China

Week in review: Learning from history

This week, we have come to realise the importance of learning from history. With the British MPs choosing to bomb ISIS in Syria, they are promising to right the wrongs of the Iraq War. With Brazil embroiled in economic turmoil and political chaos, it is clear that President Rousseff has not learnt the value of sound economic governance. With the ongoing UN climate change conference, there is hope that the lessons have been learnt from the Copenhagen Conference in 2009 which ended with little to show for it. Finally, as the US prepares for its first rate hike in over half a decade, we hope that they have learnt from the ECB who tried to raise interest rates in 2011 despite the ongoing debt crisis and even today, is still paying the price.

Yuan be with us?

An employee counts Chinese one-hundred yuan banknotes in an arranged photograph at the Bank of China Hong Kong Ltd. headquarters in Hong Kong, China, on Thursday, Nov. 12, 2015. The People's Bank of China's 2015 edition of the 100 renminbi banknote, with new anti-counterfiting features, starts circulating today. Photographer: Xaume Olleros/BloombergRenminbi

What happened? The Yuan, finally gained approval this week to be included in the IMF “Special Drawing Rights” (SDR) Basket. The Chinese currency is the 5th to be included in the basket, along with the Pound, the Dollar, the Euro and the Yen, and cements the Yuan’s place as a global reserve currency.

What’s going behind the scenes? As noted by Christine Lagarde, Managing Director of the IMF, this marks a major ‘milestone’ for China in its steps to integrate with the global financial system. In including the Yuan in the SDR basket, the IMF is acknowledging that the Chinese currency plays a major role in global trade and is “freely usable” for fund transactions, the two conditions required for approval. Consequently, it signifies the IMF’s recognition of China’s efforts to liberalise its financial markets and allow for the free flow of capital across its borders; most notably, its August devaluation of over 3% where the Chinese central bank allowed the market to have a greater say in setting the daily trading band for the currency.

Why is this important? Within the SDR basket, the Yuan has a weighting of just over 10%, making it the third biggest currency in the basket after the Dollar and Euro. Its inclusion is no small matter, as the SDR is a very important asset which is traded internationally for the freely exchanged currencies that make up the basket and at the same time, the weightings of the SDR basket determine the interest rates that the IMF charges for loans to members. Nonetheless, as the Yuan will only be officially included in the basket from September 2016 onwards, the significance of this announcement lies in its symbolism.

A wild week adds to Brazil’s woes

President Dilma Rousseff

 

What happened? It’s been a truly tumultuous week for those in Brazil; even more corruption charges were thrown at the country’s biggest firm Petrobas, the economy apparently shrank at a record 4.5% year-on-year in the third quarter and to top it all off, its president  Dilma Rousseff is facing impeachment for playing with the national accounts.

What’s going behind the scenes?

  • For over a year, Petrobas has been at the centre of what is Brazil’s biggest corruption scandal in history and this week brought even more allegations. At its heart, Petrobas executives have been accused of bribing politicans for contracts, using company profit. Prominent Brazilian politicians and businessmen have already been arrested for their involvement; most notably, billionaire André Esteves who was chief executive of Brazil’s investment bank, BTG Patual, was arrested this week along with Delcídio Amaral, the first sitting congressman to be detained in Brazil’s democratic history.
  • Opposition politicians this week began impeachment proceedings against President Dilma Rousseff over claims that she used accounting tricks to make the state finances appear less dire than they actually were. This simply adds to the state of political chaos that Brazil is currently in, as it is the Speaker of the lower house Eduardo Cunha who is calling for the impeachment, likely to save his own skin as he also faces calls to be unseated.
  • Unsurprisingly then, the Brazilian economy is doing horrifically as all of the economic indicators are in free fall. Latin America’s largest economy is contracting at the fastest rate since the Great Depression, unemployment has almost doubled since last year to 8%, inflation is in double digits for the first time in over a decade 2012 and the budget deficit is now at 9.5% of GDP.

Why is this important? This simply demonstrates the importance of economic competence; voted in on a platform to raise standards of living in Brazil, Rousseff has catastrophically failed to meet that expectation and from there, everything has unravelled. The economy is in a dire state of affairs due to her economic mismanagement and overspending in her first term, and although she is now trying to pass spending cuts and fiscal reforms through Congress, her loss of popularity is preventing her from passing able to pass those measures, further exacerbating the problems.

The spectre of Iraq, Afghanistan and Libya looms

What happened? This week, the House of Commons debated a motion to extend air strikes against Isis from Iraq into Syria and after a gruelling parliamentary session of 10 hours, 397 MPs backed the motion with 223 against, a majority of 174 MPs.

What’s going behind the scenes? The build-up to the decision was not without drama; Prime Minister David Cameron was strongly criticised for making some highly personal attacks by suggesting that those who opposed the bombing were “a bunch of terrorist sympathizers”. At the same time, the very issue of bombing Syria created a sharp divide within the Labour party as their leader Jeremy Corbyn, who is strongly anti-war, backed down from his intentions to whip the Labour ministers into voting against the motion and gave in to pressure to give his cabinet ministers a free vote.

Why is this important? As mentioned by Jeremy Corbyn, “the spectre of Iraq, Afghanistan and Libya looms” over this decision and although the vote was technically voting for action in Syria, it was more a vote about the role of Britain on the world stage. The debate about British interventionism has lasted decades as back in the 1990s as it was the slowness of the Western allies (including Britain) to intervene in Bosnia that allowed war crimes to be committed, thousands to die and millions to become refugees. The stance on interventionism has changed dramatically over the years; from being pro-interventionism following the successes in Kosovo and Sierra Leone, Britain has been against it as the Iraq War and intervention in Libya have become engraved into the conscience of the public as a grave mistake. Perhaps, now with terrorism as a resurging threat, that mood has changed once again.

Other News:

Mark Zuckerberg, Priscilla Chan and their new baby, Max. (Screenshot from Facebook.com)

As mentioned in our previous blog posts, December is set to be the crucial month for monetary policy and just a few days in, there are clear signs that this is the case. Mario Draghi extended the timeline for the ECB’s QE programme to March 2017 and the asset purchases would be extended from just sovereign debt to municipal debt (i.e. debt issued by regional and local governments) but disappointingly, the pace of monthly purchases was maintained at €60bn a month. Nonetheless, the ECB did cut deposit rates even further to 0.3%. Meanwhile, on the other side of the ocean, Janet Yellen made the case for a rate hike as she stated that the US economy has “recovered substantially” from the Great Recession and is set for further growth and firmer inflation.

Delegates from 195 countries descended on Paris this week for the United Nations Climate Change Conference (COP21) to discuss the best way to tackle what is regard by the some as the biggest threat to humanity in history, climate change. After the failure of the Kyoto protocol to force countries to cut emissions, the focus is now on voluntary action plans where countries make pledges to do their part to save the environment. The key issue at the heart of the talks is that rich countries grew rich from exploiting fossil fuels during the industrial revolutions and poor countries who are now trying to do the same, are being told not to.

Mark Zuckerburg, founder and CEO of Facebook, made a bold statement by outlining a plan to donate 99% of his $45bn wealth in Facebook shares to charity, following the birth of his daughter Maxima this week. Nonetheless, the entrepreneur has attracted criticism because by donating the shares through the Chan Zuckerberg Initiative, a Limited Liability Company, Zuckerburg can avoid tax on the sale of his shares but he stresses that using this corporate structure gives him the flexibility to fund non-profit organizations and make private investments on issues of public policy.

Week in review: Turning the corner

It’s been a busy week, that’s for sure. The central theme this week is about how the Fed is finally overcoming its concerns about excess slack in the US economy with the release of the October jobs report, about how the equity markets have been doing much better in the past month to the extent that the US stock market reported its best month for 4 years and about how the Cross-Strait relations are apparently improving with a meeting between the Chinese and Taiwanese presidents. Nonetheless, in sharp contrast, both Volkswagen and Valeant appear to be subsumed by their scandals and rather than turning the corner, they appear to be walking towards the precipice.

Lift-off incoming?

Janet Yellen, vice chairman of the U.S. Federal Reserve in Washington, on April 16

  • What happened? This week saw the release of October’s US job data that was all by measures, impressive. The big number was that the US economy added 271,000 jobs last month, almost 100,000 than expected and it was the strongest rate of job creation this year. There were strong showings around the board in unemployment and wages as the jobless rate fell to 5%, the lowest rate in seven-and-a-half years and there was a significant 2.5% increase in average hourly earnings on the year before, the best rate of wage growth since 2009.
  • What’s behind this story? The strength of this jobs report is of great importance because it was just last week that Janet Yellen specified the strength of the US recovery in terms of jobs and prices as the key factor behind whether to raise rates in December. With very visible evidence that the US labour market is tightening and explicit comments earlier in the week from Yellen that a December rate rise was a “live possibility” , the likelihood that the US Federal Reserve puts into motion its great ‘lift-off’ is rapidly increasing; using the price of fed funds rate futures, the market now anticipates that the Fed will raise rates at a 70%% probability, double the 35% chance seen a month ago.
  • Why is this important? The decision has been coming for a long time but it cannot be understated how important the decision is. Many important questions will emanate from the rate hike; the emergence of monetary policy divergence between Europe and the US, the worry of heightened capital outflows from emerging markets and the concern of how the US economy will handle being on a higher Fed Funds rate for the first time in several years.

Valeant stocks  jump off a cliff

A board shows the name of Valeant Pharmaceuticals above the floor of the New York Stock Exchange shortly after the opening of the markets in New York in this October 22, 2015 file photo. Drugmaker Valeant Pharmaceuticals International Inc laid out a detailed defense on October 26, 2015 of its relationship with a little-known specialty pharmacy, but its arguments failed to calm all investors' concerns. REUTERS/Lucas Jackson/Files

  • What happened? Valeant, one of the world’s largest drugmakers, saw the price of its stock fall by over 20% in its first hour of trading on Thursday before closing down by 14% at the day’s end. This is in sharp contrast to the near 40-fold increase in its market value over the last five years, that has caused it to be the stock of choice for many hedge fund mangers with the most vocal backer being Bill Ackman. Having once been worth over $260 a share, its dramatic tumble to a share price of just over $70 has inflicted large losses on many hedge funds.
  • What’s behind this story? Valeant is under fire for its suspicious accounting practices of inflating sales using its in-house pharmacies as well as its controversial strategies which involve price-gouging, that has now caught the eye of regulators and Hilary Clinton who pledged to crack down on such activities, and its debt-fuelled acquisitions that now appear unsustainable as its net debt of $31bn now exceeds its equity value.
  • Why is this important? The pharmaceutical industry has been a very hot industry this year with a number of significant M&A transactions currently in progress such as Pfizer’s intentions to buy Allergan and Shire’s recently announced deal to buy Dyax for just under $6bn. As such, such regulatory pressure in the industry should most certainly be noted as it may severely affect the chances of any deals being completed.

The largest IPO of 2015

Taizo Nishimuro, president of Japan Post Holdings Co., poses for photographs before striking a bell during a ceremony to launch the company's listing on the Tokyo Stock Exchange (TSE) in Tokyo, Japan, on Wednesday, Nov. 4, 2015

  • What happened? Japan Post. Never heard the name? Neither had we. There wasn’t too much hype around it, or at least not as much as last year’s biggest IPO of Alibaba, but the stock listing of Japan Post Bank, Japan Post Insurance and their parent company Japan Post Holdings is by far this year’s largest IPO at a collective market value of $11.5bn.
  • What’s behind this story? Japan Post is a major player in the Japanese economy; it is Japan’s largest employer, Japan’s largest bank and Japan’s largest life insurance writer and as previously state-owned enterprises, the privatisation of these companies represents a big attempt to reform the economy. There is also another striking feature about the IPO; having been priced quite cheaply, to the extent that they ended 15-55% higher on their first day of trading, and with 80% of the stock being sold to Japanese retail investors, it is an apparent attempt by the Japanese government to create a new generation of Japanese stock investors, akin to Margaret Thatcher’s attempts in the 1980s with the privatisation of many British public entities.
  • Why is this important? Although it is from first impressions a very domestically-focused company, the ambitions of Japan Post Bank should not be taken lightly as the bank intends to use its substantial pool of reserves to make itself a major institutional investor. Indeed, it is well-known that the Japanese economy has characterised a very conservative attitude with very high rates of saving so trying to channel those funds towards more high-yielding securities may stimulate a significant increase in consumption.

Other news

  • The Turkish elections concluded this week with the ruling Justice and Development Party (AKP) winning the election with a notable majority of 317 seats out of 550. It puts President Recep Tayyip Erdoğan back into power but the election itself was highly controversial as censorship and political violence were rife.
  • This week saw a tragic plane crash as Metroject Flight 9268 crashed in an Egyptian desert after taking off after taking off in Egypt en route to Russia. With the crash being so recent, investigations are still ongoing but there are grave suspicions that ISIL were responsible for the plane crash, as British intelligence apparently have evidence to support this conclusion whilst technical failure has already been ruled by the French authorities.
  • The Chinese President Xi Jinping and Taiwanese President Ma Ying-jeou shook hands with on another in a historic meeting held in Singapore between the leaders of the two countries. There is a great deal of tension and history between the two countries as China asserts that Taiwan should be a part of China whereas Taiwan has long valued its independence, as it was where the Kuomintang fled to after failing in their fight to reunite China against the Communists in 1949.
  • Volkswagen sank into even more trouble as it emerged that certain Porsche and Audi cars were also fitted with devices designed to cheat the emissions testing system. What’s more, although the cheating on emissions test initially concerned just Nitrogen Oxide emissions, it was revealed that 800,000 VW vehicles also have “unexplained inconsistencies#” regarding their carbon dioxide emission too and most crucially, this includes petrol cars as opposed to just diesel cars. This is a major blow as this scandal has spread from being isolated to just a particular type of VW cars to the entire VW group and now threatens to bring the entire company to its knees as another €2bn was put aside to deal with the growing scandal.

Week in review: A spring in my step

This week saw many important developments, with the release of new data to suggest that some economies like the US and UK were doing worse than anticipated whilst others like the Eurozone finally caught some wind in their sails. Nonetheless, despite facing setbacks in a number of forms, both Osborne and Yellen seem committed to carrying out their intentions, whether it be the introduction of harsh budget cuts or the first Fed rate rise in years. In a similar vein, it seems that nothing can dampen the resurgent M&A pipeline with speculation of yet another megadeal. 

Another M&A megadeal in the making

Pfizer lab handout

Branded boxes of Allergan Botox, produced by Allergan Inc., are arranged in this photograph taken at a skin and beauty clinic in London, U.K., on Monday, Nov. 17, 2014. Actavis Plc agreed to pay about $66 billion for Allergan Inc., a deal that creates a new top 10 drugmaker and ends Valeant Pharmaceuticals International Inc.'s attempt at a hostile takeover of the maker of Botox. Photographer: Jason Alden/Bloomberg

  • What happened? Pfizer, the world’s largest pharmaceutical company, this week approached Allergan, most famous for their Botox drug, to discuss the possibility of creating the world’s largest drugmaker worth over $300bn.
  • What’s behind this story? Although the talks are just at a very early stage, there are very good reasons for Pfizer to pursue a deal. The most significant is the tax benefit; being based in the US, Pfizer paid an effective tax rate of over 25% last year compared to just under 5% for the Ireland-domiciled Allergan so by acquiring Allergan, Pfizer would be able to complete a tax inversion where it domiciles in Ireland and drastically reduces the amount of corporation tax it pays. Aside from the usual synergies that result from acquisitions of this scale, especially applicable to biotech firms that are heavily dependent of their drug pipeline for revenue, now is a particularly attractive time to seek a deal as US pharma stocks have lost a significant amount of value following a promise by Hilary Clinton, the Democratic presidential frontrunner, to regulate drug prices more heavily.
  • Why is this important? This follows what has been a record year for M&A transactions as just last week, a megadeal in the brewing industry between AB inBev and SABMiller was just agreed upon. However, just like with the ‘Megabrewer’ deal, there are numerous complications that make the likelihood of a deal slimmer; politically, there needs to be a lot of manoeuvring as the US government has already instituted a set of anti-inversion measures and is in the process of implementing more whilst it should be noted that it was the outrage of British politicians that prevented Pfizer’s acquisition of AstraZeneca last year.

All eyes on me

Janet Yellen

  • What happened? This week, there were a number of developments that have significantly changed the outlook for a December increase in the Fed’s Funds Rate. In particular, these developments included the latest Fed meeting, the release of the US growth data for Q3 and the completion of the negotiations over the raising of the /US government’s debt ceiling.
  • What’s behind the story? Let’s start with the October Fed meeting; although the Fed as expected did not change the interest rate itself, the sentiment of its monthly statement has changed to a more hawkish tone because it explicitly outlined the conditions required for a December rate rise which will be the US economy’s ‘progress … toward its objectives of maximum employment and 2% inflation’ and removed mention of global risks such as China’s slowdown adversely affecting the US economy. On the other hand, data this week revealed that the US had grown by just 1.5% at an annualised rate for the third quarter of 2015, a drop of over 60% compared to the previous quarter’s growth rate of almost 4.0%. Although this was due to largely temporary factors such as the slowdown in inventory accumulation, it still gives reason for the Fed to delay the Fed rate rise. On a similar note, the US Congress agreed to raise the government’s debt ceiling to avoid a debt ceiling and in doing so, allowed government spending to rise by $80 billion over the next two years so by paving the way for fiscal stimulus, it also may reduce the incentive for monetary stimulus in the form a rate hike.
  • Why is this important? Speculation over the timing over the impending rate hike has been the driving factor behind many of the big stories in the past few months as firms are seeking to capitalise on the low borrowing costs through M&A deals, stock markets have adopted a bullish markets in the drive for higher returns and emerging market currencies are being battered as investors are taking their cash back to the US in preparation for the rate hike.

Austerity gone too far?

The UK's chancellor of the exchequer, George Osborne

  • What happened? In a dramatic turn of events, UK Chancellor of the Exchequer George Osborne was defeated in his plans to introduce £4.4bn worth of tax credit cuts but not by the democratically elected House of Commons, rather by the unelected House of Lords.
  • What’s behind the story? This latest chapter in Osborne’s march to austerity has been highly controversial because this measure would hit the poorest hardest with the Resolution Foundation, a think-tank, estimating that 3.3m families would lose on average £1,100 a year and it would greatly damage incentives to work, imposing an effective marginal tax rate of up to 80% on some of the poorest in societies.It is in this light it only makes sense that the Lords scuppered Osborne’s planned cuts but in doing so, the Lords has allegedly overstepped their constitutional boundaries by voting down a financial package backed by MPs in the Commons.
  • Why is this important? The incumbent governing party, the Conservatives, were elected on a mandate to cut the deficit in the form of a £10bn budget surplus by 2020 and their austerity measures have resulted in considerable progress towards that goal with public sector net borrowing for the first half of the financial year already down almost 15% compared to the year before. However, having pledged £12bn worth of welfare cuts in their manifesto, Osborne must decide where to make those cuts without upsetting the very electorate that voted the Conservatives back into power with a majority and without causing too much harm to the economy which has already a slowing rate of growth of 0.5% in Q3 compared to 0.7% in the previous quarter due to poor export performance.

Other news:

  • China released the first details of its upcoming five-year plan, by announcing the end of its infamous one-child policy by replacing it with a two-child policy and the moderation of its economic growth target rate to just 6.5%. So far, these measures reflect China’s attempt to modernise both economically and socially but the devil is truly in the details as more specific and drastic reforms will be needed to arrest China’s economic slowdown.
  • The Eurozone showed promising signs of progress as it escaped deflation in September by recording a 0.1% inflation rate whilst unemployment in the region for September was recorded at 10.8%, the lowest rate since January 2012. On the whole, whilst these statistics are indicative of an improving economic outlook, they are still far below target and make the case for monetary stimulus by the ECB strong nonetheless.
  • The World Health Organisation this week declared that processed meats were responsible for causing cancer by labelling ham, sausages and bacon as “Group 1” carcinogens, a category which includes tobacco and asbestos. It is however important to note that their report clarified that they are not as “equally dangerous” as the other carcinogens because whilst “eating processed meat causes colorectal cancer”, the risk “remains small.”

Week in review: A sinking feeling

In this section, we provide a comprehensive look at the week’s top stories, examining all the important parts of the story from the immediate details to the critical factors lying below the surface. 

IPOs losing their buzz

1961 Ferrari SpA 250 GT SWB California Spider, picnMastercard and Visa logos are pictured on credit cards in New York, Wednesday, August 31, 2005. Photographer: Daniel Acker/Bloomberg News.

  • What’s happened? Following the great success of the equities market last year which saw a bullish run, the record-breaking Alibaba flotation and a slew of lucrative bio-tech IPOs, the equity-listing market appeared to show significant signs of weakness this week. For example, First Data’s IPO of $2.65bn, which was the largest US IPO this year, performed abysmally as it was launched at the price of $16 a share that was already below the expected range of $18 to $20 and it ended up trading at a further discount on its debut. Similarly, in markets worldwide, IPOs are being put on hold as the IPOs for Digicel, a Caribbean telecoms group and Albertsons, an American grocers, were cancelled whilst  the UK-based Acacia Pharma have delayed a planned flotation.
  • What’s behind this story? The IPO market as a whole been struggling throughout the year as shares that floated in 2015 have been down by 5% on average and over half are below their issue price. It has been factors such as a slowing China, uncertainty over the timing of the Fed’s impending rate hike and pessimism about the recent Q3 earnings season that has caused investors to seek  to minimise their risk by eschewing IPOs and companies are responding in kind by delaying their IPO until more favourable conditions return. In fact, it was exactly this equity volatility that CEO of Digicel Denis O’Brien cited as his reason for abandoning plans for what would have been one of the largest IPOs this year this year at $1.7bn.
  • This is yet another sign of the major economic factors at play that have been dominating the minds of investors for months, creating a dampener on the performance of equities. Nonetheless, the Ferrari IPO also showed that even if investors have become more risk-averse, investors are still up for a good deal when presented to them; valuing the company at $9.8bn through its sale of 7.2m shares at $52 apiece, the luxury car-maker’s share price rose even further before closing at $55 at the end of its debut day.

The mystery of Chinese growth data

Chart: China key activity indicatorsRenminbi banknotes are placed on a bank staff's table in a bank in Lianyungang, east China's Jiangsu province on August 11, 2015. China's central bank on August 11 devalued its yuan currency by nearly two percent against the US dollar, as authorities seek to push market reforms and bolster the world's second-largest economy. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)

  • What’s happened? The Chinese statistics bureau releasing data reporting that the Chinese economy had grown at an annualised rate of 6.9% during Q3, which marked yet another fall on its growth rate in previous quarters.
  • What’s behind this story? There are suspicions arising from the release of this data as it seems too perfect. Beating expectations of 6.7% growth rate from a Bloomberg poll, it implies that China is on track to achieve its full-year growth target of 7%. This comes despite other statistics from China’s economy painting an even worse picture as industrial production grew by just 5.8% in September which was close to the 6-year low that was seen in March but it was allegedly robust consumption that prevented the headline growth rate from being any worse as retail sales rose by a better-than-forecast rate of 10.9%. To what extent is the Chinese government manipulating the data? Who knows.
  • Why is this important? Economists naturally expect China to slow down due to structural reasons such as a shrinking labour force and the end of “catch-up growth” as China completes the transition from a rural to industrial economy but the multi-million question is whether it will be hard or smooth landing. Cyclical factors at the same time are also dampening Chinese growth prospects such as weakening demand for Chinese exports and an oversupply of housing so it creates even more uncertainty about whether the Chinese government can do enough to nail this landing as it has been trying hard to stimulate the economy via cuts to the headline interest rate on top of fiscal stimulus.

To “do whatever it takes”

Mario Draghichart: Eurozone

  • What happened? This week, Mario Draghi made clear the European Central Bank’s readiness to deploy more monetary stimulus; he explicitly pointed out that the “size, composition and duration” of its QE programme was subject to review in December and it would act to further boost to the Eurozone economy should the slowing emerging markets have a severe impact. For the time being though, the ECB is set to continue its current QE programme of €60bn monthly asset purchases in mostly government bonds until at least September 2016.
  • What’s behind the story? The ECB’s significant monetary stimulus has had mixed success it seems. For one, it has helped to improve the condition of European credit markets by encouraging banks to ease credit conditions on loans to businesses as a survey of European banks by the ECB has shown. On the other hand, economic data from the Eurozone continues to be weak with sluggish growth in form of industrial production in the eurozone falling in August by 0.5% as well as anaemic inflation with consumer prices actually falling by 0.1% in September. This gives justification for why the ECB may be looking to expand their current €1.1tn bond-buying programme and reduce the deposit rate of -0.2% even further.
  • Why is this important? This whole ordeal highlights the divergence in monetary policy around the world; whilst the ECB is looking to increase its monetary accomodation, just across the channel, the Bank of England is set to tighten its monetary policy within just a few months and the central bank for the world’s largest economy, the Fed, is in a similar situation. This has big implications for capital markets with capital being so internationally mobile and will thus have a big effect on equity prices. It also highlights the effects that persistently low oil prices have had because although it may have had some limited effect in boosting consumption, it has also created the spectre of deflation that has entered the ECB’s cross-hairs.

The future of the European Investment Banking industry

Tidjane Thiam, chief executive officer for Credit Suisse Group AG, speaks during a Bloomberg Television interview at the bank's headquarters in Zurich, Switzerland, on Thursday, July 23, 2015. Credit Suisse reported second-quarter net income that beat analyst estimates even as profit from investment banking fell in the months before Thiam took over. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption *** Tidjane Thiam

  • What’s happened? Having hit hard times recently, two of Europe’s major players in the global investment banking industry have announced drastic measures in order to keep afloat. Credit Suisse, with their new chief executive Tidjane Thiam, announced equity raising plans of $6.4bn and outlined a schedule to restructure their investment bank, ultimately leading to it being shrunk by 20%. Meanwhile, Deutsche Bank, who also recently appointed a new chief executive of John Cryan, made plans to dramatically turn around the business by replacing its outdated technology, shedding its labour force and revamping its asset and wealth management divisions as well as splitting its investment bank.
  • What’s behind this story? Both are struggling under the current economic climate as their main strength has traditionally been fixed income which is currently doing abysmally. For Credit Suisse, revenue from fixed income sales and trading was down 42% year-on-year which helped to drive down their net revenues by 20% whilst Deutsche Bank is expected to make its first loss in 4 year on the basis of such weak performance of the division. As long as the weakness in fixed income continues which is being driven by both structural factors such as risk aversion and cyclical factors such as greater aversion to risk, so too will the weak performance of these banks persist.
  • Why is this important? As highlighted by this FT article, over the past decade, there has been a significant reversal in the fortunes of European investment banks; from 14 of the world’s 20 largest banks being European, that number has more than halved to just 5. If the plans to shrink the European investment banks go through, Europe will have even more of a diminished presence in the global investment banking industry and that would be a great loss due to their socio-economic role in acting as an intermediary between savers and borrowers and in making markets more liquid.

In other news:

  • Mark Carney controversially entered the UK’s EU referendum debate by claiming that Britain has been the leading beneficiary of the EU’s four freedoms of capital, labour, goods and services and in his eyes, this has allowed the UK to enjoy one of the fastest per capita growth rates in the G7 over the last four decades. As the governor of the Bank of England, a politically independent central bank, some have argued that he has overstepped his remit but that emphasised that he was not offering a “comprehensive assessment of the pros and cons” of EU membership.
  • The Canadian general election concluded with Justin Trudeau, leader of the Liberal Party, being elected as the new Canadian Prime Minister, ending Stephen Harper’s decade-long reign. The son of a former Canadian Prime Minister, Trudeau has been elected on a strong mandate with 40% of the popular vote and a majority in parliament but he faces a tough challenge as the economy is gripped in a recession. Nonetheless, Trudeau believes he has the answer as he has made bold promises such as a pledge to  run three consecutive deficits in order to fund infrastructure spending.
  • Valeant had a stressful week as it was accused of accounting fraud by incorporating the financial results of Philidor, a specialty pharmacy that it bought the option to acquire in 2014, into its own financial report, leading to claims that it has been artificially raising its revenue. Although executives at Valeant have denied the allegations, the damage has been done as Valeant shares lost 25% of their values over the following 2 days and there is now growing concern over Valeant’s business model which is dependent on buying the rights to “under-priced” drugs and then quickly raising their prices due to the threat of new drug laws. There is a sinking suspicion that this whole charade has been maliciously created as it was a company called Citron that released the report making such claims and it has come to light that Citron was shorting Valeant stocks, causing them to profit massively from the debacle.

Week in review: Policymakers steady their hand whilst market sentiment goes wild

In this section, we cover the 10 most important events of the week, focusing on the big stories in the markets, in business and in the world of politics. This week, there was a flurry of economic data released and monetary policy decisions made that were underpinned a cautiously optimistic tone whilst the M&A boom took to the wind and carried on inflating.

1. Let’s begin with the bad news: Citing a slowing China and impending monetary tightening from the US amongst others, the OECD cut its growth forecasts for the global economy slightly; from 3.1% to 3% for 2015 and from 3.8% to 3.6% for 2016. Nonetheless, the Paris-based thinktank emphasised that the ‘outlook [was] clouded by important uncertainties’ such as as Japan’s ‘erratic data’ and the Eurozone which was ‘improving, but not as fast as might be expected’.

2. It’s still not looking good for China: The tide of disappointing news continues to come for the world’s second largest economy as industrial output rose by 6.1% in August from a year earlier but disappointing fell short of expectations of a 6.6% rise. However, in an optimistic sign, the Chinese government has announced measures that seek to put the Chinese economy back on track – the reform of its inefficient state-owned enterprises, including the partial privatisation of of their operations.

3. But it’s looking better and better for the UK: This week provided many promising signs for British consumers. On Wednesday, the ONS reported that average weekly earnings (excluding bonuses) increased by 2.9% in the three months to July compared to a year ago, the strongest rate of growth in average pay since 2009. Together with the unemployment report that revealed that the UK unemployment rate had been unchanged at 5.5%, it suggests that employers are willing to pay more to keep existing workers or hire more workers in what seems to be a tightening labour market. Add to that Tuesday’s news that the annual UK inflation rate for August had dropped to 0.0%, this large boost in real earnings offers an encouraging sign for consumer spending in the coming months.

4. Japan forgoes monetary easing…: In the face of an ailing Japanese economy which contracted in Q2 2015 and saw an inflation rate of 0% last month, the Governor of the Bank of Japan Haruhiko Kuroda argued that he foresaw a gradual recovery continuing in the economy and thus shied away from any more quantitative easing but pledged to be proactive if he saw continued further weakening in the economy.

5. … whilst Fed forgoes monetary tightening. After widespread speculation from some economists that the Federal Reserve would at last raise interest rates in this week’s monthly meeting, the Chairwoman Janet Yellen announced that the federal funds rate would in fact be maintained at 0-0.25%. Citing a below-target inflation rate of 1.2% and “recent global economic and financial developments” in the emerging markets like China as the primary reasons for the lack of a rate rise, 13 of 17 members of the Federal Open Markets Committee still predict a rate rise by at least 0.25% this year.

6. M&A megadeals at their all time high: With the total value of so-called attempted M&A megadeals (i.e. transactions worth over $10bn) reaching $1.19tn this week, no other year has recorded such enthusiasm for these megadeals. As one FT article notes,  ‘the M&A boom comes at a time when debt financing is particularly cheap and many US and European groups are suffering from a lack of revenue growth. A large number of companies are also under pressure from investors to do something with their large cash piles after years of share buybacks.’

7. Telecoms deal marks the zenith of the megadeals: French telecoms group Altice’s deal to buy Cablevision, a US cable company, for $17.7bn was what pushed the total value of giant deals in 2015 into record-breaking territory but bears the signs of excessive froth in the markets. By paying almost $35 a share in cash, Altice has valued Cablevision at $9.6bn, a 66% premium on its price from mid-May which has been boosted in recent weeks as speculation of a takeover emerged and by issuing a significant amount of debt of $8.6bn to finance the acquisition on top of cash from an equity issuance, many analysts fear that that Altice is becoming overleveraged by its growing debt pile, having made two large US acquisition in four months.

8. And there’s more on the way: Anheuser-Busch InBev, the world’s largest beer company, announced that it is considering taking over its biggest rival SABMiller, which would form a global beer monopoly which serves 1 in 3 beers worldwide. As this Economist article notes, there are three big reasons why AB InBev is interested in this takeover; its experience in reaping synergies from big acquisitions, its opportunity to expand its global reach and the appealingly low price of SABMiller at this current point in time.

9. Progress in migrant crisis stalls: This week, the European migrant crisis took a turn for the worst as countries struggled under pressure of the influx of refugees. After promising to be a sanctuary for desperate Syrian asylum seekers, Germany on Monday imposed controls on its border with Austria and prompted a classic beggar-thy-neighbour response; Austria, Slovakia, the Netherlands, Hungary and Croatia have become the latest to also impose border controls in an attempt to stem the enormous inflow of migrants into their country, effectively suspending the Schengen Agreement which had created a free-travel zone within participating countries.

10. Tensions over Syria come to a storm: With Russia being confirmed to have sent at least 4 fighter jets this past week in support of President Bashar al Assad’s government forces, the growing military aid it has sent in recent weeks in the form of tanks and military personnel has caused alarm amongst western nations.  US Secretary of State John Kerry is now calling for talks with Russian officials, because although Russia has stated that the presence of Russian troops in Syria is intended to help fight IS there, an equally likely motivation is that Putin wishes to prop up President Assad’s regime, who has long been his ally.

Week in review: A new future beckons

In this section, we cover the 10 most important events of the week, focusing primarily on the big stories in the markets and business as well as economic news. With promises of economic stimulus, significant progress being made on important geopolitical issues and the rise of a new political leader, this week was filled with stories that we may look back at one day and think ‘That was the turning point.’

1. Optimism for the Eurozone: At last, the Eurozone sees a glimmer of light. After its growth forecasts were revised downwards last week, this week brought the opposite movement; it’s growth during Q2 was revised up from 0.3% to 0.4%. Promisingly, the main components of growth appeared to be household spending which rose 0.4% and exports which climbed 1.5%. 

2. Optimism for the European migrants: In his state of the union address on Wednesday, the European Commission President Jean-Claude Juncker proposed what he has called a “swift, determined and comprehensive” solution to Europe’s migrant crisis. Under his plans for Europe to house 160,000 asylum seekers over the next 2 years, most of the EU member states have controversially been assigned quotas, forcing them to take in their share of the refugees or face a fine.

A solution to the migrant crisis?

3. Chinese fears compounded: After an awful few weeks with Chinese manufacturing activity reportedly contracting in August, this week offered no respite from the bad news. This time, the focus of the concern lies not in the output data but in inflation (or rather, the lack of it). Thursday saw the release of data suggesting that the producer price index (PPI) in China had fallen 5.9% in August from the same month last year, which was the largest fall in 6 years. Analysts have cited falling commodity prices as the main driver and express concerns about the effects of falling prices on corporate profitability as profit margins are eroded away.

4. Asian fiscal stimulus on the way: After an awful few weeks, Chinese policymakers announced new measures to stimulate an economy that is growing at its slowest pace in decades by promising “proactive fiscal policy and related measures, do timely fine tuning, and speed up reform measures”. Similarly, in Japan, Shinzo Abe responded to deflationary fears by introducing dramatic cuts to corporate tax rates from its current rate of 35% by 3.3% and outlined plans to reduce it further within the next few years. This launched quite the reaction in the Japanese stock market with the Nikkei experiencing its largest one-day gain since the financial crisis of 7.7%.

5. Bank of England holds rates unchanged: Although the decision to leave interest rates at 0.5% was widely expected, the main thing to note is that the policymakers commented that whilst the recent turmoil in Chinese markets would “add to the global headwinds” that the UK faces, they would be stick to their schedule for raising the interest rates within the “the turn of the year”. With no change in the monetary policy from the BoE, all eyes will now be on the Fed which will also be making the decision on whether to raise their interest rates next Thursday.

Bank of England Governor Mark Carney emphasises that the Bank is sticking to its schedule

6. A future with even cheaper oil?: Despite once predicting oil prices to reach a new high of $200 a barrel in 2010, 5 years Goldman Sachs has completely reversed their tone with new estimates suggesting that oil prices could fall to their lowest ever level at $20 a barrel. “The oil market is even more oversupplied than we had expected,” claimed the bank, citing ‘further OPEC production growth, resilient non-OPEC supply and slowing demand growth’.

Glencore attempts to improve its poor finances

7. Glencore takes precautionary measures: On the back of predictions of continued low oil prices, the mining and commodities trading giant announced that it would initiate a $10 billion debt-reduction plan by launching a $2.5 million share issue and a suspension of dividends. Many investors have already fled Glencore this year, driving its share price down nearly 60% and this move is clearly aimed at winning over the trust of investors, intending to protecting the firm’s credit rating should commodity prices fall further. In related news, Glencore also  suspended operations at two of its large African copper mines for 18 months to reduce oversupply in the market and raise the market

8. M&A boom sees no end in sight: Despite especially volatile markets in recent weeks, the appetite for M&A deals seems to have been undampened. On Tuesday, $40bn of new transactions worldwide were announced in what is on track to be a record year for mergers and acquisitions. For comparison, the level of M&A activity has already hit $1.46tn so far this year, surpassing the levels seen in 2014 and is on track to exceed $4tn in 2015, the highest level since the financial crisis. 

9.  Historic Iran deal gets the go ahead: After opponents of the deal to lift sanctions from Iran failed to secure the 60 supporters needed in a procedural vote to break a Democratic filibuster, Barack Obama has been given the liberty to implement the deal. The dynamics of the US Senate system meant that in order for a vote on the legislation to proceed, debate first had to be brought to a close with a so-called “cloture” motion, requiring three-fifths of the Senate to approve and without reaching that requirement, an infinite period of debate on the bill could have technically take place (i.e. a filibuster), thus preventing the Senate from actually being able to vote on the legislation.

10. Labour lurches to the left in landslide victory: Sweeping the Labour leadership election with almost 60% of the vote in the first round, Jeremy Corbyn, the hard-left candidate, was elected to the leadership of the party with an seemingly unshakable mandate. Having earnt his victory through the support of the Labour grassroots movement, his main priority is to now re-establish the Labour party after this year’s disastrous result in the General Election; his key proposals during the campaign included the renationalisation of the railways, apologising for Labour’s role in the Iraq war, ‘People’s quantitative easing’ to fund infrastructure, opposing austerity, controlling rents and creating a national education service.

Corbyn stands victorious

The week in review: Oil-heavy economies hit hard times and monetary policy quandaries

In this section, we cover the 10 most important events of the week, focusing primarily on the big stories in the markets and business as well as economic news.

1. Fears of a Chinese slowdown are heightened: It was officially confirmed on Monday. The Chinese manufacturing purchasing managers index fell to 49.7 in August, a level indicating a contraction of activity within the manufacturing sector and it meant that the index had sunk to its lowest level since 2012.

2. It wasn’t all bad news for China though: In celebration of the 70th “anniversary of victory in the war against Japanese aggression”, China held a stunning military parade with over 10000 army troops as well as an array of advanced combat weaponry being on display. This was a welcome relief to the world markets as the military parade meant that the Chinese stock markets were on a break and could not be the bearer of bad news as it has been recently.

A formation of military aircraft performs during a rehearsal ahead of celebrations to mark the 70th anniversary of the end of World War Two, in Beijing on 23 August 2015.

3. The same couldn’t be said for Canada: After a contraction of an annualised 0.8% in Q1, Tuesday’s news of an annualised 0.5% contraction in Q2 meant that the world’s 11th largest economy had officially entered recession. Analysts are pointing to the falling price of oil in recent times as being the main driver behind the poor data.

4. Similar woes for Australia: A day after the Canadians declared a recession, the world’s 12th largest economy reported a quarterly growth rate of just 0.2% in Q2 which was just half of what they had forecast. Driven by China’s drop in demand and a slump in oil prices, it was Australia’s slowest quarterly growth rate since 2013.

Canada GDP Growth RateAustralia GDP Growth Rate

5. Speaking of oil…: After a week in which oil had dropped to its lowest level in 6 years, the commodity had been making rapid gains from Monday to Wednesday with its biggest 3-day rise in 25 years. In particular, this sharp rally was driven by new estimates of lower US oil output and discussion of a cut in OPEC oil production. However, in the next few days, oil fell quite rapidly as the market had started to absorb the news of even more evidence pointing to a slackening of output in Chinese manufacturing.

6. The Jackson Hole Conference draws to its conclusion. Its message? Central banks can’t tackle inflation as well as they thought they could. The comment at the Fed’s annual symposium on Monday came after the Eurozone consumer prices index remained at a rock-bottom 0.2% in August, the same as in July. Worryingly, this was in spite of the ECB being almost six months deep into its extensive monetary easing programme.

7. Eurozone pessimism presses Draghi to adopt a more active stance: Having downgraded the forecasts for Eurozone inflation and growth, the European Central Bank’s governor Mario Draghi announced that he would be prepared to implement more monetary stimulus should the events in emerging markets, China especially, threaten the Eurozone’s recovery. Under existing plans, the ECB intends to buy €60bn worth of predominantly government bonds each month until September 2016 but to demonstrate his readiness, the purchase limit of a single country’s debt stock was raised to 33% from 25% and he commented that he would be willing to extend the asset purchases programme “beyond [the set date], if necessary”.

8. European migrant crisis intensifies: In what is already Europe’s worst migrant crisis in 70 years, images of a drowned toddler lying lifeless and face down on a Turkish beach, who had tried to reach Europe with his family, have sparked outcries on social media websites about the handling of the crisis. After circulating on Twitter, the hashtag #KiyiyaVuranInsanlik, or “humanity washed ashore” in Turkish, quickly gained traction as EU leaders met in Brussels to discuss how to resolve the crisis. Meanwhile, David Cameron revealed on Thursday that he would allow thousands more refugees from Syria, bowing to growing pressure at home and abroad,

A paramilitary police officer carries the lifeless body of a migrant near the Turkish resort of Bodrum - 2 September 2015

9. US economy shows its strength: On Friday, the monthly jobs report revealed that in August, a total of 173,000 jobs were created and the unemployment rate dropped to 5.1% from 5.3% in the month prior. With this rate being a 7-year low and a rate that the Fed deems as representing “full employment”, tit suggests that the world’s largest economy was picking up momentum ahead of the Fed’s crucial interest rate decision later this month.

10. But the IMF urges against rate rises: Raising concerns abut the current state of most developed economies in which the expected gains from low oil prices had failed to materialise, low inflation had become widespread and medium term growth had proved to be only “moderate”, the IMF gave caution on Thursday against possible rises in interest rates from countries like the US and the UK who have been considering it. Indeed, fear that a Fed rate hike may cause further turmoil in emerging markets and harm the prospects of the global economy also likely drove Christine Lagarde to make such a statement.