Week End Blog – With Slow Growth, Oil Scares and Currency Wars

The Euro zone only grew 0.2% in the third quarter, and yet this was a positive surprise. And to make clear just how slow growth has been, that same 0.2% was also higher than the average GDP growth in the last ten years of 0.18%. Technically, we are not in a recession, but it’s not exactly rapid growth either.

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Germany managed to stay away from a new recession with a marginal growth of +0.1%. Italy was, as expected, not as lucky as its economy shrunk with 0.1%. Compared to Q3 in 2013 Italy’s economy is 0.4% smaller. Greece’s economy, on the other hand, is doing very well with YoY growth of 1.7%. But this becomes less impressive if take the recession years into account in which GDP shrunk up to 9%.

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The slow growth era the Euro zone seems to have entered is also reflected in the bond market. The German 10-year bund yield fell back to below 0.80%.

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But oil prices were the real falling knives this week. The deafening silence of Saudi Arabia was finally interrupted, but that did not make things better. Some superficial quotes that the country will not change its long-term policy made a lot of anxious people think that OPEC will not reduce output at this month’s meeting. The jury is still out, but the damage has been done as crude oil continues its longest run of weekly declines since 1986.

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And that is, of course, no good news for Russia. This week Russia’s central bank announced that it reduced its GDP growth forecast for 2015 to exactly 0%. To keep in mind, this forecast includes an average price of oil of $95. That seems like a pretty bold assumption given where prices are heading lately.

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Let’s move to Russia’s new ‘best friend forever’, China. Industrial production and retail sales numbers again confirmed that the economy is slowing. Concerns about overly optimistic government growth targets are increasing.

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That’s seems to be irrelevant for the Chinese stock market, well at least for now. China’s domestic equity markets are opening up to foreign investors, and this has led to a steady outperformance of late.

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But from a longer-term perspective Chinese equity returns still look pretty sad. Just take a look at the performance of the other billion people stock market, India. Where investors in China made a return of just 64% since 2002, investors in Indian stocks realized 700% of return over the same period.

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Currency wars are back! With the Fed being the only major central bank that dares to think of higher interest rates (the UK has lowered its growth and CPI forecast so an imminent rate hike is out of the question) the dollar value is consistently driven higher. We are not done yet but 2014 is already becoming a year of massive US dollar appreciation.

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The Bank of Japan, meanwhile, has opted for QE until infinity. As a result the yen is going down, and it is going down hard. During the last three years the yen has lost more than 30% of its value.

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Ah, and then there is the Swiss referendum on gold. Should the Swiss vote ‘yes’ the SNB will have to buy a total amount of $60 billion in gold to reach the reserve target level of 20%. It would make Switzerland the country with the third largest gold reserves by 2019, if everything else stays equal of course. Another important implication of a ‘yes’ is that in order to reach the 20% weight of gold in the SNB reserves it will have to sell euro’s. In this case it is highly unlikely that the SNB can maintain its peg against the euro of 1.20.

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I will conclude this Week End Blog with a link to my short article on seasonality. Historically, the November to April time span represents the best six month period for equities. This is the traditional Halloween or Sell in May effect. But equities are not the only asset class characterized by a seasonal return pattern. To find out more about seasonality in financial markets please click here.

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Thanks for reading. Enjoy your weekend!

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