emerging markets

Week in review: Disappointment, distress, despair

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. This week was dominated by a fear of what is to come; another war? Another financial crisis?  Another global recession? It is simply human nature to expect the worst.

A new cold war?

  • What happened? After weeks of seeing Syrian migrants flooding into Europe, the focus this week turned to its root cause; the conflict in Syria itself. Although it was reported last week that Russia had started to send military equipment to Syrian government forces, Russian President Vladimir Putin stepped up his intervention to a new level by initiating airstrikes in the war-stricken country.
  • What’s going on behind the scenes? Although Putin has repeatedly asserted that his intention to wipe out ISIS, there are reports that the airstrikes have hit Syrian rebel forces in an attempt, leading many to believe that Putin is trying to prop up the Assad regime as well as Obama to claim that the airstrikes are in fact strengthening Islamic State.
  • Why is this important? There are fears from some that this is just the beginning, that Russia may consider going into Iraq with Iraqi President Haider al-Abadi announcing that Russian airstrikes were “a possibility” and that Iraq would “welcome it.”  Should this occur, we may find ourselves in the midst of a new global cold war.

A wild ride for Glencore

  • What happened? It started on Monday when the major trading house and mining giant Glencore fell by an eye-watering 31% to its lowest ever share price of 67p, making it the biggest loser of the FTSE 100 this year, having declined by over 77% since the start of the year. To the relief of investors, it bounced back during the week as shares reached as high as 99p on Thursday and by Friday, it had recovered most of the value that had been lost during Monday’s turmoil.
  • What’s going on behind the scenes? The fears stemmed from the South African investment bank Investec whose analyst Marc Elliott released a damning note, in which he made the prediction that the firmwould see almost all of its equity vanish if commodity prices stayed weak. This ignited the fears as the trading house is looking far too leveraged, with debt levels almost double its market capitalisation of $16bn and is looking far too exposed to commodity markets, with a 56 percent decline in first-half earnings in August following slowing demand from China that has dragged down demand for copper. It was only a statement made by Glencore’s executives that it was ‘operationally and financially robust’ that allayed the fears.
  • Why is this important? This whole episode triggered fears that a collapse in Glencore could have major global ramifications, in a “quasi-Lehman moment” in the words of Legal & General Group CEO Nigel Wilson. It certainly looked that way as credit default swap spreads in Glencore spiked massively from around 300 basis points in mid-September to a high of over 750 basis points this week, suggesting that investors saw a default as a very real possibility.

An emerging markets earthquake?

  • What happened? In a report released this week, the IMF warned that the number of corporates failures in emerging markets could spike significantly in the wake of a normalisation of US monetary policy, with grave consequences for emerging economies.
  • What’s going on behind the scenes?  Noting that the cheap cost of money in recent times has pushed companies in emerging economies to gorge on debt, to the extent that corporate debt in emerging economies ballooned from $4trillion in 2004 to $18 trillion last year,  the IMF fears that the companies in emerging economies are too exposed to a rise in the US interest rate by the Fed. With a surge in dollar-denominated debt in emerging economies, a stronger dollar triggered by a hike in the Fed Funds rate may leave many firms in emerging economies insolvent if they have not been hedging their exposure to foreign exchange swings.
  • Why is this important? Growth prospects for emerging markets are already starting to look gloomy with Brazil and Russia both being mired in recession, and the latest data from the Brookings-FT index suggests that emerging economies are at risk of “leading the world economy into a slump”.  When the highly-anticipated rise in the Fed Funds rate does arise, the issues that emerging economies currently face will only be exacerbated.

US jobs data disappoints

  • What happened? According to data released this week, the US economy added considerably fewer jobs in September than were expected at just 142,000 and on top of downward revisions to the number of jobs created in July and August, job creation in US over the past three months has fallen its slowest pace since February 2014 and is significantly lower than that seen this time last year when the US economy was creating well over 200,000 jobs a month.
  • What’s going behind the scenes? The US economy has been badly battered by the falling price of oil that has forced the energy industry to shed jobs rapidly, with 120,000 jobs lost since last December. At the same time, a soaring dollar on top of slowing global demand has hurt US exports, to the extent that U.S. manufacturing growth has fallen to a two-year low.
  • Why is this important? With another Fed meeting scheduled for 27-28 October, this disappointing round of of jobs data will weigh heavily in the mind of Janet Yellen. On top of wage data indicating that average hourly earnings remained flat at 2.2%, Michael Feroli, an economist with JPMorgan, has already claimed that “this takes October completely off the table [for a Fed rate hike] and . . . obviously it makes December questionable as well”. And as highlighted by the previous story, the strength of the US economy and the timing of the Fed rate lift-off will play a vital role in the health of the global economy.

Japan at the cliff’s edge

  • What happened? It was revealed this week that Industrial production in Japan fell by 0.5% in August and adding that to July’s fall of 0.8%, it suggests that another quarter of economic contraction is on the cards.In fact, with the Japanese economy having contracted by 1.2% at an annualised rate last quarter, this leaves Japan on the brink of a technical recession.
  • What’s going on behind the scenes? This new data indicates that as Japan’s largest trading partner by far, the much-discussed Chinese slowdown is having major ramifications on Japanese growth. On top of this, Japan has its own domestic problems as it is struggling with frustratingly low consumption, owing to last year’s rise in the consumption tax and its persistent struggles with deflation.
  • Why is this important? As the world’s 3rd largest economy, a downturn in Japan bodes poorly for the prospects of the global economy. The Japanese Prime Minister Shinzo Abe knows this and recently initiated the second phase of his Abenomics programme by firing three  “three new arrows” to try and stimulate the economy. He announced a new target of raising GDP by 20% to 600 trillion yen ($5 trillion) by 2020, promised to keep the population above 100 million people and vowed to bolster social security for the rich-yet-aging population. Only time will tell if his measures will prove effective.

Week in review: Crisis upon crisis

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, we saw crises dominate the headlines; a venerable company was put into disrepute, emerging markets appear to be staring into the abyss and the dilemma about what to do with European migrants only intensified.

1. Hell breaks loose for Volkswagen:  The German car giant this week admitted to installing software in an estimated 11 million vehicles that allowed to them to cheat emissions tests. The sinister motive is evident; having bypassed the checks, the engines allegedly produce nitrogen oxide pollutants 40 times above the permitted US level. Volkswagen has subsequently fallen turmoil, with their stock falling ⅓ in the first four days after news scandal broke, their CEO Martin Winterkorn resigning and investigations from authorities across the worldwide being launched.

2. Greek Voters re-elect Syriza: Alexis Tspiras won a ‘victory of the people’ in Greece as 35% of the electorate voted to return Syriza to power. However, despite gaining an extra 50 seats for gaining the most votes, the radical left party was still short of an overall majority, prompting them to once again enter coalition with the nationalist Independent Greeks. Nonetheless, with voter turnout sinking to a historic low of below 60%, it signals discontent  with the former anti-austerity upstart, now a pro-bailout ally of Brussels, as the country continues to head to ruin.

3. Yet more monetary easing!: The world of low-interest rates is here to stay it seems as both Norway and Taiwan saw interest rate cuts this week. The Nordish central bank Norges Bank cut their overnight deposit rate to a record low of 0.75%, citing the effects of falling oil prices on the oil-dependent economy; it has sapped growth to a snail’s-pace at 0.2% and has driven unemployment to its highest level since 2006 by pushing oil companies to cut workers. Meanwhile, the Taiwanese central bank cut its policy rate for the first time since the global financial crisis to 1.75% but here the explanation is different; facing declining competitiveness in the wake of the yuan devaluation, the central bank cut its rate to support its weakened exports and growth.

4. And more unconventional monetary policy?: Meanwhile, in the UK, the Bank of England’s chief economist Andy Haldane proposed the scrapping of cash and a transition to a digital alternative. As unorthodox as it seems, it is his way of tackling the zero lower bound and paving the way for negative interest rates; with the abolition of cash, if the central bank charged a negative nominal interest rate, people could no longer convert their deposits into cash to escape the nominal losses on their deposits and it would thus successfully stimulate spending. As all new innovations do, the idea has been subject to fierce criticism.

Bank notes

5. On the other side of the world however…: Despite sending out a dovish message to the world with a hold on interest rates last week, the Fed’s chairwoman Janet Yellen appeared to change her tone as she claimed that ‘it will likely be appropriate to raise the target range for the federal funds rate sometime later this year’. The speech, along with an upward revision to the US growth rate for Q2 2015 to 3.9% on an annualised basis, caused markets to rally towards the end of the week.

6. Emerging currencies collapse: Concerns about Chinese growth and uncertainty about U.S. rate hikes have appeared to hit the emerging market currencies hard. In the wake of Wednesday’s news that activity in China’s factory sector shrank to a near 7 year low in September and Thursday’s aforementioned Yellen speech, the South African rand and the Mexican peso hit record-lows. Sparking fears about what is to come, the Malaysian ringgit and Indonesian rupiah fell to their lowest levels since the 1998 emerging markets crisis. Worst of all, the Brazilian real continued its slide and having lost 60% of its value since the start of the year, the Brazilian central bank stated its willingness to use its foreign exchange reserves to defend the currency.

7. Urgency over the European Migrant Crisis: With over 500,000 migrants being estimated to have arrived in Europe this year already, the European migrant crisis is quickly escalating so the resettlement plan to relocate 120,000 of the refugees across the European Union, approved by a majority of EU ministers this week, was well-needed. Nonetheless, such a plan has attracted controversy as the smaller Eastern European nations have been overruled in the matter and are protesting at these ‘diktats’ from the Europe’s command. Most notably, Hungary’s prime minister Viktor Orban accused Germany of ‘moral imperialism’ and of trying to ‘impose its will on other countries’. Nonetheless, the plan is being pushed ahead as 66,000 of the refugees in Italy and Greece will soon be resettled across Europe.

Europe’s refugee and migrant crisis

8. Disaster strikes hajj pilgrims: In the worst-ever tragedy to occur during the annual Muslim pilgrimage, a stampede killed 769 people in Saudi Arabia in Thursday. There has been plenty of finger-pointing as Iran’s President Hassan Rouhani called for an investigation into the incident at the UN whilst Saudi authorities have accused the pilgrims of failing to follow instructions.

9. Osborne buddying up with the Chinese: Despite more and more evidence that the Chinese economy is slowing, the British Chancellor of the Exchequer spent this week in China trying to drum up business for the UK. His most notable achievement was a guarantee for up to £2 billion of Chinese investment in the controversial construction of Hinkley Point C, Britain’s first new nuclear plant in the UK for 20 years that will provide up to 7% of the UK’s electricity needs once operational. A perhaps less desirable feat was being credited as ‘the first Western official in recent years … [to ignore] the human-rights issue’ by the Global Times, a Chinese state-run newspaper. Congrats Mr Osborne.


10. “The most hated man in America”: Martin Shkreli, CEO of Turing Pharmaceuticals, made headlines this week for being a ‘morally bankrupt sociopath’; having recently acquired the rights to Daraprim, a drug often given to cancer and Aids patients to tackle a rare parasitic infection,  he raised the price of the drug by over 5000% fom $13.50 to $750 per pill. This blatant move of price-gouging attracted widespread criticism and even prompted the US Democrat presidential candidate Hilary Clinton to intervene by tweeting that she would bring down drug prices if elected. Despite being unapologetic at first for taking advantage of the medically vulnerable, he later backed down by promising to reduce the price of Daraprim down to a more “affordable level”.