The Sentix indicator for Euro Zone investor confidence in August came in higher than expected. Figure still comes in second lowest since January 2015 amid post-Brexit uncertainty and growing worries about Italian banks.
Investor confidence records slight recovery from initial post-Brexit slump
Sentix GmbH this morning published its’ indicator of the Eurozone’s investor confidence in August. The figure came in at 4.2%, up 2.5% from last month’s figure and beating estimates by 1%.
The indicator is a composite figure of 36 different indicators capturing aspects of investor confidence in the EMU. It is based on a monthly survey of 1600 financial analysts and institutional investors.
Investor confidence in the EMU seems to be recovering from the past month’s post-Brexit shock, which produced the lowest rating in 17 months.
Investor confidence stays low due to Italian banking worries
However, the rating still represents the second lowest rating since January 2015.
This does not come as a surprise, as economic uncertainty over the long term effects of the UK’s decision to leave the European Union have been joined by renewed worry about the banking sector in Italy.
Italy’s Monte dei Paschi di Siena has made most headlines. Analysts’ speculate that the oldest bank in the world stands at the brink of collapse with billions in non-performing loans.
Germany records growth in industrial production
Some good news to spur positive economic sentiment in the EMU came from the German Federal Statistical Office (Destatis) this morning.
Industrial production in Germany rose by 0.8% in June. This represents an increase of 0.9% from Mays’ negative measure and beat estimates by 0.1%. The figure comparing June’s industrial production to the same month last year came in at 0.5%, also 0.9% higher than results recorded in May.
Euro stays unaffected by higher than expected figures
While positive data on investor confidence in the EMU and industrial production in Germany is usually considered to have bullish effects for the Euro, persistent concern about the economic situation in Europe due to the Brexit vote and Italian banking worries weigh heavily on the Euro, which prevented the EMU currency from recording any major gains against other currencies.
The EUR/USD is trading at 1.10856, the EUR/GBP at 0.84913 at 11.22am.
Theresa May’s decision last week to delay approving the Hinkley Point nuclear power station signalled a turnaround in government policy towards China, barely a year after David Cameron’s announcement of a “golden era of relations” between the UK and Beijing. Since then, the political ground has shifted dramatically; with the UK now set to exit the EU, will a UK-China relationship still be mutually beneficial?
For China, one of the main draws of a strong relationship with the UK was the access it could provide to the EU bloc. Despite the Foreign Ministry commenting on the referendum saying that China “respects the choice made by the British people”, the exit vote certainly came as a blow – President Xi Jingping made it clear earlier this year on a state visit that it “hopes Britain, as an important member of the EU, can play an even more positive and constructive role in promoting the deepening development of China-EU ties.”
Partnership outside the EU
Without access to Europe, will the UK still be a strong partner for China? The weakening of the economy since the vote will also weigh heavily as Beijing weighs up the pros and cons of continuing their relationship – and investment – with the UK. According to Philippe Le Corre, a policy analyst in China-Europe relations, this could be bad news for the UK: “The reality is that Britain will be of no use to China within the EU now, with no influence left whatsoever.”
Theresa May’s turnaround in government policy towards the Hinkley Point nuclear plant, strongly supported by the Cameron-Osbourne partnership, will come as another blow to China. May has signalled that she has “severe reservations” about closer ties with China over nuclear plant, citing long-term security worries and the possibility of French energy company EDF being able to complete. Going ahead with the project would have shown trust in the China General Nuclear Power Corporation, and opened the door to further trade between the two countries. Hesitation now is likely to weaken the partnership that Cameron and Osborne worked to hard to create.
Post-Brexit agreement
Moving forward, it remains to be seen how much of the £40 billion worth of trade agreements between the two countries will still go ahead. The EU exit may well allow the UK to form its own trade relationships with China, maintaining the friendly relationship between the two countries – but without UK influence in the EU to barter with, it seems China now has the upper hand. Any agreements made post-Brexit are likely to be on their terms.
The average pay for a CEO in the FTSE 100 is £5.48 million, according to the latest report by think-tank High Pay Centre, with no women making the list of top ten highest paid executives.
Chief executives of firms on London’s FTSE 100 index saw their mean average income rise by 10 percent in 2015, with bosses earning around 129 times the salary of their employees. The ‘excessive’ pay in Britain’s top companies recently prompted government scrutiny, with Theresa May looking to implement a series of boardroom reforms to counteract the “irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses”.
Several heads of large companies have come under fire recently for the size of their salary, with head of the advertising group WPP Sir Martin Sorrell recently being forced to defend his pay packet of over £70 million per year. Oil giant BP has also faced shareholder revolt over pay, with a salary of £14 million for CEO Bob Dudley being rejected at the company’s AGM.
Stefan Stern, director of the High Pay Centre, said: “There is apparently no end yet in sight to the rise and rise of FTSE 100 chief executive pay packages. In spite of the occasional flurry from more active shareholders, boards continue to award ever larger amounts of pay to their most senior executives.”
China import figures suggest drop in domestic demand
Chinese import and export figures came in lower than expected for July, suggesting a drop in domestic demand and global economic weakness.
Imports dropped 12.5 percent, their biggest decline since February, with exports also falling 4.4 percent according to China’s General Administration of Customs. China’s trade surplus stood at $52.31 billion in July, up from $48.11 billion in June.
These figures are the latest in several signs of weakness in the Chinese economy, with both exports and imports declining solidly over the past year. Analysts expect trade to remain weak, perhaps with a moderate increase towards the end of the year with Christmas manufacturing.
Japanese shares up on Monday after positive US jobs data
Japanese markets started the week on a high after the US announced a non-farm payroll figure of 255,000, far higher than expected by analysts.
Japanese exporters were helped by a weaker yen, and markets reacted well to the figure which heightened anticipation of a rate rise by the Federal Reserve before the year’s end.
The Nikkei 225 index closed 2.4 percent on Monday with other Asian markets having a similarly positive close: the Hang Seng closed up 1.57 percent, with the Shanghai Composite up 0.93 percent.
UK consumer spending rises in July
Consumer spending picked up in July, despite concerns of an economic slowdown in the wake of Brexit, according to the latest survey from card company Visa.
Consumer spending rose 1.6 percent in July compared with a year earlier, up 0.9 percent from June and hitting the strongest growth rate since January.
However, Visa warned that monthly consumer data can be volatile, with Visa’s managing Direction Kevin Jenkins commenting:
“July’s data suggests that UK consumer spending is holding up despite the ongoing uncertainty following the referendum, albeit at lower levels of growth than we’ve seen in the last couple of years.”
London based BlackRock Investment Strategy Trust this week announced that it will review its’ investment objectives and policies on terms of sustainability amid the changing economic conditions following last month’s Brexit vote.
In the announcement published on the London Stock Exchange the Trusts stated:
“Since the implementation of the new investment objective and policy, interest rates have fallen and there has been a significant decline in the universe of investments which could support a multi-asset approach to meeting the stated investment objective and total portfolio return target. Although in the last 12 months the Company has paid dividends totalling 6.64 pence per share, which represents a dividend yield of 5.6% (based on Friday’s closing share price), since the change in investment objective and policy the Company’s NAV (cum income, with debt at fair value) has declined by 14%.”
The announcement, made by the Board and the Investment Manager of BlackRock, comes only 18 months after the trust, formerly known as British Assets, changed its’ name to Black Rock Income Strategies, prompted by a switch in management from F&C to Black Rock, and launched its’ latest investment strategy, implementing a multi-asset dividend driven approach.
The Trust claimed that revision of its’ investment strategy became necessary “in the context of the prevailing market conditions and investment outlook post the recent UK Brexit Referendum.”
It was announced that all share buy-backs will be suspended while the review is in progress.
Share prices of BlackRock Income Strategies Trust PLC (LON:BIST) dropped 5.72% in the days following the announcement.
Shares are trading at 111.49pence (+0.21%) at 16.07pm.
Wage growth for July indicates better than expected state of US labour market
The data on earnings growth and job creation in July, published on Friday by the US Department of Labour, beat analysts’ estimates on both figures of average hourly earnings and indicators of job creation. This suggests that the US labour market is in a better current position than previously projected.
Wages are growing faster than expected
Average hourly earnings grew by 0.3% between June and July, up 0.2% from earnings growth between May and June. The figure beats estimates by 0.1%.
The year on year indicator for wage growth met analysts’ expectations at 2.6%, the same level seen the previous month, with the figure for average weekly work hours coming in at 34.5, up 0.1 per hour from last month and analysts’ estimates.
255,00 new jobs created in non-agricultural business
Most surprisingly, the number of new jobs created in all non-agricultural business stood at 255,000 in July, down only 37,000 from June’s figure and 75,000 higher than previously predicted.
Slight disappointment only came from the unemployment rate, which remained at 4.9% in July rather than seeing the 0.1% decrease predicted by analysts.
USD rallies against major currencies
The USD rallied against other major currencies in anticipation of the data release and continued its hike after the positive results at1.30pm.
The USD/JPY gained 0.84031 between 1.20pm and 2.47pm.At 2.57pm the pair was trading at 101.85954.
US Stock markets rally
The Dow Jones Index gained 0.85% in early morning trading on the back of positive labour market data, standing at 18,507.85 at3.21pm.
The S&P 500 Index was up 0.69%, to 2,179.23 and the NASDAQ composite index recorded a 1.03% jump.
Traded commodity prices drop on positive US labour data
Silver and Gold prices were down as the positive data rallies interest in higher risk, interest earning assets.
Gold dropped 1.54% between 1.20pm and 3.14pm, to trade at 1339.73USD/ounce.
Impact on future Fed decisions
The better than expected data also refuelled the debate about the possibility of a Fed rate hike in the meeting next month. As expected, the Fed refrained from increasing the interest rate in its meeting in July, but indicated that an increase may still be on the cards later this year.
The next Fed monetary policy meeting will take place from the 20th to the 21st September. Today CME Group’s Fed Watch Tool indicates a 20% possibility of a rate increase at the next meeting, up from 9% likelihood the previous day.
Most analysts still believe that the Fed will hold off on a rate hike until its December meeting.
Whilst Italian banks may be having a rough time at the moment, one in particular is on the brink of collapse: the 500 year old Monte dei Paschi di Siena bank, currently caught in the throes of a possible private rescue.
Like most Italian banks, MPS is struggling under the weight of millions of Non-Performing Loans and recently received the worst score in the most recent European Banking Authority stress tests. Despite Prime Minister’s assertions that the Italian banks are “good”, the share price of MPS has plummeted, falling from €90 to 26 cents alongside slashing dividends. Renzi may still think that Monte dei Paschi “could be a very good bank for the future”, but it is in major need of a €5 billion recapitalisation for the third time in three years, as well as a clean-up of its €27 billion worth of non-performing loans.
Renzi has spoken out strongly against a bail-in, whereby banks existing shareholders would take the hit, on the grounds that this would hit thousands of family savers. Bailing out the bank with taxpayer money would be another unpopular option for the centre-left Prime Minister, whose leadership depends on winning a referendum on the constitution, to be held in October.
However last week, MPS came up with a third option: a private sector-backed bailout. Despite the bank being worth under 1 billion euros on the market, the rescue scheme hinges on raising 5 billion to prop up the bank before the end of year. So far, the plan has gained traction; the global coordinators for the cash call, JPMorgan and Mediobanca, have secured a pre-underwriting agreement from another six other banks, including Santander, Goldman Sachs and Credit Suisse. However, MPS still has to negotiate the sale of 9.2 billion euros of bad loans through an unprecedented securitization. Drawing on the size of the task ahead several other banks have, perhaps not unreasonably, chosen to opt out.
LC Macro Chief Economist Lorenzo Codogno, a former chief economist at the Italian treasury, told Reuters: “Italy is on a good course to solve its banking issues. However, leaving aside some near-term re-pricing of risk, this is not yet a turning point.”
India’s upper house of parliament unanimously passed a long awaited bill this week, allowing the creation a unitary tax system and finally achieving a completely integrated single market within the country. Economists are confident that the revision of India’s fragmented taxing system can increase the economy’s efficiency and create up to a 2% increase in GDP growth per year.
Bill will bring country together under single tax system
The bill, over a decade in the making, will amend the Indian constitution to allow a replacement of the country’s mix of national, state level and local taxes by a unified value added tax system.
Finance Minister Arun Jaitley hailed the move as “the most significant tax reforms in Indian history.”
It will create a unified single market which brings together the vast amount of the country’s 1.25bn consumers and fully integrate its current £1.5tn economy. Under the new tax system consumers will pay the same taxes in every Indian state. Products such as electronics and motorbikes will become cheaper but prices may increase for goods such as tobacco and fizzy drinks as well as services.
Economists believe reforms will boost economic growth in India
While it took over a year to get the bill passed in the upper house, technocrats, economists and businessmen alike welcome the final decision to move forward with the reforms. Most economists believe that the creation of a single market will increase the efficiency of the country’s economy and may add as much as 2% to its yearly GDP growth. During the debate of the bill in the Upper House Arun Jaitley said: “It would certainly give a boost [to] the economy, which is required at this critical stage.”
India overtook China as the world’s fastest growing economy in 2015 when the country’s GDP rose by a total of 7.5%, compared to China’s increase of 6.9%. At the end of the first half of 2016, results pointed towards India staying in this position with growth levels indicated at 7.6%. But as the global economy faces challenges of low oil prices and economic uncertainty in Europe due to the Brexit-vote, ongoing terror threats and the looming threat of another banking crisis in Italy, countries all around the globe have to strive for increases in efficiency to achieve growth targets.
Business will profit from the simplified tax system
Under the new system businesses will be able to reclaim tax credits which were already paid by suppliers, giving businesses more investment incentives. Further, the creation of an integrated market throughout the country will make it easier to transport goods between different Indian states, removing much of the bureaucratic and logistical challenges as well as the great cost faced currently.
In an interview with indianexpress, Bhaskar Pramanik, Chairman ofMicrosoftIndia commented:
“I am pleased that the Goods and Services Tax (GST) Bill was passed in the Rajya Sabha today. It is a positive development and I hope the Government will implement this long pending reform by April 1, 2017. The Government’s idea of a single tax regime is crucial to improve ease of doing business in India and address the ambiguities of the current indirect tax landscape, proving beneficial for the economy, at large.”
New tax bill will promote Modi’s “Make in India” – Mission
Modi in front of “Make in India” logo
The new goods and services tax will also promote Prime Minister Narendra Modi’s goal of driving the growth of local manufacturing. The promotion of local production and Indian goods is one of Modi’s most prominent policy goals, targeted by a range of policies under the “Make in India” flagship. Policies included the promotion of local manufacturing, the support of intellectual property rights and the opening of the country’s economy to 100% FDI under the automated route in many sectors including broadcasting, manufacturing, agriculture, whole-sale trading and food production retail trading.
The new tax system will reduce the burden of overlapping and differing state taxes, therefore remove many of the current barriers to doing business in India for both local and international companies.
Foreign companies welcome revisions
The new unified tax system will also make it easier for multinational corporations to make full use of the potential of the Indian market. Companies such as IKEA, H&M, Gap, Zara and many of Japan’s and Western countries’ car makers will face simpler bureaucratic processes and lower charges when selling their products on the Indian market.
Complications to enact bill still lie ahead
While the unanimous vote of the upper house this week has been celebrated as a huge success, it will be difficult to meet the April 1st deadline for enactment.
The amendment of the constitution requires at least 15 of the 25 Indian states to approve the new piece of legislation, which may take several months. Some experts worry that individual states may not be inclined to approve the bill at all, as under the new unified tax system local governments will lose revenue from taxation for which they will not be compensated over the coming 5-year period.
Further, as the new tax is to be electronic rather than a manually filled, an immense update in the government agencies IT infrastructure will be necessary to run the new system.
Rajeev Dimri, partner at BMR Associates said: “It is not impossible but a lot of agencies will have to work double time to meet the April 1 deadline.
Katharina Fleiner 05/08/2016
The latest US jobs data has just been released, with the non farm payroll figure coming in at 255,000.
This is a steep rise from the 180,000 expected by analysts prior to the release. The USA’s unemployment rate came in at 4.9 percent.
The unexpectedly high figure suggests stronger wages and brings discussion of a Fed rate hike back into play, with a rate increase looking more likely in the not too distant future.
Yesterday’s big news was the announcement by the Bank of England that interest rates would be cut from 0.5 percent to 0.25 percent. But amongst all the financial jargon – what does that mean for you?
Essentially, a rate cut can be good or bad – or both. Lower interest rates mean less to pay back on a loan if you’re a borrower, but less interest accumulated on money in the bank if your’re a saver.
What is the impact on borrowers?
Those affected most will be mortgage holders. According to data from the Office for National Statistics, the Bank of England’s cut will mean an average £22 monthly reduction in the bill for a variable 25-year repayment mortgage on a typically priced home of £211,000, with the average monthly bill being around £779.
However, the rate cut will only affect borrowers who have a bank tracker rate mortgage – a mortgage whereby the interest rate varies in direct relation to that of the Bank of England’s announcement. Unfortunately only one in five mortgage holders have a loan of this type; nearly half of lenders have a fixed-rate mortgage, which will remain unaffected by the rate change.
And for savers?
In simple terms, a bank rate cut is bad news for savers; in fact, the rate cut is designed to create a bad saving environment and encourage the population to spend instead.
Whilst interest rates on savings accounts have been poor for years, they are likely to get steadily worse from now. At the moment, the average interest rate on an easy access savings account is 0.65 percent; this is now likely to drop to 0.4 percent. Many banks have already cut their rates in anticipation, including West Bromwich Building Society and Nationwide.
What about the possibility of negative interest rates?
A negative rate is designed to encourage savers to take their money out of savings accounts and spend it, thus stimulating the economy. Bank of England governor Mark Carney made it clear in his announcement yesterday that negative rates were not something being considered at the moment, but warned that rates may drop to 0 percent in the near future. From there, surely, negative rates are just one small step?
Several European countries already have negative rates, including Switzerland, Denmark and Sweden. If this happens, the chances are banks will adopt negative rates too, meaning that, essentially, the British population will be paying banks to hold their money. Just last week, the Royal Bank of Scotland wrote to its business customers to warn them that it might charge negative interest rates if the Bank Rate should fall below zero, and it is likely that many more would follow suit.
