“The International Monetary Fund and Christine Lagarde…..”

The International Monetary Fund and Christine Lagarde

According to Christine Lagarde, managing director of the International Monetary Fund (IMF),   sharp swings in global financial markets in the past few days are not worrying since economic growth is strong but reforms are still needed to avert future crises.  She further added that economies are also supported by plenty of financing available.  Lagarde repeated an IMF forecast that was originally issued last month, that the global economy would grow 3.9 percent this year and at the same pace in 2019, which she said was a good backdrop for needed reforms.  She further added that, “we need to anticipate where the next crisis will be.  Will it be shadow banking? Will it be cryptocurrencies?.”

Italy’s GDP

Italy’s economy grew slightly less than expected in the fourth quarter of last year, but over the whole year growth was the strongest since 2010.  Data from ISTAT reported that Gross Domestic Product rose a quarterly 0.3 percent at the end of the year following an 0.4 percent rise in the July to September period and was up 1.6 percent on an annual basis.   ISTAT further said that the fourth quarter growth was based on a rise in both exports and domestic demand. Despite the expansion for 2017, being the strongest posted by Italy since 2010, the country is still left in its position as one of the most sluggish economies in the 19 nation currency bloc.  ISTAT will issue the official full-year 2017 growth calculated according to EU criteria, on 1 March and three days later Italy will go to the poll in a parliamentary election.  The official forecast of the government of Prime Minister Paolo Gentiloni was for Italian growth of 1.5 percent and forecasts that this will remain solid.  The European Commission last week forecasted Italy’s growth of 1.5 percent in 2018, putting it in the last place in the Europe just above Britain.

Germany

Germany has remained without a proper government since last September after an inconclusive election.  German Chancellor Angela Merkel and the leader of the Social Democrats faced further criticism on Monday from within their own parties over a new coalition deal that still has to be approved by SPD members.  Members from the Christian Democrats were annoyed after Merkel agreed in the coalition talks to cede the finance ministers to the SPD. Meanwhile, the SPD could yet reject the coalition deal in a ballot whose results will be announced on 4 March.  On Sunday Merkel said that if the SPD members rejected the coalition agreement, Germany would probably hold a new election.

UK Inflation

British inflation in January held unexpectedly to its highest level in nearly six years.  Consumer price inflation held at an annual rate of 3 percent in January with no change from December after in November, hit its highest since March 2012 at 3.1 percent according to the Office for National Statistics.  After the June 2016 decision by voters to leave the European Union inflation jumped, pushing up import costs and effecting the value of the pound.  The Bank of England surprised investors last week stating that interest rates would need to rise sooner in order to get inflation back to target within two years rather than three.  Core consumer price inflation which excludes food, energy, alcohol and tobacco rose to 2.7 percent from 2.5 percent and services price inflation which is more sensitive to wage costs, also accelerated.

Trump’s Budget

President Donald Trump proposed a $4.4 trillion federal budget on Monday for fiscal year 2019.  Trump has asked lawmakers for drastic reductions in environmental, research and diplomatic programs that is a 27 percent cut to the State Department, 25 percent cut to the Environmental Protection Agency, cost cutting overhauls to Medicare and other social safety-net programs.  Part of that money will be diverted towards building a wall on the Mexican border and boosting defense spending. The budget shows the 2019 deficit will nearly double from the projections of last year to $984 billion.  The national debt would rise nearly $30 trillion and the budget would not balance, assuming the Congress adopts all Trump’s proposals including spending cuts.

US Consumer Prices

Data showed US consumer prices rose more than expected in January with core inflation posting its biggest gain in a year.  This has caused some concerns that interest rates will increase faster than expected sending the benchmark US bond yields high.   The Labour department said its Consumer Price Index increased 0.5 percent in January as households paid more for gasoline, rental accommodation and healthcare.  Excluding the volatile food and energy components, the CPI shot up 0.3 percent, the largest increase since January 2017.  Year on year, the rise in the so-called CPI was unchanged at 1.8 percent in January.  A separate report showed that US retail sales decreased 0.3 percent last month, the biggest fall in nearly a year and has raised some concerns about economic growth.   After the data, US Treasury yields jumped.

Korean Meet Up

North Korean leader Kim Jong Un has invited South Korean President Moon Jae-in to meet in Pyongyang.  This move can raise prospects to ease tensions on the Korean Peninsula.  This would be the first time the leaders of the two countries would have met in 11 years.  Meanwhile, there was a change from the Trump’s administration previous stance, that North Korea must first agree to discuss giving up its nuclear weapons before talks began.  As Vice President Mike Pence said, the US is ready to engage in talks about North Korea’s nuclear program even as it maintains pressure to Kim Jong Un’s regime.

Japan

Japan has posted its longest continuous expansion since the 1980s boom, as the fourth quarter growth was boosted by consumer spending.  The revival plan of Prime Minister Shinzo Abe is moving a step closer to beating decades of stagnation.  This is a positive sign for the Bank of Japan, as the economy is finally building up momentum to lift consumer prices and move towards the 2 percent inflation target.  The economy expanded at 0.5 percent annualised rate from October to December less than the median estimate of annualised growth of 0.9 percent.   Japan’s economy grew a real 1.6 percent in 2017, the fastest increase since a 2 percent expansion in 2013.  If growth continues, it could lead to some speculation that the Bank of Japan could afford to scale back quantitative easing.  Japan’s economy has posted the longest continuous expansion of 12 quarters between April-June 1986 and January-March 1989.  Economists are cautious about domestic demand because any further decline in global stocks could hurt sentiment and returns on investors’ portfolios.  Real wages fell 0.4 percent in the fourth quarter, the first decline in three quarters which is another risk to domestic demand.  On a separate note the government has appointed Bank of Japan Governor Haruhiko Kuroda for another term, in a sign the central bank will be in no rush to withdraw its massive stimulus programme.

Zuma’s Removal From Office 

President Jacob Zuma of South Africa refused to obey the request of the African National Congress to resign voluntarily which prompted the top leadership to order his removal from office.  The ANC’s National Executive Committee decided to recall Zuma 75, during a 13 hour meeting that ended on Tuesday.  The African National Congress wants Cyril Ramaphosa a 65 year old former labour union leader and businessman to take over as soon as possible, before elections take place next year.  Like this he will have the time to rebuild the economy.  The police raided the homes of some of Zuma’s allies.

Oil

On Monday OPEC said that world oil demand would grow faster than expected in 2018 in view of a healthy world economy.  However, the global market should return to balance only towards the end of 2018 not before that, as the higher prices would encourage the United States and other non-members to pump more, as said by OPEC in its monthly report.   OPEC said world oil demand would rise by 1.59 million barrels per day this year, an increase of 60,000 bpd from the previous forecast.  To balance the higher demand forecast, OPEC said the United States and other outside producers would boost supply by 1.4 million bpd this year, up 250,000 bpd from last month and the third consecutive rise from 870,000 bpd in November.

Where Are Markets Heading?

The S&P confirmed it had entered correction territory on Thursday of the previous week, as it closed down 10.2 percent from its high on 26 January.  Stocks have rebounded sharply in the two sessions since then, posting their biggest two-day percentage gain since June 2016 and cut the decline to 7.6 percent as of Monday close.  Although market strategists are not discounting the possibility that stocks could renew their slide, they said the shaky economic conditions that tend to presage a bear market were absent.  Although a recession, which is a period of significant decline in economic activity that is not determined until after it occurs, market watchers cite indicators that the economy is still doing well.  The longer term 10 year Treasury note is 128 basis points above the short term 3 months Treasury bill. Such a steeping yield curve is a sign of economic strength, while flat or inverted, is seen as a forerunner of a recession.  On Thursday, the 10 year Treasury yield hit a high of 2.942 percent, as investors continued to reassess the outlook for US inflation and the path of Federal Reserve rate hikes.  The number of interest rate expected increases has risen to four in the wake of Wednesday’s release of inflation data.  Meanwhile the S&P 500 index closed higher for a fourth day of gains on Wednesday and continued to set the tone for global stocks.  The Japan’s Topix index ended the session 1 percent higher, despite continuing gains for the yen.

Twitter Inc

Twitter’s overall revenue was $731.6 million beating Wall Street’s target of $686.1 million (as per Reuters), while net profit was $91.1 million or 12 cents a share, compared to a loss of $ 167.1 million or 23 cents a share a year earlier.  Overall revenue rose two percent in the fourth quarter, from a year earlier.  The increase in revenue was helped by expansion outside the US, pushing the shares in the social network to more than two year highs. The revenue from outside the US rose 17 percent, making up for an eight per cent decline in US sales.  Revenue from Japan rose 34 percent to $106 million and Chinese exporters were strong advertisers abroad.  Facebook Inc has 2.1 billion monthly users, while Snap Inc, has 187 million daily users.  Shares in Twitter had already surged 47 percent over the past 12 months outpacing the 17 percent rise in the S&P Index.

Gold

As the US dollar slipped, gold prices rose.  Markets were awaiting the US inflation data that may offer some clues on the pace of future US interest rate increases.  Inflation is at times seen as positive for gold, as the asset is seen as a safe haven when price pressures are rising.  However, expectations that the US Federal Reserve will lift interest rates to fight inflation makes gold less attractive.

Dollar

The Dollar hit a 15 month low against the yen on Wednesday as investors remained on edge, ahead of key US inflation to be released later in the day.  Japanese shares dropped increasing the demand for the yen, which is sought in times of market turmoil.  US shares managed to gain for a third consecutive day on Tuesday, after last week’s sharp downturn.  The dollar continued with its decline later in the week, hitting a three-year low against a basket of major currencies.

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