BOV Market Watch - Week Ending 23 September 2016 - Bank of Valletta

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BOV Market Watch - Week Ending 23 September 2016

23 Sep 2016

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OECD trims global growth forecasts citing low-growth trap. The Organisation for Economic Co-Operation and Development (OECD) stated that the global growth is expected to slow at a faster rate than anticipated earlier as the World has entered into a low-growth trap. The global growth projection for the year was reduced to 2.9% from the 3% estimated in June. The forecast for next year was revised from 3.3% to 3.2%. The modest reduction in the global growth projections reflected the downgrades in key advanced economies, mainly United Kingdom for 2017, which was offset by regular progress in major emerging-market commodity producers. OECD chief Economist Catherine Mann said “The sharp slowdown in world trade underlines concerns about the robustness of the economy and the difficulties in exiting the low-growth trap”.

ECB says, China and Brexit pose risks to global growth. The European Central Bank (ECB) noted in its economic bulletin that the governing council of the Bank will stay vigilant and ready to act, if necessary, to meet its price stability objective. The European Central Bank said that the risks to the outlook for global economic activity remain on the downside. The Bank observed that although Brexit has so far had limited impact, however the result instigates a rise in macroeconomic uncertainty. The ECB said that “Policy uncertainty surrounding the economic transition in China could lead to an increase in global financial volatility”. In its September meeting, the ECB had left its interest rates unchanged and confirmed its asset purchase program of Eur80 billion monthly, with the aim of getting consumer price growth back to its target rate of 2%.

UK budget deficit exceeds forecast. The UK budget deficit narrowed in August, but the bigger than projected shortfall indicated the difficulty in meeting budgets set prior the Brexit vote. The Office for National Statistics (ONS) stated the public sector net borrowings declined by GBP0.9 billion from the previous year to GBP10.5 billion in August. The deficit had exceeded analysts’ expectations of GBP10.2 billion. The deficit for July was revised upwards from GBP977 million to GBP 1.9 billion. The improvement in the public finances in August is not likely to persist as the post referendum economic slowdown started to have an impact and Chancellor Philip Hammond might eases its fiscal squeeze in the Autumn Statement.

French manufacturing confidence strengthens in September. According to the statistics office Insee, survey results showed that the French manufacturing confidence improved in September. The manufacturing confidence index increased from 101 in August to 103 in September. The reading was anticipated to remain unchanged at 101. The Business managers surveyed in September showed that past activity improved in September after easing in August. The corresponding index rose to 8 from 6 in the previous month. The indicator for personal production expectations increased to 10 in September against a reading of 2 in August. In September, there was an overall increase in order books. The balance of opinion on global order books increased from -16 to -14. In the meantime the export book balance fell from -9 to -10.

Fed votes to leave rates unchanged. The Federal Reserve opted to keep its interest rates unchanged between 0.25% and 0.5% though the Central Bank projects a rate hike before the end of the year. The Federal Open Market Committee (FOMC), said that even though latest economic data showed that growth is picking up, it was not sufficient to persuade a majority of its members to increase interest rates. The Fed policy committee said “the case for an increase in the federal funds rate has strengthened but decided, for the time being to wait for further evidence of continued progress toward its objectives”. The Federal Reserve’s so-called dot plot, that indicates its outlook of monetary policy, shows that members still anticipate that the Fed will raise its interest rates a quarter point in 2016.

Japan’s trade balance fell into deficit in August. The Ministry of Finance said that Japan’s posted a trade deficit of 18.7 billion yen. The deficit of 18.7 billion yen had missed analysts’ expectations who had projected a surplus of 191.0 billion yen for the month. Exports in August fell 9.6% from the previous year to 5.32 trillion yen ($52.4 billion), whilst imports declined 17.3% from a year earlier to 5.34 trillion yen ($52.5 billion). Exports to all of Asia fell 9.4% from the previous year, while exports to China in August dropped nearly 9% from a year earlier. Exports to the US, declined an annual 14.5%, while exports to the

European Union dropped 0.7%. Imports from all of Asia slipped 13.8% on year, while imports from China fell 15.4%. Imports from the US slid 9.5% on year whilst imports from the European Union declined an annual 12.4%.

Australia leading economic index unchanged in August. The latest survey published by Westpac showed that the Australia leading economic index remained unchanged in August, after a marginally revised 0.08% in July. The six-month annualized growth in the index rose to 0.2% in August from -0.01% in July. The positive leading index growth rate trails 15 successive months where growth has been lower than the trend. This index reading is the first above the trend result since the beginning of last year and the second strongest since December 2013. Westpac’s chief economist, Bill Evans said that the index is indicating that the Australian economy is likely to continue growing around its long run trend rate of 3%.