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BOV Market Watch - Week Ending 2nd December 2016
02 Dec 2016

Oil soars as OPEC agrees to first production cut since 2008. OPEC ministers agreed on Wednesday to cut output for the first time in eight years, resulting in a sharp rise in oil prices. The deal is meant to drain record global oil inventories and bridged disagreements between the group’s three largest producers - Saudi Arabia, Iran and Iraq. It also ended OPEC’s flirtation with free markets that started in 2014. The cut was broader than many had expected, extending beyond OPEC. Crucially, Russia agreed to unprecedented cuts to its own output.

U.S. third quarter GDP revised up, home prices reclaim pre-crisis levels. The U.S. Commerce Department said that the world’s largest economy grew more than initially estimated in the third quarter. According to a revised GDP report, the economy expand at a rate of 3.2% on an annual basis, higher than the 2.9% reported in the preliminary estimate. This was the highest quarterly growth rate in two years. In a separate report, U.S. home prices rose by 5.5% in the year to September, meaning that house prices in the U.S. have now fully recovered from the plunge they suffered during the 2008 financial crisis.

BOE Financial Stability Report: Outlook for UK financial stability “remains challenging”. The outlook for U.K. financial stability remains challenging, the Bank of England (BoE) said in its half-yearly Financial Stability Report. The bank said that the likelihood that some U.K. specific risks to financial stability could materialize remains elevated. Risks associated with the global environment also remain at a high level, the bank warned, as the U.S. election has reinforced existing vulnerabilities. The central bank expects uncertainty to rise over the coming months as a result of the forthcoming Italian referendum and a number of elections in the Eurozone. Other potential threats to financial stability include rapid credit growth in China and vulnerable sovereign debt positions in some Eurozone economies.

UK consumer confidence falls further in November. The latest survey by market research firm GfK revealed that the consumer confidence index in the Britain fell sharply to minus 8, missing expectations of minus 4. This is the lowest reading since July of -12. A reading below 0 suggests that pessimists outnumber optimists. U.K. consumer confidence fell further in November as Britons are becoming more anxious about their financial situation and the country’s economic prospects over the coming months. Joe Staton of GfK said in a statement, “The slump across the board this month points to continuing uncertainty about the state of the economy among consumers”.

Eurozone consumer confidence rises in November. Preliminary survey results published by the European Commission show that the consumer confidence index for the region rose by 1.9 points, from minus 8 in October to minus 6.1 in November. The rise in confidence was influenced by significantly brighter expectations concerning the future general economic situation and future unemployment. Daniel Christen, an assistant economist at Capital Economics said that the Eurozone consumer confidence is likely to weaken in the coming months and consumer spending growth to slow.

Eurozone inflation accelerates before key ECB decision on QE. In November, inflation in the Eurozone accelerated, continuing its slow increase prior a decisive European Central Bank (ECB) meeting next week. Consumer prices rose by 0.6% from the previous year, after a 0.5% increase in October. Core inflation remained at 0.8% in November. The ECB’s council wants to see a sustained increase in inflation and will discuss in next week’s meeting whether to extend a 1.7 trillion-euro quantitative-easing (QE) program past its end date in March. ECB President Mario Draghi recently told European Parliament lawmakers that the bond-buying program is “sufficiently flexible” and could be “revisited to preserve the substantial degree of monetary accommodation necessary” to meet the central bank’s inflation objective.

German unemployment declines as expected in November. Data from the Federal Labour Office showed that German unemployment ticked down in November in line with expectations. The labour market in Germany, which is Europe’s largest economy, remained strong. The unemployment rate in November fell to 5.7% from 5.8% in October whilst the adjusted unemployment rate remained steady at 6%, the lowest since the German reunification. On a seasonally-adjusted basis, German unemployment fell by 5,000 in November after a 13,000 decline in the prior month. The decline in unemployment was in line with market expectations.

OECD backs Trump’s economic plans. Donald Trump's economic plans have received strong support from the Organisation for Economic Cooperation and Development (OECD), with the international organization predicting the President-elect's infrastructure policy and tax cuts will boost the U.S. economy. The OECD forecast that the U.S. economy will grow by 2.3% in 2017 and by 3% in the following year. This growth should in turn reduce the unemployment rate in the world's largest economy from the current 4.9% to 4.5% in 2018.

Brazil’s senate backs spending cap. Brazil's Senate this week approved a strict cap on federal spending, handing a timely victory to President Michel Temer, who is struggling to restore fiscal discipline amid an economic recession amid a political crisis. The senate voted by 61-14 to back the constitutional amendment that will limit federal spending to the rate of inflation for 20 years, with an option for a presidential revision after 10 years. The constitutional change is expected to easily clear a second and final vote on December 13.

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