say. Not only would economic recovery have come much earlier without central bank intervention, the return to economic growth would also not have to face the risk of price inflation as it does now because of the excessive creation of central bank liquidity over the past couple of years.