Global equities moved higher earlier this week on the trade and economic news from China, but stagnated on both Thursday and Friday for investors.
Six of the world’s central banks have already moved forward with negative interest rates. The most notable ones are the European Central Bank (ECB) and the Bank of Japan (BOJ). The actions have helped to encourage demand and bring some price stability, by averting deflation. About 25% of world output, is now produced in areas that have interest rates below zero.
Long term effects of negative interest rates are still unknown but banks, insurance companies and pension plans are already experiencing negative effects.
Demand for additional lending from the World Bank by developing countries has now risen to levels never seen outside a financial crisis. It is set to climb to $150 billion USD (United States Dollar) between the years 2013 and 2016. Forecast for growth by the organization is only 2.9%, but may be downgraded lower, after the first quarter results are fully known.
World map showing real GDP growth rates for 2009 (countries in brown were in recession.)
In related news, the China run Asian Infrastructure Investment Bank has agreed to work with the World Bank in a number of joint projects.
This week begins the reporting process for the first quarter profits, or lack there of. Wall Street analysts predict a 7.9% plunge, the steepest drop in profits since the Great Recession. The earnings erosion is due to global currency turmoil, a strengthening American dollar, a plunge in oil prices and the slow growing world economy (3.2%).
The big news for American business this week, is the walkout of 40,000 employees from Verizon. The strike is the largest walkout in years for the United States. The last one was in 2011, which was also the result of a work stoppage by Verizon. It lasted for two weeks.
In China, consumer inflation came in lower than expected last month. The consumer price index (CPI) was just 2.3% year to year, when 2.5% was forecast. The producer price index (PPI) fell for the 49th consecutive month, down 4.3% year to year. These results, increase the likelihood of even more efforts of stimulus by Chinese authorities.
Chinese-made car, the Chery QQ
After dismal results in January and February, the trade environment in China improved in March. Exports last month surged 18.7% from a year ago, while imports dropped just 1.7%. In USD exports rose 11.5%, which is the first real growth in nine months.
On Friday, it was reported that the economy of China grew by 6.7% in the first quarter. It is the slowest rate of growth, since the financial crisis of 2008 and 2009. If the figure is accurate, it allows the government to keep within the target of expansion between 6.5% and 7% for the year.
Japanese financial authorities acknowledge the necessity of more monetary easing, in the wake of a weak economy and the threat of deflation.
Nuclear tensions are increasing in several areas of the world. North Korea claims it has successfully tested a long range engine that is designed for a ICBM. This would then allow a potential strike thousands of miles away. Meanwhile, Iran insists that negotiations with the United States over their domestic missile program, is off the table.
Verkhovna Rada Building, Kiev, Ukraine. The Parliament of the Country.
Regional allies along with the United States, are creating plans to provide for more sophisticated weapons to militants who are fighting the Syrian government. This would be in the event, that the six week old truce fails to hold.
The Ukrainian Prime Minister has finally given into political pressure and resigned. It allows the end of a legislative crisis and will allow the $17.5 billion USD bailout program to resume. Parliament will have just 30 days to form a new government. A new prime minster was already selected on Friday.
The governor of Puerto Rico declared a financial emergency this week. The action suspends lending and freezes most withdrawals at the island’s Government Development Bank. The commonwealth has outlined a plan to reduce $49.3 billion of debt to between $32.6 to 37.4 billion, by exchanging existing bonds for new ones.
On the mainland, politicians in the United States are attempting to craft a bill that will allow Puerto Rico to restructure the total debt of $70 billion USD. There is still infighting between Democrats and Republicans over the details.
Bank of England Headquarters
Inflation in the United Kingdom hit a 15 month high last month. CPI rose 0.5% from last year. Core inflation which excludes food and energy is up by 1.5%, the biggest advance since October 2014.
The Bank of England has pledged to keep interest rates steady, reasoning that the economy is still not growing sufficiently and the turmoil being caused by the threat of the country leaving the European Union (E.U.).
The countries of Germany, France, Italy, Spain and the United Kingdom, which are the five largest in the E.U., have reached a deal in cracking down on those businesses and individuals trying to escape taxation. They are now asking the rest of the G-20 (world’s largest economies) to follow suit.
The International Monetary Fund (IMF) and officials of the Euro-zone are at odds over the third Greek bailout. The IMF insists the $97 billion USD package may need to be renegotiated, because the Greek fiscal targets are totally unrealistic. Germany has stated that IMF participation is vital to keep their participation in the agreement. Meanwhile, European officials do not want to reopen debt discussions.
The United States court system has cleared the way for Argentina to raise as much as $15 billion USD in new bonds, in an effort to pay off holdout creditors. This will permit the country to return to the international credit markets. It will buy time for the economic reforms put in place by the new President to take hold.
The committee in the lower house of the Brazilian Congress has voted to impeach President Dilma Rousseff. Her crime is the alleged manipulation of public finances. A vote in the full House will take place on Sunday. If they are in agreement, the trial will take place in the Senate if a simple majority agrees. She will then be obliged to step down from power, for up to six months during the proceedings.
The Supreme Court of Brazil rejected a request by the government on Friday, to stop the impeachment process against President Rousseff.
Member nations of OPEC
In anticipation of the meeting in Doha this weekend, the Iraqis OPEC (Organization of the Petroleum Exporting Countries) reiterates his support for a production freeze as the only way to bring about a rebound in prices. At this time 15 countries both in and outside of OPEC, plan to attend the conference. They represent 75% of global output.
A major rise in crude prices as a result of the meeting is unlikely, because an agreement at this point would merely codify a level of overproduction, that is between 1 to 2 million barrels a day.
In related news, it was announced that oil output in the United States has now dipped below 9 million barrels a day. This helped to boost prices of American produced oil earlier this week.
On Friday morning, American West Texas Intermediate (WTI) oil dropped back -2.67% to $40.39 USD, less than $2.00 above where prices stood last week. International priced Brent is also down -2.67% at $42.67 USD.
The Investment Newsletter had 3 early stock targets.
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