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Week in Review: 21-25 August 2023

Summary


This week, the spotlight was the FED chair speech at the Jackson Hole symposium. No news...they are data dependent and we'll have to wait. The speech was neutral, in my opinion.

 

In the US, new orders for manufactured durable goods plummeted by 5.2% in July 2023, the sharpest decrease since the aftermath of the COVID-19 outbreak in April 2020, driven by a significant drop in demand for transport equipment.

 

The BRICS (Brazil, Russia, India, China and South Africa) meeting in South Africa was also in the agenda for the week. The summit was held in Johannesburg, Aug 22-24 2023. Vladimir Putin attended the meeting virtually. Xi skipped the event, despite the presence of counterparts Cyril Ramaphosa of South Africa, Brazilian President Luiz Inacio Lula da Silva and India's Prime Minister Narendra Modi. Xi's remarks were delivered by Chinese Commerce Minister Wang Wentao, and it was not clear why Xi, who had a meeting with host Ramaphosa earlier in the day, did not attend.

Comments from Brazil's Lula pointed to a divergence of vision within the bloc, which political analysts say has long struggled to form a coherent view of its role in the global order. "We do not want to be a counterpoint to the G7, G20 or the United States," Brazil's Lula said on Tuesday during a social media broadcast from Johannesburg. "We just want to organize ourselves."

Beyond the enlargement question, boosting the use of member states' local currencies in trade and financial transactions to lessen dependency of the U.S. dollar is also on the summit agenda. "The objective, irreversible process of de-dollarization of our economic ties is gaining momentum," Russia's Putin said in a pre-recorded statement.

South African organizers say there will be no discussions however of a common BRICS currency, an idea floated by Brazil as an alternative to dollar-dependence.

Six countries are set to join the group in 2024: Iran, Saudi Arabia, the United Arab Emirates, Argentina, Egypt and Ethiopia. The move, which will more than double the size of the bloc, will likely throw more scrutiny on Beijing's political influence in the Persian Gulf.

Recently, questions have been raised about whether BRICS is taking an anti-West turn under the influence of China and Russia, amid Beijing's deteriorating relationship with the United States and Russia's standoff with the West over the war in Ukraine.


Now, a brief word about the post-COVID recovery projects ongoing in Europe.

To support the EU member states in recovering from the COVID-19  pandemic, the EU has launched an unparalleled stimulus package.  Adopted on 14 December 2020, the European Union Recovery Instrument (“NextGenerationEU”) is worth a total of 750 billion euros. For the  countries that have been hit particularly hard, the instrument is an  important pillar to recover from the economic crises initiated by the COVID-19 pandemic and intensified by the energy crisis after the Russian invasion of Ukraine. Many of the experts from countries that are beneficiaries of NextGenerationEU express substantial concerns about the implementation of the package. For instance, experts from Italy and  Portugal mentioned that they are concerned about “delays on critical attenuation plans (especially PNRR [the Italian National Recovery and Resilience Plan])” and that “it’s becoming clearer the PNRR funds are not being disbursed which is worrisome”. Those quotes exemplify the importance of the NextGenerationEU funds for targeted regions, especially regarding the intended (structural) transformation of local economies. Experts in Southern Europe seem to be worried about “mismanagement” and bad implementation of the EU funds: “Without the projects envisioned by the PNRR, Italy is deviating from the path to the transformation needed to face the challenges of the future. For instance, digitalizing the public administration system or improving non-university post-secondary vocational/technical training.” Under the Partnership Agreement, concluded between the European Commission and Portugal, €23 billion will be made available to support the economic, social and territorial cohesion in Portugal until the end of the decade. These funds will help develop a more diversified, innovative and competitive economy, with a strong focus on the green and digital transition of the country, in line with key EU priorities. The funds should also promote balanced territorial development between different regions and between rural and urban areas, notably to ensure a better access to essential services. Let's see whether these funds are going to improve the weaker economies and make them more competitive in the upcoming years or not.

 

Regarding the financial markets, for the week, the main stock market indices are up, with the NASDAQ 100 gaining 1.7%, the S&P500 up 0.8%, and the RUSSEL 2000 down 0.3%. Gold gained 1.4%, and silver 6.5%. The barrel of WTI dropped 1.7% and seems like it's going to continue around the 80-81$/bbl in the near future. Bitcoin was unchanged and is still around ~26000 USD.

The relative strength of the US dollar rised 0.7%, and bond yields decreased on the long end (4.24% for the 10-year and 4.29% for the 30-year US bonds). The US bond yield curve is peaking at 5.59% in 6 months from now. 

 

Sources:

https://tradingeconomics.com

https://www.reuters.com/world/brics-leaders-meet-south-africa-bloc-weighs-expansion-2023-08-22/ 

https://www.cbsnews.com/news/brics-summit-four-biggest-moments-why-they-matter/

Economic Experts Survey, Q2 2023, Evaluating Global Economic Policy Worldwide; ifo Institute, Center for Public Finance and Political Economy. (https://www.ifo.de/DocDL/EES_Report_Wave_Q2_2023.pdf)

https://ec.europa.eu/european-social-fund-plus/en/news/eu23-billion-economic-and-social-development-portugal-2021-2027


Comment


There are signs of manufacturing slowing down, and ocean shipping is also in a bit of a crisis. The trucking company Yellow, in the US, went under. The real estate market in China is an impending crisis. Germany is in a recession and Europe is not booming. Well, these the macroeconomic factors together with central banks pushing interest rates higher and banks raising lending standards doesn't leave margin for a fundamentally strong economy. Does this mean the end of the world is coming? No, maybe just a recession!

Next year there are elections in the US, and we would be lead to think that nobody wants to irritate the electorate and cause economic pain in an election year. However, this is precisely what happened in the presidential election of 2008 - Barack Obama was elected to help solve the financial crisis. History doesn't repeat, but it rhymes. Until November 2024, the crisis and the recession have enough time to develop and the candidates will be shouting at the current administration and trying to gather votes. Let's see if this prediction is accurate...

Regarding liquidity and the markets, it is our opinion that a general pullback (~10%) in the US stock market is still due for the near term. Later in the year, fundamental factors will determine the direction of the markets.

 

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