In a depressing message for a Monday morning, the Brookings Institute reported that “global growth is sliding back into the morass.” In a publication ahead of this week’s annual meetings by the International Monetary Fund and World Bank, the American think tank warned that many countries have become caught in a “vicious circle” of low growth, popular discontent and a backlash against globalization.
The IMF is expected to say that the global economy is growing at a 3% rate, and will encourage policymakers to pursue inclusive and faster growth. Meanwhile, three issues dominated international markets last week: U.S. politics, the supply of oil and European banking.
The first U.S. presidential debate at Hofstra University in New York on Monday was widely judged to be a victory for the Democratic nominee Hillary Clinton over the Republican nominee Donald Trump. Edward Luce's Global Insight column in the Financial Times concluded, "Republican nominee sets himself a low bar and fails to clear it."
At an unofficial meeting in Algeria on Wednesday, OPEC ministers surprised markets by unveiling a tentative agreement to cut oil production for the first time in eight years. The oil price jumped 6% on the announcement, but markets were extremely volatile, with considerable skepticism about the agreement's longer-term impact. Analysts noted that the proposed cuts are relatively small, and that OPEC countries might have second thoughts about losing market share ahead of a final agreement at the official meeting Nov. 30.
Concern about the European banking sector follows the U.S. Department of Justice's US$14 billion fine against Deutsche Bank for misselling mortgage-backed securities. Worries are growing that business is being pulled from the bank, which is Germany's biggest lender.
This anxiety has added to investor concern about Europe, with sentiment already weakened by the U.K.'s decision to exit the European Union, more extremist public sentiment and a swathe of troubling financial developments, not least from Italy. Financial intelligence organization EPFR Global reported that redemptions from European equity funds amounted to US$1.9 billion in the week to Sept. 28. This is the 34th consecutive week of outflows and brings the exodus since mid-February to US$95 billion.
Meanwhile, global dealmaking shrunk to its lowest level in three years. This is the result of a record level of withdrawn bids — US$692 billion so far this year, a sharp drop in U.S. activity — down 31% at some US$1.0 trillion, and a 20-year low for British involvement in takeover deals — just 8% of global deals. Data from Thomson Reuters shows that merger and acquisition activity reached only US$2.37 trillion in the first nine months, a 22% fall compared with the record-breaking activity for the equivalent period last year.
Reflecting this shrinking activity, the value of IPOs has fallen almost one-third to US$82.5 billion in the year-to-date, compared with US$123 billion globally in the first nine months of 2015.
On the brighter side, a report by Barclays suggested three reasons for “a generally sturdy commodity sector” during the final three months of the year. First, Barclays' analysts cited a supportive macro environment, with Asian economic growth set to improve and an expectation that governments will use more fiscal expenditure — in the form of infrastructure projects — to boost growth. Second, the report concluded that supply-demand fundamentals are improving. Third, there is, according to Barclays, an increasingly bullish sentiment amongst commodity investors.
It was a mixed week for metals, with strong performances from zinc and aluminum, up 4.0% and 2.0%, respectively, but falls for gold — down 1.2% — and iron ore — 62% Fe was 2.3% weaker. Copper and nickel were little changed. Thermal coal broke above US$70/t — 6,000kcal/kg, FOB Richards Bay — for the first time since August 2014, and closed the week 8.2% higher at US$74.50/t.