“Bitcoin’s Stumble…..”

Bitcoin’s Stumble

This week saw major digital currencies suffering declines, with the bitcoin dropping below $10,000 bringing its loss to almost 50 percent from a record a month ago as scrutiny from regulators around the world weighs on the digital coin craze.  Other cryptocurrencies such as ethereum and litecoin also stumbled.  Although there is no obvious driver for the moves, China’s move in escalating its crackdown on trading in digital assets and South Korea’s finance minister’s intention to ban local cryptocurrency exchanges might be the reason behind such moves.  China which first began targeting the industry last year, is escalating its clapdown on cryptocurrency trading, in particular online platforms and mobile applications that offer exchange like services.  Regulators around the world are stepping up scrutiny of cryptocurrencies amid concerns over excessive speculation, money laundering and tax evasion.   In the US, the Securities and Exchange Commission asked at least 15 funds to pull applications this month for bitcoin-related exchange-traded funds.    The sell-off this week from a rally that pushed bitcoin 1400 percent higher last year brings some trauma and doubt on how viable cryptocurrencies are and the blockchain technology that underpins it.   Furthermore, it sets the question as to how regulators will play a role in an industry that is decentralized.  Many are of the opinion that digital coins represent a bubble which have triggered double-digit selloffs over the past year, often followed by rebounds.  The digital coin is still higher by almost 1,000 percent from a year ago.

Oil 

Surging oil production is poised to push US oil output to more than 10 million barrels per day beating a record set in 1970.  This level is not expected to last and the US government forecasts that the nation’s production will climb to 11 million barrels a day by late 2019, a level that would rival Russia, which is the top world’s producer.  The economic and political impacts of soaring US output have affected the nation’s oil imports by a fifth over a decade, providing high-paying jobs in rural communities and lowering consumer prices for domestic gasoline by 37 percent from a 2008 peak.  US energy exports now compete with Middle East oil for buyers in Asia.  The US oil price benchmark, West Texas Intermediate crude is now watched closely worldwide by foreign customers of US gasoline, diesel and crude.  Whether shale sector can continue at this pace remains an open debate.  The cartel of oil producing nations backed down in November 2016 and enacted production cuts amid pressure from members over lower prices which had dropped to below $27 earlier that year from more than $100 a barrel in 2014.  Shale producers won the price war through aggressive cost-cutting and rapid advances in drilling technology.  Oil is now trading above $64 a barrel enough for many US producers to finance both expanded drilling and pay dividends to shareholders.  OPEC and its allies will meet this weekend to review their strategy and discuss the way forward given the global oil glut, in particular the situation with the US production, which could have an impact on the prices which have been increasing so far as a result of the OPEC’s hard work.

Dow Breached The 26,000 Mark

Wall Street indices rose sharply on Tuesday and the Dow hit the 26,000 mark for the first time as the fourth quarter earnings season kicked into high gear.    Expectations of stronger quarterly earnings, supported by a steep cut in corporate taxes and solid global economic growth have bolstered optimism on Wall Street in 2018.  According to Thomson Reuters more than three quarters of the 26 S&P 500 companies that have reported so far, have topped profit estimates.

EURO

On Monday the euro hit its peak at $1.2296 its strongest since December 2014. According to market participants they expect the euro to remain on solid footing in the near term.  Euro rallied on the back of optimism about the Eurozone’s economic outlook and expectations for the European Central Bank, to wind down its massive monetary stimulus.  Those expectations were further reinforced by the Estonian central bank chief and ECB rate setter Ardo Hansson on Monday where he said to a German newspaper that the ECB could end its 2.55 trillion euro bond-buying scheme in one step after September, if the economy and inflation develop as expected.

UK Outlook

UK inflation eased for the first six months in December, which can be the start of a slowdown that will ease pressure to consumers who saw their disposable income squeezed with the increase in prices in 2017.   Inflation fell by 1 percent in December from 3.1 percent in November which was the fastest in more than five years.  The Bank of England currently forecasts that inflation will ease through this year, to reach about 2.4 percent at the end of 2018.  What matters most for rate setters is the development of price pressures coming from low unemployment and a squeeze on supply arising from low productivity.  The BOE’s Monetary Policy Committee raised its key interest rate in November for the first time in a decade and said a couple of more hikes would be needed over the next three years.  The outlook for inflation will also be affected by the pound which has strengthened recently and remains well below its pre-Brexit level.

Catalonia

The Spanish government has dismissed the possibility of the former Catalan leader Carles Puigdemont ruling the region from a self-imposed exile in Brussels.  Catalan separatists agreed on Wednesday to try and re-elect Puigdemont as regional leader.  Puigdemont is facing arrest in Spain for sedition and rebellion.  Spanish government spokesman Inigo Mendez de Vigo said that, “Parliamentary rules are very clear.” From an analysis of Catalan parliamentary law, any regional presidential candidate must appear in person in order to be voted in.  He further added, “they do not contemplate the possibility of a presence that is not in person.”  Puigdement spearheaded a movement last year for the wealthy northeastern region of Catalonia to split from Spain, culminating in Madrid, sacking his administration and imposing direct rule.  Shortly afterwards he moved to Brussels.  Mariano Rajoy the Spanish Prime Minister held local elections in December to resolve the crisis.  Thousands of companies moved their registered headquarters to outside the region.  The result of the election delivered a slim majority to separatists, increasing the possibility of a renewed push for secession from Spain this year.  The regional parliament will sit for the first time on Wednesday to choose the parliamentary speaker, while a new regional leader could be elected by parliament as soon as 31 January.  Five members of the Catalan parliamentary, including Puigdement, are in self-imposed exile in Brussels three of whom are serving custodial sentences in Madrid for their role in organising an illegal referendum on independence from Spain.

Angela Merkel

Merkel has struck a deal with Social Democrat rivals to open government coalition talks easing months of uncertainty that has undermined Germany’s global role and raised questions about her future in politics. The deal to revive a “grand coalition” that has governed since 2013 must be approved by the SPD party members at a congress planned for 21 January.  The SPD (Social Democratic Party) suffered the worst result in September’s election since the modern Federal Republic was founded in 1949.   After the September election setback, Angela Merkel turned to the left-leaning SPF to renew their grand coalition after the collapse in November of talks on a three way coalition with the Greens and Free Democrats (FDP).

German Inflation

German consumer prices rose by the fastest pace since 2012 during the past year, as published on Tuesday by the Federal Statistical Office.  According to the Wiesbaden-based government statisticians, average annual inflation reached 1.8 percent in 2017 after an 0.5 percent in 2016.  The Office attributed this increase to higher energy, foodstuff and housing costs.  German price growth slowed to a monthly rate of 1.7 percent in December mainly due to a reduction in energy price growth from 3.7 percent in November to 1.3 percent during December.

US – Avoiding A Government Shutdown?

House Republicans worked on a plan to try and force the Senate to accept a short-term spending bill this week that does not address immigration issues and other demands from Democrats in order to avoid a government shutdown after 19 January and keep the government spending through 16 February.  The bill ignores the immigration debate and Democratic attempts to address the situation of undocumented immigrants who arrived in the US as children.  It also shelves for now bipartisan attempts to produce a long-term spending bill that raises budget caps for defense and non-defense spending.   On Thursday the House was close to passing a one-month government spending bill.   The bill will then pass to the Senate where Democrats will decide whether to block the measure to gain leverage on immigration.    According to the White House Press Secretary Sarah Sanders, President Donald Trump supported the bill in its current form.  The Republican-controlled House approved funding through 16 February on a vote of 230-197 sending the stopgap bill to the Senate for consideration, as President Trump pushed hard for a measure to sign before Friday’s deadline.

China

The economy of China grew faster than expected in the fourth quarter of 2017, posting its first annual acceleration in growth since 2010 with the activity lifted by global growth.   China’s gross domestic product grew 6.8 percent in the October to December period from a year earlier.  The better than expected economic growth in the fourth quarter of last year was supported by continued strength in the services industry and an expanding agricultural sector, official data showed. According to the National Bureau of Statistics services grew 8.3 percent from a year earlier, accelerating from the 8 percent pace in the third quarter, while agriculture expanded 4.4 percent versus 3.9 percent three months before.    The economic recovery in the industrial sector and a global upswing, boosted exports and provided room for President Xi Jinping to tackle debt risks which is one of the goals for the coming three years. With consumer inflation still contained and the currency firm, the central bank has been able to tighten the screws in some areas without increasing the benchmark interest rates.  The GDP Deflator for the full year, a gauge of economy-wide inflation, came in at 4.33 percentage points while nominal growth accelerated to 11.2 percent.  GDP in those terms grew to 827 trillion yuan up 8.4 trillion.

China and Japan and US Treasury Positions

China and Japan, the two biggest foreign US creditors, reduced their holdings of US government debt in November, when the US dollar weakened against their respective currencies according to data from the US Treasury Department.  The reduction in the holding of Treasuries, supports the notion that foreign central banks are cutting back their dollar exposure in their foreign exchange reserves.  Last month the International Monetary Fund said the share of the dollar of global currency reserves shrank in the third quarter of 2017 to 63.5 percent its smallest since mid-2014.  China’s holdings of US Treasuries fell to $1.176 trillion in November, its lowest in four months.  Japan, the second largest holder of treasuries, scaled back its stake in US government debt for a third straight month to $1.084 trillion.  This was the lowest level since June 2013 at $1.083 trillion.  The dollar ended 2017 with its lowest performance on the premise that central banks besides the Federal Reserve are preparing to end the policy measures adopted to fight the 2008 financial crisis and the recession.  Although overseas central banks continued to roll back their Treasury positions, private offshore investors still have an appetite for US stocks and corporate bonds amid the positive global economic momentum.

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