The week that was:
Markets were highly volatile. The Nasdaq has lost 9.4 percent on the month amid volatility and is up around 55 percent on the year. That volatility reflects widespread skepticism about future economic activity, which depends greatly on the course of the novel coronavirus (COVID-19). In the US, the total number of COVID-19 cases since the start of the pandemic surpassed 7 million infections and 200,000 deaths.
A Bloomberg survey of economists predicts Saudi Arabia’s economy will contract by 4.8 percent this year and grow by 3.2 percent next year. The UAE’s economy is projected to contract by 5.1 percent. All GCC economies are suffering from lower oil prices, which have dropped almost 40 percent since January 7. The UAE has also been affected by the downturn in international air travel. In August around 1 million passengers passed through Dubai airport, compared to more than 8 million in August 2019.
Even if oil prices recover to the mid-$60/b by the second half of 2021 — which Goldman Sachs optimistically forecasts but which is far from certain — the damage in terms of higher government debt-to-GDP ratios will effect all GCC economies.
Libya is getting closer to resuming oil exports, which could initially reach 260,000 bpd. The impact that will have on oil prices depends on several factors: on the supply side, the compliance of OPEC+ countries with the agreed 7.7 million bpd of production through the end of 2020 is important, and the compensation cuts for countries overproducing in the second quarter of this year become all the more crucial. The demand side will depend on economic recovery and the resumption of air and road travel. Europe provides a good example of the demand-side challenges, with COVID-19 cases on the increase and energy consumption still lagging. The slight global-demand overhang for crude pales against the inventories which had been building since March.
The FTSE Russell Index announced that it will include China in its World Government Bond Index, which may result in inflows of up to $140 billion. The yield differential between the Chinese 10-year government bond at 3.077 percent and the 10-year Treasury at 0.67 percent speaks volumes and will have ramifications for exchange rates. The dollar gained in September after five consecutive months of losses. We can expect the Yuan to appreciate when investments flow into Chinese government bonds.
Focus:
Chair of the Federal Reserve Jerome Powell painted a muted picture in his testimony before the US Congress. He reiterated that rates would remain at near-zero levels through 2023 and that the long-term inflation outlook remained at 2 percent, but said the Fed was willing to let it temporarily overshoot in order to achieve its long-term goal. He stressed that employment was the key metric and voiced concerns over unemployment levels.
First-time jobless claims for the week ending September 19 came in at 870,000 — 4,000 more than the preceding week.
Powell admitted the need to redesign the Main Street Lending Program and the Cares Act because not all allocated funds were taken up. He gave a stern warning that the economy would suffer without further fiscal stimulus.
Speaker of the House of Representatives Nancy Pelosi and Secretary of the Treasury Steven Mnuchin heeded Powell’s call and agreed to reengage in negotiations over a stimulus package. The Democrats and Republicans remain far apart on figures, however, with the former requesting $2.4 billion and Republicans proposing $1.5 billion. Support for municipalities is one of the main bones of contention.
Many Republicans have expressed concerns about helping to sustain jobs that will likely no longer exist after the economy has recovered from the pandemic. While there is some validity to the “zombie” company/job argument, mass unemployment without benefits will result in further economic downturn and hardship as workers are forced to spend their savings, since the US economy is heavily dependent on consumption.
In the UK, Chancellor of the Exchequer Rishi Sunak replaced the government’s comprehensive furlough program with a narrower scheme to subsidize wages. Blanket measures, while necessary at the height of lockdown, are no longer affordable. Under the new rules, employees must work at least one-third of their contracted hours to qualify. The new support system accounts for about 25 percent of the furlough program and reduces applicable jobs from 80 percent to roughly 20 percent. Sunak also explained that the pandemic was dragging on longer than anticipated, which would have ramifications for which jobs would survive the downturn.
The argument about sustaining “zombie jobs” has also reared its head in the UK. The labor market will undoubtedly see changes when the economy eventually recovers from the pandemic, and government finances have their limits. However, Goldman Sachs warned that it expects unemployment in the UK to double to 9 percent as 2.2 million employees will transition from being furloughed to being unemployed under the new rules, while 1.3 million workers will continue to be supported.
Where we go from here:
US President Donald Trump has yet to approve the TikTok deal with Oracle and Walmart, with the two companies set on obtaining a 20-percent share of the newly formed TikTok Global, which will serve the US market. A sticking point is who will own the remaining 80 percent — TikTok’s Chinese owner ByteDance or ByteDance shareholders. The latter would push US ownership to over 50 percent. ByteDance argues that TikTok Global would be its subsidiary, which does not suit Trump. The Chinese government has lambasted the US administration’s handling of the deal.
If there is no agreement by the weekend, TikTok should, theoretically, no longer be available for download from US app stores. The Trump administration is expected to make its case in court hearings over the weekend.
Meanwhile, European companies are reportedly preparing for the prospect of a no-deal Brexit by stocking their warehouses, and JPMorgan Chase has moved $230 billion from London to Frankfurt.
— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources
