Bank of England
The big economic news for the week is the actions taken by the Bank of England in the United Kingdom. The benchmark interest rate was cut from 0.5% to 0.25% a 100% reduction. It is the first reduction since 2009 and is another unprecedented low in the 322 year history of the central bank.
The central bank in the United Kingdom has also decided to expand the asset purchase program by £60 billion the equivalent of $78.16 billion USD (United States Dollars) and most worrying a move into the buying of corporate bonds worth £10 billion ($13.03 billion USD).
These monetary moves were taken as a response to avert a recession. The United Kingdom is now the 6th largest economy in the world, following the withdrawal from the European Union (Brexit). France has now recaptured the 5th ranking position. Yet as a world reserve currency, the value of the British pound sterling still matters enormously.
Japanese Prime Minister Shinzo Abe
The other major financial news was the decision by the Prime Minister of Japan to approve a $28 trillion yen, the equivalent of $274 billion USD stimulus package. This was done because the consensus among his cabinet is that expansive monetary policy may not be enough alone, to promote more economic growth.
The further quantitative easing initiated by the Bank of England, makes it far more difficult for the United States Federal Reserve (Fed) to raise interest rates in 2016. With the the Euro-zone engaging in further monetary easing, along with China and Japan, the Fed is facing major headwinds in raising rates. This is even though the improving jobs picture for July in the United States has raised the likelihood of a Fed rate increase in December from 37% to 45%.
The United States (U.S.) economy added 255 thousand non-farming jobs in July, when 180 thousand had been forecast. The unemployment rate held steady at 4.9%. The U6 rate which includes all those individuals still looking for work,are underemployed or discouraged is still at 9.7%. Youthful unemployment remains near 16%.
Labor participation increases slightly by 0.1% to 62.8%. It remains at a generational low. There are still 94 million working age Americans looking for full time employment.
There was a major stock rally in the United States equity markets on Friday, due to the positive July jobs report. The NASDAQ reached a 2016 high at 5,221.54 and the Standard & Poor 500 hit another lifetime high of 2,180.27. The Dow Jones Industrial composite is up for the week and back above 18,500.00.
Bill Gross
Financial manager
Bill Gross the portfolio manager of Janus, joins the group of leading businessmen advocating an investor withdrawal from equity markets. He instead is recommending investments in tangible assets like gold. His concern over stocks and bonds is the result of negative interest rates and below zero returns on sovereign bonds.
In the United States this week, the Democratic Party nominee Hillary Clinton is increasing her lead in the public opinion polls, against her Republican opponent Donald Trump for the presidential elections to be held in November.
The United States Chamber of Commerce along with a business group from Texas, have filed a legal challenge against the Treasury Department. The reason is based on the accusation that the new rules written to try to limit corporate inversions are illegal. The claim is the government has rewritten the tax code to stop the business practice,without legislative action by Congress.
In the Euro-zone, German factories orders were down 3.1% in June, on year to year statistics. This was far worse than the expectations, that forecast a drop of 1.5%. For the month, orders were down 0.4% from 0.1% growth in May.
Theresa May U.K. Prime Minister
Theresa May the new Prime Minister of the United Kingdom, has presented an industrial policy for the nation following Brexit. The emphasis will be on industrial long term productivity growth.
Meanwhile construction in the United Kingdom, declined the most last month since the financial crisis of 2008 and 2009.
Some analysts are predicting losses of more than $15 billion USD for Brazil, as a result of the Olympics. The economy already wracked by one of the worst recessions ever, can ill afford the additional costs.
In addition to the bad publicity associated with the Zika virus, Brazil is dealing with violent crime,numerous protests, political unrest, rampant poverty and poor to collapsing infrastructure. This reality will be hard to hide, despite the natural beauty of Rio de Janeiro which is the site of the Games.
Despite the present political turmoil in Turkey and the country’s debt rating being downgraded, Turkish stocks and bonds are one of the best performers in the emerging world. They increased by 6.6% and 3.3% respectively last week.
Prime Minister Modi
The big investment news in Asia this week, comes from India. The upper house of Parliament has approved the creation of a national sales tax (GST). This comes after a decade of discussion on the proposal. It would replace a myriad of different fees and levies. It comes as one of the biggest legislative victories for Prime Minster Modi, since he was elected in 2014. It still needs approval by the lower house and at least half of all the individual states. Enactment of the bill is projected to increase Indian GDP by 2%.
Indonesia saw a gain in GDP (Gross Domestic Product) of 5.18% in the second quarter, from a year earlier. This was above expectations and is a result of stronger domestic consumption and somewhat higher commodity prices. Household spending which comprises more than 50% of GDP rose 5.04%.
A protest in Wellington, New Zealand in November 2014.
The Philippines wants to join the Trans-Pacific Partnership (TTP) even though, the passage of this landmark trade agreement is unlikely to be accomplished in the United States Congress this year. Despite strong support from U.S. President Obama, both presidential nominees oppose the treaty as it is presently configured.
If TTP is enacted by all 12 participating nations in the Pacific Rim, it will encompass 800 million people and involve 40% of all global trade.
Australia is continuing to loosen monetary policy. The central bank cut the benchmark interest rate by 25 basis points, to a new record low of 1.50%. Officials have concluded this will help combat the ongoing low inflation and slowing economic growth.
In corporate news, Uber Technologies has decided to give up the effort to grab a share of the Chinese market. The company has instead given up local operations in exchange in a minority stake in the leading domestic competitor Didi Chuxing. The deal combines the $7 billion USD assets of Uber with that of Didi worth $28 billion USD.
The United States 10 year government bond yield, is still low at 1.55%. The American dollar continues to maintain strength against the major currencies of the world. It is the result of the ongoing investor flight to safety.
Gold is retrenching further this week, after reaching a high of $1,370.80 USD last month. The price is now listed at $1339.80 USD, a decrease of $11.60 from last week. The price for silver dropped 2.86% on Friday to $19.83 USD, a $0.53 loss for the week.
Crude oil is at 3 month lows and remains near bear territory. The price per barrel has dropped from $52 USD in June to between $41.00 and $42.00 USD in early August. This equates to a drop in valuation of above 20%. The price had dipped to below $40.00 USD earlier in the week.
On Friday, American West Texas Intermediate (WTI) oil decreased +1.07% to $41.48 USD. Prices are now just $0.12 USD lower from last week. It equates to a negligible decline from last week. International priced Brent is down by -0.88% at $43.90. This is still a $0.37 USD increase in valuation from last Friday.