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CE Macro Report

There is increasing uncertainty for the fate of the EU in the case of Brexit. The Bank of England has stated that the referendum is “the most significant near-term domestic risk to financial stability”, and brings the risk of a credit crunch. As a result, they have toughened this year’s stress tests and will offer additional liquidity measures to banks in the weeks surrounding the vote. Undoubtedly the effects of a proBrexit result will be volatility, however, to what extent is impossible to say. Approximately 200m jobs in the eurozone depend on trade with Britain. These jobs and overall terms of trade between the EU and Britain would become uncertain in the case of a proBrexit result. Additionally, remaining contributors to the bloc’s budget would be obligated to make larger payments. Brexit could have additional effects by setting a precedent for exit from the union, as it would demonstrate for the first time that EU integration can be reversed. This is especially important at time when tensions in the EU are high because of recent terrorist attacks and the refugee crisis. A recent survey found that 53% of French voters want a referendum on their EU membership. Over the summer of 2015 there was the possibility of Grexit and many European countries have considered departure from the union as a politically viable solution to both economic and social challenges.

After 300 years of independence the London Stock Exchange is poised to merge with Deutsche Börse, creating one of the world’s largest exchange operators. Under the proposed deal, Deutsche Börse shareholders would own 54.4% of the combined group and LSE shareholders 45.6%. The merger is expected to improve efficiencies, generating an additional EUR 450m over 3 years. The deal’s scale effects offer banks and investors billions of savings in the costs of trading in OTC markets; this is especially relevant as new Basel regulations are implemented: banks are forced to post larger amounts of collateral at clearing houses and are subjected to a higher leverage ratio. The largest impact will be felt by the risk management business, as the exchange would net off extra products’ risk, reducing the amount of capital held against positions. One way this is done is through compression, where OTC trades that offset each other are torn up, cutting gross exposure levels. Moreover, the new system would enable banks better margin-netting opportunities, netting the margin that traders post to back both their future and swaps derivatives. Critics of the merger warn against the creation of an exchange that is too big to fail with monopolistic charges. The main argument cited is a loss of independence, however there are more British shareholders in Deutsche Börse then German and the two exchanges are undeniably linked already. A consideration going forward is the practical aspects of the merger.

The European Central Bank has taken further steps to stimulate the economy: reducing the interbank rate and expanding quantitative easing. The value of bonds the ECB buys has increased from EUR 60bn to EUR 80bn. The forecasts for inflation and growth were lowered to 1.3% and 1.7% respectively in 2017. Mario Drahgi also stated that he did not foresee more rate cuts this year; however, the leader of the ECB has made this assertion before and later gone back on his word. On the day of announcement the euro experienced a 2% rise and shares in eurozone banks rallied before losing most of their gains later in the day. Yields on investment grade debt have plunged. The ECB as a buyer of highly rated corporate debt has caused a flood of companies selling corporate bonds. The 4 days following the ECB announcement saw bond sales of EUR 30bn. On March 16th, EUR 17bn of new corporate and bank debt sales were announced, the busiest day for bond issuance since May 2001. AB InBev sold the largest ever euro-denominated bond with the total size of the order book being EUR 31bn. The debt is intended to fund their takeover of SAB Miller and is part of a growing trend of increased bond issuance to fund M&A activity.

Key Indicators

  • GDP Growth Rate: 0.4%
  • Unemployment Rate: 10.4%
  • Wage Growth: 1.5%
  • Inflation Rate: -0.1%
  • Interest Rate: 0%
  • German Bund 5y yield: -0.36%
  • Manufacturing PMI: 51.6
  • Industrial Production: 2.8%
  • Consumer Confidence: -9.7

Asia Macro Report

Election boost for the Philippine economy
The recent decision to hold interest rates at their current level places the Philippines in a position to reach the forecasted growth of 5.9%. This places them in a unique regional position, for many of the surrounding economies are trying to fight the damaging consequences of the Chinese slowdown. The upcoming election in May is expected to increase consumption, thus acting as an added bonus to the Philippine economy. The country is already seeing these benefits through the President's accelerated investments in infrastructure, a decision that is seen as being closely tied to the upcoming election.
By James Renton


Philippines, due to sell $2 billion worth of 25 year bonds
The Philippines is expecting to sell maximum $2 billion worth of 25 year bonds, while buying back shorter term bonds, or the more mature debt securities. As the country has observed its dropping rate of the 25 year bonds' yield over time, the act of selling seems to discard the loss and further benefit its exceptional economic growth in Southeast Asia. The Philippines achieved the growth of 5.8% in 2015, particularly in its outsourcing and property industries. Buy-back of the mature shorter term bonds would boost an inflow of foreign direct investment. Consequently, SM Prime's dominance in the property industry could further aid the expansion of accommodating foreign tenants in the firm’s shopping malls.
By Janice Kim


Qualms about $81 million Philippine Cyberheist
The Philippine banking system is embroiled in controversy after $81 million disappeared from Bangladesh's central bank and was deposited into four casinos in The Philippines. The Philippine senate is currently investigating the cyberheist. Anti-money laundering laws are weak in the Philippines. Filipino regulators have failed to keep up with the burgeoning growth of the gambling industry enabling hackers to perform one of the greatest banking heists in history. The tenuous bank secrecy laws draw major concerns from investors who worry about the strength of the Philippine economy. The heist has damaged the good reputation the government has built since Benigno Aquino was elected in 2010.
By Alex Spencer


Philippine imports register highest growth in five years
Total payments for imported goods increased 30.8% in January 2016, the highest amount since November 2010. The value of imported capital goods, accounting for 37.7% of total merchandise imports, increased 80.4%, the highest year-on-year increase since September 1996. According to the Socioeconomic Planning Secretary, these statistics indicate the continued high level of investor confidence in the country. He continued, ‘[the] 10 other selected Asian economies saw a decrease in imports . . . with South Korea, Singapore, and China experiencing the steepest declines’. Import payments for raw materials intermediate goods increased 12.5%, which bodes well for industrial production; payments for imported consumer goods increased 29.3%. China, Japan, and the US continue to be the main sources of imported goods to the Philippines.
By Roberta Periquet

LatAm Credit and Debt

Latin American Credit and DebT - Giles Bischoff

With Brazil’s economy having contracted by an alarming 2.6%, the spotlight seems to be shifting now from Brazil to Argentina as investors who are more optimistic about the Latin American region speak of a silver lining amidst low oil prices and Fed rate hikes. That silver lining, with nearly 30% yearly growth across the broader part of Latin America, is the market for credit and consumer lending. Not only does this give a much needed boost to consumer spending, it also incentives the banking industry to de-dollarize their countries’ economies. As lending becomes increasingly more popular in Latin America, consumers will effectively need to convert their dollars to their countries’ currencies and bring their money from abroad back home to make interest payments. This props up the value of their respective currencies, and reduces risks of hyper inflation, the seemingly ever-recurring scourge that has continually plagued Latin America.

Moreover, it appears that hope springs eternal as long as Mauricio Macri continues to talk change in Argentina. Moody’s upgraded their credit ratings of the country’s debt from stable to positive in November after the Argentinian presidential hopeful, Mauricio, was elected to take office on the 10th of December in 2015. This optimism arises from the confidence President Macri continues to instil that his resolution for the Argentinian debt holdout episode will come to fruition.

Unfortunately, there is still much needed for Latin America to attain more positive credit ratings. After all, how confident is Moody’s really in Mauricio? Apparently only Caa confident—as in Argentina’s credit rating gets a Caa for how confident Moody’s really is in that Argentina will be able to make a return at the international level to credit markets in order to borrow abroad and service its debts. Furthermore, the Chilean government expects that approximately half of its consumer lending is provided for by unregulated sources, and, dismally so, much the same can be said for most other Latin American countries. This is a problem that will most certainly need to be addressed for the region to continue to prosper from the ever-growing credit market, otherwise we could likely be witnessing another massive credit bubble. Nonetheless, Argentina appears to be taking a step in the right direction towards financial stability. As long as Macri continues to prove his legitimacy as an anti-establishment, anti-corruption politician, introducing more economically sound policies as well as spurring wide-spread financial regulation, Argentina will likely take to the helm, surpassing Brazil in order to lead the Latin American region into steadier waters. 

Despite Deal, Setbacks Ahead for Argentina

Despite Deal, Setbacks Ahead for Argentina

By Maya Moritz

 

In what appears to be a sign of hope for the ailing region, South America’s second largest economy (by GDP) has ended a lengthy, cumbersome legal battle after nearly fifteen years of fighting.

According to Patrick Gillespie for CNN Money, the country has settled with NML Capital, the hedge fund groups that have closed much foreign trade between Argentina and its former partner nations, for $4.6 billion (£3.2 billion).

That sum equals approximately three quarters of what was owed to the multiple hedge funds after they purchased the country’s defaulted debt in 2001. Since then, the funds have sought to block Argentina from trading in an effort to force the country into paying back the funds.

The drawn-out negotiations have further crippled the Argentinian economy, which faces inflation, various attacks on the credibility and character of government through corruption scandals, and a spiraling crisis.

In South America, many are critical of the hedge funds, often nicknamed vultures, for having no mercy on an already strained economy. In fact, Argentina’s president has passed several laws during his time in office that would interfere with the country’s ability to pay back the loans.

One of the main criticisms against the hedge funds focuses on their lack of appreciation for Argentina’s struggles, especially after the United State’s housing bubble burst. The debts were bought a mere seven years before the crisis, and the debt-holders continued to hold Argentina accountable even as the American recession adversely affected Argentina’s economy (and the world economy).

Even now, with Argentina working to break out of a continent-wide downward spiral, the country now must attempt to continue building their own economy while sending money out of the economy for these debts. Some fear that the deal will prevent Argentina from achieving economic success for a considerable length of time.

Still, the road to paying back the debts is long and includes repealing a host of laws, congressional approval, and crafting an effective and functional payment plan for the large sum.

Asia Macro Report

China cuts off its overseas investment schemes
Having suffered from steep depreciation of renminbi, China reached a decision to cut off its overseas investment schemes in an effort to prevent capital outflows. As a result, foreign asset managers in Shanghai’s free trade zone, such as BlackRock and Aberdeen Asset Management, have come to a major loss, since they were responsible of selling overseas investment products to wealthy Chinese clients. The two firms received licences last year; since then, they have been waiting for a confirmation of quotas, which however, has now become of no use.

By Janice Kim

 

South Korea’s Production Slumps
The South Korean governments growth target of 3.1 percent is starting to be questioned. The worse than expected export and production data is a worrying sign that slowing Chinese growth is making a negative impact on South Korea. The decline of -1.8 percent in production was much worse than the prediction of -1.0 percent. This downturn has specifically hit manufacturers of electronic parts, devices and machines. This data, when combined with fears about relations with North Korea and speculation that U.S. interest rates will, has led the won to depreciate.

By James Renton

 

Moody’s Warns of Potential Downgrading of China’s Sovereign Rating
China has a problem with rising debt levels and low levels of foreign exchange reserves. Moody’s has estimated the scale of china’s ‘explicit government debt’ to be at 41% of GDP, up 33% from 2012. Implicit debt lies in state-owned enterprises, local banks and local ‘government financing vehicles’. The agency feels that given the scale of reform needed to fix the imbalances in the economy, it is unlikely that the authorities will have the “capacity to implement reforms”. However, with most of China’s national debt held by local banks and other local investors, the downgrading may not have any significant impact. China’s leaders are currently attempting to move economic growth away from industry and exports and more towards domestic consumption and services. This serves well for those organisations looking to expand into the consumption sector of China.

By Aashish Ahuja

 

China passed sanctions against North Korea
China has not only passed but participated in the drafting of the latest sanctions against North Korea, supposedly the toughest in decades. The bans on exports of aviation fuel, luxury watches, snowmobiles, and jet skis are targeted towards the country’s elite - both its status symbols and the necessities for its nuclear programme. However, whether China will follow through in their implementation is yet to be seen. Loopholes such as the sale of coal and iron ore for “livelihood purposes”, for example, are already in place. Exports will only be banned if it can be proven that they are to be used for North Korea’s nuclear programme, which will be very difficult in practice. Apart from this, there has been plenty of civilian to civilian trade across the border, which has been resilient against sanctions in the past.

By Roberta Periquet

CE Macro Report

Eurozone experiencing sluggish recovery, following a disappointing start to 2016. Eurozone growth averaged a quarterly rate of 0.3% in the second half of 2015 and the SX5E fell 7.5% in the first month of 2016. This is an especially discouraging result for two reasons: recent low energy prices have boosted consumer spending and continued quantitative easing is designed to further stimulate growth following the implementation of negative interest rates in June, 2014. These conditions, however, have been counteracted by the slowdown in China and Emerging economies, which account for a quarter of Eurozone exports. Additionally, negative market sentiment has been a persistent factor in the downturn of stock prices and economic performance. The outlook for the remainder of 2016 is modestly positive due to: the ECB’s is expected to continue loose monetary policy, as a result of the inflation rate becoming negative at 0.2%; there is a lack of a foreseeable end to the commodities rout; there is expected to be increased spending on refugees, especially in Germany.

German bund yields are dropping even deeper into negative territory. On the 29th of February the two year yield closed at -0.57%. Yields are decreasing as investors flood to safe haven assets, like the bund, forcing prices upwards. This dramatic shift is following the announcement of negative inflation in the Eurozone; the implication of which is continued quantitative easing. The EU is unable to buy anything that is below its deposit rate, which currently stands at -0.3%, making half of German debt ineligible for Quantitative Easing. Another consideration is the historic link between low yields and economic health. In the past, consistently low yields have been a signal to economic recession.

Europe’s migrant crisis is increasingly unstable, as tensions peaked on the Greece Macedonia border. Refugees attempted to break down the barbed wire fence separating the two countries and were held back by tear gas. The refugee crisis persists across the EU and the arrival of 1.1m refugees into Germany is destroying Angela Merkel’s support base, as well as faith in her immigration plan. 9 months after its creation, the EU’s refugee relocation policy has failed to come close to achieving its stated aims; of the 160,000 people intended to be relocated roughly 600 have. The result of the increasing uncertainty is that some member states have taken independent action; Austria partially closed their borders earlier this year. The EU’s refugee policy is inching nearer to complete failure as borders close and policy is determined independently.

Credit Suisse has posted its first loss since 2008. The bank posted a 2015 net loss of 2.94bn Swiss francs, as well as an impairment charge of 3.8bn Swiss francs. As a result, the bank’s stock is down 36% this year and shows no signs of rebounding. This is the lowest level it has hit since 1992. The bank is following in the footsteps of many of its peers, as European banks struggle to be profitable in the ever changing regulatory environment, against increasing capital requirements, and with too much exposure to the energy assets. European banks are being hit hard by a market wide selloff.


Key Indicators:

  • GDP Growth Rate: 0.3%
  • Unemployment Rate: 10.4%
  • Wage Growth: 1.4%
  • Inflation Rate: -0.2%
  • Interest Rate: 0.05%
  • Government Bond 10y: -0.3%
  • Manufacturing PMI: 51
  • Industrial Production: -1.3%
  • Consumer Confidence: -9

 

 

 

 

 

MEA Macro Report

South Africa:

Tomorrow, South Africa will propose its fiscal budget for 2016 which South Africans are hoping will reverse the current credit downgrade pressure. South Africa is currently rated a notch above sub-investment grade with markets expecting an eventual downgrade. South Africa is suffering from low growth (due to low commodity prices and decreased demand from China), a loss of financial credibility and subsequent capital outflows. The IMF projects South Africa to grow by 0.7% for 2016. Analysts will look for fiscal consolidation, an increase in taxes, and debt to remain at ~3% of GDP, all while increasing South Africa’s growth prospects. A downgrade would increase the cost of borrowing for both the state and individuals (making growth prospects even bleaker) as well as lead to further capital outflows.

 

Middle East:

Last week Saudi Arabia and Russia, with the backing of Qatar and Venezuela, agreed to freeze oil output in an effort to halt the 70% price depreciation over the past 18 months. The deal is contingent on other OPEC producers to agree to output freezes, which is seen as unlikely due to Iran’s introduction into the oil supply after trade sanctions were lifted last month (Iran’s oil minister told national news outlet that Iran wouldn’t cede market share). Continual monitoring of situation will be necessary.

BP released an interesting long-term projection about the oil market over the next 20 years. Due to the shale-oil revolution, BP projects that oil reserves will continue to grow at a greater rate than consumption, meaning that oil prices are unlikely to increase in the long run. OPEC will be able to maintain market share but won’t be able to effect the market like it used to. This will make the US self-sufficient in coming years and a net exporter, therefore effecting the dynamics of the oil supply market and OPEC countries.

However, shale companies are still highly indebted and are therefore reliant on banks/creditors and subsequent financial instability. It is also important to take long-term projects with a fair amount of scepticism due to inability to fully forecast geopolitical, environmental, growth and other relevant risks/factors. 

LatAm Article

 The Light at the end of the Tunnel - Positive Aspects of the struggling environment in Latin America 

2015 has indeed been a rough year for the Latin American Markets. With decreasing oil prices and increasing political instability in many countries of the region, uncertainty amongst investors has been growing. However, there is a light at the end of this tunnel. Positives are starting to emerge from different sources. 

With a contraction last year and a projected increase of 0.1% in the overall growth in Latin America for 2016, the belief was that the World Bank would jump in to help. This has not been the case. However, China has come to rescue. From 2014 to 2015 China tripled its investment in Latin America, with its main focus in infrastructure and manufacturing. The figures stand at $29bn in bilateral loans plus $35bn in multilateral finance platform in Latin America. This presents a positive outlook for the overall health of the economies, as the IMF predicts that every dollar spent in infrastructure corresponds to $1.60 worth of economic growth.

On the other hand, this money inflow into the manufacturing sector represents an opportunity for competitiveness for Latin America following the Chinese economic slowdown. Although the investment may result in the overall growth of the economies and hence some sort of hope for investors, China’s risk in terms of political instability still remains high. Countries such as Ecuador and Venezuela that present high levels of leverage and no clear sign of political restructuring may struggle to repay.

Meanwhile in Brazil, even with political and corruption scandals with Petrobras, businesses and investors remain positive. With the recent £35bn takeover of BG Group, Mr van Beurden asserts that Brazil will be one of the key growth markets identified by Shell. He predicts an output of 550,000 barrels from Brazil by the end of the decade, more than 4 times their current combined production.  

This transaction is not the only one to show optimism for long-term investments in Brazil. The last three months in 2015 were Brazil’s best fourth quarter since 2013 in M&A transactions; the total amount of deals reached $22.59bn. Currently, with 45% depreciation in the Brazilian real against the dollar, assets have become more affordable for foreign investors, attracting buyers from Europe, Asia and the US who are looking for long-term relative cheap investments at the bottom of the cycle. Petrobras in the meantime still looks to sell $15.1bn assets by the end of this year to repay debt.  

Mexico and the UK finalized their Dual Year, which included common investment, trade, and tourism among other aspects. Being the 14th largest economy in the world and an emerging market, Mexico is becoming increasingly attractive for foreign investors. Last year investments amounted to $30bn, from which £264m were from British companies investing in the aerospace industry. Furthermore, Mexico’s trading figures also stand on a positive note with $700bn a year. According to Diego Gomez Pickering, Ambassador of Mexico in the UK, ‘global expectations for Mexico as an emerging market are now running high in the United Kingdom and will do for years to come.’

 

Maria Barragan

Sources:

http://blogs.ft.com/beyond-brics/2015/12/22/mexico-and-the-uk-sharing-the-best-they-have-to-offer/ 

http://www.ft.com/cms/s/0/e8c07066-d3ec-11e5-969e-9d801cf5e15b.html#axzz40GxEjnkJ 

http://blogs.ft.com/beyond-brics/2016/02/12/china-doubles-bets-on-ailing-latin-american-economies/

http://www.ft.com/cms/s/0/70e6ee72-d3fa-11e5-969e-9d801cf5e15b.html#axzz40GxEjnkJ

 

 

US Macro Report

The Domestic Setting

The Federal Reserve Open Market Committee met on the 28th of October to discuss monetary policy in the US. It assessed that while economic activity is growing at a rate greater than that during the 2008 recession, labour market indicators are below expected levels. Unemployment rate figures for October, released on the 6th of November, showed a slight fall from 5.1% to 5% as nonfarm payroll employment increased by 271,000 from 142,000 jobs created in September and 136,000 in August. However, figures showed a reduction in growth rates for Personal income and Spending from 0.4% in the previous month to 0.1% this month. It must also be noted that the IBD Consumer Optimism index fell from 47.3 to 45.5, despite market prediction of a marginal increase to 47.4 and the New Home Sales Index fell from 529 points to 468 despite the market’s expectation of an increase to 550 points.

The FOMC stated its expectation that inflation would gradually rise towards 2% in the US as economic growth continues to accelerate and unemployment continues to fall. Ultimately, the FOMC elected to leave interest rates unchanged, with the Federal Funds rate between 0% and 0.25%. Its public briefing concluded by cautioning against forecasting a short-term funds rate rise, saying that economic conditions may require low interest rates for a long time before the FOMC feels comfortable constricting the money supply. Yields on two-year Treasury notes rose by 8bp at the Fed’s comments whilst the Dollar rose 0.9%. The Greenback has continued its upward trajectory against most major currency pairs including the EUR, GBP and CN¥. Expectations that the Fed would lift Interest rates before December fell due to the flat inflation rate in September and a GDP growth of 1.5% that failed to meet expectations and was significantly weaker than the previous quarter. Given the status quo, a rate rise in December is most probable.

Asia and the Eurozone

Weak global growth has begun to take its toll on the US economy especially given the recent Chinese government announcement that the economy grew by 6.9% in the third quarter with nominal growth estimated at 6.2%, the weakest since 1999 and since the onset of the financial crisis. This is being put down to a transition from an export and investment driven economy to one that is driven instead by domestic consumption as can be seen by the economy’s slowdown in fixed asset investment from 10.9% to 10.3% in the previous quarter. This can also be seen largely in its falls in exports, by 5.5% in August, after an 8.3% drop in July. Imports, mostly of raw materials, fell by 13.8% in August. As a result of weakening domestic conditions, the Chinese Central bank has cut its benchmark rate for the sixth time in 12 months briefly triggering a rally in global equities and commodities. On the 3rd of November, the Chinese Communist party released its 5-year report for 2016 to 2020. The anticipated GDP growth level of 6.5%, a 0.5% fall from the previous 5-year report, is also a fall relative to the economy’s current growth level. Later today, the 8th of October, the Chinese government released figures for showing a 6.9% fall in year on year Exports and a 7.1% fall in Imports. Whilst leaving China with its highest trade surplus on record, the changes suggest that domestic demand is not as strong as is needed to continue supporting its economic growth at the current rate. The Communist Party’s own reservations for the future growth rate of the Chinese economy tied with its currently ailing rate of growth has severe implications for all of its trading partners.

In India, growth was down 0.5% in the second quarter as a result of low export levels. Its trade deficit reduced to -$10.5 billion from -$12.5 billion in September as exports fell by 24.3% year on year from a being down 20.7% in the previous quarter. Imports fell further from negative 16.6% year on year to negative 25.4%. The PMI Manufacturing index was down to 50.7 from 51.2 in the previous quarter. The diminishing growth prospects of two the fastest growing global economies will continue to plague the US economy over the coming months.

The Eurozone experienced a greater fall in the consumer confidence index than expected, falling by 0.6 points to -7.7 within the euro area and by 0.2 points to -5.7 in the EU. Inflation barely remains above zero at 0.2% and will likely miss the ECB’s original targets for both 2016 and 2017. Inflation targets have now been cut to 1% and 1.5% respectively. As a result, the ECB has announced an extension of its €60 billion monthly bond repurchasing programme; further pushing European bond yields down. German bunds hit a record low of -0.32% and global equities rallied at the news. The Bank of England maintained its base rate of 0.5%; it is likely to wait for the FOMC to raises rates in order to avoid a capital influx into the UK economy by pre-empting the US.

Commodities

In Commodities, the Gold price continued its fall, reaching its lowest point in three weeks, a decline attributable to the Fed’s expected rate rise in December. Gold futures for December delivery settled down 2.4% at around US$1,150 an ounce whilst the Copper price also hit a three-week low, reflecting global demand concerns. Oil prices remain low as the US benchmark West Texas Intermediate (WTI) for delivery in December traded at around US$46 per barrel. Oil stockpiles increased by 3.4 million barrels, below an industry group estimate, however it must be noted that a recent fall in US oil rig count could imply a future reduction in domestic crude production in the coming months.

Looking Ahead

Following the contents of the Fed Open Markets Committee’s latest policy statement on Wednesday the 28th of October all eyes will look forward to the Fed’s December meeting. In a recent survey, 65 per cent of the 46 economists from leading banks in the US, Europe and Asia said they expected the central bank would increase the Federal Funds rate at its December meeting especially given the latest employment data. Figures for China’s Retail Sales and Industrial Production will also be watched closely for any indicators regarding its economic growth. In the US, figures for Retail Sales, CPI and Manufacturing will be analysed carefully given their relevance to the Fed’s upcoming rate setting meetings and the fact that the US recovery is still largely being driven by consumer spending. The Eurozone’s GDP growth figures will also be watched attentively. Expectations are for a year on year increase of around 1.7%, largely driven by consumer spending.

 

CE Macro Report

Scott Gibson and Michelle Vero

Eurozone macroeconomic conditions are beginning to brighten up as Eurostat, the statistics office for the European Union, predicts inflation to rise to 0.00% in October, a 1% increase from September’s deflation, according to a recently published flash estimate. This is excellent news, especially when combined with the EU’s unemployment rate of 10.8%, an almost 4 year low. Furthermore, there is reason to believe that the European Central Bank will strengthen their €1.1tn quantitative easing programme at the December meeting, following Mario Draghi’s announcement that “the degree of monetary policy accommodation will need to be re-examined.” This could mean the inclusion of a wider range of assets, a time extension or an increase in the amount of monthly purchases. A rate cut, from the current level of -.2%, is also under consideration. This forward guidance may be the inflationary stimulus the Eurozone needs.

Deutsche Bank will incur a $258m fine in settlement fees with US authorities, as a result of “non- transparent methods and practices” in the undertaking of clearing transactions, valued at $10.86bn, on behalf of both Middle Eastern and Asian entities. In addition, following a €6bn third- quarter loss, 9,000 full-time jobs within Deutsche Bank are being cut, as well as shareholder dividends being suspended for the next two years. Detusche Bank joins the ranks of European investment banks such as UBS, Credit Suisse, and Barclays, who are struggling to redefine themselves after the financial crisis. They now face ever-changing regulation, uncertain market conditions and increased competition; how they handle these hurdles will determine their future.

Volkswagen, German car manufacturer, has wiped 40% (€32.4bn) from their stock’s value since September, after admitting to installing defeat devices in 11m diesel cars. Although the scandal’s effects on sales are as of yet unknown, the firm has since revealed losses of €1.7bn for the third quarter, the first time this German powerhouse has made a loss in 15 years. Recently, America’s Environmental Protection Agency has reported that the scandal is wider than previously thought. Extending to models from its premium Audi and Porsche brands. VW have isolated €6.7bn of funds to deal with affected cars, however UBS analysts expect the true cost of this scandal to surpass €30bn and with recent news the costs could be even higher. 

UK Macro Report

Shire to buy US biotech group Dyax for $5.9bn

Shire, the London-listed drug maker, has struck a defensive $5.9bn deal to buy Dyax, a US biotech company with a breakthrough rare disease treatment that would have rivaled parts of Shire’s existing portfolio. The takeover adds to the frenzy of global deal making in pharmaceuticals, bolstered by the availability of cheap debt, an eat-or-be-eaten mentality among midsized companies and an explosion of experimental treatments.

 

Travis Perkins boosted by Deutsche Bank upgrade

Travis Perkins rallied after Deutsche Bank upgraded the stock to ‘buy’ from ‘hold’ and lifted the price target to 2,234p from 1,991p. It said that as a building materials supplier with pure UK exposure, Travis Perkins is leveraged to a resilient economy against a backdrop of global growth concerns.

 

The GBP to EUR conversion is pushing new inter-month highs in mid-week trade following the release of a strong Services PMI reading. 

The pound begun the week at 1.4006 against the euro and is now seen at 1.4155 - the best exchange rate since August the 19th."The PMI surveys make optimistic reading this month in terms of prospects for the UK economy. The composite indicator sits at 55.4, well above the critical value for growth of 50.0 and over two points up on last month," says Sam Hill, Senior UK Economist at RBC in London.

 

UK services rebound, economy to pick up in fourth quarter - PMI

The growth rate in the UK economy has recovered faster than expected in the last month. A survey showed that the economic growth has picked up pace during the initiation of the final quarter. Bank of England policymakers meeting this week to review the economic outlook will be encouraged to see jobs growth hitting a five-month high among services firms, which account for more than three-quarters of activity in Britain's private sector.

 

Manufacturing boost gives hopes of UK economy growth

Manufacturing, which makes up about 10 per cent of the UK’s economic output, bounced back after sliding into recession, with new orders driven by healthy domestic demand. The latest Chartered Institute of Procurement & Supply snapshot of activity also showed an improvement in export activity, with new work intakes increasing from customers in America, the Middle East and East Asia. 

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