It never rains but it pours

My Fair Lady
In the musical ‘My Fair Lady’, Professor Higgins (Rex Harrison) drills Eliza Doolittle (Audrey Hepburn) with speech exercises such as ‘The rain in Spain, stays mainly in the plain’ to help drop her ‘mockney’ accent.

Which got us thinking perhaps it should be the rain in Spain, stays mainly in the ‘plane’. Spain is facing a general election before the end of the current year. Taking its lead from Greece, the ruling party appears to have held off on structural reform given how unpopular this is at a time when unemployment levels remain high. Indeed, Spain has largest deficit of any Eurozone country. The Spanish property ‘boom and bust’ is well known, the folly of which can be reflected by Ciudad Real airport which no doubt sees some rainfall, but sadly has neither planes or passengers. This opened in 2008 having cost €1bn and featured in Top Gear’s 20th season. However, the airport ceased operation in April 2012 and was abandoned during the Spanish property crash. During a recent auction, a consortium of Chinese investors expressed an interest in the airport but their bid was only €10,000!

While the ECB has been selectively buying bonds artificially driving down bond yields, European fixed interest investors could become more nervous should more radical anti-austerity parties gain greater power in countries like Spain. We have already seen what can happen in Greece! Let’s hope we don’t hear the phrase ‘contagion’ again. Beyond this, France has a general election in spring 2017 and the far-right has been gaining influence. Let’s face it, no one is a fan of austerity measures but debt levels have got to be reduced. Debt levels across the Eurozone stood at 93% GDP at the end of March, a record high and testament to how little has actually been achieved.

Italy has recently embarked on a €12bn privatisation programme to reduce debt. However, Italy is demanding more budgetary leeway from Brussels to accommodate tax cuts over the next three years, setting the scene for a challenge between Italy and the EU over fiscal policy. What with fighting still ongoing in Eastern Ukraine, then Europe still faces many bumps in the road to recovery and it is just not Greek voters who could say ‘No!’ Which reminds us of the expression ‘It never rains but it pours’.

What have we been watching?

Globally, shares had their worst week so far in 2015 last week. Whilst volumes were thin, vs second quarter, earnings proved mixed with Apple disappointing. The rout in commodity markets also undermined confidence and unsurprisingly saw widespread weakness from commodity companies. Numerous commodities hit multi year lows, with the copper at a six year low an oil falling back into a bear market for the second time in 2015.

Greece Flag
Having implemented new VAT rates as part of the latest bail-out conditions, Greece held back on imposing higher taxes on farmers highlighting the challenges faced by PM Tsipras. Creditors expect Greece to have passed all the laws required by August 7th in order to disburse funds by August 17th. While much still needs to be done, the progress made so far to avoid default has helped European equity markets recover to levels last seen in April.

China Flag
Someone described the Chinese authorities’ actions to stabilise the equity market as ‘ham- fisted but effective’. The Shanghai Composite Index, which had lost about one-third of its value since early July, has since rallied by about 15%. However, we sense that the situation is likely to remain volatile and issues are being suppressed rather than being resolved. The problem for the Chinese authorities now, is how to remove the ‘unconditional measures’ without further de-stabilising the market. Furthermore, given many shares are suspended, how will foreign investors react once trading re-commences? This is because the episode is a clear signal that the Chinese Government can intervene in the market anytime it wants and is similar to foreign exchange intervention. Last week’s sell-off in gold was triggered by sizeable Chinese selling, possibly linked to margin calls.

Oil Drum
Despite lower Saudi oil exports, the UN Security Council’s unanimous endorsement of the Iran nuclear deal and continued weakness of commodities in general from the stronger US Dollar, led the US oil price to dip below $50 at one point. The lowest level for three months. Brent closed below $57.

The decline in commodity prices and a slowdown in global trade has hit many emerging markets hard. Recessions in Russia and Brazil, along with slowdowns in South Korea, Mexico and Chile, amongst others, has led to a sharp rise in unemployment this year which, in turn threatens to drag consumer spending lower in these countries. Emerging markets have been a ‘sea of red’ so far this year and the US hasn’t even started to raise interest rates yet! Expect the stronger US Dollar and weaker commodity prices to continue to create significant headwinds for many emerging markets.

Finally, perhaps we should all focus on enjoying the summer holidays, for Autumn will soon be upon us, the evenings start to draw in and the US and/or UK possibly confirms the first interest rate hike.

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