December 3rd – The BESA Times

Sixtieth Edition - Monday, 3rd Every week, a complete snapshot of what happened around the world in the past seven days

 


This year's edition of the G20 summit took place in Buenos Aires, Argentina over the weekend and was attended by leaders and officials of all 19 countries and the European Union. The summit assumed heightened importance in terms of achieving consensus driven multinational political outcomes amidst rising nationalist and isolationist tendencies across major countries in the world that threaten to disrupt the existing multilateral world order.


The meeting between US and Russia, to discuss security issues, was cancelled just a day before the start of the summit by US President Donald Trump due to the further deterioration of Russia-Ukraine ties caused by the seizure of Ukrainian ships by Russian authorities near the Crimean Peninsula on the 26th of November. Trump added that the meeting would take place once the situation is resolved.


All eyes at the summit were on Saudi Crown Prince, Muhammed Bin Salman (MBS), as he looked to mend his image following the killing of Saudi journalist Khashoggi, an incident which supposedly took place at the behest of MBS. In addition to having bilateral meetings with the UK PM Theresa May and the Indian PM Narendra Modi, the Prince had a lengthy conversation with French President Macron and exchanged pleasantries with Trump and Putin. All of which signaled that the international community could be willing to move on from the Khashoggi incident and give MBS a pass even as President Erdoğan of Turkey continuous to push the blame on the Prince, with claims of possessing evidence that directly implicates him.


The most anticipated event of the summit was the trade talks between US and China which took place on Saturday at a working dinner. The Trump administration agreed not to increase tariffs from 10% to 25% on $200billion of imports from China as was previously decided. This is conditioned on the completion of successful negotiation with China, within 90 days, on ownership and transfer of technology and intellectual property of US firms operating in China. In addition to that, China further agreed to increase farm imports from US and remove tariffs on American cars to reduce the trade gap. International relationship experts and business leaders think that the talks were a step in the right direction as they provide a path towards reconciliation between the countries, but at the same time acknowledge that the hard work would begin once the negotiations on the specifics of the deal start.


Major Asian countries and exporting powerhouses Japan, South Korea and Taiwan reported either a contraction in manufacturing output or a decrease in growth, according to latest economic data. One common factor among all the countries was reduced external demand. Export driven markets in Europe such as Switzerland and Germany reported contraction in their GDP which was caused primarily by contraction in exports. Global uncertainty regarding trade, thus, has started to take a toll on real economy.


General Motors, last week, announced its decision to shut down four of its plants in the US in order to reduce annual costs by $4.5billion. It is expected to lead to job losses for over 14,800 workers. GM took this decision in light of decreasing demand for passenger cars in American markets due to consumer preference switching to sports and utility vehicles. It also added that it needs to increase cash flow in order to invest in newer technologies such as electric cars and AI. Further compounding the cash flow problems was the recent increase in the cost of production due to tariffs on aluminum and steel imposed by the Trump administration. Another major US carmaker, Ford, had previously decided to shut down production of passenger cars in the US citing similar reasons. Thus, these decisions were seen as major political losses for Trump even though it mattered little in the larger scheme of things (14k job losses vs millions that are being created).

 

What to remember from last week’s news?


Jay Powell, Chairman of the Federal Reserve of the US, in a speech on last Wednesday, stated that the interest rates in the US were 'just below the neutral rate' (interest rate that doesn't encourage or discourage growth). This helped spark a rally in both equity and fixed income markets as the statement was perceived to be dovish (lower probability of higher rates) and a seen as a reversal from the hawkish stance taken by the Fed in October when it stated that the rates were a long way away from neutral, which triggered the worst monthly loss in S&P500, among other asset classes, since 2011, as investors frantically adjusted valuations expecting higher rates. Even though Powell's statements were not a result of the change in neutral rate forecasts (which have a range of 1%pts), their timing was important with latest data showing a cooling in house sales and hourly wages, therefore pointing to lower inflationary pressures in the economy. The minutes of the most recent Fed meeting, which were released last week, point to Fed adopting a more hands on approach for determining rates, with an increased use of incoming data as opposed to relying on forward guidance which it had been doing in recent years of very low rates. Now with rates approaching neutral territory the Fed has decided to be more cautious since it cannot afford to overestimate inflationary pressures and risk sending the economy towards recession by jacking up rates to a high level. But the adoption of extra caution comes with the inability to signal to the market the future rate path, which would raise uncertainty and volatility in the markets.

 

Did you know:


The October Effect: Whether it's coincidence or not, investors and brokers get nervous in the month of October because the worst stock market crashes occurred during this time.


October has a reputation of being one of the scariest months for investors. Some of the biggest stock market crashes in history happened in this month.


Experts argue that the so-called “October Effect” has more to do with psychological expectations than an actual phenomenon.


The Panic of 1907 was a US financial crisis that began in mid-October when the New York Stock Exchange slumped 50% from its peak just a year earlier. One of the largest trust companies in the country was suspended, triggering nationwide fears and massive cash withdrawals from New York City banks.


The Great Crash, or the Stock Market Crash of 1929, began on Oct 24 (Black Thursday) – the first day of panic selling that devastated the market. It signaled the beginning of the 12-year Great Depression.


Black Monday refers to Oct 19, 1987, when stock markets around the world plunged in a sudden financial meltdown.


It started in Hong Kong before spreading westward, hitting bourses like dominoes.

The US Dow Jones Industrial Average suffered its biggest percentage loss (22%) in history that day.


The Asian economic crisis erupted in July 1997 and quickly raised fears of a global meltdown. On Oct 27, the Hang Seng Index in Hong Kong plunged 6%.


In the United States, the Dow fell 350 points to trigger a 30-minute halt in trading.


The global financial crisis in 2008 is considered one of the worst since the Great Depression.


In began in 2007 with the US sub-prime mortgage crisis. Within a year, it became a full-blown global banking crisis. Markets around the world took a battering.


On Oct 6, the Dow dropped 800 points, closing below 10,000 for the first time since 2004.

 

What to expect from the coming week:

Theresa May's Brexit deal, having secured the approval of the 27 EU countries, now must win support of the members of the House of Commons of the UK, a task which looks increasingly difficult by the day. Currently the numbers do not add up for the passing of the deal in the House since Labor, DUP and a sizeable section of the conservative party stand opposed to it. As of now, the question is about how badly the deal loses in the Parliament and what happens after that. Concessions agreed on the deal by EU (most likely on Irish backstop), fresh general elections, no deal Brexit or a second referendum are among the possible options.


OPEC is scheduled to have a meeting in the coming week to decide upon the future oil output strategy in the wake of US WTI falling more than 30% from its peak in two months to $50. Russia, too, has agreed to co-operate with the cartel as there is a general consensus among oil producing nations that fears originating from Iran and Libya, related to oil shortfall, were exaggerated and, therefore, action to increase output to allay those fears lead to oversupply in the market. The cartel is expected to cut oil output to stabilize the price of WTI in the range of $60-$70.


The 'Yellow Vest' protests in France against Emmanuel Macron have been growing stronger every week and it would be interesting to see whether Macron, now back in Paris after attending G20, will cut down on some of his unpopular reforms or continue pursuing them. Further antagonizing the masses could lead to a populist backlash but Macron's immediate political position would remain safe since no elections are scheduled until 2022.

 

WRITTEN BY @ADITYA VAGHELA PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT

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