* Signs of improving business sentiment in the UK as inflation eases
* Contagion fears persist in Southern Europe as the sovereign debt crisis rumbles on
* Federal Reserve Chairman Bernanke leaves door open for additional securities purchases
* Bank of Japan leaves policy settings unchanged as the central bank targets 2.9% GDP growth this year
* Many emerging markets currencies fall in response to developments in Europe
* News International drops its bid for BSkyB
Slowing inflation in the UK
Most of the newsflow in the UK indicated that trends which have been in place for months, particularly the anaemic recovery in domestic demand and stubborn inflationary pressures generally remain intact. According to the Office for National Statistics (ONS), Consumer Price Index (CPI) inflation eased slightly from 4.5% in the year to May to 4.2% in the year to June. However, the ONS noted that unemployment claims rose by 24,500 in June to 1.52mn – the highest level since March 2010.
The quarterly economic survey undertaken by the British Chambers of Commerce (BCC) found that business conditions within the UK improved slightly in Q211: a net balance of 18% of manufacturers surveyed reported that domestic sales increased. A net balance of 26% of manufacturers said that export sales rose. In the services sector, the corresponding numbers were 10% and 18%. Separately, the BDO Monthly Business Trends Indices found that confidence in the manufacturing sector is at the lowest level for two years.
Contagion in Europe
In the Euro area, the main theme of the week was the risk of ‘contagion’ in ‘peripheral’ countries – the process by which market reactions to the problems in Greece result in lower prices for bonds (and other assets) in Spain, Italy, Portugal and other countries that are perceived as being at risk of a sovereign debt crisis, with the result that there is increased likelihood of a crisis in these countries.
Early in the week, ratings agency Moody’s cut the sovereign rating of Ireland to below investment grade, assessing that that government will eventually need another bail-out. Later, the Euro weakened against other major currencies and Italian and Spanish government bonds were sold down. Yield spreads between Italian government bonds and German Bunds blew out to the highest level since the introduction of the Euro at the beginning of 1999.
Spreads between Belgian government bonds and Bunds also hit Euro-era highs. The same was true of Spanish government bonds. Belgium’s government released better-than-expected budget deficit projections for 2011. Spain’s Finance Minister Elena Salgado said that there may be even more budget cuts next year in order to control the country’s deficit. (Following this, on Thursday 14 July, Italy’s Senate voted in favour of a crucial Euro48bn fiscal austerity plan.)
Budget deficit issues persist in the USA
Stock market investors reacted negatively to the testimony of Federal Reserve Chairman Ben Bernanke before the House of Representatives Committee on Financial Services. Mr Bernanke indicated that the Federal Reserve has no plans to extend its recently completed program of purchasing longer-dated US Treasury securities. However, he did indicate that additional securities purchases, or an extension of the average maturity of the Federal Reserve’s holdings of Treasuries were among the options open to the central bank in the event that the US economy remained weak. Other options included a reduction in the rate of interest paid to banks on their reserves (currently 0.25%).
By the end of the week, there was still no agreement between the administration of President Barack Obama and the Republican leadership of the US Congress in relation to the spending cuts that the former would have to agree to if the latter is to approve an increase in the US government’s debt ceiling. During the week, ratings agency Moody’s had warned that the US Government’s AAA rating might be under threat if the deadlock was not broken.
Most other news during the week highlighted the fragility of the US economic recovery. Only 18,000 new jobs were created in June, the lowest monthly rise for nine months. The unemployment rate rose slightly from 9.1% to 9.2%. According to the Commerce Department, retail sales increased by 0.1% in the month of June driven by an 0.8% rise in sales of cars and car parts. Elsewhere, sales of discretionary items such as furniture and appliances were weaker.
Bank of Japan is slightly more upbeat
At a meeting on 12 July, the Policy Board of the Bank of Japan decided to keep the uncollateralised overnight call rate at 0-0.1%. The general tenor of the comments accompanying the official announcement was upbeat. The central bank has noted that the economy is recovering in the wake of the various disasters of mid-March: exports, domestic private demand and household and business sentiment have all improved. Financial conditions have generally continued to ease, with the year-on-year change in the Consumer Price Index (excluding food) returning to positive territory. The Bank of Japan is looking for GDP growth of between 2.5% and 3.0% in the current (April 2011 - March 2012) fiscal year: the median of forecasts of Policy Board members is 2.9%.
Emerging market news
A key feature of the week was the softness of emerging markets currencies (and, in some cases, stock markets) as investors fretted about the worsening sovereign debt crisis in the Euro area. In Asia, currencies that weakened included the Malaysian Ringgit and the South Korean Won. In South Africa, where headlines were dominated by widespread strikes, the Rand – like stocks and bonds – fell. In Latin America, Brazil’s Real also retreated: this was partly in response to the central bank’s latest measures to stem the rise in the currency. Brazilian banks are now required to make non-interest bearing deposits equivalent to 60% of their short US Dollar positions – above certain limits.
In Europe, Turkey’s Lira fell to the lowest level (vis-à-vis the US Dollar) in over two years although Foreign Trade Minister Zafer Caglayan said that a weak currency was of ‘no concern’ as it and would help the economy, in part by narrowing the trade deficit. Elsewhere, the Polish Zloty slipped, in a week that the National Bank of Poland suggested that inflation should fall from 4% this year to 2.4% in 2013 in its latest inflation report. The central bank is therefore under less pressure than previously to increase official interest rates. In June, inflation rates in the Czech Republic and Hungary – at 1.8% and 3.5% respectively – were lower than had been expected. In Hungary, the Forint also came under downwards pressure.
The latest data from China reassured many observers that the country is not headed for an economic ‘hard landing’ anytime soon. Official statistics indicated that GDP growth in Q211 was 9.5%, slightly down on the 9.7% of Q111, but stronger than had generally been expected. In spite of the moves by the People’s Bank of China to tighten monetary policy, particular sectors are still expanding. Imports grew by 19.3% year-on-year in the month of June, while exports expanded by 17.9% to a new monthly record of US$162bn. Consumer price Index (CPI) inflation has accelerated from 5.5% in May to 6.4% in June. Here, a key factor remains surging food prices, which are 14.4% higher than they were in June 2010. The price of pork has jumped by 57.1%.
As a result of the central bank’s intervention in currency markets to limit the rise in Renminbi at a time that China is running a large current account surplus, foreign exchange reserves rose by US$153bn in Q211 to US$3,197bn – roughly equal to half of the country’s GDP. M2, the broadest measure of money supply, is up 15.9% year-on-year. In spite of official measures to curb speculation in real estate markets, the number of housing transactions surged by 31% month-on-month in June. The value of homes sold rose by 31% to Rmb499bn (US$77bn). Total investment in real estate increased by 33% to Rmb2, 600bn in 1H11.
In India, wholesale price inflation rose from 9.06% in May to 9.44% in June, increasing expectations that the Reserve Bank of India would tighten monetary and fiscal policy further later this month. Elsewhere, Bank Indonesia kept its key interest rate unchanged at 6.75% as inflation has fallen to 5.54% in June, the lowest level for 12 months. By contrast, the Bank of Thailand lifted its benchmark repurchase rate by 0.25% to 3.25%. Thai central bank has now increased rates at each of the last six monetary policy meetings with the latest rate hike apparently seeking to counter the inflationary effects of policies of newly elected Prime Minister Yingluck Shinawatra. In Singapore, official data indicated that GDP contracted at an annualised rate of 7.8% in Q211 – having expanded at an annualised rate of 27.2% in Q111. This was mainly the result of the impact on the city-state’s manufacturing sector caused by a downturn in global demand for semi-conductors and – because of the disasters in Japan in mid-March - a shortage of components.
Developments in the Middle East and North Africa were mixed. In the UAE, First Gulf Bank (the country’s fourth-largest in terms of assets, and one that is controlled by the ruling family of oil-rich Abu Dhabi) announced plans to raise US$3.5bn by way of its first issue of a Sukuk (a bond that is structured so that it complies with Sharia – or Islamic law). This is a large deal, given that combined Sukuk sales of the six Gulf Co-operation Council (GCC) states – UAE, Saudi Arabia, Oman, Qatar, Bahrain and Kuwait – so far this year amount to US$2.3bn, or 5% less than in the corresponding period last year.
Elsewhere, the latest data from the International Energy Agency shows that Saudi Arabian oil production last month rose by 700,000 barrels/day to 9.7m barrels/day, in response to increased demand for oil both within the country and in global markets. Meanwhile, in Egypt, many of the new political parties welcomed the announcement that the next parliamentary elections would be postponed from September to November – giving them more time to prepare.
Company news
India’s Enforcement Directorate alleged that Etisalat, the main telecommunications company of the UAE, had increased its stake in its Indian joint venture – Etisalat DB – above 49% without seeking approval from the Foreign Investment Promotion Board, as is required by Indian law. Etisalat denies any wrongdoing.
In Brazil, BNDES, the state development bank withdrew its support for the proposed merger of the local business of French retail giant Carrefour with Pão de Açucar, the largest Brazilian retailer. The deal had been opposed by Casino Group, a major shareholder in Pão de Açucar and a commercial rival of Carrefour in France. Switzerland’s Nestlé announced plans to buy a 60% stake in China’s Hsu Fu Chi, a maker of chocolates, biscuits and sweets. In Mexico, the national anti-trust regulator, the Comisión Federal de Competencia, announced a second investigation into anti-competitive practices in the markets for cable television, fixed-line telephony and Internet services.
News Corporation, in the wake of the telephone hacking scandal at its paper The News of the World, dropped its bid for the outstanding shares that it does not already own in British Sky Broadcasting (BSkyB). Peabody Energy, which is the world’s largest private sector coal company, launched a new bid, in conjunction with ArcelorMittal for Australia’s Macarthur Coal. This announcement came in the wake of the Australian government’s detailing of plans for a carbon tax that will be introduced from mid-2012.
