(ZH) A synchronized global slowdown, with no end in sight, has spooked some of the wealthiest investors around the world, according to a new survey from UBS Wealth Management, seen by Bloomberg. UBS polled wealthy investors, who are preparing for a significant stock market correction by the end of next year.
In the survey of more than 3,400 high net wealth respondents, 25% said they’ve sold risk assets, such as equities, commodities, and high-yield bonds, and have transitioned into cash. The synchronized global slowdown, coupled with a US-China trade war, were some of the greatest concerns of respondents.
“The rapidly changing geopolitical environment is the biggest concern for investors around the world,” said Paula Polito, client strategy officer at UBS GWM, in a statement. “They see global interconnectivity and reverberations of change impacting their portfolios more than traditional business fundamentals, a marked change from the past.”
China Undergoing an L-Shaped Recovery, Says UBS Asset Management’s Briscoe
About 80% of the respondents expect volatility to increase through 2020, and 55% believe a market plunge could occur before Q4 2020.
Worse, 60% of respondents expected to raise cash levels in the coming quarters (i.e., sell stocks).
Most respondents said the added caution is due to a possible blowoff top in global equity markets. About 70% of respondents are optimistic through 2030.
“The challenge is that they seem to want to respond” to short-term uncertainty “by really shortening their time horizons and shifting to assets like cash that are safe,” said Michael Crook, a managing director on the investment strategy team. Though with many of these people investing on a time horizon across decades and for future generations, that “seems like a mismatch.”
And while most respondents said they’re preparing for market turbulence in the short term, many should rethink their US outlook for the next decade. Teddy Vallee, CIO of Pervalle Global, shows that the “US is dead money for the next 10 yrs.”
Over the last five years, China has spent unprecedented amounts overseas, but now the acquisitions are drying up as national security concerns worry the west. James Fontanella-Khan and Arash Massoudi, the FT’s corporate finance and deals experts, explain why the US, Europe and others have become wary of China and brought in measures to limit foreign takeovers.
(Economist) Blame economics, demography, a sense of powerlessness…and social media
FOR ANYONE trying to follow protest movements around the world it is hard to keep up. Large anti-government demonstrations, some peaceful and some not, have taken place in recent weeks in places on every continent: Algeria, Bolivia, Britain, Catalonia, Chile, Ecuador, France, Guinea, Haiti, Honduras, Hong Kong, Iraq, Kazakhstan, Lebanon and more. On November 1st Pakistan joined the ever-lengthening roll as tens of thousands of protesters converged on the capital, Islamabad, to demand that the prime minister, Imran Khan, stand down within 48 hours.
Probably not since the wave of “people power” movements swept Asian and east European countries in the late 1980s and early 1990s has the world experienced such a simultaneous outpouring of popular anger on the streets. Before that, only the global unrest of the late 1960s bears comparison in terms of the number of countries swept up and the number of people mobilised.
Explain where income inequality comes from — specifically, why 1% of U.S. income earners take home 20% of pay.
Describe what makes a society just.
Advance an argument that a market-based economy with political equality for all offers the best means of achieving a fair and equitable distribution of income and social status.
Clifton: Why should leaders care about this book?
Rothwell: Income inequality is one of the most contentious political issues of our time. The leading Democratic Party candidates talk about it and have proposals to address it. On the political right, there is robust debate among scholars, pundits and politicians about what to do about income inequality, if anything.
What is lost in the debate is a coherent theory for why income inequality exists.
Many Democrats believe mass inequality is a natural consequence of capitalism. The party’s left wing believes only income redistribution and public control of healthcare, energy and banking can fix inequality. More scholarly views of inequality attribute it to declining unionization, increasing globalization and automation — and how these factors interact with skill and education.
One problem with these explanations is that they act as though inequality was invented in 1980 — a turning point in income inequality — and never existed prior to that, which isn’t true.
A second problem with these explanations is they’re not supported by the facts. The highest income earners have never worked in sectors that are highly unionized (e.g., finance, healthcare and professional services), so declining unionization has had almost no effect on them.
Likewise, most top income earners are in domestic sectors that aren’t affected by international trade, so globalization isn’t part of the story. Moreover, at the macro level, countries that trade more are no less equal.
There is also no reason to think that automation has disproportionately benefitted most top earners. Hedge funds were invented in 1949 long before the widespread use of computers and have basically had the same 2 and 20 pay structure since their inception. Doctors and lawyers and most CEOs do not use automation or robots.
“Income inequality is one of the most contentious political issues of our time.”
Clifton: Does it just come down to talent?
Rothwell: I have no doubt that many rich people are highly talented. But it can’t explain most of income inequality for several fundamental reasons.
First, what we know from a century of research on employee performance, cognitive ability, and personality is that a diverse constellation of traits predicts success in life, measured as performance, income, or health status. These include IQ, conscientiousness, emotional stability, enthusiasm and integrity. These traits are distributed more equitably than income.
My analysis of data from around the world shows that CEOs, doctors, lawyers and other high-income earning groups tend to score slightly higher on measures of IQ — but not nearly enough to justify more than moderately high salaries. And plenty of very high-scoring people make rather modest incomes. I calculate that if people were paid solely on IQ, experience, and personality traits, U.S. income inequality would be half of what it is currently.
A second reason to question the idea that talent explains income distribution is to see how occupational status affects income, irrespective of talent. This can be done by looking closely at specific occupations that are massively over-represented in the top 1% of income earners.
Economists have studied these occupations — in finance, medicine, law, dentistry — using a variety of methods. One is to see what happens when someone changes careers. Moving into the high-paying occupations and industries inevitably results in a massive income increase, whereas talent has not changed.
“What is lost in the debate is a coherent theory for why income inequality exists.”
Clifton:Why do we need a theory of income inequality?
Rothwell: We need to better understand inequality so we don’t make mistakes culturally and in public policy.
Culturally, we are most apt to advance when we are confident that education, literacy and work are rewarding. The notion that competence is explained by talent, rather than opportunity and education, cuts against this cultural faith. The most inventive period in U.S. history was just after the Civil War, when we eliminated slavery, improved the Constitution, created land-grant universities and started massive investments in education.
Former slaves and their children flocked to schools with tremendous enthusiasm and literacy rose rapidly for Southern Americans of both races. As a result, Americans largely invented the modern technologies we take for granted, and black Americans who moved to the North were right there with them — inventing at very high rates, with many becoming successful entrepreneurs.
Unfortunately, this all coincided with Jim Crow ideology, which held that social status was purely a function of group genetics. The policies that followed made it impossible for black Americans to fully participate in markets for goods and services, and I’d add that those policies had many negative unintended consequences that went beyond harming blacks — like economically segregated and over-priced housing.
Likewise, it would be a terrible mistake to prevent markets from working in the name of reducing inequality, as many on the left would like. Segments of the left largely agree with President Donald Trump on the merits of preventing trade with China and Mexico in order to save American factory jobs. But the negative effects of trade on factory workers are offset by large gains from lower prices and pale in comparison to the negative effects of healthcare inflation. The beneficiaries of healthcare inflation have largely been hospital and pharmaceutical executives and physicians, all of whom enjoy huge regulatory advantages won by decades of lobbying. The losers have been everyone else, who now see 18 cents of every dollar go to healthcare.
Beyond trade, proposals to reduce income inequality include raising the minimum wage, encouraging unionization, forcibly breaking up tech companies just because they are successful, and eliminating the independent contractor business model used in the so-called gig economy. These proposals have the wrong understanding of income inequality, and thus propose the wrong solutions.
“Culturally, we are most apt to advance when we are confident that education, literacy and work are rewarding.”
Clifton: So why do you think income inequality is so high in the U.S.?
Rothwell: The overarching reason is that we don’t enjoy political equality in this country. That has two consequences:
Unequal access to public goods and services — security, education, healthcare, infrastructure, etc.
Unequal access to markets for goods and services.
The first is especially bad for children born in poor families and holds back many in the black community. Jim Crow policies created segregated neighborhoods, which in turn dispense unequal schooling, policing services, and exposure to environmental toxins and the like. This explains why black Americans outperformed white immigrant communities in the North at the beginning of the 20th century but fell behind by the end of the 20th century.
The second — unequal access to markets — is also special in the United States, despite our reputation for being a highly free-market country relative to Europe. In reality, our state governments — which are controlled in large part by professional associations — impose extremely burdensome rules on legal services and health services, which end up benefitting elite professional groups at the expense of everyone else. In many cases, European countries have more free-market rules governing these services.
Likewise, the U.S. has famously profitable financial services. But what is less recognized is that banks and financial firms have driven down profit margins for most consumer-facing financial services. The problem with financial services in the U.S. is that the federal government (via the Securities and Exchange Commission) forbids retail investors from participating in the markets with the highest returns and highest profit margins (hedge funds, venture funds, private equity funds). Only accredited investors and institutions can invest in these assets.
As a result of the arms-length process, these funds charge outrageously high fees to union pension funds and other institutions that pool the investments of ordinary Americans, resulting in massive redistribution of income to the top. This isn’t a function of markets, but of political economy and regulations.
“A lesson throughout history is that common people will rise to the occasion when given the chance to use their talents.”
Clifton:Should we do away with income inequality altogether?
Rothwell: No. Every democratic country has high-income earners and entrepreneurs who do better than the average laborer. No one objects if Serena Williams is paid more than the average pro tennis player. She earned it.
The problem with extreme inequality is that it is based on political power, not merit. For that reason, it is fundamentally unfair. It is also inefficient.
My ideal society would compensate people proportionately to the value of what they do. It would also take care of the poor and disabled and give them equal access to public goods and economic opportunities.
A lesson throughout history is that common people will rise to the occasion when given the chance to use their talents. That is how we got the Industrial Revolutions in Britain and the United States, and that is how we will solve our greatest challenges as a society.Jim Clifton is Chairman and CEO at Gallup.
Fiscal/monetary mix ‘most stimulative’, Paul Tudor Jones says
Signs of trade deal, firmer factory gauges boost optimism
David Solomon, Goldman Sachs CEO, on Negative Rates, Trade, Election, EconomyGoldman Sachs Chief David Solomon says the chance of a U.S. recession in the near term is “not significant.”
The worst may be over for the world economy’s deepest slowdown in a decade.
A wave of interest-rate cuts by central banks including the Federal Reserve and mounting hopes of a U.S.-China trade deal are buoying confidence in financial markets just as key economic indicators show signs of stabilization after recent declines.
While a robust rebound may still not be on the cards, the relative improvement could put an end to the fears of just a few weeks ago that the world economy was barreling toward recession. Such an environment looks for now to be enough for Fed Chairman Jerome Powell and fellow monetary policy makers to take a pause from doling out monetary stimulus.
“We do see multiple reasons for a stabilization in global growth in 2020 versus 2019,” said David Mann, chief economist for Standard Chartered Plc in Singapore, who shares the International Monetary Fund’s expectation that global growth will accelerate next year.
Among the reasons for confidence: While JPMorgan Chase & Co.’s global manufacturing index contracted for a sixth month in October, it inched closer toward positive territory as both output and orders firmed.
In the U.S., the Institute for Supply Management’s gauge of factory activity stabilized in October while the government’s jobs report on Friday showed payroll gains exceeded forecasts and hiring in the previous two months was revised much higher. The ISM’s gauge of services is also showing signs of improvement.
In Europe, there are also tentative signs of health after it was squeezed by the trade war as well as Brexit. The euro-area economy expanded more than forecast in the third quarter and while Germany may already be in recession, the Ifo Institute reported that expectations among its manufacturers edged up in October.
As for Asia, inventories of semiconductors in South Korea fell the most in more than two years in September in a sign a slump in global technology is ending.
Financial markets are tuning into the optimism. U.S. stock benchmarks climbed to all-time highs on Monday and the yield on the 10-year Treasury note rose. European and Asian stocks have also advanced.
“I just look at the fiscal/monetary mix, it’s the most stimulative that I think I’ve ever seen,” said billionaire hedge fund manager Paul Tudor Jones on Tuesday. “It’s no wonder that the stock market’s hitting new highs. It’s literally the most conducive environment, certainly in the short run, for economic growth and strength that I’ve ever seen.”
What Our Economists Say“Hopes for a ‘phase one’ trade deal and reduced hard Brexit fears have stoked sentiment — that’s evident in the stock market and some of the October survey data. Whether that becomes more than a blip on an otherwise-unbroken downward trajectory depends on whether the U.S. and China can solidify their trade truce.”
— Tom Orlik, Bloomberg Economics
One key reason for the potential turn is the wave of interest-rate cuts from global central banks. Of the 57 institutions monitored by Bloomberg, more than half cut borrowing costs this year with the Fed doing so three times and the European Central Bank pushing its deposit rate further into negative territory. Rate cuts also operate with a lag so the positive effects of easier monetary policy have yet to fully flow through, meaning a further impulse likely awaits.
Powell last week hinted the U.S. central bank may be done reducing borrowing costs as he said the stance of policy was now “appropriate” to keep the economy growing moderately. “It would take a material change in the outlook for me to think that further accommodation would be required,” Fed Bank of San Francisco President Mary Daly said on Monday.
Also driving sentiment is that President Donald Trump and President Xi Jinping are on the cusp of signing “phase one” on a trade deal, which could be enough for global commerce to find a footing. China is reviewing locations in the U.S. where Xi would be willing to meet with Trump to sign a pact.
Meantime, U.S. Commerce Secretary Wilbur Ross said Washington has also enjoyed “good conversations” with automakers in the European Union, raising hopes that the Trump administration may not slap tariffs on imported automobiles this month.
Morgan Stanley economists reckon the contraction in global trade volumes likely narrowed in October, declining 0.6% compared to 1.3% in September. Retail, auto and semiconductor sales are all stabilizing, they said in a report this week.
Elsewhere in Europe, the risks of a so-called no-deal Brexit have also diminished after the EU extended the deadline on the U.K.’s departure until the end of January and Prime Minister Boris Johnson called a December election in the hopes of breaking the impasse between politicians.
The soft landing scenario isn’t fully sealed. In May, similar hopes were building, only for Trump to ramp up tensions with China. While Washington and Beijing have signaled they’re getting closer to agreeing on the first phase of a deal, it’s not clear whether trade talks would continue toward a comprehensive agreement.
“If the U.S.-Chinese trade escalates again, or if the U.S. starts a new trade war against the only other economy of almost equal size, the EU, it could all still go wrong,” said Holger Schmieding, chief economist at Berenberg Bank. “But in the absence of such new political shocks, chances are that the global downturn could peter out in early 2020 and make way for a modest upturn thereafter.”
The strength of any revival may ultimately depend on the health of China’s economy, which expanded in the third quarter at its weakest pace in decades and where evidence of a bottoming out in demand remains tentative.
A gauge of Chinese manufacturing dropped this month to the lowest level since February while a measure of new export orders contracted at a faster pace. At the same time, construction, real estate, consumption and services are holding up, buoying expectations that officials are managing a gradual slowdown.
(EP) Un informe alerta de que los planes de recorte que tienen sobre la mesa la mayoría de Estados no son suficientes para combatir el calentamiento
El inicio del proceso por parte del Gobierno de Donald Trump para retirar a Estados Unidos del Acuerdo de París ha desencadenado una riada de declaraciones públicas de mandatarios en defensa de ese pacto. Así lo han hecho líderes de China, Francia, la Comisión Europea, España, Chile… Solo EE UU se ha retirado hasta ahora del acuerdo contra el cambio climático, firmado en 2015 en la capital francesa. El resto de los grandes emisores –China, la Unión Europea e India– sigue dentro. Pero una cosa es defenderlo a través de declaraciones y otra es estar en la senda de cumplir con la meta que establece ese pacto: que el calentamiento se quede dentro de unos límites manejables. Un grupo de expertos, encabezados por el expresidente del IPCC –el panel de científicos asesores de la ONU– Robert Watson, ha analizado los compromisos de los 184 países que han presentado planes de recorte de emisiones hasta ahora y el resultado es que menos del 20% de los mismos se consideran suficientes para cumplir con París.
Ese 20% de cumplidores está dominado por el bloque de la Unión Europea. A los 28 se añaden Islandia, Liechtenstein, Mónaco, Noruega, Suiza, Ucrania y la República de Moldavia. Todos ellos, según este análisis auspiciado por la organización Fundación Ecológica Universal (FEU), tienen planes de recorte que fijan reducciones para 2030 de sus gases de efecto invernadero de al menos un 40% respecto a los niveles de 1990. En el caso de la UE, Liliana Hisas, directora ejecutiva de FEU, estima que algunas proyecciones apuntan a que las medidas aprobadas llevarán a una reducción de hasta el 58% de esas emisiones.
El Acuerdo de París obliga a todos los Estados que se suman al pacto a presentar planes de recortes de sus emisiones de gases de efecto invernadero, culpables del sobrecalentamiento del planeta según la mayoría de la comunidad científica y vinculados, principalmente, al uso de los combustibles fósiles. De momento, 184 Estados han presentado programas de recorte, que son dispares y en muchos casos difíciles de comparar. Esos planes de recorte de todos los países deben servir para que el incremento medio de la temperatura en el planeta se quede por debajo de los dos grados respecto a los niveles preindustriales y en la medida de lo posible por debajo de 1,5.
El informe elaborado por este grupo de especialistas fija como meta para evaluar a los Estados el objetivo de 1,5 grados. Y, según detallan, para conseguir que la temperatura se quede por debajo de ese umbral en 2030 se deberán haber reducido las emisiones mundiales un 50% respecto a las de 1990; y en 2050 se tendrán que alcanzar las emisiones cero. Al analizar los planes de recorte de los países para la próxima década, estos expertos concluyen que solo ese 20% de países está en la senda para cumplir con esa ruta de eliminación de sus emisiones. El resto, al menos en los compromisos presentados ante la ONU, no está bien encaminado.
“Estamos en una situación crítica”, advierte Pablo Canziani, doctor en Ciencias Físicas y miembro del IPCC. Porque la suma de todas las contribuciones actuales llevará a un aumento de más de tres grados, como ya ha advertido la ONU. “Esto significa que las medidas para hacer frente al cambio climático deben duplicarse o triplicarse en la próxima década para reducir las emisiones en un 50% para 2030”, explica el informe.
El estudio apunta a que el 75% de los 184 planes presentados hasta ahora son insuficientes para frenar el cambio climático. Luego existe un pequeño grupo de Estados, 12 países que representan el 5% del total, que el estudio determina que cuentan con unos planes “parcialmente suficientes”.
Volumen de emisiones
El problema no es solo numérico, es decir, no reside solo en que el 75% de los países no están en la ruta correcta. El principal escollo es el volumen de emisiones de gases de efecto invernadero de los países que no están siendo ambiciosos. Porque la UE solo representa ya el 9% de las emisiones globales, recuerda el informe. Los principales emisores ahora son, además de Europa: China (26,8%), Estados Unidos (13,1%), India (7%) y Rusia (4,6%). China e India están dentro de la categoría roja del informe, la de países con planes de recorte insuficientes. Rusia ni siquiera ha presentado el suyo. Y Estados Unidos –cuyo plan data de la época de Obama y también se considera insuficiente en el informe– ha iniciado el camino para salirse del acuerdo.
“Estamos muy lejos de llegar a los dos grados”, advierte Canziani. “Y cuanto más se retrasen las medidas mayores serán los costes económicos y socioambientales”. El informe recuerda, por ejemplo, que las pérdidas económicas y daños de los 690 fenómenos meteorológicos extremos de 2017 supusieron unas pérdidas de 330.000 millones de dólares. Para 2030, advierten los investigadores, se espera que se hayan doblado.
Aumento de la ambición
Pero no todo son malas noticias. El propio Acuerdo de París establece un calendario de revisión al alza de los planes nacionales de recorte de emisiones. En 2020 se producirá la primera revisión y hay unos 70 países que sostienen que presentarán nuevas contribuciones, aunque ni India, ni China, ni Rusia están aún dentro de ese bloque. La cumbre del clima que se celebrará en diciembre en Madrid debe servir para lograr el compromiso de más Estados a aumentar su ambición contra el calentamiento global.
El informe apunta a que “el 97% de las 184 promesas climáticas son las mismas que se presentaron inicialmente en 2015 y 2016”, cuando se cerró el Acuerdo de París. De momento, solo seis países han revisado sus planes: cuatro han prometido recortes más fuertes y dos han debilitado sus metas.
“Este informe es una llamada de atención a los nuevos liderazgos”, dice Canziani. “Se necesita un liderazgo de los países más emisores y de los ciudadanos que viven en los países con las emisiones per cápita más altas”, concluye este investigador.
Monday morning and we here we go again for another “dramatic week”. There are going to be monthly PMIs to look at in particular: will we see any further deterioration, or will growth start to pick up as an early Christmas present? And there are of course rate meetings for the Fed, and the BOJ, and the BOC: the former will cut, with the real issue being if they will signal more soon or not given they are already deep in Repo Madness; and will the giant BOJ wake up from slumber like a giant Kaiju and start throwing markets into turmoil again?
Plus there is the Brexit circus. Will the EU grant the UK an extension until end-January 2020, or a more flexible date, or will France veto that and insist on a very short extension? Almost certainly they will insist that the newly reopened Withdrawal Agreement is this time firmly shut – so if the British Parliament then decides to merrily reopen it from its end and unilaterally start ramming amendments into it, it will not be doing so with EU approval. As such, and just as pertinently, will PM BoJo get his December election or not? The greater likelihood is not, as Labour appears to be desperate for an election – just not now – although the Lib Dems may be prepared to allow one given they see this as a way to prevent any further movement towards Brexit in the short term. (Though what do they think the election campaign will be about? The price of cheese?) Note that the latest opinion poll for the Observer has the Tories on 40% (+3 on the week), Labour unchanged on 24%, and the Lib Dems on 15% (-1), with the Brexit Party on 10% (-2).
Demonstrators in Lebanon form human chain across Lebanon
In Europe, we have just seen the AfD surge to second place in state elections in Germany’s Thuringia with 24% of the vote, double what it got last time, putting it 1ppt ahead of Chancellor Merkel’s CDU, with the Far Left Die Linke in first place. The AfD are nowhere near power as nobody will co-operate with them, but that 24% outcome is all the more remarkable given an attack on a synagogue and neo-Nazi death threats through the campaign.
In China, Chairman Xi Jinping will be presiding over the long-expected Communist Party Plenum, which is usually looked to for policy guidance. Market expectations this time are that all the focus will be on politics and control, and none will be on market-based reforms. Tellingly, this weekend saw China disband a three-year old Global Forum on Steel Excess Capacity after nobody has been prepared to cut back on capacity: China is claiming it alone has, but this somehow overlooks that its net steel output is up on three years ago, at a record high, and still growing.
On Ukraine-Gate the US impeachment wagon continues to trundle along, with supporters claiming it is laden with damning evidence, and opponents arguing it has exactly as much weight as Russia-Gate did. Perhaps the apparent elimination of IS leader Abu Bakr al-Baghdadi by US special forces will tip the Washington political balance slightly back towards consensus…but perhaps not, as the Washington Post (“Truth Dies in Darkness”) changes its headline description of al-Baghdadi–who presided over torture, mass murder and rape, slavery, and genocide–from “Terrorist-in-chief” to “Austere Religious Scholar” and then finally to “Extremist Leader”. Could they not perhaps have settled on “populist?”, he wondered sarcastically?
Enough minutiae about Fed policy: our house view remains they are going all the way back to zero. Enough minutiae about PMIs: it is obvious that broad swathes of the economy are slowing down.
The global backdrop remains of slowing growth, increased financial vulnerability in places, and yet an institutional architecture that is either in denial or has no firm idea of what policy mix to use to stop this happening. And, crucially, global populations that are not content to just sit and wait for something better to turn up eventually.
Indeed, consider that we now have mass public unrest (on and off) in: France, Spain, and that 24% AfD vote in Germany, and Brexit in the UK; Algeria; Iraq: Lebanon; Egypt; Russia; Hong Kong; Venezuela; Chile; Ecuador; and Bolivia. Plus deepening polarisation in the US – and one could add the middle-class disruption of Extinction Rebellion in Australia, Canada, and others.
In short, there isn’t a continent that isn’t seeing unrest in some form, and as Branko Milanovic notes today, one wonders if this isn’t all a little 1968-ish.
Of course, one can’t usually join dots that simply, but if this is 1968-redux then consider the historical echoes. The Prague Spring was violently crushed by Soviet Tanks and the West was powerless to prevent it. Meanwhile, student uprisings in the West produced social reforms and a policy swing to the Left. Along with the Vietnam War, that contributed to the end of the USD peg to gold and the first phase of the global Bretton Woods order – and then to very high inflation in the 1970s, which was ultimately ended by the Volcker Fed and the current phase of deflationary neoliberal globalisation that is once again pushing people out onto the streets.
In short, regardless of what the Fed does this week, or the BOJ; and whatever the PMIs print at; and whatever the EU or Boris give and get, we still face Ages and Ages of Rage in a market that is still largely pricing for the calm of the status quo ante.
With an economic slowdown looming in the euro area, how should fiscal policies respond? This column uses a behavioural macroeconomic framework to investigate the trade-offs between stabilising output and public debt. It proposes that, when the interest rate is lower than the growth rate of the economy, fiscal policy can be used as a tool for output stabilisation while keeping public debt stable. It argues that many EU countries have the fiscal space to stimulate their economies, which could help in preventing a recession.100
With the spectre of a recession looming in the euro area, and elsewhere, the policy question that arises is how much leeway the fiscal authorities in the euro area have to follow counter-cyclical fiscal policies aimed at providing some stimulus. This question is important because it appears that the ECB’s capacity to provide for such a stimulus is limited. The ECB has flooded the markets with liquidity to the tune of trillions of euros since 2015. It is difficult to see how adding a couple of hundred billion of money base, most of which is likely to be hoarded or put to use for speculative activities, will provide for a significant stimulus of economic activity in the euro area.
The conclusion must be that the burden of business cycle stabilisation in the euro area will have to come from the fiscal authorities. This was also recognised by Mario Draghi when he announced a new dose of quantitative easing for the euro area (Hüther and Südekum 2019.).
Two questions arise about the use of fiscal policies. The first one is how effective these policies are in stimulating the economy. This is the question of the size of the fiscal multipliers. The second one is how much leeway the fiscal authorities have to perform their stabilisation responsibilities, taking into account that these authorities have significant levels of outstanding debt. There is considerable reluctance among policymakers these days to use fiscal policies for stabilisation purposes. This reluctance is mainly driven by the fear that these policies may lead to a surge in government debt and in so doing quickly become unsustainable.
There is a huge and longstanding literature on the size of the fiscal multiplier. Our contribution here is to present the results obtained in a behavioural macroeconomic model as developed in De Grauwe (2012), De Grauwe et al. (2019), and De Grauwe and Ji (2019).
In contrast with the existing rational expectations dynamic stochastic general equilibrium (DSGE) models, our model takes the view that agents have cognitive limitations preventing them from having rational expectations. Instead, these agents use simple rules of behaviour, i.e. heuristics. The model introduces rationality by assuming that individuals learn from their mistakes and are willing to switch to the better-performing rule. This model produces endogenous business cycles driven by ‘animal spirits’, i.e. market sentiments of optimism and pessimism that in a self-fulfilling way create booms and busts and are in turn influenced by these market movements. Our model seems to be appropriate to analyse the effectiveness of fiscal policies.
One important characteristic of this model is that the effects of policy shocks depend on the initial conditions, i.e. the state of the economy. This also means that the fiscal multipliers obtained in this model depend on the state of the economy. This is a key feature allowing us to analyse how fiscal policy can be used in different business cycle conditions.
Figure 1 shows the results of computing the fiscal multipliers in the behavioural model under different initial conditions. We simulated 1,000 impulse responses of a positive government spending shock assuming each time different initial market sentiments, or animal spirits. Panel A shows the frequency distribution of the short-term fiscal multipliers, i.e. the response of GDP after four quarters. We observe a wide variation of these multipliers, from 0.8 to 1.5. We also note two peaks in the distribution: one around a multiplier of 1, and another around a multiplier between 1.2 and 1.3.
Panel B shows the origin of these two peaks. In the panel, we set out the fiscal multipliers on the vertical axis against the state of animal spirits in the initial period. These animal spirits are expressed as an index varying between -1 and +1. When the index equals -1 all agents are pessimistic, i.e. they forecast a decline in the output gap. When the index is +1, all agents are optimistic and forecast an increase in the output gap. When the index is 0, optimistic and pessimistic forecasts cancel out and the animal spirits are neutral. We find that when animal spirits are neutral (tranquil periods), the fiscal multipliers cluster around 1. When animal spirits take on extreme values, these fiscal multipliers cluster around 1.2 to 1.3. Thus, extreme values of animal spirits tend to amplify the effects of a fiscal expansion and lead to multipliers exceeding 1. Note, however, that there is still a lot of noise around the non-linear relation between fiscal multipliers and animal spirits, suggesting that other initial conditions affect the size of these multipliers.
There is increasing empirical support for the view that the size of the fiscal multipliers depends on the state of the economy. In a series of influential papers, Auerbach and Gorodnichenko (2012 and 2013) find that the size of fiscal multiplier is state-dependent in the US economy during the post-war period. In particular, they find that the multiplier exceeds 1 during recessions (see also Blanchard and Leigh 2013).
Figure 1 Short-term fiscal multipliers and animal spirits
Source: De Grauwe and Ji (2019)
Interest rate regimes and sustainability of fiscal policies
As mentioned earlier, there is considerable reluctance among policymakers to use fiscal policies for stabilisation because of a fear that these policies may lead to a surge in government debt and, in so doing, quickly become unsustainable. There is therefore a need to focus on issues of sustainability.
Sustainability is very much influenced by the interest rate regime countries face. It is well-known that when the nominal interest rate on public debt exceeds the nominal growth rate of GDP, the debt-to-GDP ratio will become unstable (will grow to infinity) unless the government produces a surplus on its primary budget balance, i.e. the budget balance that excludes interest payments.
Countries that experience an interest rate regime in which r > g, where r is the interest rate and g the growth rate of GDP, are therefore very much constrained in the use of fiscal policies. This is much less so in countries where r < g. In the latter countries, the inherent dynamics of the debt-to-GDP ratio will tend to be stable, i.e. even if the government finances all interest spending by debt issue, the debt-to-GDP ratio will tend to decline. There is therefore no need to produce a surplus in the primary budget balance. It is clear that, in the countries facing a favourable interest rate regime, there is no necessity for the fiscal authorities to finance interest spending by taxation. This has the effect of producing a softer budget constraint allowing for more choices in the use of fiscal policies for stabilisation purposes (see also Blanchard 2019.).
What is the interest rate regime prevailing in different euro area countries today? Figure 2 shows the evolution of r – g since 2013, the first year after the sovereign debt crisis. We observe that r – g declined in all euro area countries. The effect of this decline is that, with the exception of Greece and Italy, all euro area countries now profit from a favourable interest rate regime in which r-g < 0. In Figure 3, we take the average over the last three years and we come to the same conclusion, i.e. most countries of the euro area (except Greece and Italy) have been in a favourable interest rate regime.
Figures 2 and 3 use the market rates. This measures the marginal cost of issuing debt. The latter may diverge from the average interest cost of the government debt. Using the average interest cost instead of the marginal cost leads to similar results.
Figure 2 r – g in euro area countries (post-sovereign debt crisis)
Source: European Commission, AMECO Note: Ireland was eliminated in 2015. This was the year Ireland had a growth rate of GDP exceeding 30%, resulting from special accounting procedures.
Figure 3 r – g (mean over 2016-18)
Source: European Commission, AMECO
Fiscal policies can be used to stabilise output. The sustainability depends on the interest rate regime and therefore determines the choices faced by the fiscal authorities. We analyse these choices using again our behavioural macroeconomic model.
We did this by computing the trade-offs the fiscal authorities face between stabilising output and debt in our behavioural model, assuming that the debt is kept sustainable. As indicated earlier, this model takes into account the state of the economy when the authorities engage in counter-cyclical fiscal policies.
We show the trade-offs between volatility of output and public debt in Figure 4. In order to understand this trade-off it is good to start from point A. This shows the points of the trade-offs when there is no fiscal stabilisation, i.e. the fiscal authorities do not follow counter-cyclical policies. As they increase their counter-cyclical fiscal policies, we move up along the trade-offs.
We distinguish between different interest rate regimes, called rs, where rs = r – g. We allow rs to vary from -3% to + 3%. Let us first concentrate on rs = r – g < 0. In this regime, we obtain negatively sloped trade-offs, i.e. when fiscal authorities increase their output stabilisation efforts this comes at a price of increasing the variability of the debt. When rs = -0.03, this negative trade-off is relatively flat, i.e. the cost of output stabilisation in terms of debt variability is small. With increasing rs, the slope of the trade-offs increases, which indicates that the cost of stabilisation tends to increase.
When rs = r – g turns positive, we observe that these trade-offs tend to bend backwards. Thus, in this interest rate regime when anti-cyclical fiscal policies become strong enough, the trade-offs become positively sloped, i.e. further attempts at stabilising output by varying government spending lead to increases in both the variability of output and debt. Further attempts to use counter-cyclical fiscal policies then reduce welfare. What is the intuition behind this result?
In order to understand this result, let us analyse what happens during a recession. If the fiscal authorities increase spending in order to stabilise output, this leads to increases in the deficit and thus in government debt. We know, however, that when rs > 0 the debt is dynamically unstable except if the authorities keep a sufficiently positive primary balance. The counter-cyclical fiscal policy, however, leads to a departure from this condition, thereby destabilising the debt. The latter forces the fiscal authorities to reduce spending, thereby offsetting the counter-cyclical policy stance. When rs is very positive, the underlying instability of the debt is very strong. As a result, the need to reduce spending to stabilise the debt overwhelms the counter-cyclical policy stance. Fiscal policies as a whole become pro-cyclical. Attempts to stabilise output lead to more variability of output and debt.
From the preceding, it follows that, in interest rate regimes in which the interest rate exceeds the growth rate of the economy, the use of fiscal policy to stabilise output is severely limited. The use of fiscal policy to stabilise the business cycle can quickly lead to a loss-loss situation in which both the government debt and the business cycle are destabilised. In a regime where the interest rate is lower than the growth rate of the economy, this problem does not arise. This is a regime that allows the fiscal authorities to follow counter-cyclical policies without destabilising government debt.
Where should one locate the different euro area countries in this analysis? We have seen that countries like Austria, Ireland, the Netherlands, Germany, Belgium, Spain and Finland are in an interest rate regime where r – g is close to -2% or lower. France and Portugal are also in a favourable interest rate regime, but less spectacularly so. This means that these countries face favourable trade-offs, which allows them to use anti-cyclical fiscal policies without destabilising their government debts. Italy and Greece, however, do not face these favourable trade-offs and risk destabilising their government debt if they were to engage in intense anti-cyclical policies.
Figure 4 Trade-off between variability of output and debt
We conclude that, on the whole, most euro area countries today have the capacity to use fiscal policies as a tool to fight a looming recession without the risk of destabilising their government debt levels.
Conclusion: Changing budgetary priorities in the euro area
The previous conclusion can be strengthened by analysing the primary budget balances of the euro area countries shown in Figure 5 and comparing these with the interest rate regimes shown in Figure 2. The most striking aspect of this comparison is that most euro area countries show primary surpluses while they are in a favourable interest rate regime, i.e. r – g < 0. The latter would allow them to run primary deficits while keeping their debt-to-GDP ratios constant. This reflects a policy choice in most euro area countries that prioritises a speedy decline in debt-to-GDP ratios. The issue is whether this policy choice continues to make sense when the euro area economy is slowing down.
In Table 1, we compute the primary balances that are needed for the debt-to-GDP ratios to remain constant in the euro area countries (see the column labelled “(r-g)*Debt”). We compare these with the observed primary balances. The difference between the two tells us how much fiscal stimulus these countries could engage in while keeping their debt-to-GDP ratio at the levels reached in 2019. The results of this calculation are presented in the last columns. These results are striking. Most euro area countries are in a situation in which they could engage in a fiscal stimulus of more than 2% of their GDP, with some countries reaching 3% or more, while keeping their debt-to-GDP ratios fixed. The exceptions are Greece, Italy and France, which have no leeway for stimulus (Greece) or relatively little (Italy and France).
One note of warning is in place here. The numbers in the column (r-g)/(1+g)*Debt identify the necessary condition for debt sustainability. They may not be sufficient. Take Portugal for example. The number -1.4% says that Portugal could have a primary deficit of 1.4% that will keep the existing debt-to-GDP ratio constant at the level of 119.5%. That level, however, could be considered unsustainable in the face of some unfavourable shocks. Portugal, therefore, may not want to use fiscal stimulus today.
Figure 5 Primary budget balances as a % of GDP, 2019
Source: European Commission, AMECO
We conclude that a significant number of euro area countries (Austria, Germany, Ireland, Netherlands and Finland) could engage in a fiscal stimulus of 3% or more of their GDP. The choice these countries face today is the following. They can either go on the path of sharp declines of their debt-to-GDP ratios, even in the face of a recession. Or they can judge that, with the present threat of a recession, a (temporary) stop in the decline in their debt ratios is desirable. Such a decision would create a fiscal space allowing them to stimulate their economies by 3% to 4% of GDP, a stimulus that would surely do much in preventing a serious recession. Thus, these countries should consider changing their budgetary priorities skewed towards fast reductions of their debt-to-GDP ratios towards one prioritising a fiscal stimulus.
Note: the column (r-g)/(1+g)*Debt measures the primary balance that will keep the debt-to-GDP ratio at the level of 2019; the last column measures the size of the fiscal stimulus in each country that will keep the debt-to-GDP ratio fixed at the level of 2019, given (r – g) in 2019.
Auerbach, A and Y Gorodnichenko (2012), “Measuring the output responses to fiscal policy”, American Economic Journal: Economic Policy 4(2): 1–27.
Auerbach, A and Y Gorodnichenko (2013), “Fiscal multipliers in recession and expansion”, in A Alesina and F Giavazzi (Eds), Fiscal Policy after the Financial Crisis, 63–98, Chicago: University of Chicago Press.
Blanchard, O and D Leigh (2013), “Growth forecast errors and fiscal multipliers”, IMF Working Papers, No. 13/1, Washington, D.C.
It started off well enough, with lots of “optimism” that a trade deal was just around the corner thanks to flashing red headlines from first Larry Kudlow and then China on Monday. However, shortly after 3am ET it all started going terribly wrong as first we got some negative Brexit news, when a Downing Street source said that unless the EU compromises and does a Brexit deal shortly, then the UK will leave the EU without a deal, which was then followed by the main event, namely China’s Ministry of Commerce saying to “stay tuned” for Beijing’s retaliation after the US placed eight Chinese technology companies on its “entity list” which now need to be licensed to access US technology exports.
That was just the start however, as China also said it will halt NBA broadcasts, further souring the mood music ahead of the trade talks scheduled this week, while shortly after the SCMP reported that this week’s trade talks were as good as dead when a “source” told the South China Morning Post that the Chinese delegation may cut short their stay in Washington, removing the possible chance of the talks extending into Friday evening as the delegation would be expected to head to the airport instead of departing at some point on Saturday.
Then, just moments later, Bloomberg doubled down on its originally refuted of soft capital controls by the US on China, when it reported that the Trump administration “is moving ahead with discussions around possible restrictions on capital flows into China, with a particular focus on investments made by U.S. government pension funds” adding that “the efforts are advancing even after American officials pushed back strongly against a Bloomberg News report late last month that a range of such limits was under review. Trump officials last week held meetings on the issue just hours after White House adviser Peter Navarro dismissed the report as “fake news,” and zeroed in on how to prevent U.S. government retirement funds from financing China’s economic rise.”
Faced with this mountain of evidence that the odds of even a watered down deal being announced this week are virtually nil, futures plunged, with the Emini sliding from session highs of 2,950 to as low as 2,910, wiping out almost all post-payrolls gains…
Citizens CEO Says China Trade Deal Could Be ‘Quite Powerful’
… while global markets had deteriorated to a sea of read despite a solid Asian session.
The news also slammed the offshore yuan, which tumbled 0.5% after earlier climbing the most in a month:
The barrage of negative news hit the European STOXX 600 index, which dropped as much as 1%, with Germany’s trade-sensitive DAX hit hard despite earlier data showing an unexpected rise in industrial output. Mixed corporate news added to the woes, with LSE shares tumbling 6% after Hong Kong pulled out of its takeover bid for the exchange, while Germany biotech Qiagen has plunged 16.5% to three-year lows after a sales warning.
Ironically, Europe’s losses followed healthy gains in Asia, where Japan’s Nikkei climbed 1.0% while MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.55%, led by gains in tech shares in South Korea and Taiwan. Hong Kong extended gains after the territory’s leader said she had no plans to introduce other laws using the emergency regulation ordnance, as it’s too early to say the anti-mask law is ineffective. On the other hand, reports, citing the Chief Executive, noted that the Chinese military could step in if the ongoing protests in the city get worse. The Hong Kong leader also noted that during Golden week, the number of visitors declined 50% Y/Y.
Also of note, China mainland stocks returned from a week-long holiday with a 0.6% rise. The National Holiday celebrations also offered a rare respite to China’s retail sector, with spending on goods and dining returning to growth this year. Yet the latest PMI survey showed China’s services sector grew at its slowest pace in seven months in September, offering little momentum to an economy that has been expanding at its weakest pace in almost three decades.
Emerging-market stocks advanced as Chinese markets re-opened after a week-long holiday, with most closing as investors still basked in the glow of the positive trade deal sentiment, as China confirmed that a high-level delegation had already left for the talks in Washington, while President Donald Trump said “we’ll see” if a deal could be reached. Of course, all that changed in subsequent hours, but it was too late to hit the majority of EM stocks.
All this happens, of course, as negotiations are getting under way ahead of a scheduled increase in U.S. tariffs on $250 billion worth of Chinese goods, to 30% from 25% on Oct. 15. Trump has said the tariff increase will take effect if no progress is made in the negotiations.
“Since tariffs have been hurting trade, people are hoping Trump may postpone some of the upcoming tariffs,” said Yukino Yamada, senior strategist at Daiwa Securities. “Nevertheless, you can’t ignore that fact that, up until now, the market has underestimated Trump’s determination on tariffs.”
The surge in trade deal uncertainty also added to pressure in fixed income markets with German bund yields nudging lower while U.S. Treasuries yields slumped as low as 1.52% despite some $78 billion in note and bond supply slated for auction this week.
Meanwhile in currencies, the dollar initially lost momentum, dipping 0.1% against a basket of its rivals after posting its biggest single-day rise in a week in the previous session, before rebounding to unchanged. The greenback traded as low as 106.80 yen, after hitting 107.44 earlier. The euro got a boost from the healthy German industrial output data, with the single currency rising 0.2% to $1.0988, not far off the more than a two-year low hit last week.
Besides the yuan, the other big mover was the pound sterling which traded at $1.2217, after Boris Johnson told German Chancellor Angela Merkel a Brexit deal is essentially impossible if the EU demands Northern Ireland should stay in the bloc’s customs union. The call between the leaders, at 8 a.m. Tuesday, came after a text message from one of the prime minister’s officials, reported by the Spectator magazine, said his government is preparing for talks to collapse.
Elsewhere, the lira was poised for its first advance in three days, clawing back some of Monday’s losses, which were fueled by concern Turkey’s planned incursion into Syria will deepen a rift between Washington and Ankara. The Turkish Defense Ministry said all preparations are complete for the military operation into Syria, while reports stated that US does not endorse any Turkish operations in northern Syria, according to a senior administration officials who added that US troops will be withdrawn from the Turkey-Syria border, not out of Syria entirely.
Looking ahead, markets will be keenly watching comments from U.S. Federal Reserve Chairman Jerome Powell later in the day, who’s speaking at the annual meeting of the National Association for Business Economics, after some weak U.S. data last week raised concerns the U.S. economy may be heading towards a protracted slowdown. Other central bank speakers include the Fed’s Evans and Kashkari. There’ll be September’s PPI reading and the NFIB small business optimism index, while from Canada there’s September housing starts and August building permits. Expected data include PPI. Helen of Troy is reporting earnings.
S&P 500 futures down 0.5% to 2,916.50
STOXX Europe 600 down 0.2% to 382.04
MXAP up 0.6% to 156.40
MXAPJ up 0.6% to 500.32
Nikkei up 1% to 21,587.78
Topix up 0.9% to 1,586.50
Hang Seng Index up 0.3% to 25,893.40
Shanghai Composite up 0.3% to 2,913.57
Sensex down 0.4% to 37,531.98
Australia S&P/ASX 200 up 0.5% to 6,593.43
Kospi up 1.2% to 2,046.25
German 10Y yield fell 0.4 bps to -0.579%
Euro up 0.2% to $1.0987
Italian 10Y yield rose 1.9 bps to 0.512%
Spanish 10Y yield fell 0.5 bps to 0.132%
Brent futures little changed at $58.36/bbl
Gold spot up 0.3% to $1,498.34
U.S. Dollar Index down 0.1% to 98.90
Top Headline News from Bloomberg
China signaled it would hit back after the Trump administration placed eight of the country’s technology giants on a blacklist over alleged human rights violations. Asked on Tuesday if China would retaliate over the blacklist, foreign ministry spokesman Geng Shuang told reporters “stay tuned.”
Boris Johnson told German Chancellor Angela Merkel a Brexit deal is “essentially impossible” if the EU demands Northern Ireland should stay in the bloc’s customs union. The call between the leaders, at 8 a.m. Tuesday, came after a text message from one of the prime minister’s officials, reported by the Spectator magazine, said his government is preparing for talks to collapse.
China’s state TV network CCTV said Tuesday that it would halt broadcasts of the National Basketball Association’s games as a backlash intensified against the U.S. league over a tweet that expressed support for Hong Kong’s pro-democracy protesters.
The U.K. government revamped the tariffs it will levy after a no-deal Brexit following warnings from industry that its earlier plans risked making domestic producers uncompetitive.
German industrial production unexpectedly improved in August after two months of decline, a development that will do little to alleviate concerns about intensifying trade tensions and waning business confidence.
Japanese investors sold a record amount of Spanish bonds in August, seeking to lock in profits from five months of purchases while pivoting more toward U.S. debt.
Asian equities traded higher across the board despite a lacklustre handover from Wall Street where stocks were choppy but ultimately closed in the red amid trade war jitters after the US blacklisted Chinese governmental and commercial organisations over treatment of the Muslim minority community. ASX 200 (+0.4%) was kept afloat by miners amid favourable price action in base metals, whilst Nikkei 225 (+1.0%) was bolstered on the back of a weaker Yen and after US and Japan signed a limited trade deal on agricultural and digital trade. Hang Seng (+0.2%) and Shanghai Comp (+0.3%) returned from a long weekend and played catchup to the NFP-induced upside in the prior session. The former was buoyed by heavyweights Geely Auto after dealers noted a pickup in sales during Golden Week, whilst HKEX shares rose in excess of 2% after it dropped its GBP 32bln bid for LSE, as the boards of the two companies were “unable to engage”. Meanwhile, Mainland China saw upside despite the Caixin Services metric falling short of forecasts, as an improvement in the Composite metric signalled the strongest rate of growth since April. Furthermore, South Korea’s KOSPI (+0.8%) showed a strong performance as the index was supported by tech giant Samsung Electronics, who’s shares spiked higher by 1% after its Q3 guidance topped analyst expectations, albeit it still noted that its profits will likely plunge 56% Y/Y. Finally, core fixed-income futures drifted lower and tracked the risk sentiment around the market with UST and Bund futures poised to close Asia trade near session lows.
Top Asian News
Hillhouse-Backed Genor Said to Seek Up to $1 Billion Valuation
Samsung Billionaire Heir to Cede Board Seat Before Legal Probe
Major European Bourses (Euro Stoxx 50 -0.9%) are lower, with the region shrugging off a positive AsiaPac hand over, as trade jitters return to the forefront following the flurry of headlines yesterday evening. This morning, China’s Ministry of Commerce said to stay tuned for a blacklist retaliation to the recent US decision to list 28 Chinese governmental and commercial organisations, including Hikvision, to the entity list over treatment of the Muslim Uighur community. Further contributing to the downbeat tone, SCMP reported that China is toning down expectations head of US/China trade talks, and even though the round of talks will take place this week, a source says that the Chinese delegation is already planning to cut short its stay in Washington by one night. Moreover, Chinese negotiator Liu He will not carry the title of “special envoy” for President Xi Jinping at the meeting, which the article speculated is an early indication that the vice-premier has not been given any particular instructions from China’s leader. Separately, but also contributing some downside to global equities, was a return of no deal Brexit fears, with UK/EU talks seemingly approaching collapse and the UK government vowed to pursue a no deal exit unless the EU compromises. The confluence of negatives saw DAX Dec’ 19 futures lose the 12000 handle. Moving forward, further impetus likely to come in the form of Fed speak (including Powell at 19.30 BST) and Minutes tomorrow and US/China trade talks, US CPI and ECB Minutes on Thursday. Sectors are lower apart from Telecoms (unch.). In terms of individual movers; Airbus (+0.7%) shares were supported by a strong delivery update. Wirecard (-2.8%) initially moved higher after the Co. announced an increase to its Vision 2025 targets, before paring gains alongside the market. EasyJet (-6.3%) shares fell after a trading update; on the face of it the update appeared strong, however investors noted that they had been expecting firmer guidance, while also suggesting that the co.’s decision to not to have a conference call was a mistake. London Stock Exchange (-4.8%) sunk on news that the Hong Kong Exchange and Clearing will no longer proceed with their offer for the Co. Uniper (-8.2%) shares fell and Fortum (-0.2%) initially rose after the former announced it had agreed to acquire a majority stake in the latter, before falling with the market.
Top European News
Fortum Gets Uniper Control in $2.5 Billion Deal With Funds
U.K. Tweaks No-Deal Brexit Tariffs for Trucks, Fuel and Clothing
Johnson Warned Against Big Tax Cuts as U.K. Faces No- Deal Shock
German Factories Feed Unexpected Rebound in Industrial Output
In FX, NZD/AUD/SEK/TRY – Not quite all change, but certainly some solace for the Kiwi, Aussie, Swedish Crown and Turkish Lira following a bad start to the week. Nzd/Usd has regained 0.6300+ status on the back of supportive fiscal impulses as the NZ Finance Minister flagged a 4 bn budget surplus overshoot against target overnight, while Aud/Usd is hovering above 0.6750 in wake of mixed Chinese Caixin PMIs and an uptick in NAB business conditions. Elsewhere, Eur/Sek has eased back from 10.8900+ peaks towards 10.8500 with the aid of some encouraging Swedish data (private/services production and Usd/Try retreated from around 5.8450 to sub-5.8000 at one stage after US President Trump threatened to decimate the Turkish economy if it crosses the line in Northern Syria.
GBP – In stark contrast to all the above, no deal Brexit risk has put the Pound back on the rack amidst reports that German Chancellor Merkel deems that a breakthrough on the Irish backstop is now highly unlikely, while other headlines contend that an agreement may be dead in the water full stop. In response, Cable lost grip of the 1.2300 handle and filled bids at 1.2275 before ploughing through more between 1.2260-50 on the way through 1.2230, while Eur/Gbp spiked to just over 0.8980 and beyond 500 mn option expiries at 0.8965.
CHF/EUR/JPY – All firmer against the Dollar even though the DXY nudged back over 99.000 ahead of US PPI and Fed Chair Powell, with an element of underlying safe-haven demand underpinning the Franc, Yen and Euro awaiting US-China trade talks alongside the aforementioned Brexit negotiations on the cusp of collapsing. Usd/Chf is closer to 0.9900, Eur/Usd near the top end of a 1.0965-95 band and Usd/Jpy eyeing 107.00 again from circa 107.45 earlier. Note, latest SCMP reports confirms earlier talk that Beijing is not looking for any major deal and propose to cut their stay short, with Liu He not attending in the guise of special envoy that would imply no remit or agenda to sign off on a full trade agreement.
NOK/CAD – The Norwegian Krona and Loonie are both holding relatively steady around 10.0400 vs the single currency and 1.3300 vs the Greenback respectively, with the former largely taking comments from Norges Bank Governor Olsen in stride as he underlined guidance for rates to remain on hold after September’s hike, barring the option to reverse the tightening move if economic developments deteriorated significantly. Meanwhile, Canadian housing starts and building permits are due and may provide the Cad with some independent direction or at least a distraction.
In commodities, the crude complex is lower on Tuesday, after negative news flow on the US/China trade and Brexit front spurring risk off. WTI Nov’19 futures broke below yesterday’s USD 52.60/bbl lows and technicians will now be eyeing support just ahead of the USD 52.00/bbl handle. Meanwhile, Brent Nov’ 19 futures are probing support at USD 58.00/bbl. In terms of geopolitical developments, news flow still appears focussed on the US’ recent decision to pull troops out of Northern Syria, which opens the door for a Turkish offensive against Kurdish forces in the area (reports allege the offensive had already begun), rather than on the US/Iran/Saudi picture; given Syria’s lack of oil it remains unlikely that these developments will have much of a baring on crude prices. In supply news, the North Sea’s Buzzard Oilfield remains closed, according to its operator, and there is still no timeline for its return to normal operations. Gold prices have reclaimed the USD 1500/oz mark assisted by the aforementioned trade and Brexit jitters, after reports that China is ready to do a deal on the parts of the negotiations both sides agree upon (and is prepared to set out a timetable for the harder issues to be worked out next year) triggered a lurch lower during US hours on Monday. Copper prices saw upside overnight on decent Chinese Caixin PMI data helped to moderate concerns about an economic slowdown in the country, but has since given up the majority of its overnight gains.
US Event Calendar
Oct. 8-Oct. 11: Monthly Budget Statement, est. $96.5b, prior $119.1b
8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.1%;
PPI Ex Food and Energy MoM, est. 0.2%, prior 0.3%
PPI Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.4%
8:30am: PPI Final Demand YoY, est. 1.8%, prior 1.8%
PPI Ex Food and Energy YoY, est. 2.3%, prior 2.3%
PPI Ex Food, Energy, Trade YoY, prior 1.9%
DB’s Jim Reid concludes the overnight wrap
I’m in need of motivational words from readers this morning. 5 months ago I set off on a journey of betterment and fulfilment but over the last few days I’ve had a wobble, become disillusioned and now need reassurance that I’ve picked the right path. Yes at 45, with three young kids, a full time (demanding) job and numerous other claims on my time I decided to completely remodel my 35 year old golf swing. After starting this process as a 5-handicapper back in early May, yet another poor round this past weekend has seen me move up to 7. Every time I tee the ball up at the moment I’ve got no idea how wild it’s going to be. Most evenings I stand in front of a mirror and do 30-40 minutes of practise swings before videoing it at the end to see the progress. My wife thinks I’m crazy. On camera it’s looking pretty good but on the course I’ve been struggling for months and have given myself tennis elbow for good measure with all the swinging. Oh and I’ve even moved to live opposite my golf course to try to find time to get better. So if you’ve made a big effort to try to get better at something and have experienced big lows before eventually seeing a euphoric payoff then I’ll be delighted to hear from you as I need it to motivate myself through the upcoming winter months.
US markets flipped between gains and losses yesterday with a level of direction normally reserved for my driver. We eventually closed in the light rough. In more detail the S&P 500 had initially opened -0.55% lower as investors first reacted to the Sunday night Bloomberg story that Chinese officials have become more reluctant to agree a broad trade deal. It then bounced back into the green to trade as high as +0.25% on comments from US official Larry Kudlow that we’ll discuss below. Ultimately the index fell back during afternoon trading to end -0.45% lower, though trading volumes were their thinnest in over a month. The NASDAQ (-0.33%) and the Dow Jones (-0.36%) performed similarly. While most of what Kudlow said was non-committal, saying that he didn’t want to predict the outcome of the trade talks, he did say that delisting Chinese companies “is not on the table”. We also got a White House statement yesterday that the US would be welcoming a Chinese delegation led by Vice Premier Liu He for further trade talks beginning on Thursday. The statement said that the topics of discussion include “forced technology transfer, intellectual property rights, services, non-tariff barriers, agriculture, and enforcement.” After markets had closed, news broke that the US is sanctioning eight additional technology companies over their involvement with China’s treatment and surveillance of the Uighur minority group. Coming just before the trade talks are set to begin, the announcement might lead to more tensions.
This morning in Asia markets have risen in spite of the above blacklisting news. The advances are across the board, with the Nikkei (+1.03%), the Hang Seng (+1.08%), and the Kospi (+0.97%) all trading higher, while the Shanghai Comp (+0.84%) also saw similar moves in spite of opening again after a seven-day public holiday. In corporate news overnight, Samsung’s results beat analysts’ estimates, even as operating profit fell 53% last quarter, and the company’s shares are up +1.36% this morning. We’ve also heard that Hong Kong Exchanges & Clearing are not going to go ahead with its attempt to take over the London Stock Exchange. Elsewhere 10yr JGBS are up +2.0bps this morning and S&P 500 futures are up +0.37%.
Back to trade, and in a special report yesterday (link here ), Peter Hooper and Michael Spencer looked at the current trade war with a historical perspective, as well as prospects for the future. They write that we’ve come to the end of a six-decade surge in global trade as a share of GDP, and that this growth led to a protectionist backlash because the benefits of trade were skewed increasingly away from lower and middle income households. Looking forward, they don’t expect the scope for trade conflict to change greatly after next year’s elections, regardless of the outcome, and either a Trump win or a progressive Democratic win could increase the intensity of the trade conflict in 2021.
Outside of trade, fiscal is another topical issue at the moment and there were interesting headlines on this yesterday from a European Commission document. It suggested that the “Euro-zone need pre-emptive fiscal stimulus to avoid protracted period of low growth” and that “more monetary easing now would be less effective than fiscal stimulus”. The Reuters article suggests that the document will be presented to the Eurogroup meeting of finance ministers next week. It’ll be interesting to see whether it gets traction but it’s important as it shows that the commission is starting to give Governments the green light to open the fiscal vaults. On page 44 of our long term study ( link ) we showed that monetary (QE especially) and fiscal policy have mostly gone in opposite directions since 2010. When central banks have been expanding their balance sheet, governments have been reducing their deficits and visa-versa. So the two moving in the same direction would be more powerful.
Back to markets yesterday and the other big move came from oil, which took a similar roundtrip move as stocks did. WTI and Brent had traded as much as +2.37% and +2.24%, which would’ve been the biggest move since the Saudi drone attack 3 weeks ago, but they retraced to end closer to flat as the risk-off mood reasserted during the afternoon. Nevertheless, energy stocks had led equity gains in Europe, with the STOXX Oil & Gas index up +0.99%, since they closed before the afternoon selloff. In the US, energy stocks lagged and the only group which advanced on the day was the safe-haven communications sector.
Unlike the US, European equities pared back losses to close higher yesterday, with the STOXX 600 up +0.71%, along with the DAX (+0.70%) and the CAC 40 (+0.61%). This was in spite of more negative data, once again from German manufacturing. Factory orders fell by -0.6% mom in August, (vs. -0.3% expected), bringing the yoy rate down to -6.7% (vs. -6.4% expected). This means that the yoy rate has been negative for 15 consecutive months, and comes at a tense time for the German economy, which stands on the brink of a technical recession after contracting by -0.1% in Q2. In the US, 10yr Treasuries ended the session +3.1bps, although the curve flattened with the 2s10s -2.7bps at 9.3bps.
It was the reverse picture in sovereign bond markets, which pared back gains to end the session lower, with ten-year bunds (+1.3bps), OATs (+1.0bps) and BTPs (+1.9bps) all seeing higher yields. The outperformance came from Portugal yesterday, where government bonds outperformed following the country’s election results, with ten-year yields down -0.4bps as investors looked for continuity as Prime Minister Costa increased his Socialist Party’s representation in parliament. Costa is still short of an overall majority however, so needs to work out an alliance with other parties, and has said he wanted to continue working with the Left Bloc and the Communists as he has for the last four years. Costa’s target is to bring public debt down from 122% at present to below 100% of GDP by the end of this four-year term in 2023. Portuguese 10yr yields fell below their Spanish equivalents for the first time since December 2009 with yields falling to 0.137% – impressive given that they were at 4.297% as recently as 2017, and as high as 17.393% in the sovereign crisis in 2012.
Elsewhere in the world of Sovereign risk, the Turkish lira fell -2.47% against the dollar yesterday, its worst session in over six months, extending losses after President Trump tweeted that “if Turkey does anything that I, in my great and unmatched wisdom, consider to be off limits, I will totally destroy and obliterate the Economy of Turkey”.
In terms of the latest on Brexit, Prime Minister Johnson won a Scottish legal challenge yesterday, where anti-Brexit campaigners had sought to force Johnson into sending the extension required under the Benn Act. The judge said that the “unequivocal assurances” that he would obey the law were sufficient. After today’s proceedings in Westminster, Parliament will be prorogued again later on today. However unlike the last prorogation, which ended up being ruled unlawful by the Supreme Court, this one is only until a Queen’s Speech on Monday, which is where the UK government outlines its legislative programme for the coming parliamentary session. Meanwhile, there seemed to be little progress towards a deal ahead of the crucial EU Council meeting on 17 October, and last night the Spectator magazine published what they claim was a message from someone in Prime Minister Johnson’s office that the government were preparing for the talks to collapse and that as a result they would be forced into fighting the next election explicitly on a no-deal platform to ensure they carried the leave vote with them.
Turning to the day ahead, we have a number of highlights, including remarks from Fed Chair Powell, who’s speaking at the annual meeting of the National Association for Business Economics. In terms of other central bank speakers we’ll hear from the BoE’s Haldane and Tenreyro, the ECB’s Lane and Hernandez de Cos, along with the Fed’s Evans and Kashkari. The data picks up a little as well this morning, with August releases for German industrial production, Italian retail sales and the French trade balance. From the US, there’ll be September’s PPI reading and the NFIB small business optimism index, while from Canada there’s September housing starts and August building permits.
(JC) Norman Lebrecht’s new book profiles some of the most influential Jews of modern times – and a feature film based on one of his novels has just been premiered. ‘It feels as though all my Chanucahs have come at once,’ he tells Jenni Frazer.
It is, says Norman Lebrecht, a question which has occupied him for half his life. For a short, intense period of time — 100 years or so — a “handful” of people appeared on the public stage “and changed the way we see the world”. Half of them, suggests Lebrecht, were Jews.
In his newest book, Genius and Anxiety, How Jews Changed the World, Lebrecht attempts to provide an answer to his question. “There is no simple rational explanation”, he says, and yet in this massive and fascinating volume, Lebrecht, a music critic and novelist with a 40-year career in journalism behind him, does his best to give the reader the solution.
He does it by dividing the century between 1847 and 1947 into decade-sized nuggets of cherishable information about our genius forebears — many of whom, it must be admitted, had a certain amount of anxiety about being Jewish.
Among Lebrecht’s cast of thousands are the expected and well-known — Freud, Einstein, Trotsky, Kafka, Disraeli — and the less well-known, such as Karl Landsteiner, Paul Ehrlich, or Fritz Haber. And then there are the people most of us have simply never heard of, such as Eliza Davis, a tough Jewish woman who challenged Charles Dickens over his portrayal of Jews in Oliver Twist — and won.
Besides that, Lebrecht adds another layer by telling us a “who knew?” element about the really famous. So we learn, for example, that before the Lubavitcher Rebbe became the Lubavitcher Rebbe, he was working as an engineer in the Brooklyn Navy Yard in New York, and “in lunch breaks he reads Ripley’s Believe It Or Not and Dick Tracy over his workmates’ shoulders”.
For those who think they knew everything about Sigmund Freud, Lebrecht offers the delicious “gotcha” morsel, that Freud forbade his wife Martha from any manifestation of Jewish practice throughout their marriage. But on the Friday night after Freud’s death, Martha lit Shabbat candles — and continued to do so for the rest of her life.
Lebrecht reminds us that the composer Arthur Schoenberg, probably alone among all the Jewish converts to Christianity, “goes to the Liberal synagogue on Rue Copernic [in Paris, when the Nazis seize power] and demands to be readmitted to the Jewish faith that he left in the 1890s… he demands a formal ceremony. On July 24 1933, the synagogue certifies his re-entry into the Community of Israel”.
And just in case this weren’t enough, the cherry on Schoenberg’s cake is that his witnesses were “the painter Marc Chagall and the scientist Dimitri Marianoff, Einstein’s son-in-law.” If you’re going to do it, go big, seems to be the subtext here. (It should perhaps be noted that the synagogue told Schoenberg that re-admission was an entirely bogus ceremony and not necessary, but he insisted).
The indefatigably curious Lebrecht asks the question: why did these Jews, some practising, many not, think “outside the box”?Moreover, he thinks that Jews “managed to see what others could not” precisely because of their upbringing, of their schooling in Talmudic disputation, of their propensity to say “what if?” and push a problem or a situation just one stage further than everyone else.
It’s a bit of a stretch, such a proposition, particularly with the men and women who outright rejected Judaism, but Lebrecht is convincing.
He takes as his starting decade 1847, the year that composer Felix Mendelssohn and his sister Fanny, also a composer, died; the year Karl Marx wrote the Communist Manifesto; and the year that Benjamin Disraeli became the de facto leader of the Tories in Parliament. The book is written in the historic present so that the reader is carried along on an almost breathless stream of name-dropping — but that only serves to give a sense of how Jews everywhere were making the most of the opportunities of 19th century emancipation and enlightenment. New ideas and how to put them into practice were everywhere and Jews, says Lebrecht, were almost always at the forefront of such developments.
The year 1847 is “a breakthrough year in terms of Jewish engagement. And I took 1947 as the endpoint because on the very day that the United Nations is voting on the formation of a Jewish state, is the day when the first Dead Sea Scrolls are brought to Jerusalem. It’s not just history ending and history beginning, but this constant process of re-invigorating history, of re-writing history, because with those scrolls, we now know that our sources are far more diverse than we ever imagined them to be”.
Though Jews were almost ubiquitous with the latest ideas or inventions, Lebrecht says that “without exception” the ideas were always accompanied by a strain of anxiety. “They said, in effect, I’m going to have to put this into practice NOW, because you never know where the next pogrom is coming from”.
His book, he says, “is not just about how Jews changed the world, but about how the world changed the Jews. The Jews of today are unrecognisable from what they were in 1847 — in terms of their civic status, their attitudes and their physicality. Jews changed; and the Jewish religion changed in many ways, even among the most Orthodox.”
Jews, insists Lebrecht, “see the world in a way others don’t.” He offers as an example Karl Landsteiner, the man who “made it safe for us to have major surgery, because he discovered blood groups.” Around 1900, Lebrecht says, surgery was quite advanced, operations were taking place but patients were dying of shock. It was Landsteiner who asked, could it be the blood, and he found three different blood groups straight away. But he was initially derided and it was not until 1907 that another young Jewish doctor in New York decided to try Landsteiner’s discovery, matching a blood type to that of a patient. It worked and ever since patients have been treated with their own specific blood groups.
Admittedly, says Lebrecht, Landsteiner was “such a self-denying Jew — he converted to Christianity — that he once threatened to sue a publisher of an American Jewish directory for including him. And yet, look at the question he asked — when is blood not blood? Is there a possibility of there being more than one type? The Talmud says yes, there is. Cranial blood is different from abdominal blood”. Lebrecht says Landsteiner is unlikely to have been aware of the Talmudic prescription.
“But he knew to ask the question. It’s to do with a Jewish style of discourse”.
Observant readers may have noted that there are not many women in Lebrecht’s catalogue of Jews who changed the world — although we do meet Golda Meir and one of the writer’s favourites, the French Jewish actress Sarah Bernhardt, who, claims Lebrecht, more or less invented the cult of celebrity, by proclaiming herself “so famous that you can’t touch me”.
Along with Lebrecht’s evident and justifiable glee at the arcane stories he has unearthed about his Jewish pantheon of game-changers, there is another level of satisfaction.
His 2002 novel, The Song of Names, has just been made into a feature film starring Tim Roth and Clive Owen and our conversation takes place on Lebrecht’s return from a red-carpet ride at the Toronto Film Festival where the movie premiered.
The book, which won the Whitbread First Novel Prize, is about the friendship between two young boys, Dovidl and Martin. Dovidl’s family are trapped in Poland at the start of the Second World War, Martin’s father is a successful and well-connected musical talent agent. The boys meet when Dovidl, a violin prodigy, comes to study at Martin’s house with a celebrated teacher.
The two boys become very close but on the eve of an international concert debut arranged for him by Martin’s father, Dovidl disappears — and is not seen again for 35 years. As adults the two re-connect — and the mystery of Dovidl’s disappearance is explained.
Lebrecht’s agent received an approach from a film-maker the week after publication but it took a long time in “development purgatory” before the film got off the ground. It is directed by Francois Girard who, says Lebrecht, was assiduous in asking for advice to make sure the film’s details were as authentic as possible.
But there is one huge difference between the book and the film: in the book, both boys are Jewish. In the film, apparently at Tim Roth’s suggestion, Martin and his family are not Jewish. “It nearly killed me”, Lebrecht says. “It works, but I lost a lot of sleep over it”. Still, he did not write the screenplay and was on hand primarily as a consultant and he is very happy with the finished product.
With the publication of Genius and Anxiety and the upcoming release of The Song of Names — which is showing on October 6 at this year’s London Film Festival — Norman Lebrecht feels, he says, “as though all my Chanucahs have come at once”. Then he laughs and says he is returning to his next novel, about his first love, music. So far, he reports, “there are no Jews in it.”
The FT’s Daniel Garrahan on some of the top stories the FT will be watching this week, including the 70th anniversary of the People’s Republic of China, Kristalina Georgieva’s move to the head of the IMF, the closure of the UK’s Cottam coal-fired power plant, and interim results from supermarket group Tesco
Three videos appearing to show encounters between US Navy aircraft and what the military terms “UAPs” – so-called ‘Unidentified Aerial Phenomena” – have accidentally been released to the public despite the military insisting that they were never cleared.
According to RT, the clips, which have at this point been widely circulated, depict American aircraft interacting with the unidentified flying objects. Several of these mysterious dark figures demonstrated aerial maneuvers that were far beyond the capabilities of human technology.
The Navy’s Deputy Chief of Naval Operations for Information Warfare Spokesman Joseph Gradisher confirmed that the videos are genuine, but insisted that the government hadn’t finished analyzing their contents, which remained unexplained. He cautioned that the public shouldn’t jump to conclusions about the existence of aliens.
The videos were released to Luis Elizondo, a former military intelligence officer who claims to have been a director of the Pentagon’s UFO research arm, the Advanced Aerospace Threat Identification Program (or AATIP). He intended to use them in a database about possible aerial threats.
In the first video, titled “FLIR1”, a strange pill-shaped object can be seen sitting on the horizon before darting sideways extremely fast.
In the second video, a US aircraft’s sensor has locked on to an object flying swiftly across the water. The pilot and his teammates can be heard expressing their surprise at the object’s speed.
In the third, an oblong object can be seen moving steadily before stopping and turning around and darting away.
The Pentagon complained about the release of the videos, saying they “should still be withheld” as they were “never officially released to the general public.” But it’s a bit too late to put the UFO back in the back.
These videos have been in circulation for months, ever since the Pentagon released files from AATIP, which had been a secret government initiative that “did pursue research and investigation into unidentified aerial phenomena.” The Pentagon has admitted that it shut down the AATIP in 2012, however there have been reports claiming that the department still investigates potential alien aircraft sightings.
Interviews with several pilots who encountered UFOs can be jarring. The pilots describe encountering vessels that accelerate to hypersonic speeds while making stops and turns – maneuvers that no human ship could pull off. Some pilots described the objects as an ongoing phenomenon. At first, one squad thought they were part of some top-secret drone program, but the pilots soon ruled this out.
AATIP’s existence was revealed in 2017, when former Senate Majority Leader Harry Reid claimed to have arranged for the program’s $22 million annual funding. It was founded at Reid’s behest back in 2007 after Navy airmen had repeatedly captured footage of UAPs.
‘The future has come to meet us’. Ahead of climate strikes started by Greta Thunberg, the FT and the Royal Court collaborate on a short drama exploring inaction on climate change. Actress Nicola Walker, transmitting news from 2050, asks why we ‘never really learnt how to talk about this’.
(GUA) New York forum aims to ‘restore’ the climate by reducing atmospheric levels of carbon to those of a century ago
A new effort to rally governments and corporations behind technologies that suck greenhouse gases from the atmosphere to help stave off disastrous global heating will be launched at the United Nations on Tuesday.
The first annual Global Climate Restoration Forum, held in New York, aims to spur international support for emerging and sometimes controversial methods to claw back planet-warming gases after they have been emitted from power plants, cars, trucks and aircraft.
The Foundation for Climate Restoration, the group behind the forum, has released a manifesto for its goal to “restore” the climate by reducing atmospheric carbon dioxide levels to those of a century ago. Atmospheric CO2 is rising sharply, peaking at 415 parts per million this year, far above the level during most of human history, around 300ppm.
The foundation aims to restore this historical norm by 2050, saying success would be on a par with the moon landing or the eradication of smallpox. It warns that the current climate is leading us “down a path toward the probable extinction of our species and thousands of others”.
“Mother Earth will survive without us but we’d like for humans to survive too,” said Rick Parnell, chief executive of the foundation, which was created last year. “This is the beginning of a 10-year strategy to get governments and companies to understand the need to restore our climate now. Humanity got us into this situation, it can get us out of it.”
Global average temperatures have increased by around 1C in the past century due to the buildup of planet-warming gases from human activity. World leaders have agreed to limit this rise to 2C, and ideally 1.5C, although global greenhouse gases are not declining and major emitters such as the US and Brazil have shown signs of going backwards.
Any realistic chance of avoiding highly dangerous levels of global heating will likely involve the removal of CO2 from the atmosphere, either through mass reforestation or nascent technology that either eliminates it from industrial processes or sucks it directly from the air.
As of 8:20 PM central Sunday evening, there is no change in 3-month, 5-year, 10-year, or 30-year treasury yields.
I propose there is little economic sense to this reaction.
Oil shocks are inherently recessionary.
Theoretically, this could be an inflationary recession like the 1970s.
Global Fairy Godmother
With stocks priced well beyond perfection, a collapse in global trade, a UAW Trade Strike Involving 48,000 Workers, and trade war threats between the US and Europe (and the UK and Europe), this all seems strange.
Then again, perhaps the Global Fairy Godmother will solve all the issues and restore global inflation (as measured by central banks).
InterNations, the world’s largest expat networking group, released its benchmark Expat Insider 2019 report revealing where the best places are in the world to live as an expat.
An expat is defined as an employee sent abroad on a corporate assignment or classed as a new international hire. This will also mean that the experiences of that certain demographic could significantly differ from a local — especially being away on corporate assignment can entail bonuses, such as relocation stipends for example.
The Expat Insider 2019 report was conducted by InterNations and surveyed 20,259 expats, representing 182 nationalities, living in 187 countries or territories. The survey ran from 7 to 28 March. Respondents were asked to score 48 different factors — which fall into 17 subcategories — related to living abroad. Those 17 subcategories are then put into five pillars — Quality of Life, Ease of Settling In, Working Abroad, Family Life, and Personal Finance.
For a place to be ranked, there needs to be a sample size of at least 75 survey participants per destination.
The Quality of Life index is made up of Leisure Options, Health & Well-Being, Safety & Security, Personal Happiness, Travel & Transportation, and Digital Life. Respondents rated factors on a scale from one to seven.
Here is the top 10 country ranking:
Portugal rose from second to first after improving its rankings across safety and security, specifically in terms of political stability — 81% rate this factor favourably.
One expat from Brazil describes Portugal as “friendly and safe” while an expat from the Netherlands said Portugal’s great quality of life is down to “a combination of things… weather, food, plenty of sites and events, the people, proximity to the beach, everything.”
Spain came in second, thanks to its climate and weather — 76% of expats in the country are completely happy with this factor versus 26% globally.
However, Internations points out that while the country places in the top 10 in almost all other subcategories of the index, it doesn’t make it into the top 20 for Digital Life and Safety & Security.
An expat from Sweden said :“The somewhat corrupt political system and the independence movement in different areas.”
(ZH) The global growth outlook is the lowest since the last financial crisis, and central banks, especially ones in emerging markets, have already started to cut interest rates to make sure growth doesn’t collapse.
Manufacturing across large parts of South America, Europe, Asia, and the Middle East are reeling from a global structural slowdown, amplified by the US and China trade war, have triggered emerging central banks to cut rates by the most in a decade, reported Reuters.
Emerging central banks took notice when major central banks including the US Federal Reserve and the European Central Bank started to cut interest rates this summer, all in an attempt to lessen the impact of a global synchronized slowdown.
Sri Lanka Central Bank Governor on Interest Rate Cut, Inflation, Tourism
Central banks across 37 emerging market economies recorded a net fourteen rate cuts in August, the most since policymakers dropped rates to zero after the global financial crash in 2008/09.
August marked the seventh straight month of net rate cuts followed by a tightening cycle that ended in early 2019. July recorded a net eight rate cuts. Cuts by Mexico and Thailand in August took markets by surprise.
After nine straight months of rate hikes in 2018, emerging central banks battled the fallout from a firm dollar, increasing inflation, and weaker local currencies.
Here’s a complete list of the recent emerging market central bank policy decessions:
PARAGUAY – The central bank cut its policy rate by 25 basis points to 4.25% on Aug. 21.
INDONESIA – The central bank, hoping it can spur faster growth at home despite a global slowdown, surprisingly cut its key interest rate for a second time in two months on Aug. 22.
MEXICO – Policymakers cut on Aug. 15 the key lending rate by 25 basis points to 8.00%- the first reduction since June 2014, citing slowing inflation and increasing slack in the economy, and fuelling expectations that further monetary policy easing could be on the way.
EGYPT – Egypt’s central bank cut the overnight deposit rate by 150 basis points to 14.25% on Aug. 22, its first cut since February, after July inflation figures came in significantly below expectations
MOZAMBIQUE – The central bank cut its benchmark interest rate by 50 basis points on Aug. 14 to 12.75%.
JAMAICA – Jamaica’s central bank cut its interest rate by 25 basis points to 0.50% on Aug. 28.
NAMIBIA – Policymakers reduced the lending rate by 25 basis points to 6.5% on Aug. 14.
MAURITIUS – The central bank on Aug. 9 cut the repo rate by 0.15 basis points to 3.35%.
PERU – The central bank cut the benchmark interest rate to 2.5% on Aug. 9 amid growing expectations for an economic slowdown in the world’s No.2 copper producer, but stressed its decision did not necessarily mean the start of an easing cycle.
SERBIA – The Serbian central bank surprised markets by cutting its benchmark interest rate another 25 basis points to 2.5% on Aug. 8, the second cut in as many months, to further bolster lending and growth.
THE PHILIPPINES – The central bank cut its benchmark interest rate on Aug. 8 and kept the door open for further easing to buttress the economy after growth slipped to its weakest in 17 quarters, hurt by tepid government spending and private sector investment.
BOTSWANA – The central bank cut the lending rate by 25 basis points to 4.75% on Aug. 29.
INDIA – The Reserve Bank of India (RBI) lowered its benchmark interest rates for a fourth straight meeting on Aug. 7 with a slightly bigger than expected cut, underscoring its worries about India’s near-five year low pace of economic growth.
BELARUS – The central bank said on Aug. 7 it was cutting its main interest rate to 9.5% from 10% with effect from Aug. 14 and that the intensity of inflationary processes had slowed in the second quarter.
THAILAND – Policymakers unexpectedly cut the benchmark rate on Aug. 7, expressing worry about strength of the baht and aiming to help support faltering growth.
JORDAN – The central bank of Jordan reduced its main rate in early August by 25 basis points to 4.5%.
HONG KONG – The Hong Kong Monetary Authority (HKMA) cut its base rate charged through the overnight discount window by 25 basis points to 2.5% on Aug. 1, its first cut since late 2008, in line with the U.S. Federal Reserve’s move. Hong Kong’s monetary policy moves in lock-step with the Fed as its dollar is pegged at a tight range of 7.75-7.85 per dollar.
MOLDOVA – The central bank raised its main interest rate to 7.5% from 7% on July 31 to fight rising inflation caused by wage increases and higher food prices.
SAUDI ARABIA / BAHRAIN / UNITED ARAB EMIRATES – Central banks of Saudi Arabia, Bahrain and the United Arab Emirates – whose currencies are all pegged to the U.S. dollar – cut key interest rates to preserve monetary stability on July 31 after the Federal Reserve lowered U.S. interest rates for the first time in over a decade.
BRAZIL – In its first rate cut since March 2018, the central bank cut its benchmark interest rate to a new low of 6.00% on July 31, an aggressive first move in a widely anticipated easing cycle to inject life into a moribund economy and prevent inflation from slipping too far below target.
AZERBAIJAN – The central bank said on July 26 it had cut its refinancing rate to 8.25% from 8.50%.
RUSSIA – Policymakers cut the key interest rate on July 26 and flagged that one or two more cuts were possible later this year as Russia faces sluggish economic growth and slowing inflation.
TURKEY – The central bank slashed its key interest rate by a bigger-than-expected 425 basis points to 19.75% on July 25 to spur a recession-hit economy, its first step away from the emergency stance adopted during last year’s currency crisis.
SOUTH AFRICA – The central bank cut its main lending rate as expected on July 18, but struck a cautious tone that suggested future cuts in borrowing costs were not a foregone conclusion despite benign inflation.
UKRAINE – Policymakers cut the main interest rate by half a percentage point to 17% on July 18, citing a downward inflation trend which is expected to continue in coming months and could pave the way for further monetary easing.
SOUTH KOREA – The central bank delivered a surprise interest rate cut on July 18, and shaved this year’s growth forecast to the lowest in a decade, as a brewing dispute with Japan piled more pressure on the trade-dependent economy.
PAKISTAN – Policymakers hiked the main interest rate by 100 basis points on July 16 to 13.25%, citing increased inflationary pressures and a likely near-term rise in prices from higher utility costs.
DOMINICAN REPUBLIC – Policymakers cut interest rates by 50 basis points to 5% on June 30.
COSTA RICA – The central bank cut the key policy rate to 4.50% from 4.75% from June 20.
CHILE – Chile’s central bank unexpectedly cut the benchmark interest rate by 50 basis points to 2.5% on June 7 as it braced for a sharper economic slowdown because of the U.S.-China trade dispute.
SRI LANKA – The central bank cut its key interest rates by 50 basis points on May 31, as widely expected, to support its faltering economy as overall business and consumer confidence slumped following deadly bomb attacks.
TAJIKISTAN – The central bank reduced the refinancing rate to 13.25% from 14.75% on May 31.
KYRGYZSTAN – Policymakers in the Central Asian nation cut the benchmark rate to 4.25% from 4.50% on May 28, citing slowing inflation.
ANGOLA – Angola’s central bank cut its benchmark lending rate by 25 basis points to 15.5% on May 24.
ZAMBIA – The central bank in Lusaka raised the benchmark lending rate to 10.25% from 9.75% on May 22 to counter inflationary pressure and support macroeconomic stability.
MALAYSIA – The central bank on May 7 became the first in Southeast Asia to cut its key interest rate this year, by 25 basis points to 3.0%, moving to support its economy at a time of concern about global growth.
RWANDA – Rwanda’s central bank cut its key repo rate by 50 basis points on May 6 to 5.0%.
MALAWI – Malawi’s central bank cut its benchmark lending rate by 100 basis points on May 3 to 3.5%.
CZECH REPUBLIC – The Czech National Bank raised interest rates on May 2, using a window of opportunity created by easing economic risks abroad to stem rising domestic inflation by fine-tuning a tightening cycle it had paused at the end of 2018.
KAZAKHSTAN – Policymakers cut the policy rate by 25 basis points to 9.00% on April 15 in an expected move taken after President Kassym-Jomart Tokayev ordered them to make credit more affordable.
NIGERIA – In a surprise move, the central bank cut its benchmark interest rate to 13.5% from 14% on March 26 as part of an attempt to stimulate growth in Africa’s biggest economy and signal a “new direction”.
GEORGIA – The central bank cut its refinancing rate to 6.5% from 6.75% on March 13, citing forecasts suggesting that annual inflation would stay close to its 3% target this year.
TUNISIA – Policymakers in Tunisia raised the key interest rate to 7.75% from 6.75% on Feb. 19 to combat high inflation – the third such hike in the past 12 months.
The reason emerging market central banks were delivering the most cuts in a decade last month is that the world is likely in a trade recession that could significantly worsen into 1H20.
Many emerging market countries have export-driven economies to the developed world, and when demand slows down, their economies suffer the most.
Rate cuts from August will take at least one year to filter into emerging markets, which means economic data from the 37 regions will likely stay depressed for some time.