Heading into the final months of 2015 and the themes for the immediate future of the global economy are clear: rates increases, liquidity crises, austerity in Europe and a limping-along China. Today’s GEO explores some of the already-visible symptoms.
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World Indexes and Forex Rates
In the Calendar This Week
Sun 8 November
China Trade balance (actual:393B expected:367B previous:376B)
Mon 9 November
Tue 10 November
New Zealand RBNZ Financial Stability Report
Wed 11 November
China Industr. Production y/y (actual:5.6% expected:5.8% previous:5.7%)
UK Claimant Count Change (expected:1.6K previous:4.6K)
US Bank Holiday
Thu 12 November
Australia Unemployment Rate (expected:6.2% previous:6.2%)
US Unemployment Claims (expected:270k previous:276k)
Fed Chair Yellen Speaks
Fri 13 November
US Core Retail Sales m/m (expected:0.4% previous:-0.3%)
US Prelim UoM Consumer Sentiment (expected:91.3 previous:90.0)
Making The News
The major economic themes at year-end can be summarized as anticipation of a Fed rates hike (accompanied by Dollar strength), euro weakness as a result of ECB easing, and ongoing slowdown in China. The socio-political polarization that often accompanies economic recession reminds of Greece – and default – as leftist leanings emerge from the Eurozone’s most troubled economies.
Portugal in Focus
Portugal, Greece and Ireland entered recession near-simultaneously during the 2011 eurozone debt crisis, which saw Portugal’s government contemplate declaring bankruptcy. Fear of “contagion” to the more powerful neighbor Spain was a popular Euro minister concern at the time.
A bailout worth 78 bil euros and cuts in public services, civil servant pay and pensions, as well as income tax increases for the working and middle classes satisfied investors that their money would be relatively safe in Portugal.
Following three years of recession, the economy is now considered to be “recovering”: growth of 1.5% during 2015, and unemployment down from 17.7% in 2013 to 12.3% at July this year.
Portugal’s minority center-right government lost an election in October. Its defeat was the result of cooperation of a Left Bloc comprised of the Socialist, Communist, and Green parties.
There immediate plans of the bloc are unclear, but of the various options it is generally believed that President Silva will nominate Costa, head of the Socialists, to form a new government. Other alternatives exist, but whichever path is chosen by the left, it can reasonably be assumed that the left will pursue a similar course to what we witnessed in Greece, earlier in the year.
Popular antagonizm toward creditors is rife, and so is distaste for existing austerity measures demanded by bailout creditors and enacted by the former center-right government.
Costa, ostensibly, intends to reverse some civil servant wage cuts, and tax inheritance exceeding 1 mln euros. Income tax brackets would be amended, and minimum wage increased. While the Left Bloc wants to restructure debt, the Communists say they are inclined to default on it and exit the European Monetary Union.
Portuguese political developments need to be placed in the context of the push back against austerity. – Marc Chandler
Greece‘s Syriza had been all bark and no bite, and are now dancing to meet creditors demands in order to secure additional bailouts. Yet, Leftist governments have taken Italy and France – both at risk of default. Spain is nearing elections in December, and the Prime Minister there has been bowing to popular pressure by asking its creditors to be more accommodating.
With the Fed widely believed to be on the brink of announcing a rates “lift-off” and with the ECB easing the euro to near-parity with the US dollar, Eurozone hardships are likely to take a turn for the worse.
Analysist Marc Chandler points out that during the Greek drama the euro did not revisit the March 2015 lows near $1.0460 and that, similarly, Portugal developments are unlikely to present a “systemic threat”. This seems a rational conclusion, but we should bear in mind that markets are hardly rational, and a default – or even threat of default – from Portugal, France, Italy, Ireland, Greece, Spain can set the price charts reeling.
It may be possible for the central banks to contain the precarious economic situation, but it may not be reasonable to believe they can do so indefinitely.
Also In The News
Corporate Bond Liquidity Drain
Nasdaq reports that, for the first time ever, several large US banks have reported negative corporate-bond inventories – a result of increasing investor demand and decreasing bond stockpiles at the brokerages that buy and sell the debt.
Wall Street is expressing concern that market liquidity – the ability to buy and sell assets quickly without moving market prices unduly – has been declining, and could potentially decline further when the Fed hikes rates.
According to NY Fed data, for the week ending 28 Oct, banks held -$1.4 bil of investment-grade corporate bonds. The implication is that banks have pledged to sell more bonds than they will buy. As the primary channels of the Fed’s quantitative easing program, banks act as authorized dealers in the trade of US securities with the Fed in exchange for credit in their Fed account.
Goldman Sachs researcher Charles Himmelberg wrote on Tuesday that it was
the first time ever [that] corporate bond inventories have turned negative
In the light of the Fed’s intention to covertly squeeze credit, as a means of raising interest rates, and with the help of Goldman Sachs and other shadow banks, this is exactly the kind of liquidity drain one might expect. Odd, then, how it is framed and reported by the mainstream.
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