What Happened This Week #1
- STOCK MARKETS IN THE GREEN AFTER SUPER MARIO PULLED OUT THE BAZOOKA
It seems like markets needed a night of sleep to really understand what just happened the day before. On Thursday, 11th March, ECB governor Mario Draghi pulled out a bazooka to bring back growth in the Euro zone. Stock markets tanked at once, with the banking sector leading the way. Yet, Super Mario promised more than what was expected by the markets. Deposit rate was lowered 10 bps (basis points) to -0.40%, cut its main interest rate to 0.00% (down 5 bps) and increased its monthly asset purchase of securities to €80 billion. Inflation and GDP forecast have been revised down though following the market turmoil of early 2016 and terrible trade figures from China — exports are down a little over 25% for the month of February on a yearly basis, the worst since the 2009 recession — and growth forecast from the IMF. Inflation in the Euro zone remains subdued near 0%, well below the ECB target of under-but-close to 2%. Mario Draghi is therefore willing to resort to new tools to fuel growth and inflation expectations. The ECB even decided to include non-bank corporation under its QE-type program. Under the previous program, only government bonds and some state-owned companies’ bonds could be purchased.
Clearly, this should have sounded like good news to investors. But it looks like the markets were not thinking properly following Draghi’s remarks. Markets at first spiked following the media release of the rate cuts but gains quickly reversed when Draghi appeared and said that QE had its “limits”. However, dropping billions in the system and lower interest rates are what has been pushing markets higher since the FED first launched its QE back in 2009. That’s why on Friday, the markets took a step back and realized how Draghi had clearly delivered something positive for the Euro zone. Stocks pushed higher as soon as opening bell rang. The CAC 40 ended up 3.27%, the FTSE100 gained 1.71% and the DAX advanced 3.51%. Even across the Atlantic, Friday was a good day with both the NASDAQ and the Dow Jones up 1.2% on that day. In France, the main index pursued a 4-week profit streak, unheard of since February-March 2015. The EURUSD (euro-dollar) exchange rate declined slightly on Friday and oil rebounded — hovering above the $40 threshold, fuelling the rally.
Now, all eyes on the FED which is to hold a FOMC meeting on the 15–16th March and decide on its monetary policy. We will see whether it pleases markets as much as Draghi did.
To go further : http://goo.gl/nS1h36
- FINLAND LEFT THE AAA-RATING CLUB FOR GOOD
There used to be a world where AAA-ratings were mainstream and easy to obtain. Then came the 2008 financial crisis which revealed the flaws of the system. Now, to get a AAA-rating as an issuer is exceptional and worth mentioning. Finland used to be part of this small circle of exceptional issuers. Back in 2014, Standard & Poor’s stripped the country out of its top rating, that is AAA. Now, Fitch followed suit by downgrading Finland from AAA to AA+ with a neutral outlook. Only Moody’s seems reluctant to do so but one must remember that it has a negative outlook on the country thus S&P move could urge its competitor to align its rating. Of course, there are several which account for the S&P decision.
First, Finland is not going strong, economically speaking. It didn’t fall into recession in 2015 for a second straight year but it only grew 0.4%. It will be the worst-performing country at 0.5% only behind Greece (-0.7%) according to the European Commission 2016 growth forecast. The country most notably suffers from high labour costs, an ageing population and declining global companies. Nokia is only a shadow of its former self for instance. Besides, slowing growth in Europe and sanction-hit Russia has hurt its exports. Given the size of the Finnish economy, one easily understands why trouble still lies ahead for the Nordic country. What’s worrying also is that production levels are nowhere near those of 2008. You know something wrong when your own Finance Minister calls you “The Sick man of Europe”. This is not something you want to brag about when you’re in charge of the country. Things are definitely bad.
To go further : http://goo.gl/NSaNvw
- IRAN WANTS TO PLAY THE OIL GAME BY ITS OWN RULES
If you haven’t heard of it by now, you should know that oil prices have experienced a steady decline from 100$ or so in July 2014 to a decade-low of 29$ back in February. Saudi Arabia is the one to blame, partially, by not cutting back on production in order to drive US shale producers out of business with low oil prices. Obviously, this was a risky move but it increasingly looks like US-based producers are delaying new production or even shutting down entire oil fields. So, Saudi Arabia seems poised to win this fight and now should be the time to push oil prices higher right? Everybody agrees on that last point. Everybody but Iran.
The Persian country just got out of a decade-long era of sanctions on its economy, not least in the oil sector. Back in January, $30 billion in assets were unfrozen by the UN and a number of countries could again import oil from Iran without fearing any retaliation from the US. Also, it was said that Iran was parking back in July 2015 more than 50 million barrels of crude, ready to ship them once sanctions are lifted. In other words, Iran does not want to give up on its oil sector given the most-needed revenues it could bring in. Last month, Saudis and Russians agreed that major OPEC and non-OPEC countries should cooperate in pushing oil prices and cutting back on production. However, Oil Minister Bijan Zanganeh said Iran would join discussions between other producers about a possible freeze of oil production after its own output reached four million barrels per day (bpd), Iran’s ISNA news agency reported on Sunday.
If the country were to be absent of the talks, one could doubt that oil production is to decrease sharply soon. Indeed, although Iran needs to massively invest in its infrastructure to sustain high levels of oil production, one must remember that the country was once a leading oil-exporting country and sanctions back in 2006 ended that reign. One thing is certain — Iran has nothing to lose if prices dive further as long as it manages to pump as much oil as it needs to claim back its role on the oil stage. Game on.
To go further : http://goo.gl/rzknth
- CHINA CENTRAL BANK SAYS IT WILL REMAIN “FLEXIBLE”
Back in December 2015, the IMF decided to include the Chinese currency (Renminbi or most casually known as Yuan) in the basket of currencies which make up the Special Drawing Right, or SDR. This does not have any impact on a currency but was a much-appreciated acknowledgment from one of the world’s most influential institutions that China was on the rise and its currency was to become increasingly used in trade and financial exchanges. Then came 2016 and market turmoil. Growth forecasts were revised down and China exports were reported to have fallen by 25% in February on a yearly basis. PMI figures (Purchasing Managers Index) showed that production contracted for yet another month and the Yuan slipped against the US Dollar. Nowadays, when things look awry, everybody turns to the Central Bank which is always expected to deliver better news, reliable options to stabilize things a bit and shore up growth. China is no exception.
Thus, all eyes were on Governor of the People’s Bank of China Zhou Xiaochuan last weekend. He spoke on a wide range of matters, not least growth and the Yuan. On the first subject, he declared that the country would not rely as much on exports as previously. This is important since the shift from an export-based economy to a consumption-led economy has long been an objective by top Chinese officials. Thus, there will not be any major involvement by the PBOC to influence the exchange rate of the Yuan if things remain stable and slowing exports will not matter on monetary policy decisions. However, internal or external shocks could prompt the PBOC to act. On the second subject, Zhou Xiaochuan was questioned about the country’s dwindling foreign exchanges reserves to $3.2 trillion from a high of $4.0 trillion back in August 2015. Interestingly enough, they fell at a slower pace in February by only $28.6 billion following a sharp decrease of about $100 billion both in December and January. Since investors become increasingly worried about the health of the Chinese economy, they pulled funds out of the country, prompting the value of the renminbi to fall. In order to keep things stable, the PBOC was thus forced to sell its reserves in US Dollars to buy Renminbi and push its value higher.
According to the Governor, the market sentiment is too bearish and should soon return to a more positive view of the country. The Governor finally stated that “there is no rush to buy dollars” despite the ongoing market turmoil. Whether the wait-and-see attitude of the PBOC will pay off remains to be seen.
- SHOULD DONALD TRUMP WIN THE PRESIDENTIAL RACE, THIS IS WHAT YOU SHOULD BUY (BONUS)
Though the likelihood of such an event is low, Donald Trump remains the leading contest in the GOP primary race. Thus, he could actually compete against the main Democrat candidate for the White House. One should thus be prepared to benefit from this opportunity. Let’s thus walk through the major ideas of the GOP candidate and see how we can benefit from it: http://goo.gl/9RZVPj.