US Interest Rates
Federal Reserve chairman Janet Yellen reiterated last week that the US central bank was still poised to fire the starting gun on the first rate rise in eight years before the end of the year. Her comments came after the Federal Reserve’s rate-setters refrained from hiking rates at its September Federal Open Market Committee (FOMC) meeting. It is the destabilising influence of China which caused the Fed to hold off raising interest rates. Many analysts seem divided on what the FOMC will do for next steps.There is a clear desire to raise interest rates but the timing is far from perfect.
China
China was the engine room of the world economy that has dragged the rest of the world with it with one of the biggest infrastructure spending plans in the world since 2008 i.e. building bridges, road highways, railway networks, housing etc…At the start of the year Chinese GDP had slowed to 7.2pc, down from almost 12pc in early 2010, and the latest official reading of 7 pc.Very few believe the official reading with some economists placing the real figure at about half of this, and the gloomiest predictions have already put the world’s second largest economy into recession. As China slows it is now exporting it problems on a grand scale devaluing its currency. Chinese goods will become cheaper across the world and, with what remaining demand there is, this will greatly increase the difficulties for earning targets of Western companies.
Commodities
The prices of commodities such as oil and gas, and base metals, have been steadily falling for about 5 years after Chinese economic growth peaked. The commodities world is now experiencing its ‘Lehman moment’. Glencore Plc, a global natural resources firm , is collapsing, with investors now sceptical about the sustainability of the company’s debt. All commodities including copper, platinum, zinc, coal and lumber are in sharp price decline due to the Chinese economy slowing and global supply significantly outweighing demand. Many commodities are producing by Emerging Market countries e.g. Brazil, Mexico, Malaysia, Zambia whose share markets and currencies are experiencing significant declines.
Corporate News
The commodity price collapse over the last 12 months has wiped out profits and caused share prices to tumble. As well as Glencore, shares of other global mining giants are also under pressure e.g. Rio Tinto, BHP, Anglo American.
Volkswagen: VW has just been accused of deliberately deceiving regulators seeking to measure toxic emissions from its cars. In a plot which could have come from a Hollywood movie, US authorities say that they have found cars that were fitted with “defeat devices”; software that switches off emission controls when cars are being driven by consumers, only turning them on when they are undergoing emission tests. It could be hit with fines ranging up to USD 18 Billion.The US is now investigating other car makers. The financial markets, which have knocked over 30 pc off the value of VW’s shares, are terrified the scandal could yet spread to other manufacturers.BMW and Daimler are down almost 15%.
AB Inbev of Belgium and Sab Miller (UK and South Africa): Sab, the owner of Grolsch and Peroni, said it received an informal approach from AB InBev brewer of Stella Artois. It has until Oct 14th to make a GBP 75 Billion pound bid. The combined group would be worth GBP 180 Billion.
Zurich withdrew its GBP 5.6 Billion Offer for Royal sun Alliance (RSA) not due to any problem with RSA but due to losses incurred by Zurich after the explosion at the Chinese port of Tianjin.
Foreign Exchange
The dollar remains strong on the back of a reasonably healthy economic outlook and Emerging Market currencies weak/very weak on the collapse in commodity prices.
Equities
All the above factors have weighed heavily on global stock markets which are down approximately 2-5% over the last fortnight. Germany is down over 10% mainly due to the VW scandal.
Major markets are broadly down 15% from their 2015 2nd quarter highs.
Equities
S&P 500: 1900
Nasdaq: 4570
Bonds – 10 Year Government Yields
US 2.10%
EU 0.60%
GB 1.78%
Foreign Exchange
USD/EUR 1.1300 (1 euro buys 1.1300 dollars)
GBP/USD 1.5200 (1 pound buys 1.5200 dollars)
Commodities
OIL: Brent: 48.00 (dollars per barrel)
GOLD: 1130 (dollars per ounce)
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Regards
Paul McCormick
