ISIS

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: Tensions flare

This week saw tensions rise up in all different areas of the world. Anger is being channelled by the French and Russians into their efforts to take down ISIS, with some blowback. Similarly, Pfizer provoked outrage by announcing their intentions to relocate from the US to Ireland through the acquisition of Allergan, mainly for tax reasons. On the other hand, George Osborne helped to settle tensions after he backed down from his plans to implement £4.4bn worth of public spending and tax credit cuts, which would have disproportionately hurt the poorest families.

The daddy of all megadeals

pfizer take over

 

What happened? So far this year, we’ve had the biggest tech deal in history, the biggest beer-brewing deal in history and the biggest hospitality deal in history. And now? The biggest pharma deal in history. That’s right; Pfizer, known for its production of Viagra, has agreed a deal to purchase Allergan, which makes Botox, for a record $160bn, to create the world’s largest pharmaceutical company.

What’s going on behind the scenes? Rumours had been circulating about whether this deal would actually go through for several month but after all of the anticipation, this deal has certainly made a splash. Not just for the size of the deal (it is set to be 2nd largest in history), but also for the motivations behind the deal; Brent Saunders, CEO of Allergan, has highlighted the “highly strategic” nature of the deal. This mainly stems from the tax inversion that Pfizer is desparately seeking; Pfizer is currently domicilied in the US where the corporate tax rate is 26% compared to the 17-18% that Allergan pays in Ireland, helping to save the company $2bn over the course of the first three years. Some analysts also believe this deal is simply a play to replenish Pfizer’s branded drugs portfolio before divesting its generics business, to leave the firm more streamlined.

Why is this important? Although this deal is very atypical in its size, the two key issues that plague almost every M&A transaction are especially pertinent to this deal; concerns over regulation and culture clashes. Politicians have been quick to denounce the deal with Hilary Clinton claiming that this leaves the US  taxpayer “holding the bag”, referring to how Pfizer has long benefited from US  taxpayer-funded research and American scientists and suggests that this deal could be blocked. Also worryingly, the chief executives of the firms have a very different take on the importance of R&D in ‘big pharma’; currently, Pfizer invests heavily in R&D whereas Allergan is known for buying or licensing drugs that have already been unearthed by smaller biotech firms.

Christmas come early?

Autumn Statement chart: Fiscal forecast

George Osborne faces the biggest test of his chancellorship.

 

What happened? This week saw George Osborne deliver his first budget for a wholly Conservative government and with it, the Chancellor of the Exchequer brought a nice treat in time for Christmas; he abandoned his plans to introduce £4.4bn worth of cuts to tax credits and public spending which were widely lambasted for their harm to the livelihoods of working-class families.

What’s going on behind the scenes? It is most likely that Osborne’s change of heart has come as a result of a more optimistic forecast by the Office of Budget Responsibility for the government’s coming five-year public finances, which was improved by a health £27bn, giving Osborne more leeway in his aim to achieve a £10bn surplus by 2020. On the other hand, it could also be that public opinion is turning against Osborne’s crusade of austerity, with a Populus poll by the FT showing that fewer people now support the notion that there is a need for ‘austerity and cuts in government spending over the next five years’, down to just 48%.

Why is this important? Given Osborne’s reputation as an opportunist, showcased by his outdoing of Labour through the repackaging of their minimum wage increase into a ‘living wage’, this U-turn by the chancellor seems to be just as well-calculated. In his budget, he outlined significant tax rises in the form of an apprenticeship levy on businesses and higher council taxes, as opposed to the spending cuts he has become known for in what appears to be a move to take the centre ground that has been left open by Corbyn’s Labour.

A “grand coalition” to fight a grand enemy



 

What happened?  This week, François Hollande made good on his promise to wage ‘war against ISIS’; not only did he triple the French air-strike capacity in Syria to bomb ISIS targets, but the French President himself has met up with numerous allies to form a ‘grand coalition’ of countries that will help him to take down ISIS.

What’s going on behind the scenes? Following the Paris terror attacks, for which ISIS claimed responsibility, the French feel very strongly about retaliating to “annihilate” the terrorist organisation and this sentiment is also shared by Russia who are equally furious at ISIS’ bombing of Metrojet Flight 9268, which killed over 200 Russians who were on board. With ISIS very clearly targeting Western Europe countries, this has made the possibility a collaboration amongst the Western allies and Russia very real.

Why is this important? Whilst Hollande’s efforts of a grand coalition were occurring, the week also brought further news that highlighted the point of a coalition; Turkey had shot down a Russian fighter jet for violating its air space, the first time a NATO member had entered hostilities with Russia since the end of the Cold War. With more co-operation, it is hoped that these countries can work together as opposed to working against each otehr, in order to achieve their common goal of eradicating ISIS from the world.

Other News:

This week marked the 100 years since Albert Einstein formulated his famous theory of general relativity. Even today, it is talked about with much admiration and is seen as one of the major milestones of scientific progress. At its heart, the theory explains gravity as a curvature of spacetime and has helped to explain an array of phenomena such as the nature of black holes and the state of the universe.

The US growth rate for Q3 was revised upward significantly from 1.5% at an annualised rate to 2.1%, with the bulk of the upward movement coming from inventories being overestimated. By putting a more optimistic spin on the data, this further raises the likelihood of a Fed rate hike next month.

Having announced five profit warnings in the last 2 years, the new chief executive of Rolls-Royce, Warren East, made her attempts to win back the trust of investors by laying out her plans to restructure the British engineering company. He intends to  cut jobs and slim down management whilst transitioning the company’s focus from jet engines, which are seeing declining demand to new generation turbines.