Eurozone

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 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