Gone with the wind


Walking into work recently, past a tall building, I was almost blown off my feet by a sudden gust of wind. Apparently accelerated winds near skyscrapers is caused by the ‘downdraught effect’. This is where air hits a building and with nowhere else to go is pushed up and down and around the sides. The air forced downwards increases wind speed at street level.

Which got us thinking, ‘it’s an ill wind that blows no good’. All the recent market focus has been on Greece and China. However, the US interest rate cycle remains a risk to markets but particularly emerging markets given the strength of the US Dollar. Dollar debt of emerging economies is estimated to have trebled over the last decade. Those emerging economies which produce oil could be particularly vulnerable given the potential Iranian oil production t come on stream. Let’s hope too many of these don’t feel the ‘downdraught effect’ from higher US interest rates as they could be ‘gone with the wind’.

The film ‘Gone with the Wind’ is set during the American Civil War and features the burning of Atlanta by Major General Sherman. His name is still vilified in parts of the southern states of America even today. To future generations of Greeks, could Wolfgang Schauble, go down in history as the man who burned Athens?

What have we been watching?

UK and US interest rate guidance, China, oil and the Greek parliamentary vote as well as details of the 17 hours of talks between Greece and its creditors from the previous weekend.

Just how heated things became during these talks is revealed by the comment from Wolfgang Schauble, the German finance minister, who reportedly fumed at Mario Draghi that he was ‘not an idiot’. One Eurozone official went onto say that ‘they crucified Tsipras in there’. ‘Crucified’.

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Greek PM Tsipras returned to Athens facing rebellion over the latest €86bn EU bail out with the far left calling it a ‘humiliation of Greece’ and the far right ‘a coup by Germany’. Despite resignations and votes against from his own party Tsipras gathered enough support to pass the vote to accept the bail out proposals, paving the way for the release of more funds.

In the meantime Euro finance ministers have agreed to provide Greece with a €7bn bridging facility from the EFSM emergency fund to avoid defaulting on a bond owed to the ECB today. The ECB has also increased short- term funding to Greek banks by €900m which takes its total Greek exposure up to €130bn. At a press conference ECB president Mario Draghi said that debt relief for Greece was necessary. The IMF waded into the argument saying it might not back the bail-out plan. The IMF is still pressing for debt relief measures by the EU and suggesting Greek government debt is likely to peak close to 200% of GDP over the next two years which it considers unsustainably high.

Greek banks have re-opened for business this morning with a new weekly withdraw limit of €420. However, we feel that given the amount of damage wrought on the Greek economy in the last few weeks, that economic forecasts are unrealistically optimistic which, together the punitive bailout terms suggest we have not seen the end of the long running ‘Grexit’ saga. Attention will no doubt turn to debt relief and how a reduction in the face value of Greek debt, a ‘haircut’ could be avoided. Suggestions so far include ‘net present value’ relief where the future burden of payments on debt could be cut or the future date at which debt is payed back is deferred.

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In the UK, BoE governor Mark Carney started to prepare the market and consumers, giving a clear steer on UK interest rates by suggesting that the decision would come into sharper relief around the turn of the year. UK inflation slipped back to zero in June, as expected and does not suggest any great urgency for policy tightening. However, the BoE will be watching the employment data which showed wages increased by 2.8%, the highest rate of growth since early 2009.

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In the USA, after a run of strong data, June retail sales dipped slightly. Yet, more to ponder over for the US Fed on the timing of the first interest rate hike. Fed Chair Yellen was very careful not to alarm investors about the US monetary policy outlook confirming that it was on course to raise interest rates this year but that prospects for the US economy were favourable.

Gold
Gold dropped to a five year low on the prospect of higher US interest rates and Chinese selling to meet margin calls.

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In Japan, the BoJ trimmed its economic growth forecast to 1.7% but refrained from taking additional stimulus measures.

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In China, signs of economic slowdown were revealed by a profit warning from Brilliance China Automotive, BMW’s Chinese business partner. This revealed that sales of BMW’s dropped by 4% in May, the first decline in China for a decade. Luxury goods retailer Burberry also noted a further deceleration in sales growth in Hong Kong. However, official figures revealed that the Chinese economy grew by 7% in Q2 although it is questionable how reliable this data is. Given signs of slowdown and stock market volatility further stimulus measures are expected. Interestingly, despite action by the authorities to reduce its debt, China’s debt to GDP ratio has continued to rise to a record 207%.

Oil Drum
Diplomats reached a deal at talks in Vienna on limiting Iran’s nuclear programme in return for sanctions relief. Iran has made no secret of its desire to materially increase oil exports should sanctions be lifted. Brent oil slipped back below $57.

As ever, there are many moving parts globally and countries are in different economic phases with the US and UK considering moving towards interest rate increases while the ECB continues with QE and this is being reflected in the currency market. Sterling climbed to its highest level against the euro since 2007. This is good if you are going on holiday to Europe but not good if you are a UK exporter. At least the benign outlook for oil prices should remain supportive of many consumer facing economies although some oil producing emerging countries face the nightmare of a low oil price and strong US Dollar. For many of our companies, this remains a challenging but not impossible trading environment. In a period of uncertainty, we continue to take encouragement from company dividend policies which must reflect management confidence in the longer term outlook for their businesses.

Finally, just as the Greeks think things could not get any worse. Foreign Secretary Philp Hammond has said that foreign diplomats in London have amassed almost £85m in unpaid congestion charges of which Greece alone, owes £1.3m. Anyone want to calculate the odds of getting this money from them?

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