Markets were dominated by weak data from the US which showed the world’s biggest economy contracted in Q1 2014 to a greater extent than expected, mainly due to adverse weather conditions. Speculations around the timing of an interest rate rise continued, with central banks reducing their debt exposure, and planned wage increases on the rise.
Considering the lag between the decision and the effective dates of pay rise in the US, this is likely to take effect in 2015, and put pressure on inflation.
Elsewhere, South Africa also contracted, hit by a five-month miners’ strike that finally came to an end. The Bank of England strives to tackle to housing market bubble without hampering the nascent recovery, while Barclays’ fine revived the banking sector woes.
In Europe, concerns over the strength of the recovery were led by France’s slowdown.
UK: BoE acts to prevent future credit boom
The Bank of England announced this week that it was placing limits on mortgage borrowing in order to prevent the recovery being derailed by a credit boom.
For the moment the measures will have little impact as no bank currently exceeds the new lending restrictions. It is however important as it shows the Bank of England is willing to take action to prevent overheating.
London is the area most likely to be impacted; prices have already risen 20% in the last year, although rises of up to another 20% over the next three years are expected by the Bank. Interestingly the new restrictions do not apply to buy to let, which is possibly bad news for generation rent.
Source: FE Analytics and Bloomberg
The banking sector was in the news again this week with news that Barclays is being sued for misleading institutional investors regarding its dark pool.
Although this will likely end in a settlement the concerning thing is that this appears to have been going on under current chief executive Anthony Jenkins who is supposed to be cleaning up the bank.
US: GDP revised down for Q1
The US economy contracted at a 2.9% annual rate for the first quarter of 2014, according to a third and final estimate from the Commerce department.
It is more severe than the second estimate of 1% contraction and the worst quarter for the US since the collapse of Lehman Brothers in 2008. Analysts estimated a revision of -1.9%.
About two thirds of the final revision is due to spending on healthcare which officials had overestimated in earlier estimates because of the introduction of Obama’s new insurance programmes.
Source: FE Analytics and Bloomberg
The contraction of the US economy in the first quarter is largely due to the extreme weather as Americans were prohibited from shopping. Economists believe there was no fundamental deterioration.
Despite the dip in Q1 GDP, the recovery is expected to continue to gain momentum in the coming quarters. However, the fact that temporary weather effects can have such impact on the economy points to the underlying weakness of the recovery.
South Africa: Miners strike over but pressures remain
The platinum miners’ strike in South Africa came to an end on the 24th of June. The longest and costliest strike in the country’s history so far has mobilised 70,000 workers from Anglo American Platinum, Impala Platinum and Lonmin.
The three-year agreement reached will see low-paid workers earn ZAR 1,000 more a month, far from the doubling of the minimum wage of ZAR 12,500 the union asked for.
Source: FE Analytics and Bloomberg
The rise in the share price of the three mining companies on the announcement was only short lived. Indeed, higher production costs means less economically viable mines may have to be closed, and jobs will be lost.
The price of platinum has not greatly risen over the last five months as investors factored the strike into the metal price. But the disruption has lasted longer than expected and reserves have depleted. This is likely to put pressure on the price in the near future.
