“Oil…”

On Tuesday the OPEC+ oil producers agreed to stick to the existing pace of gradually easing supply curbs through July, as they seek to balance expectations of a recovery in demand against a possible increase in Iranian supply. In April OPEC+ decided to return 2.1 million barrels per day (bpd) of supply to the market during May through July as it anticipated demand would rise despite the increased number of cases in India.  Since that decision, oil prices have extended their rally and have now gained more than 30% this year. The prospect of more crude oil from Iran, on talks of reviving its nuclear deal, has limited the upside.  Benchmark Brent crude hit $71 a barrel, its highest since March, on Tuesday. According to Saudi Energy Minister Prince Abdulaziz bin Salman, who spoke after the OPEC+ conference said that he saw a good recovery in demand in the US and China.  Oil prices rose on Tuesday, with Brent hitting $71 and trading at its highest since March, on expectations for growing fuel demand during the summer driving season in the United States. Prices were also boosted by Chinese data showing that the country’s factory activity grew at its fastest this year in May. Brent crude futures for August LCOc1 gained 2.1%, to $70.80 while U.S. West Texas Intermediate crude CLc1 for July was at $68.19 rising by 2.8%. Brent earlier hit a session peak of $71, the highest intra-day price since March 8.  On Thursday oil prices were little changed after strong gains in the previous two sessions on expectations for surging fuel demand later this year while major producers maintain supply discipline. Brent crude futures LCOc1 were up 0.22%, at $71.51 a barrel after touching their highest since September 2019 at $71.99. The international benchmark had gained 1.6% on Wednesday. U.S. West Texas Intermediate crude futures CLc1 rose 0.20%, to $68.97. Prices rose as high as $69.40, the strongest since October 2018, after gaining 1.5% in the previous session.

Eurozone Factory Growth

Eurozone manufacturing activity expanded at a record pace in May according to a survey on Tuesday.  The HIS Market’s final Manufacturing Purchasing Managers’ Index (PMI) rose to 63.1 in May from April’s 62.9.  According to Chris Williamson, the chief business economist at IHS Markit, “Surging output growth adds to signs that the economy is rebounding strongly in the second quarter”.  He further added, “However, May also saw record supply which are constraining output growth and leaving firms unable to meet demand to a degree not previously witnessed by the survey.”  The disruptions by the coronavirus pandemic are still having a huge impact on supply chains making it a sellers’ market for the raw materials that factories need. 

Eurozone Business Growth

Euro zone business activity surged in May amid the release of coronavirus restrictions that gave life to the bloc’s dominant services industry, a survey showed.  The survey echoed the data released on Tuesday that showed that factories had their best month on record. The acceleration in vaccine programmes across the region and a drop in reported daily cases has allowed governments to remove some measures imposed to try and stop the spread of the virus.  The IHS Markit’s final composite Purchasing Managers’ Index (PMI), which is seen as a good gauge of economic health, jumped to 57.1 last month from April’s 53.8, its highest level since February 2018. May’s final reading was comfortably above the mark separating growth from contraction. An index covering the service industry increased to a near three-year high of 55.2 from 50.5. Chis Williamson, the chief business economist at IHS Market, said “The euro zone’s vast service sector sprang back into life in May, commencing a solid recovery that looks likely to be sustained throughout the summer.” While the services new business index was the highest since early 2018 the overall composite new orders reading bounced to a near record 58.4 from 53.4, its highest since June 2006. Manufacturing activity expanded at a record pace in May, according to another survey on Tuesday which suggested growth would have been even faster without supply bottlenecks that have led to an unprecedented rise in input costs.

UK Manufacturing

An increase in new orders helped to drive a record increase in British manufacturing activity last month as the economy started to recover from the COVID-19 pandemic, showed a survey on Tuesday.  The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose to 65.6 in May from 60.9 in April.   This marked the highest figure since the survey started in 1992.  The index levels represent the pace and breadth of growth.  The surveys’ gauges of growth in new orders and employment also hit record highs.  Also suffering an increase were the measure of input cost inflation paid by factories for goods as they cited poor harvests, port disruption and Brexit. 

US Manufacturing Gains Steam

US manufacturing activity picked up in May as demand increased amid the reopening of the  economy that boosted orders.  However, unfinished work piled up because of shortages of raw materials and labour.  On Tuesday the Institute for Supply Management (ISM) survey found that companies and their suppliers “continue to struggle to meet increasing levels of demand,” noting that “record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments” of manufacturing.  According to the ISM, worker absenteeism and short-term shutdowns because of shortages of parts and workers continued to limit manufacturing’s growth potential.  The ISM’s index of national factory activity increased to a reading of 61.2 last month from 60.7 in April. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy.

US Weekly Jobless Claims

The number of Americans filing new claims for unemployment benefits dropped below 400,000 last week for the first time since the COVID-19 pandemic started more than a year ago, indicating a strengthening labour market despite a worker shortage that is limiting hiring.  Initial claims for state unemployment benefits totalled a seasonally adjusted 385,000 for the week ended May 29, compared to 405,000 in the prior week, said the Labour Department on Thursday. That was the lowest since mid-March 2020, when the compulsory closures of nonessential businesses kicked in to slow the first wave of coronavirus infections.

Australia’s Economy

Australia’s economy for last quarter moved ahead amid high consumers and businesses expenditure lifting output back above where it was last year when pandemic lockdowns moved the country into its first recession in three decades. The economy expanded by a real 1.8% in the first quarter showed data from the Australian Bureau of Statistics (ABS) on Wednesday.  The solid back-to-back quarterly growth helped annual output climb 1.1% to A$525.7 billion.  This is a major turnaround from last year’s recession low of $468.3 billion.

The better-than-forecast figures pushed Australia’s benchmark share index .AXJO to record highs while supporting the local dollar near a one-week top. On average, Australia’s rich world peers are 2.7% smaller than they were before the pandemic, Deloitte’s research found, the United Kingdom shrinking almost 9%, the European Union contracting by 5% and the United States 1% smaller.

Australia’s Central Bank

Australia’s central bank left its cash rate at record lows on Tuesday and reiterated its lower-for-longer policy stance even as data showed the country’s economic output was above its pre-pandemic level and house prices were shooting up The Reserve Bank of Australia (RBA) left its policy settings at 0.1% for a sixth straight meeting, awaiting inflation and wage pressures. As the Reserve Bank of New Zealand (RBNZ) last week hinted at the end to a pandemic-era, ultra-loose monetary policy, leading some to believe the RBA would venture on that path too. Governor Philip Lowe instead justified the need for near-zero rates despite a strong economic recovery by saying “inflation and wage pressures are subdued” and a pick-up in prices is expected to be only “gradual and modest.” “An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus,” Lowe added. The RBA also repeated it will not raise interest rates until inflation was “sustainably” within its 2-3% target band. Under its central scenario, underlying inflation is seen below the mid-point of that range through mid-2023.

China’s Factory Activity

China’s factory activity expanded at the fastest pace this year in May as domestic and export demand picked up, however, sharp rises in raw material prices and strains in supply chains impacted some companies’ production, a business survey showed on Tuesday. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 52.0 last month, the highest level since December and inching up from April’s 51.9.  New orders rose at the strongest pace so far this year and a gauge for export orders was the highest since November, but the output reading, while still solid, was slightly lower than the previous month.  Manufacturers passed on some of the pressure to their customers, with a gauge for output prices rising at the quickest pace in a decade. Charges for exported goods rose at the fastest rate in three years.  Prices for commodities such as coal, steel, iron ore and copper have surged this year, fuelled by the lifting of pandemic lockdowns in many countries and ample global liquidity. China’s policymakers have expressed their concern about rising commodity prices in recent weeks and called for stricter management of supply and demand and to crack down on “malicious speculation.” Firms continued to hire but at a slower pace, with some enterprises saying they were trying to reduce costs. Earnings at China’s industrial firms grew at a slower pace in April, with high commodity prices and weaker performance in the consumer goods sector limiting overall profitability from manufacturing.

Global Economy Factory Activity

Factory activity increased in Europe last month and stayed strong in Asia amid growth in demand according to surveys however rising costs of raw materials and supply bottlenecks are a headache for business and weighed on the recovery in export-driven economies.   Eurozone manufacturing activity would have been even faster without these constraints, but IHS Markit’s final eurozone manufacturing PMI still increased to 63.1 in May from 62.9 in April.  In Britain a deluge of new orders helped drive a record increase in factory growth, and its IHS Markit/CIPS manufacturing Purchasing Managers’ Index climbed to 65.6, the highest since the survey started in 1992.

Market Wrap

European stocks slipped from record highs on Monday and trading was low due to holidays in major markets.  The pan-European STOXX 600 index was down 0.1% with shares in Frankfurt dropped 0.09% and the CAC 40 increased to 0.18%.  The UK and US markets were closed for holiday. 

Global stocks again hit record highs and oil climbed on Tuesday, before the European and US data that this week should offer major clues about the health of the world economy.  Meanwhile, strong metal and oil prices boosted shares of big companies, while data showed eurozone manufacturing activity expanded at a record pace in May.  

European stocks rose towards record levels on Wednesday, helped by energy and consumer stocks, while strong economic data from U.S. and Europe buoyed investor sentiment. The pan-European STOXX 600 index .STOXX rose 0.4% in early trading, after touching a record high in the previous session. A strong expansion in U.S. and European factory activity in May lifted world shares to record highs on Tuesday, with investors looking to U.S. jobs data on Friday for confirmation of a solid recovery in the world’s largest economy.  Meanwhile, oil and gas stocks .SXEP rose 1.1% to lead sectoral gains in Europe as crude prices extended gains after OPEC and its allies stuck to their plan to cautiously bring back oil supply to the markets in June and July.  

Wednesday saw the markets moving to higher levels with the DJ Industrial Average reaching 34,600.38 increasing 0.07%, the NASDAQ 100 closed 13,675.79 rising by 0.16% and the S&P 500 reached 4,208.12 moving higher with 0.14%.  European markets also increased with the CAC 40 reaching   6,521.52, an increase of 0.49%, the DAX rose by 0.23% closing at 15,602.71 and the FTSE 100 closing at 7,108 with an increase of 0.39%. 

World stocks traded close to record highs on Thursday as investors weighed inflation concerns ahead of key U.S. economic data.  Investors stayed away from big bets before the release on Friday of US jobs data, which should offer further clarity on whether the faster than expected pace of economic recovery can be sustained and the implications for monetary policy.  In Europe the broad Euro STOXX index (.STOXX) was 0.2% down, moving away from the levels  reached on Tuesday.  A similar pullback happened in Asia, with the MSCI broadest index of Asia-Pacific shares outside Japan dropping 0.2% after reaching three-month highs on Wednesday. In Japan, the Nikkei share average .N225 rose 0.4%, while Australian shares .AXJO climbed to all-time highs as investors cheered stronger-than-expected economic growth data released on Wednesday.

Currency Roundup

Sterling edged lower on Tuesday after touching a fresh three-year high versus the dollar amid expectations for a recovery in the British economy following a successful vaccination programme.  A surge in house prices also supported the currency.  Sterling hit its highest level since April 2018 of $1.4250 during the Asian session against the dollar, with analysts attributing it to positive global investor sentiment towards the UK economic recovery.  Well into the London session after a long weekend, sterling reversed its course to edge 0.2% lower at $1.4183 versus the dollar.  It was down 0.16% against the euro at 86.20 pence.

The Australian dollar pared early gains on Tuesday after the country’s central bank stuck to its dovish policy despite the upbeat economic data pointing to surprisingly strong growth. The Aussie dollar was still up slightly on the day at $0.7746 having edged further away from last week’s trough of $0.7677. The Aussie pulled back after the Reserve Bank of Australia (RBA) concluded its monthly policy meeting by holding rates at 0.1%, while reiterating that no hike was likely until at least 2024. The bank noted the economy had performed better than expected, but also cautioned it was vulnerable to coronavirus lockdowns such as the one currently gripping Victoria.

The dollar held to minor gains on Wednesday, edging up from near a five-month trough versus major peers, as a pickup in U.S. manufacturing kept the bets alive for a quicker normalisation of Federal Reserve policy. The euro traded at $1.22 after pulling back from near a multi-month high.

The dollar index which measures the greenback against six currencies, hovered just below 90 after dipping to as low as 89.662 on Tuesday and approaching the lowest since Jan. 7 at 89.533.  The euro traded at $1.22 after pulling back from near a multi-month high overnight, when it climbed to $1.22545. Sterling remained lower at $1.4135 after easing off a three-year high of $1.4250 reached on Tuesday, while the Canadian dollar traded at C$1.20675 per dollar after rallying to a fresh six-year peak of C$1.2007 overnight as oil prices rose.

Thursday saw the US dollar rising as traders awaited a batch of US economic data that could set the tone at central bank meetings later this month.  Against the euro the dollar traded 0.2% higher at $1.2183.  Fed officials have begun to hint at tapering discussions and on Wednesday the Fed announced it will unwind corporate bond holdings it accumulated through an emergency facility last year – another sign of pandemic measures coming to an end. Sterling was the best-performing G10 currency against the dollar in May, with a 2.9% gain, but moves have been even more dramatic against the Japanese yen, since there are no expectations of Japan’s monetary support backing off. Sterling was 0.1% lower to the dollar at $1.4154 on Thursday as investors were a little concerned about whether a new virus variant spreading in Britain can delay plans for reopening the economy.

Malta:  Structure of General Government Debt – 2020

A press release dated 1^st June 2020 showed that in 2020 the Financial Corporations sector held the largest amount of debt with 60.5 percent followed by Households and Non-Profit Institutions Serving Households (NPISH) with 19.1%.  The share of the Rest of the World was 18.2%, an increase of 6.1% over the debt held in 2017.  The Non-Financial Corporations sector held 2.2% of the debt. 

Debt securities that include Malta Government Stocks and Treasury Bills which are by far the preferred debt instrument for General Government with EUR 5,945.1 million, or 85.4% of the total debt in 2020.  Other debt instruments are Loans and Currency with 7.8% and 6.8% respectively.  The increase reported under Debt securities mainly relates to the financing of the Government’s COVID-19 measures while the increase in Loans and Currency mainly represent the EU loan from the temporary support to mitigate Unemployment Risks in an Emergency instrument and the issue of the 62+ Malta Government Savings Bonds.  The cost of debt was 2.7% in 2020, compared to 3.7% in 2017.  At the end of 2020, General Government Debt amounted to EUR 6,960 million in nominal value (the market value is estimated at EUR 8,178.4 million).  Market debt increased by EUR 1,245.8 million over 2019, slightly lower when compared to the increase of EUR 1,257.2 million in nominal debt. 

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