The Global Economy in July

In the immediate aftermath of the Brexit vote, global market volatility has fallen and the global economy is now steadier than it has ever been. While not everyone will survive the fallout unscathed, Europe shrugged off the Brexit vote, as economic confidence in the EU rose during the month. However, despite the markets’ recovery, some say the uncertainty it created is still a concern. The Bank of England (BOE) cut interest rates for the first time in over seven years, while expanding its bond-buying program, noting that economic indicators had “fallen sharply”.

The Bank of Japan (BOJ) also announced further stimulus measures, albeit less than what was expected by markets. Some say the lackluster measures may mean the BOJ has acknowledged the limits on monetary policy. In addition, the Japanese government announced a 28 trillion yen fiscal stimulus package earlier in July, of which 4.6 trillion yen has been budgeted for the current fiscal year. Analysts say the modest monetary stimulus raises the pressure for the government to deliver on its promise of fiscal stimulus.

The US Federal Reserve (Fed) left rates unchanged last month, while highlighting that risks have diminished. Analysts say this could indicate that economic conditions could warrant further rate hikes in the US.

The constant flow of monetary stimulus has depressed yields in many developed nations, pushing investors to riskier assets in the search for greater returns. Investors have poured a record amount of funds into emerging market bonds and have even turned to emerging market stocks. Indonesian stocks, for example, have benefitted from the investor confidence, amid optimism for growth and reform. Yet, the Bank of America (BofA) notes that it may not be a search for yield, but a search for safety. They note the recent outperformance of government debt even as their yields fell as evidence of this phenomenon.

However, a failed coup in Turkey served as a reminder that the higher yields on emerging market assets come at the cost of greater economic and political challenges. The Malaysian Ringgit has also come under pressure recently, as the nation contemplates further rate cuts to boost growth, amid a political scandal and low oil prices.

Demand for commodities has grown this year, fueled by safe-haven demand, particularly with gold. Yet oil prices have fallen into bear market territory in July, weighed by a revival in concerns that the supply glut in crude oil has returned. While many expect prices to recover by the end of the year, some say they could fall as low as $30 a barrel again. The OPEC has scheduled an informal meeting in September, while stating that it expects the recent price drop to be temporary. Many do not expect much to come from the meeting.

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