Author: Ashton Wenborn

People’s Bank of China cuts key rates

Posted on by Ashton Wenborn

The People’s Bank of China has cut its key lending rate in a bid to stem a gathering stock market collapse and, in doing so, arrest mounting fears concerning the country’s slowing growth. Less than 24 hours after “Black Monday” hit, so-called by local media when Chinese stocks suffered their biggest single-day slump since 2007, the central bank has responded by slashing its rates and pumping liquidity into the banking system.

The interest rate cut is the country’s fifth
since November

The interest rate cut is the country’s fifth since November and will see the key lending rate reduced to 4.6 percent, down from 4.75 percent, whereas the bank’s reserve requirement ratio stands at 18 percent, down from 18.5 percent previously. The latter means that the banking sector will be given more capital to play with at a time when many have been reluctant to lend, for fear of default.

According to the People’s Bank of China, the measures were taken in order to reduce “the social cost of financing to promote and support the sustainable and healthy developments of the real economy.” However, many analysts believe that the rate cut is an overdue response to recent losses on the stock market, and the consensus is that not acting sooner contributed to “Black Monday”. The news is not all negative, and many have been keen to point out that the Shanghai index was up 43 percent on the year previous, as of Black Friday’s end.

The IMF forecasts that China’s growth for this year will come in at 6.8 percent, slightly less than the bank’s seven percent target; and the slowdown has led investors to believe that there will be knock-on effects for companies around the globe. With many reliant upon the world’s number two economy for growth, any negative news for China is negative for profitability, and markets have suffered greatly as a result.

De Beers cuts diamond prices to weather rocky market

Posted on by Ashton Wenborn

De Beers, the largest diamond producer in the world, has reduced its prices by as much as nine percent amid falling demand and mounting pressure to reduce supply. A general slump in commodities across the globe has been felt particularly in the luxury goods sector, including of course, fine jewellery and diamonds. Moreover, China, a key growing market for diamonds, has been hit significantly because of the country’s slowing economic growth and the tumbling stock market.

De Beers faces increasing pressure from other players in the industry

As a result of the global economic landscape, De Beers faces increasing pressure from other players in the industry, including cutters, polishers and traders, as they contend with their own falling sales and shrinking margins.

New fashion trends, which see the demand escalate for coloured gemstones, such as rubies, sapphires and emeralds, have in turn caused a decline in sales of diamond-encrusted jewellery. The growing popularity for less expensive alternatives is naturally enhanced further by economic fluctuations in both key and emerging markets. While a credit shortage from Antwerp Diamond Bank, a source of finance for 80 percent of the city’s industry players, adds further strain to the $80 diamond business. The gradual deceleration of the bank’s activities was decided by KBC Groep NV Yinren Group following the unsuccessfully completion of the subsidiary’s sale last September.

Twice so far this year, De Beers has reduced its production target from 34 million carats to between 29 and 31 million carats. The drop in production has led to Botswana, the biggest exporter of diamonds and where De Beers mines are predominately based, to reduce its GDP growth forecast by almost half. Despite starting the year with expectations of expansion at 4.9 percent, the Finance Ministry reduced the figure to 2.6 percent in August. “The downside risk to the projections continues to be the country’s high dependence on diamonds, whose demand and prices are subject to global fluctuations,” Bloomberg reported the Ministry as saying.

Equity investors anticipate greater volatility

Posted on by Ashton Wenborn

From south east Asian currencies, to tumbling commodity prices, to the Chinese stock exchange – to describe markets around the world as unstable would be an understatement. As a result, the Chicago Board Options Exchange Volatility Index – known as the VIX – has reached its highest point since 2011.

From Malaysia to Russia, emerging market currencies have been hitting record lows against the dollar

Often referred to as the “investor fear gauge,” the VIX shows the market’s expectations of volatility for the next 30 day period. Quoted in percentage points, anything over 30 is expected as showing a high degree of expected volatility; the surge of the VIX in the last few days to over 40 reflects a deep fear within US equities markets. Such fears stem from pessimism over the conditions of the world economy.

China, the source of much of the world’s economic growth, has seen a slowdown – with its largest recorded fall in manufacturing growth since 2009 recorded last week. Further, after an unprecedented tumble in its stock markets through June and July, forcing government action, the week of August 24 saw further declines. China’s recent unprecedented RMB devaluation has further allayed fears that the world’s second largest economy is in trouble.

Falling commodity prices have also hit emerging markets, of which they are usually exporters, hard. Stemming from both an actual slowdown in the Chinese economy and fears of further deterioration, commodity prices have fallen. As the FT notes, “a broad index of commodity prices slid to the lowest point of this century.” Further, oil-dependent nations have suffered due to an Opec induced glut in the market forcing prices to a six-year low. From Malaysia to Russia, emerging market currencies have been hitting record lows against the dollar.

Japan misses inflation target – but it’s ok, says Abe

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On August 24, Prime Minister Shinzo Abe announced that the Bank of Japan has fallen short its two-year inflation-rate target of two percent, but that it is “acceptable”. The premier expressed to the Japanese Parliament that he has full confidence in the monetary policy of the central bank’s governor, Haruhiko Kuroda – thus indicating that the bank is not under pressure to further expand its massive stimulus programme.

The two percent target has now been moved forward to September 2016

The two percent target has now been moved forward to September 2016, although many experts believe that this new deadline is also over-ambitious.

Kuroda has expressed his willingness to expand the stimulus programme, yet policymakers fear that this could lead to the depreciation of the yen and further raise the cost of living, as well as the cost of imported goods.

While Japan continues to face on-going economic domestic issues, the continued slump in global oil prices is the principle reason behind price weakness. Although there have been promising developments in the country, such as the tightening of the labour market and reduction in the unemployment rate, they have not yet translated into increased consumer spending. In spite of a short-term rise in May, household spending unexpectedly fell once again in June, thereby maintaining an enduring and disappointing pattern of decline.

As illustrated by the performance of the Japanese economy this year, the stimulus programme alone is not enough to reach the two percent inflation target, nor to mitigate against the risk of sustained price decline and deflation. Yet, hope still exists through the export market – large corporations, such as Toyota, Nissan and Honda experienced a boost in profits this year, which in turn led to increased employee wages – such mechanisms could be the solution to fuel spending and in effect, recovery.

China not in crisis (yet), says IMF

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Speaking at a press conference on August 22, IMF executive director Carlo Cottarelli warned the watching media that it was “totally premature to speak of a crisis in China.” The warning came in response to mounting challenges for the world’s number two economy, with an economic slowdown stock market slump chief among them.

Stock markets have taken a more than 30 percent hit since the mid-point of the year, mostly in response to poor economic data

Stock markets have taken a more than 30 percent hit since the mid-point of the year, mostly in response to poor economic data and the realisation that growth in China is far less than many have grown accustomed to. The slump has been coupled also by panicked predictions for the future of the Chinese and global economy, though Cottarelli has been quick to reassure investors that the reduced rate is a consequence of “necessary” adjustments.

The high-ranking IMF official insisted that monetary policies had been very expansive in recent years, and, as such, the slowdown is part of the transition to safer and more sustainable growth. “China’s real economy is slowing but it’s perfectly natural that this should happen,” said Cottarelli, according to Reuters report. “What happened in recent days is a shock on financial markets which is natural.”

The claims are closely in keeping with the IMF’s recent China predictions. In a conference call earlier this month, Markus Rodlauer, Deputy Director of the organisation’s Asian Pacific Department and Mission Chief for China, said: “This transition is challenging, but the authorities are committed to achieve it. They have made progress in reining in vulnerabilities built up since the global financial crisis, and have embarked on a comprehensive reform program.”

The IMF forecasts still that GDP growth will clock in at 6.8 percent for this year, which, although less than last year, is still close to Chinese authorities’ own target of seven percent.

Tsipras resigns and calls for snap election

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Following a tumultuous but short time in office, leader of the ruling Syriza party, Alexis Tsipras, announced his resignation on August 20. It is expected that the second and third largest political parties will waive their right to form an administration, instead approving snap elections. Experts predict that the national vote will take place earlier than the previously indicated date, September 20.

The television address given by Tsipras was made on the same day that Greece received €13bn – the first part of a new €86bn bailout package, which will be given over the next three years. The payout enabled the government to fulfil a debt repayment of €3.2bn to the ECB, thereby allowing it to avoid default.

Greece’s economic hole is so deep that loans are simply not enough to fill it

During his speech, Tsipras said that it was now up to the people to decide if the agreement reached with Eurozone leaders is enough to overcome the current situation the country faces. “I want to be honest with you. We did not achieve the agreement we expected before the January elections,” he said. “I feel the deep ethical and political responsibility to put to your judgment all I have done, successes and failures.”

Tsipras passionately took to his post in January, winning through promises to alleviate austerity and bring relief to the Greek people. Despite starting with such conviction, over the course of the past seven months Tsipras has gradually shifted from this strong stance and relented to the very conditions that he initially rejected. After months of laborious and unsuccessful negotiations, the prime minister approved the kind of package that his predecessors adopted just a few years before – making more enemies in Europe and within his own party in the meantime. In an unsurprising move, on August 21, 25 MPs within Syriza broke away to form their own party, Popular Unity.

From the beginning of his controversial term, it was evident that Tsipras would have no choice but to agree to the austerity measures required to secure a new bailout deal. To his credit, Tsipras tried ardently to negotiate a better package, for which he still has support from Syriza voters, but simply put, the economy is not yet in a position to dismiss tax rises, the ‘solidarity tax’ for the unemployed and pension cuts. Of course, it is dire for those living in increasingly impoverished conditions for several years now, but not enough has been done for the situation to be otherwise. Greece’s economic hole is so deep that loans are simply not enough to fill it. The fundamental shift needed starts with tax, specifically a tax to those that avoided paying for so many years. Until this is achieved, the poorest will continue to be hit hardest of all, while the economic future of the country maintains a bleak outlook.

Currency devaluations become less effective

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As any introduction to macroeconomics class will tell you, a decrease in the value of a country’s currency leads to goods and services becoming more competitive on the world market – increasing demand and spurring economic growth. However, according to a new study by the World Bank, this vital tool in the arsenal of finance ministers and central bankers across the world is becoming less reliable.

The analysis of 46 countries found that since the 1990s, the effectiveness of currency depreciations in increasing exports and spurring on economic growth has halved. As the paper points out, “over the period 1996–2012…the elasticity of manufacturing export volumes to the real effective exchange rate has decreased over time.”

This may come as bad news for China, which recently went through a series of currency devaluations, some speculate, to reboot their faltering economy

Countries that have become embedded in the global economy’s “global value chains” are most likely to see a decline in the effectiveness of currency depreciations. “As countries are more integrated in global production processes” the study continues, “currency depreciation only improves the competitiveness of a fraction of the value of final goods exports.” Goods are increasingly produced as part of a global supply chain, meaning devaluation in one country has a minimal impact on a product’s final price. The savings made are often likely to be absorbed by the multinational company in control of the supply chain, without necessarily raising the demand in the country with a devaluated currency.

This may come as bad news for China, which recently went through a series of currency devaluations, some speculate, to reboot their faltering economy. Latest figure show, for instance, that Chinese manufacturing has suffered its largest contraction since 2009. As the study notes, integration into the world economy’s supply chain – and China deeply is- particularly makes economies more immune to currency devaluations.

Eurosceptics pushing for Greece’s withdrawal from the eurozone are also likely to take note of this study. The convention has been to argue that inclusion in the monetary union, alongside economic powerhouses like Germany, has made Greek exports uncompetitive. Likewise, being locked in the union has prevented Greece from being able to revive its economy through currency depreciation. However, as the study underlines, Greece dropping the euro in favour of a devalued currency, such as a new drachma, may not be as effectiveness a tool for boosting growth as it once was.

Valeant agrees to Sprout Pharmaceuticals acquisition

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Canada-based Valeant Pharmaceuticals announced on August 20 that it had entered into a definitive agreement to buy Sprout Pharmaceuticals for $1bn, with the opportunity for Sprout to enjoy a share of future profits. Sprout’s newly released flibanserin has caused stir in the hours since its approval, and the treatment for generalised Hypoactive Sexual Desire Disorder (HSDD) has been nicknamed the “female Viagra”.

Whether the drug will be accepted en-masse
is uncertain

News of the deal emerged just over 24 hours after the FDA approved the Sprout pill, to be marketed under the brand name Addyi. “Delivering a first-ever treatment for a commonly reported form of female sexual dysfunction gives us the perfect opportunity to establish a new portfolio of important medications that uniquely impact women,” wrote Valeant’s Chairman and Chief Executive J. Michael Pearson in a statement. “We applaud the efforts of the Sprout team to address this important area of unmet need and look forward to working with them to bring the benefits of Addyi to additional markets around the world.”

The pink pill is scheduled for release in the US in the fourth quarter of this year, and is aimed at women who experience emotional stress due to low sexual desire. Whether the drug will be accepted en-masse is uncertain, though Addyi will likely benefit from the scale of Valeant’s marketing operations. Studies have shown that the effect of the pill is marginal, and the side effects – namely low blood pressure – have turned some consumers off the drug already.

Under the terms of the deal, Valeant will offload $500m upon the transaction’s closing, expected September, and hand the remaining $500m to Sprout in the opening quarter of 2016. “This partnership with Valeant allows us the capacity to now ensure broader, more affordable access to all the women who have been waiting for this treatment,” said Sprouts chief executive Cindy Whitehead. “Beyond building this in the United States, Valeant also offers us a global footprint that could eventually bring Addyi to women across the globe.”

Kazakh currency plummets 23 percent

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In a bid to stabilise its economy, on August 20 the Kazakh government abandoned control of its exchange rate in favour of a free float system that will be determined by supply and demand. Although the shift has caused a drastic 23 percent decline – the largest ever drop for the tenge – it is expected that the currency will stabilise somewhat in the coming weeks.

Kazakhstan, together with Vietnam, was the latest emerging market to ditch efforts to control
its currency

Kazakhstan, together with Vietnam, was the latest emerging market to ditch efforts to control its currency and relinquish a fixed exchange-rate regime in anticipation of the increase in US interest rates.

The decision in Astana was supported further by the present fiscal landscape, in which the crude-driven economy is struggling to contend with low oil prices and the escalating difficulties facing its two biggest trade partners – China and Russia.

The Central Asian state hopes that the devaluation of the tenge will boost exports, create jobs and encourage investment. Furthermore, according to an announcement by Prime Minister Karim Massimov that was reported by Bloomberg, the shift is also expected to facilitate the pursuit of an inflation target of three to four percent in the medium term.

Despite the bold move, given the country’s intractable links with Russia and China, particularly those with the former, Kazakhstan’s own economic future is increasingly precarious. Although positive steps are being taken to prevent further decline in the arduous wait for rebounding oil prices, including a 10 percent slash to the government budget in February, it simply may not be enough when the Fed’s increase ultimately ensues. While corruption maintains its stronghold and the limited access to capital drastically continues to reduce fiscal activities, the development of the economy is severely restricted, particularly amid the current tumultuous climate of the region.

Tianjin insurance costs rocket to $1.5bn

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The two explosions that that rocked the Chinese port city of Tianjin last week are expected to cost insurance firms $1.5bn, stemming from direct damage as well as the halting of manufacturing operations. The disaster resulted in over 100 confirmed deaths so far, with many still missing and hundreds hospitalised.

While both international and domestic insurers are set to take heavy losses, domestic firms are expected to take the brunt of it

According to the BBC, based on “official Chinese media reports, bank Credit Suisse estimates the losses could amount to $1-1.5bn,” while the ratings agency Fitch warned that actual costs could be higher. “Claims from the blasts are likely to undermine the financial performance of some regional players and those property and casualty insurers with high risk accumulation in the affected areas,” the BBC reports Fitch as saying.

While both international and domestic insurers are set to take heavy losses, domestic firms are expected to take the brunt of it. Car insurers are also to be particularly financially hurt, with damage being reported for 80 percent of the 10,000 newly built cars that were located in a nearby logistics port. Many car manufacturers have had to halt operations, with the ensuing loses liable to be paid by insurers. Toyota, which has three production lines in the area, has ceased its operations, which can produce over half a million cars a year. With the prospect of lingering harmful chemicals in the atmosphere and environment, how long these shut downs will continue is uncertain. Further, as Chinese response teams and volunteers sift through a clear up the debris, the death toll is expected to rise, further adding to compensation costs for life and injury insurance.

The cause of the explosions, which took place in a warehouse storing hazardous and flammable chemicals such as calcium carbide, sodium cyanide, potassium nitrate, ammonium nitrate and sodium nitrate, are yet to be determined. According to the FT, “The Central Commission for Discipline Inspection, China’s anti-corruption agency, said on Tuesday that Yang Dongliang, head of the country’s workplace safety regulator, had been detained on suspicion of “severe disciplinary violations”.”

Syria turns to Turkish currency for stability

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Despite Syria’s civil war raging for nearly five years now, many areas seized by opposition forces have often continued to use the national currency: the Syrian pound. In the divided city of Aleppo, however, some traders are attempting to change this – promoting the adoption of the Turkish lira in the districts of the city held by various rebel factions.

The adoption of the lira is also hoped to bring economic stability

According to the FT, those “advocating a currency switch say it is economically practical because Turkey has become the north’s main trading partner.”Aleppo, once the business capital of Syria, has since 2012 been at the heart Syria’s war, with districts being divvied up by the Syrian government and different rebel factions. Based in the north of the country near the Turkish border, “local markets are dominated by Turkish products or goods sent via Turkey,” writes the FT. Despite initially falling as the war started, Turkish exports in 2014 were worth $1.8bn, not far off the pre-war 2010 amount of $1.84bn.

The adoption of the lira is also hoped to bring economic stability. Since the start of the civil war in 2011, the Syrian pound has been unstable. At the conflicts outset, the currency was worth 47 to the US dollar, but now stands at 189 to the dollar. “Using Turkish currency will benefit local residents because it’s less volatile,” said Aleppo tradesman Rashid Tahvali, reports the Turkish-based Anadolu Agency.

Not all are in favour of the change, however. “The people are split for and against and the debate is causing us problems,” Fouad Hallaq, an activist from Aleppo city told the FT. Some fear that the lira will lead to the domination of rebel held northern areas by Turkey, with more nationalist-minded rebels seeing it as a plan hatched by the AKP and rebel factions funded by the Turkish state. Those opposed call the plan an “Ottoman occupation of the north”, according to Ahmed al-Ahmed, an Aleppo activist, speaking to the FT.

South Africa’s young workers to boost economy

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In its latest economic report, the World Bank looks at how South Africa can use a sizeable demographic shift – the growth of its work-age population – to its advantage. It outlines how economic prosperity can be attained through a cycle of job intensive growth, enhanced productivity, greater saving, and by making substantial improvements to education. All of which will help the country’s youth to drive economic growth by as much as 5.4 percent.

South Africa’s working-age population (those between 15 and 64 years of age) has grown significantly in recent years

“We hope that analysis and evidence offered in this report will promote informed dialogue and policy debate about the country’s development priorities pertaining to job creation and economic inclusion in a context of major demographic changes”, said Guang Zhe Chen, World Bank Country Director for South Africa in a statement.

South Africa’s working-age population (those between 15 and 64 years of age) has grown significantly in recent years: increasing from 11 million in 1994 to 54.9 million in 2015, with that number set to grow by a further nine million over the next 50 years.

This surge in working-age population poses a unique opportunity for the country and not just for improving the South Africa’s economic growth, but for the improvement of living standards for all. However, this window of opportunity it hampered by high unemployment and poor job creation rates, with more than 30 percent of its workforce currently out of work.

“We see that education is the greatest priority for South Africa if it is to harness its demographic opportunity to propel growth,” contends World Bank Program Leader, Catriona Purfield. “Getting basic schooling right is the first step to ensuring that school leavers and graduates have the foundational skills necessary to function in the modern workplace.”

Chinese devaluation plagues emerging markets

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Although China’s recent weakening of the RMB has been – as far as currency depreciations go – relatively modest, the effect is being felt far and wide. As testament to just how important and central China now is the world economy, last week’s revaluation has had a deleterious result for many emerging market economies.

On Monday August 17, the Turkish lira, Mexican peso and South African rand all hit new lows against
the dollar

On Monday August 17, the Turkish lira, Mexican peso and South African rand all hit new lows against the dollar, while the South East Asian leaders Malaysia and Indonesia saw their currencies decline to the lowest price levels since the 1998 Asian Financial Crisis. With many emerging market economies being reliant upon Chinese economic growth and exports, investors are, according to the Financial Times, “in a sell-first, ask-questions-later mood at the moment.”

Likewise, Bloomberg has identified a set of emerging market currencies, termed the “troubled ten,” said to be particularly vulnerable from China’s currency devaluation. This grouping is composed of the Taiwan dollar, Singaporean dollar, Russian rouble, Thai baht, South Korean won, Peruvian sol, South African rand, Chilean peso, Columbian peso and the Brazilian real.

“It’s all about vulnerability,” Hans Redeker, the London-based global head of foreign-exchange strategy at Morgan Stanley, told Bloomberg. “Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China.”

The fear is that these currencies will further weaken as interest rates in developed economies – principally the US – rise. The resulting currency strengthening that a rate rise will bring will further push down the value of the above mentioned emerging market currencies.

Shell Arctic drilling gets the go ahead

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Shell’s latest Arctic drilling endeavour has been given the go-ahead by the Obama administration, which now means that the Anglo-Dutch multinational can drill beneath the ocean floor off the coast of Alaska. Previously, the company was restricted to drilling the topmost sections of its two wells there, although the long awaited final permit means that the oil giant can extract Arctic oil and gas more freely at the so called Burger Prospect, Burger J.

Backers of the plan maintain that Arctic drilling will grow increasingly important as the century wears on

The permit was awarded after the company repaired a damaged icebreaker, and on the condition that Shell works with the utmost commitment to stringent health and safety measures. Bureau of Safety and Environmental Enforcement (BSEE) safety inspectors have been deployed on each of Shell’s drilling units, and they’re working “24 hours a day, seven days a week to provide continuous oversight and monitoring of all approved activities,” according to the BSEE in a statement.

“Activities conducted offshore Alaska are being held to the highest safety, environmental protection, and emergency response standards,” said Brian Salerno, Director of the BSEE. “Now that the required well control system is in place and can be deployed, Shell will be allowed to explore into oil-bearing zones for Burger J. We will continue to monitor their work around the clock to ensure the utmost safety and environmental stewardship.”

Backers of the plan maintain that Arctic drilling will grow increasingly important as the century wears on, and that the $7bn spent on the venture so far is justified on the basis that costs will fall dramatically in the decades to come.

Japan returns to “dangerous and expensive” nuclear

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Almost five years on from the Fukushima triple meltdown, Japan has restarted one of two reactors at its Sendai plant and, in doing so, marked a long-awaited return to nuclear power. Located in the country’s Kagoshima Prefecture, the plant is the first to resume operations after the last of the country’s 44 reactors was shut down two years ago.

Anti-nuclear campaigners gathered outside the facility to protest against the decision

The Fukushima catastrophe, which was triggered by an earthquake off the coast and made worse by the resulting tsunami, claimed the lives of 16,000 people and triggered the evacuation of 160,000. Shaken both by the event and a failure to contain the damage in the time since, much of the population is opposed to a nuclear restart.

Anti-nuclear campaigners gathered outside the facility to protest against the decision. Among them was the former Prime Minister Naoto Kan who told the crowds: “We don’t need nuclear plants,” adding later that Fukushima had “exposed the myth of safe and cheap nuclear power, which turned out to be dangerous and expensive.” His successor Shinzo Abe, meanwhile, has already committed to nuclear power as part of the country’s energy strategy, with the resource set to make up a 20 percent share of Japan’s total generating capacity by 2030, down from 30 percent prior to the 2011 crisis.

Over $100m has been spent in keeping to the country’s beefed up safety regulations and the Sendai plant became the first of 25 applicant plants to be granted permission for a restart last September after passing what Abe called “the world’s toughest safety screening.”

Forecast to start generating power before the end of the first week, the plant should reach full capacity within the month and will be joined in October by a second reactor.