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

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: 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.