“The Attack On Crude Facilities In Saudi Arabia….”

The Attack On Crude Facilities In Saudi Arabia

An attack on Saudi Arabia over the weekend that shut 5 percent of global crude output caused Brent crude to post its biggest intra-day percentage gain since the 1991 Gulf War.  Saudi Arabia is the world’s biggest oil exporter and the attack on state-owned producer Saudi Aramco’s crude processing facilities has cut output by 5.7 million barrels per day.  The Iran-aligned Houthi movement that controls Yemen’s capital claimed responsibility for the attack, which has damaged the world’s biggest crude oil processing plant.  Iran denied the blame and said it was ready for a “full-fledged war”, however the United States blamed Iran.  President Donald Trump said Washington was “locked and loaded” to retaliate.   Monday saw oil prices hitting four-month highs after the attacks on crude facilities in Saudi Arabia and came off-  their peaks after US President Donald Trump announced that he would use the country’s emergency stockpile to ensure stable supply.  Producers around the world said there were enough stocks stored up to make up for the shortfall.   Thursday saw oil prices edging higher in Asian trade amid Saudi Arabia’s pledge to restore full production by end-September at facilities knocked out by the attacks.

US Federal Reserve Policy Meeting

On Wednesday the US Federal Reserve cut interest rates again to sustain a record-long economic expansion but signalled a higher bar to further reductions in borrowing costs.  Whilst describing the US economic outlook as “favourable” Fed Chair Jerome Powell said the rate cut was designed “to provide insurance against ongoing risks” including weak global growth and tensions from the trade war.   The benchmark overnight lending rate was lowered by a quarter of a percentage point to a range of 1.75 percent to 2 percent.  It was the second rate cut by the FED this year.   In a news conference after the announcement Jerome Powell said, “if the economy does turn down, then a more extensive sequence of rate cuts could be appropriate”. Powell said, “what we think we are facing here is a situation which can be addressed, which should be addressed, with moderate adjustments to the federal funds rate.” He noted that the US labour market was strong and inflation was likely to return to the FED’s 2 percent annual goal.  Powell further added, “We are going to be highly data-dependent … We are not on a pre-set course, we are going to be making decisions meeting by meeting.” He also said that the FED would stop cutting rates “when we think we’ve done enough.”  There was lack of agreement on the quarter-rate cut on Wednesday from three of the ten voting policymakers.  There was little change by policymakers about the projections of the economy, with the GDP growth seen at a slightly higher 2.2 percent this year and the unemployment rate to be 3.7 percent through 2020.  Inflation is projected to be 1.5 percent for the year, below the FED’s 2 percent target, before rising to 1.9 percent next year.

Central Bank Of Japan Meeting

The Bank of Japan kept monetary policy steady on Thursday however indicated the chance of expanding stimulus as early as the next policy meeting in October by issuing stronger warning over the risks threatening the economy.  The short-term interest rate target remained at -.01 percent and a pledge to guide the 10-year government bond yields around 0 percent under its yield curve control (YCC) policy.  The BOJ also said in a statement that it was becoming necessary to pay “closer attention” to the chance that the economy will lose sufficient momentum to achieve the 2 percent inflation target set by the BOJ.  BOJ officials said that solid domestic demand is offsetting some of the weakness in exports, helping to sustain moderate economic expansion.  The BOJ next meeting is on 30-31 October when it will conduct a quarterly review of its long-term growth and inflation forecasts.

Swiss National Bank

The Swiss National Bank is keeping the SNB policy rate and interest on sight deposits at the SNB at -0.75 percent.  The Bank will intervene in the currency exchange market as the need arises keeping in mind the overall currency situation.  Moreover, the Swiss National Bank is adjusting the basis for the calculation of negative interest on sight deposits at the SNB.  Whilst negative interest will continue to be charged on the portion of the banks’ sight deposits which exceeds a certain exemption threshold, this exemption threshold will now be updated monthly, reflecting the development’s in the banks’ balance sheets over time.  In view of the inflation outlook in Switzerland and the latest international developments the expansionary monetary policy continues to be necessary.  The foreign exchange market is in a fragile situation and the Swiss franc has appreciated in trade-weighted terms and remains highly valued.

Swiss Slash 2019 Growth Forecast

The Swiss government cut its 2019 growth forecast by a third on Tuesday amid risks brought about by the escalating trade war between China and the US, the rising Swiss Franc and the slowdown in Germany.  The government said it expects the Swiss economy to grow 1.7 percent in 2020, the same rate as the previous forecast.  It said, “Weaker development than previously assumed is anticipated for the global economy and uncertainty is high, which is weighing on the export economy and investment.”  Furthermore, the government referred to weak foreign demand in Germany, which is having an impact on the metal and machinery industry.  The government also said that the rise in the swiss franc is curbing exports as the strength in the Swiss Franc makes exports more expensive abroad.

Germany’s Economic Outlook – ZEW Survey

A survey on Tuesday by ZEW institute showed that the mood among German investors improved more than expected in September, however the same institute said that the outlook for Europe’s largest economy remained negative due to trade disputes and Brexit uncertainty.  ZEW said in its monthly survey that economic sentiment among investors rose to -22.5 from -44.1 in August.

BOE Meeting

The Bank of England said that Brexit uncertainty and slower economic growth were increasingly causing Britain’s economy to perform below its potential, and that a failure to reach a deal to leave the EU by 31 October would worsen the situation.  Prime Minister Boris Johnson has vowed to take Britain out of the EU by 31 October without a transition deal if necessary, however parliament ordered him to delay departure if he cannot come up with a fresh agreement with the EU that parliament also backs.  The nine members of the BOE’s Monetary Policy Committee voted to keep rates on hold at 0.75 percent and stressed that a no-deal Brexit risked hitting sterling and damage growth.  The BOE says that it wants to raise rates gradually over the medium term, as long as a no-deal Brexit shock to the economy is avoided and global growth picks up a bit.  Brexit uncertainty already appears to be weighing on productivity growth in businesses, and the labour market is no longer tightening as job creation has slowed, said the BOE.  The BOE also said, “Recently … entrenched Brexit uncertainties and slower global growth have led to a re-emergence of excess supply.”

UK Retail Sales

Retail sales in August in the UK dropped unexpectedly after shoppers bought less online than the month before according to official figures issued on Thursday.  The Office for National Statistics said that monthly retail sales volume dipped by 0.2 percent.  “Non-store retailing” mainly online shopping dropped by 3.2 percent, the biggest decline since August 2015, and came a month after Amazon held its annual “Prime Day” promotion that helped boost sales by 7.6 percent the previous month.  Compared with August 2018, sales were up by 2.7 percent (July’s growth 3.4 percent) and again the weakest since May. Meanwhile, the Confederation of British Industry, said its members reported the biggest fall since 2008 in its gauge of retail sales in August, as sentiment deteriorated in the sector.  On a separate note on Thursday, the Organisation for Economic Co-operation and Development said that if Britain leaves the EU without a deal, its economy was likely to be 2 percent smaller than otherwise in 2020-2021, pointing towards a recession, even if its exit is relatively well managed.

Inflation In The UK

According to the Office for National Statistics (ONS) the prices of goods and services paid by consumers rose at an annual rate of 1.7 percent in August after a 2.1 percent increase in July.  Consumer prices in the UK rose last month at the slowest rate since December 2016.  Meanwhile, ONS figures showed British house prices rose in July by just 0.7 percent in annual terms, the smallest rise since 2012, as weakness in the London market spread to other parts of England.  The sharp fall in inflation should boost households whose spending has fuelled the economy, while businesses cut investment ahead of the 31^st October BREXIT deadline.

The Suspension Of The UK Parliament By Boris Johnson

Scotland’s highest court ruled last Wednesday that the suspension of the UK Parliament was unlawful and was an “egregious” attempt to parliament.  A week earlier the High Court of England and Wales rejected a similar case, stating that the matter was political and not one for judicial interference.  Both cases were in front of the Supreme Court, the highest judicial body in the United Kingdom, whereby the judges will give a ruling on whether Johnson’s advice to the queen was illegal.  Johnson had announced on 28 August that he had asked Queen Elizabeth to dismiss or suspend parliament for five weeks from last week to 14 October saying the shutdown was necessary to allow him to introduce a new legislative agenda.  Britain’s Supreme Court aims to deliver its ruling early next week on whether Prime Minister Boris Johnson acted lawfully when suspending parliament for five weeks in the run-up to Brexit, said he president of the Court on Thursday.  If the ruling goes against Johnson, he could be compelled to recall parliament ahead of schedule, giving the legislature additional time to challenge his plan to lead Britain out of the EU on 31 October with or without a divorce deal.

Brexit And The Sterling

Earlier this month the pound fell to a three-year low below $1.20 and then soared more than 4 percent.  Many of the gains came about last week after parliament voted to force Prime Minister Boris Johnson to seek an extension to the current 31 October deadline for leaving the EU if no agreement has been reached.  The market focused on a meeting between Johnson and the European Commission chief Jean-Claude Juncker which was held on Monday. Johnson on Monday said that a Brexit deal was beginning to emerge, but the EU said he offered nothing to break the impasse during his visit to Luxembourg.

Data From China

On Monday data from China added to global growth concerns as growth in industrial production dropped to its weakest in 17 ½ years amid the trade war with the US and softening domestic demand.  Meanwhile, retail sales rose less than expected.

US-China Trade Talks

Deputy-level US-China trade talks are scheduled to start in Washington on Thursday, said the US Trade Representative with the aim of high-level trade talks in October.  Earlier on Monday, US Chamber of Commerce Chief Executive Tom Donohue said US Trade Representative Robert Lighthizer told business executives he was seeking a “real agreement” that addresses intellectual property and technology transfer issues first raised by the USTR two years ago.  Donohue also said that Lighthizer did not give an indication if the talks may produce an interim deal with a more limited scope, as was suggested by some media reports.

Moody’s Downgrades Hong Kong’s Outlook

Moody’s changed its outlook on Hong Kong from stable to negative on Monday, reflecting the rising risk of “an erosion in the strength of Hong Kong’s institutions” amid the ongoing protests in the city.  This move followed Fitch Ratings’ downgrade earlier this month on Hong Kong’s long-term foreign-currency-issuer rating from “AA+” to “AA”.

Markets Wrap

European shares fell on Monday after four straight sessions of gains amid the attacks in Saudi Arabia. On the same day US Treasury yields also dropped affected by the attacks in the weekend on crude facilities in Saudi Arabia that shut about 5 percent of the world’s oil supply.  Oil prices soared halting a four-day positive run in world stock markets and increasing the demand for safe-haven assets. The rise in oil prices and poor economic data from China pushed gold prices, the Japanese yen and the Swiss franc higher, whilst core eurozone bond yields dropped.  The London FTSE recorded the smallest losses, with an 0.07 percent dip, helped by the rise in shares of oil majors BP and Shell.  On Tuesday eurozone government debt yields edged lower amid the geopolitical uncertainty from the weekend attack on Saudi Arabia oil facilities supporting a cautious tone in the bond markets before the FED meeting where a rate cut was expected.  Longer dated eurozone government bonds yields were up to 1 basis point down on the day.  Whilst the Germany’s 30-year yield was down 1 bp to 0.05 percent, the 10-year benchmark yield was also down 1 pb to -0.48 percent.  After the US Fed Decision this week, US stocks extended their losses and the US treasury yield curve flattened.  The 10- year treasury note yield increased to 1.79 percent.   On Thursday a day after the Federal Reserve cut interest rates, a gauge of global equity performance edged higher on Thursday and crude oil prices climbed higher amid concerns that the result of last weekend’s attacks on Saudi Arabia’s oil facilities pose supply risks.  Thursday also saw a rally in bank stocks for the first time in four sessions after the US Federal Reserve cut interest rates but set a higher bar for further reductions.

Currency Roundup

Monday saw the dollar falling while safe-haven currencies and the currencies of oil-producing countries rallied, following the attack on Saudi Arabia’s refining facility that disrupted global oil supply and increased Middle East Tensions.  The Norwegian crown surged to 8.9215 per dollar and then settled at 8.9695 crowns, up 0.2 percent on the day.  The Canadian dollar rose 0.2 percent to C$1.3264 after earlier reaching C$1.3208.  Meanwhile the currencies of oil importers such as Turkey and India weakened.  The Japanese yen rose 0.4 percent while the Swiss franc gained against the euro but was only up 0.2 percent at 1.0946. Both are safe-haven currencies.  The US dollar recovered earlier losses and added 0.1 percent against a basket of currencies, with its index touching 98.343.  The euro dipped 0.2 percent to $1.1049.  In the UK, Boris Johnson’s confidence of sealing a deal to leave the European Union by 31 October renewed pressure to the pound. The Japanese Yen rose from a seven-week low versus the dollar and kept onto those gains after the decision by the BOJ to keep policy steady for now on Thursday.  After the Decision by the FED to cut interest rates, the US Dollar gained ground against the euro and the yen.  The British pound fell on Thursday after the Bank of England kept interest rates on hold as was expected however, for the first time the BOE detailed the damages that a further Brexit delay could cause to the economy.

Malta:  Harmonised Index of Consumer Prices (HICP) – August 2019

In August 2019, the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) was 1.9 percent (July: 18 percent).  The largest upward impact on inflation was measured in the Food and Non-Alcoholic Beverages Index, while the largest downward impact was recorded in the Education Index.  The HICP measures the monthly price changes in the cost of purchasing a representative basket of consumer goods and services.  The HICP is calculated according to the rules specified in a series of European Union Regulations, developed by Eurostat in conjunction with the EU.  The HICP is used to compare inflation rates across the European Union.

Malta:  International Economic and Financial Transactions – 2^nd Quarter 2019

For the period April-June 2019, provisional figures for Malta’s external transactions show that the current account balance recorded a surplus of EUR 361.0 million (same period 2018:  EUR 336.7 million).  This surplus was primarily the result of a positive net balance of the services account of EUR1,152.7 million marked by improvements in the net balances of the other services, travel and transport accounts and was partially outweighed by negative net balances in the goods account, primary income account and secondary income account.  During the June quarter of this year, the capital account registered a positive net balance of EUR 21.3 million as compared to a positive balance of EUR 7.3 million in 2018.  The financial account was shaped by net asset increases of EUR 677.5 million, an improvement in net balance of assets of EUR 46.2 million over the same quarter in 2018.  Meanwhile the development in the financial account balance was attributable to higher other investment (EUR1,780.4 million) and portfolio investment (EUR 1,309.2 million).  These were outweighed by lower direct investment of EUR 2,314.4 million, higher financial derivatives liabilities of EUR 33.1 million and a decline in the reserve assets of the country by EUR 64.7 million.

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