FX markets

Japan: Sluggish economy in the second quarter

The Japanese economy did little more than stagnate in the second quarter, growing only 0.2 per cent (q-o-q, annualized). This setback does not come as a complete surprise given the surprisingly strong figure in the first quarter, when GDP grew 2.0 per cent (also q-o-q, annualized). Nevertheless, the latest figure fell short of the market’s expectations. All the same, compared to the year-earlier period Japan’s economy climbed back into the black again, with a growth rate of +0.4 per cent (y-o-y) after two quarters in the red. Major reasons contributing to the weak performance in the spring quarter include external influences such as production shutdowns in April in the wake of the earthquake on south island Kyushu, where many companies have automobile and IT production plants, which are export-intensive industries. Exports then also fell steeply in the second quarter (-1.5% q-o-q, simple rate). But inventory depletion (-0.2 % q-o-q) also…

Expansionary central bank policies act as a sedative for the markets

We have seen an increase in economic and political risk factors in recent weeks. While the consequences of the Brexit decision can only be speculated on up to now, the implications of the negative consequences are already evident in the first confidence surveys and purchasing mangers‘ indices. Political uncertainty in countries such as Spain or Portugal, where the formation of the government is a never-ending process, is being suppressed in the face of new major issues. Many investors reacted anxiously to the problems in the Italian banking sector, which prompted speculation about the necessity of another bank bailout by the state. In France and Germany, several terrorist attacks rather than economic issues are fuelling mounting uncertainty. One might have expected that a heightened mix of risks would impact on investor sentiment and that volatility on the markets would remain high. In fact, the situation on the foreign exchange markets has…

China: High industrial sentiment – just a flash in the pan?

The latest survey findings in China were a real surprise this morning: The sentiment figures polled by private service provider Markit for manufacturing made a real leap in July and, starting from the relatively low level of 48.6 points, jumped two full index points to 50.6 points. In other words, for the first time in one and a half years the indicator is now back above the growth threshold of 50 index points, and last saw such a strong surge back in summer 2013. Almost all the sub-components of the purchasing manager index improved on the month, and most of all the sub-indices for production output and new orders. So is everything in fine fettle in China? We did not expect a rise in the indicator, but would not take the current surprising brightening in sentiment to mean that we should opt for a more upbeat assessment of China’s economic…

FOMC – not much concrete information

Short-term economic risks have diminished The Open Market Committee of the Fed left its key interest rates unchanged yesterday evening. The accompanying press statement provided no concrete indications as to the possible timing of the next interest rate adjustment. However, the current economic assessment is significantly more positive than in the previous statement. The Fed states that short-term risks for the US economy have diminished. The evaluation of the situation of the labour market also sounds significantly more positive. Various indicators suggest that capacity utilisation in the labour market has increased. Consumer spending is reported to be robust and economic growth has improved. At the same time, the text passage stating that the Fed is closely monitoring the global situation was left unchanged. This could be understood as an indication that the Brexit consequences for global economic growth and for the US economy are not yet foreseeable and that in…

Negligible growth – negligible interest rates

There is a frequently cited rule of thumb that says government bond yields should roughly correspond to nominal growth domestic product growth. However, this rule does not describe an exact correlation but rather a structural, long-term relationship between the financial markets and the real economy. The yields of government bonds are linked to a country’s economic activity based on various impact channels. In the long term, therefore, yields tend to follow the trend predetermined by potential growth. Potential growth worldwide is in turn shaped by structural changes and has been on a downward trajectory for a number of years. This is due above all to low productivity growth and persistently weak investment. However, the shift in the segments‘ shares in gross domestic product in the developed countries – away from manufacturing to the service sector – has reduced potential growth. Besides these real economic factors, low inflation momentum also plays…

Brexit might be the best thing to happen to the EU

Many must feel like they have woken up to a nightmare, but this nightmare is for real – the British have decided to leave the European Union. Yet Brexit might be the best thing to have happened to the EU in recent years. Brexit could provide the impetus for a better, more modern Europe. With 52 percent voting to leave the EU, the result was very narrow – a decision that no one had seriously expected in the run up to the referendum. This was also reflected on financial markets which were caught completely off guard. In the short term, calm will return to stock markets, but further political and economic developments will prove crucial in determining the long-term direction of financial markets. Now it is up to politics and the economy to restore stability, a mammoth task for those responsible. The referendum has left Great Britain a divided country….

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