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Macro-economic insights

Weekly update: week 31


Boris (Alexander) Johson, has manifested himself as a hard-line brexiteer. Where before his election there was still doubt that he might make a big switch between his rhetoric and actual policy, today it seems clear that he is on collision course with Brussels. Scotland and North Ireland have both expressed their dislike with this strategy and Europe seems unlikely to even consider a renegotiation. As a consequence, the GBP has crashed with some analyst stating that the Euro-GBP exchange rate could flip, making £1<€1. On the upside for the UK (if to remain a United Kingdom) a weak pound could boost the export and British listed companies with activities abroad see the incoming profits in foreign currencies rising due to the devaluation. In contrast to the face lift some parameters get due to a weak pound, the underlying economic fundamentals are strongly challenged. Leaving the European single market has a huge impact and a no deal scenario is very undesirable according to the Bank of England. In Belgium it is estimated 42.000 jobs would be lost due to a brexit.

The ECB has confirmed last Thursday that they will do everything in their power to fulfil their mandate. Mr. Draghi has confirmed that in September the rate (currently -0.4%) can go lower. The deterioration of the expected inflation in light of the economic slowdown and uncertain economic climate have pushed the ECB to this position. In contrast to the Fed, the ECB has not been able to raise the interest rates since the previous crisis making it unclear how effective its policy will be.
The lower rates are not desirable for banks who, although have healthier balance sheets, fail to make decent profits with lower spreads on credit. Some argue that the minimum rate on savings which is applicable in som

Bond markets have responded quite strong to the news, even though the exact decision is only for September, with government bonds trading at very low/negative yields.     
The effective return on all Swiss state loans with a term of 50 years was negative on Thursday. Here with all yields, from 3 months up to 50 years, had a negative interest rate.

In other news, the ECB has decided last Friday that the European Central banks will no longer coordinate the sale of gold in between all European Banks. This was an agreement made in 1999 to limit gold sales.

The ECB has announced that they are happy to have Christine Lagarde as the successor of Mario Draghi. In light of the treaty on the functioning of the European union the 25 directors of the ECB have to give their opinion on the potential candidate

The Fed has announced its first rate reduction in 10 years. They will lower the interest rate from 2,25% to 2,00%. According to Powell this is single mid cycle correction. Some analysts believe that there might be 2 or 3 cuts needed and Mr. Trump thinks 25 bp is insufficient. The strong dollar, the economical uncertain climate (China + EU) and the trade war make it necessary to for a slight reverse of the monetary tightening. The ‘overvalutation’ of the dollar is seen as a problem by some.

The Belgian economy continues to cool down. In the second quarter of 2019, growth amounted to 0.2% which is 10 bp as anticipated. The inflation forecast of 1.6 % is below the 2% goal of the ECB. The NBB still maintains its overall growth for 2019 on 1.2%. The problem is not with consumption but with the corporate investments. Like in many European countries and developed economies, due to economic uncertainty investments are postponed. In addition, the rise in demand due to enlargement of the stock in function of the Brexit in the first quarter of 2019 has faded away. Companies are stalling their investment as they are questioning how to commit capital in function of their supply chain.

German banks perform terrible. When comparing the index of the German stock with the index of the German bank shares, the course has deviated significantly. In 2019, taking 1988 as index year, the difference was a tenfold with the index of German bank shares noting roughly par compared to 1988 and the index of German shares roughly 1.100.

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Research Archive

29 September 2019 Research Week 39
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22 September 2019 Research Week 38
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15 September 2019 Research week 37
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8 September 2019 Research week 36
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1 September 2019 Research week 35
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25 August 2019 Research Week 34
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18 August 2019 Research Week 33
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11 August 2019 Research Week 32
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30 July 2019 Research Week 31
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30 July 2019 Research Week 29
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