This week witnessed the effects of the low oil prices (as OPEC output cut doubts), rising inflation with bond yields and strong US dollar as powerful data on US third quarter of GDP growth for the first time in two years, strong flash october manufacturing activity and pending home sales up in september in US.
Oil futures fell on Monday after Iraq said it should exempted from OPEC output freeze and offered oil fields under new contract terms. Iraq’s decision and geopolitical conflicts in Iraq strongly affected the oil prices this week because Iraq is the second biggest producer in OPEC after Saudi Arabia. Then, the price of oil rose on Tuesday, as markets weigh OPEC supply cut prospects, but it ended week lower as uncertainty about OPEC cuts. Moreover, almost all currencies are most likely to be influenced by strong US dollar and movements in crude oil futures. On the other side, according to the IMF report, the outlook demand growth isn’t encouraging and further slowdowns in emerging and advanced economies can change the demand picture significantly. According to me, China is the key for oil prices future..
German business confidence in October improved to the highest level since 2014. This means a positive sign that Europe’s largest economy has started to become powerful. German inflation hits its highest level since october 2014, as cost of services continued to rise while energy prices fell. Germany manufacturing PMI rose with business confidence..
The UK economy advanced 0.5% on quarter in the three months to September of 2016, beats the market expectations of 0.3 %. Therefore, UK’s GDP grew better than expected from the previous month. UK government bond yields reached the highest since day of Brexit vote after the UK’s GDP growth while oil prices are low this week. However, Brexit concerns and uncertainty still continue and it is important to make sure that growth is sustainable in future for UK.
US flash october manufacturing PMI reached the highest figure since October last year, boosted by stronger output and new business growth. The most important thing is that US economy strengthens as GDP rises by 2,9%. Moreover, the strong growth and positive data mean that Fed’s interest rate hike expectations rise in december. In other words, Fed is so close to increase the interest rates. Consequently, US government bond yields rises with inflation as rise of fed rate hike expectations.
Japan’s flash October manufacturing PMI also beats market expectations after showing its fastest expansion in nine months, on the other hand, Japanese core inflation hits 3 year low. After the core inflation data, it’s easily seen that Bank of Japan (BoJ) will need more time for inflation to reach it’s 2% target…How far is it? – BoJ might reach the expected inflation level in 2020.. The japanese yen is around 105,3 per USD today, the lowest level since late july, as an increase in US bond yields and GDP growth that raised the chances of interest rate hike in December and despite disappointing Japanese inflation data and huge public debt to GDP.
Lastly, if imports exceed exports (which means trade deficit), there may be a problem in terms of competitiveness. As you see in the chart below, China benefits from the current account surplus while US carries large current account deficits. The US trade deficit, for instance, tends to get worse when the economy is growing strongly. On the other hand, China’s september exports also fell 10% form a earlier year. Nowadays, global trade demand has slowed. In other words, current account deficit is a big problem for some major emerging and also advanced countries such as United States, United Kingdom, Brazil, Australia, Canada, Turkey and Mexico.
Datasource: IMF/Ratings: S&P
Credit Default Swap (CDS) 5Y spreads measure the sovereign risk. From the table below, Germany still has the lowest country risk while Venezuela has the highest one.
Today’s CDS spreads(bp):