Monetary Policy

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.

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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”.

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.