Fed

Week in Review: Animals galore!

The theme of this week’s post is animals! We have animal spirits are driving even more M&A activity, this time in the hotel industry. We see a fundamental divide between the hawks and doves in monetary policy, between those who want to see less monetary stimulus and those who want more. Finally, there is a tale about the mythical unicorns, the start-ups that are valued at over $1bn before even being public listed!

Hotels are getting in on the action!

A Marriott flag hangs at the entrance of the New York Marriott Downtown hotel in Manhattan, New York November 16, 2015. Marriott International Inc will buy Starwood Hotels & Resorts Worldwide Inc for $12.2 billion to create the world's largest hotel chain with top brands including Sheraton, Ritz Carlton and the Autograph Collection. REUTERS/Andrew Kelly

  • What happened? After the last few weeks were dominated by headline-making ‘megadeals’ in the beer, tech and pharmaceutical industry, it was the hotel industry’s turn; Marriott International approached Starwood Hotels & Resorts with an offer of $12.2bn to acquire them. However, the deal is not yet done as the door is still open for other hotel chains to propose an even better offer.
  • What’s going on behind the scenes? The hotel industry is known to be widely dispersed; the combined firm would be the largest hotel company in the world but would still only have a global market share of 7%. Nonetheless, growing in scale is highly significant as Marriott hopes to gain greater bargaining power against the internet booking companies of Expedia and Priceline who together control 61% of the market, and a greater ability to compete with the likes of Airbnb who have intensified the competition that the hotel companies face. Finally, this deal is perfectly in line with Marriott’s strategy of international diversification because they are already steadily opening one new hotel in China every fortnight but through the acquisition of Starwood who sell over 20% of their rooms in Asia, they can dive straight into the Asia-Pacific markets where incomes are rising fastest.
  • Why is this important? The hotel sector had been particularly quiet in the first half of this year, even when most of the sectors were seeing large amounts of M&A activity going on but within a fortnight, that changed dramatically. Firms such as Accor, the French hotel group and Travelodge, the budget UK hotel chain, were quickly immersed in deals before this bumper transaction was announced. Ultimately, it highlights that in the face of disruptive innovation and pressures from their distributors, firms must adapt and M&A is one way to do that. Only time can tell if that is a sufficient answer.

Are unicorns even real?

Jack Dorsey

  • What happened? Of course unicorns exist! No, we don’t mean the mythical horned creature, we mean the tech firms that have managed to amass a valuation in excess of $1 billion. However, one purported unicorn, the payment processing company of Square Inc, didn’t nearly as well as it hoped when it had its initial public offering last week. Its shares priced at $9, well below its indicated price range of $11-$13.
  • What’s going on behind the scenes? In its previous private fundraising round, Square had been valued at $6bn and if the IPO had gone according to plan, it would have been worth as much as $4.2bn but alas, its public valuation at debut was just a meagre $3.2bn. When we consider why the firm was valued at such a discount relative to its private valuation, there are many reasons. The most important factor to consider is almost always the fundamentals; behind all the optimism about its status as a unicorn, Square is still a loss-making financial services company and although its year-on-year adjusted revenue growth rate is high at over 70%, it is on a downward trend. In fact, in an competitive industry where there are at least 5 other unicorns, it is clear that the market has deemed Square as being simply not unique enough to command such a high price.
  • Why is this important? On the whole, tech IPOs have done rather poorly this year; there have been less than 30 tech IPOs in the US this year, the least since 2009 and there is good reason for this. Investors are suspicious of the high valuation that privately listed companies have received, as it is not clear how strong the fundamentals of the firm are and what terms private investors have been given by private tech firms. With unicorns being as illustrious as they are, just as with the mythical creatures, it seems that August’s market correction has made investors sceptical of the unicorns.

Hawks and doves
ECB president Mario DraghiJanet Yellen testifies before the House Finance Committee in the Rayburn House Office Building November 4, 2015

  • What happened? More and more evidence is accruing to suggest that the ECB and the Fed are going to change their monetary policy stance in December. The big sticking point is that the changes are almost certain to be in the opposite direction to one another.
  • What’s going on behind the scenes? The US is coming off the back of a strong jobs report in October where there was a record low level of unemployment and according to the minutes of the Fed’s October meeting, many members on the board support the view that the conditions for a Fed rate hike “could well be met”. In direct contrast, ECB President Mario Draghi echoed his famous call to “do whatever it takes” to save the Euro in 2012, by announcing that he “will do what we must to raise inflation as quickly as possible” after months of near-zero inflation rates and a paltry growth rate in Q3 for the Eruozone. As such, December looks set to be the month when the Fed finally abandons its rockbottom Fed funds rate with a hawkish rise but also when the ECB makes dovish moves to bolster its €1.1tn quantitative easing programme.
  • Why is this important? A change in the monetary policy for the two biggest economies in the world would individually be enough to attract the interest of most economists but the fact that they are set to occur in the same month and with a difference in direction has added a whole new element into the mix. This is most plain to see in currencies and bonds where the dollar is surging to a seven-month high against the Euro whilst the sovereign debt spreads on two year Treasury notes against their G7 equivalents has reached almost 80 basis points, the greatest since 2007.

Other News:

  • There were significant developments in the fight against ISIS, in the aftermath of the Paris terror attacks that killed at least 129 people and injured more than 300 others. French President Hollande declared war on ISIS and launched an air offensive in Syria against known ISIS strongholds in retaliation. Meanwhile, the US continued to launch air strikes against and claimed to have killed the leader of IS in Libya. Finally, calls have been made to restrict the flow of Syrian migrants into Europe and the US, in fear of letting in would-be ISIS terrorists.
  • Walmart reported positive results last week as its stocks rallied and its sales in its domestic stores were slightly higher in the third quarter but despite this, profit was down by 11%, owing to the poor performance of the international stores. In particular, sales at Asda were down 4.5% due to fierce competition from the discount retailers who have seen their market share double in the past 3 years.
  • The Japanese economy fell into recession in the third quarter as it saw a slight contraction of 0.8% at an annualised rate that added to Q2’s contraction of 0.7%. This is a severe disappointment for Japanese Prime Minister Shinzo Abe whose efforts to eliminate deflation and revitalise economic growth through fiscal and monetary stimulus have clearly been in vain. Fortunately, the underlying reason for the contraction was simply a sharp decline in inventories, as private consumption had actually grown by 2.1% at an annualised rate, suggesting this ‘technical recession’ isn’t nearly as bad it seems.

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: 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.

martinrowson260915

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”.

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.

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.

The week in review: Markets tumble, milestones reached and moods swing to optimism

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

China’s market woes continue: Starting with what the Chinese media have dubbed ‘Black Monday’, China’s main stock market index tumbled by 8.5% and another 7% the day after, with the trigger being more data indicating a growth slowdown in China as well as news that the government had withdrawn its previous attempts to stabilise the markets. Thankfully, this turmoil did not last the entire week as the Chinese central bank cut its headline interest rate by 0.25% and the government resumed its commitment to keep the markets afloat.

china-stock-market

Volatility in the equity markets worldwide: Nonetheless, spreading from the woes of the Chinese stock market, the VIX index, an indication of volatility in the S&P 500, spiked sharply to its highest levels since 2009. This was seen primarily on Black Monday as the Dow Jones saw a record point-drop of 1000 points at the opening bell and there were significant tumbles in all markets worldwide, with the European markets seeing their worst days in years. This pessimism did not last however because as the week drew on, these stock markets did recover.

Oil falls sharply, then recovers strongly: It was a topsy-turvy week for oil and it all started on Monday, when off the back of concerns about China, oil dropped 7% to its lowest level in 6 years, along with other commodities. Then, the losses were reversed later in the week, when oil saw its strongest two day gains in several years.

Fed plans put on ice: Prior to all the turmoil in the stock markets, September had looked like the month when the Fed would, after years of bottom-rock interest rates at 0.25%, finally raise the Fed Funds Rate. All that appears to have changed as the Fed is now worried that such a move could further destabilise markets worldwide through capital flows, further strengthen an already strong dollar and further stifle China’s economy.

Facebook reaches an unprecedented milestone: On Monday, Mark Zuckerburg announced that a record 1 billion users had logged into Facebook, implying that around 1 in 7 people around the world was using the popular social media website. This adds to more good news this year as it has seen its revenue growing by leaps and bounds.