Archive for September, 2016

The Global Economy In August

Throughout most of August global markets were about the continuation of the Emerging Market rally from July as the yield search carried on. Emerging market debt might even reach record levels by end 2016. But the month end was marked by concern that positive US economic indicators would push the US Federal Reserve to hike interest rates in September. The Jackson Hole Symposium on 25th August was expected to provide indications of the direction of monetary policy of the US Federal Reserve’s (Fed), where Fed Chairwoman, Janet Yellen, stated the Fed saw reason to raise rates in 2016. The statement rattled the emerging market rally, as investors became averse to riskier assets. However, the August US non-farm payroll data released on 2nd September has reduced chances of a hike in September, improving sentiment and allowing markets to move up again.

 

Economic indicators, especially Purchasing Managers Indices (PMI), have improved in the Euro region and the UK over the last month, providing some breathing space for Central Bankers and Policymakers. Yet, economic growth in Europe continues to be underwhelming and analysts expect the Pound to depreciate further by the end of the year, due to long term structural issues and uncertainty.

 

Oil prices continued to be volatile within the $40 to $50 range, with July’s fears of supply disruption being replaced by fears of a supply glut building up owing to Saudi Arabia reaching a record summer output. The issues caused by low oil prices were reflected in the Saudi Arabia’s commitment to reaching an OPEC and non-OPEC consensus for an oil production freeze. Russia and Saudi Arabia used the recent G20 summit to come to an agreement to work towards stabilizing the market and the end-September OPEC meeting in Algeria is expected to produce an outcome in this regard. The talk of a freeze created a rally in prices but some analysts are divided as to whether a freeze is feasible or even effective.

 

Within Emerging Markets, the issue of political risk was highlighted by recent uncertainty over the policies of Philippine’s new President, Duterte. Philippines stocks have tumbled following his harsh remarks against President Obama which prompted the US President to cancel a visit to the island nation. Meanwhile, analysts continue to worry about the debt problem in China and see a pattern of investors avoiding Chinese assets to reduce exposure to a possible future crisis. India is going through a transition period as its much respected Central Bank Governor, Raghuram Rajan, hands over the reins to his successor. Some are concerned about reversals in reforms and policies taken by Rajan, but his successor, Urjit Patel, is known to be an avid supporter of his policies.