October 2016 | www.selectasset.com
October 2016 Market Update
On September 21, the U.S. Federal Reserve Board of Governors announced that it decided, by a 7 to 3 vote, not to change its benchmark interest rate. Board Chair Janet Yellen said, “We’re generally pleased with how the economy is doing.” However, Yellen also admitted that Fed officials “struggled” to reach a consensus over when to return to normal interest rates. In fact, 14 out of 17 Fed officials surveyed expect at least one rate increase this year. The next Fed committee meeting will be held in November, six days before the U.S. presidential election. On another front, the U.S. Census Bureau’s 2015 annual report, released on September 13, revealed that median household income in the USA was USD 56,516, a 5.2% increase since 2014. While all household income percentiles grew, the poorest 10% experienced the most growth at 7.9%. The overall growth in income is considered huge for a one-year period, and it’s the first time average household income has grown since 2007. Regarding industrial news, U.S. biotech seed giant Monsanto Co. agreed to sell itself to Bayer AG, Germany’s drug and agrochemical conglomerate, for USD 66 billion, in what would be the largest all-cash acquisition on record and could transform Bayer AG into a world-leading agricultural and biotechnological powerhouse. The two companies still need to surpass intense regulatory investigations in the USA, Canada, Brazil and the EU. If the deal succeeds, the new company could command more than a quarter of the world’s market for seeds and pesticides. Industry and market opinions are split over the benefits and future outcomes of the deal.
The impact of Brexit, which passed three months ago, on Britain’s economy, continued showing signs of fading last month. UK Prime Minister Theresa May has not yet announced a date for UK’s exit from the EU, nor does she intend to begin negotiations this year. In the manufacturing sector, the UK’s Purchasing Manager’s Index is up, and the labor market is described by some economists as “robust” and others as “stable.” Meanwhile, consumer confidence has recovered and home prices rose 0.6% on average during the previous month. According to the second quarter report the year-on-year national average was up 5.1%. Economists are now upgrading the UK’s GDP forecast to 1.8% in growth for 2016. The Bank of England’s (BOE) Monetary Policy Committee, encouraged by the results of its quarter point interest rate cut in August, voted on September 15 to maintain the interest rate at 0.25%. However, inflation is still at 0.6%, well below the BOE’s target of 2.0%. Analysts are predicting a further rate cut of 15 basis points before the end of the year. In late September, amid continued opposition, the UK government approved contracts with the French energy company EDF for construction of the Hinkley Point C new nuclear power station in Somerset. Building of the plant, said to become the biggest construction site in Europe, will employ more than 5,600 workers on site, will cost at least GBP 18 billion, a third of which will be paid by China’s CGN group. Once operational, the plant will eventually employ a 900-person team, and supply 7% of the UK’s power needs by as early as 2025.
The latest data on the Eurozone’s economy continued to point to slower growth, reaching 20-month low as of late September. While there has been no new Brexit-induced shock, a consensus of economist’s opinions is that the third quarter will show the same 0.3% growth achieved in the second quarter. The boost from low oil prices is also expected to fade. As such, growth forecasts for the year remain between 1.2% and 1.5%. European Central Bank President Mario Draghi addressed this situation by calling on European policy makers to do more to stimulate growth through structural reforms and supportive fiscal policies. However, experts doubt policy makers will implement any policies or reforms. Political instability persists in Spain, although its economy did better than other EU countries. Economic and political uncertainty challenges remain in Italy. France revised its growth prospects to reflect downward trends. Looking at the financial sector, Germany’s Deutsche Bank faces scrutiny. On September 15 the Wall Street Journal and Bloomberg reported that the U.S. Department of Justice (DOJ) is seeking to fine Deutsche Bank USD 14 billion for its role in underwriting bad residential mortgage-backed securities that lead to the 2007-2008 financial crisis. The news caused Deutsche Bank shares to fluctuate. Deutsche Bank also had a potentially huge fine related to mirror trades in Russia that violated sanctions. Previously, Deutsche Bank had paid the DOJ USD 1.9 billion in 2013 for a securities-fraud case. Perhaps of greater concern, however, was an announcement in June by the U.S. Federal Reserve that the bank had failed the most recent “stress test” and showed “broad and substantial weaknesses.” This was followed by an International Monetary Fund warning describing Deutsche Bank as “one of the most important net contributors to systemic risks in the global banking system.”
While central banks in Europe and the USA struggle to decide when to change interest rates, Bank of Japan (BOJ) Governor Haruhiko Kuroda is trying to act differently. Despite the doubt of many economists concerning the effectiveness of the BOJ’s policies, Kuroda announced on September 21 that the BOJ pledges to continue expanding the monetary base until consumer prices exceed the government’s target of 2% inflation. Three and a half years after Kuroda took the helm of the BOJ, inflation settles at around minus 0.5%. The introduction of negative interest rates in January has not helped to increase consumer spending, but the BOJ decided to keep the interest rate at a steady minus 0.1%. Depressed oil prices since 2014 have not helped growth. However, Kuroda said prices have not increased and the economy has not grown due to low consumer expectations. Kuroda also plans to exert more direct influence on long-term interest rates, a sensitive issue for commercial banks. He has also said the BOJ’s bond-buying program will keep yields on 10-year government bonds at current levels. Amid the BOJ’s announcements, Prime Minister Abe continues to defend his Abenomics plan. Recent data showed GDP grew 0.7% in the second quarter, over the first quarter in annualized terms, while exports contracted in August for the eleventh straight month due to the strong yen. Economists predict this kind of sluggish growth will continue for the foreseeable future, but unemployment remained low and Abe’s supplementary budget may help boost spending. In the energy sector, the government dealt a blow to Japan’s nuclear power program when Liberal Democratic Party’s Policy Research Council Chairman Toshimitsu Motegi called for decommissioning the Monju prototype fast-breeder nuclear reactor. Over 1 trillion yen has been spent on the prototype reactor without achieving the original project’s goals. At present, only three nuclear power plants in Japan have returned on line since the Fukushima disaster.