› News for December 25.

News for December 25.

Oil prices kept plunging last week, concerning the market players. Analysts diverged in their opinions about the forecasts for oil price in 2019-2020. Some of them continued optimistic predictions, calling the price level of $70 per barrel an average price level for the upcoming year. There are some whispers from Saudi Arabia that the kingdom is going to reinforce negotiations for the oil production cut, signalling a tighter supply market in the first half of 2019. However, there was uncertainty between OPEC members as countries exporting oil failed to arrange a sustainable and clear decision to implement supply limitations. Some of the OPEC members, like Iraq and Nigeria, refused to lower the output, bringing more uncertainty to the supply market. Meantime, one of the three oil giants, the Russian Federation, did not add any optimism to oil speculators as the discussions around the supply concerns kept hovering across the unclear situation. It does not seem that Russian producers have a solid position to lower oil production in the nearest future. At the same time, North American shale production brakes records, surging several months in a row. The U.S. corporations are not intended to cut the output, insisting on their investments in shale fields must keep working. The export and daily production kept rising in the United States, beating average experts’ forecasts several times this year. WTI Crude was trading around the level of $45 per barrel, the first time in 10 months, erasing almost all of the previous gains this year. Further weakness is seen for the black gold price.

Financial conditions in the United States are concerning the former Federal Reserve Chairwoman Janette Yellen. She is worried about the corporate debt situation in the U.S., underlying that exactly the same issue caused the latest financial crisis in 2008. Yellen stated that even if the Fed would continue hiking the interest rates next year, the level of the monetary policy would still remain at comparatively low levels, while there always be a certain number of investors seeking for high yields and holding corporate debt securities. Even though such investors would consider this type of securities as relatively safe, there is always a risk of overloading the borrowing financial system, creating the same pressure as it happened in 2018 when the financial bubble burst to create the global recession. The other concern is related to the absence of any instruments in hands of the Federal Open Market Committee to prevent such a scenario. Fed’s Chairman Powell announced an additional tightening of the monetary policy conditions in 2019 last week after FOMC hiked the interest rates the fourth time this year. Moreover, the regulator promised to keep clearing the balance sheet, unwinding unnecessary assets from the government structure. However, those measures would not be enough in case of a huge negative economic shock, according to Yellen.

 Japanese government
Source: The Japan Times

The Japanese government had also decreased its forecast for the economic growth in 2019. The country’s economic outlook has been lowered after recent data released. It’s widely expected that the real sector would slow down the expansion to 1.3% growth next year, while previous predictions (in June 2018) were focused on more optimistic figures of 1.5% GDP growth, according to informed sources. Although the official information will be published only next week, those rumours already started to affect equities and currency markets. The Bank of Japan also renewed its economic forecast last week after leaving the interest rates unchanged at ultra-low levels. BoJ officials stated that the current pace of the economic growth would even worsen in the 2019 financial year, sliding to 1% of the real GDP. Key factors, influencing the economic slowdown, are trade tensions between the United States and China, as well as a global economic forecast which has been cut by the International Monetary Fund last week. Consumer prices excluding fresh food costs were rising by 0.9% in November - that’s the key component of the inflation closely monitored by the Bank of Japan. October’s figures were slightly better with 1% inflation noticed, which indicates to continuously declining inflation in the country. Therefore, yearly base inflation lowered its pressure in Japan, which points to further soft monetary policy by the regulator in the long-term perspective, according to the market expectations. Bank of Japan used to predict that the base inflation would have accelerated to 2% this year, but that was not confirmed by the macroeconomic reports. Meantime, consumer prices excluding food and energy grew for 0.3% after increasing by 0.4% in October. It’s also worth reminding that Japanese economy lost 0.6% of its quarterly volume in the third quarter of 2018, according to the latest final revision of the report. Year-on-year losses exceeded the level of 2.5% which is one of the worst results in recent years.

Some good news came from the European Union as Brussels and Rome reached an agreement regarding the Italian budget in 2019. The EU officials cancelled sanctionary measures related to the budget deficit exceeding average limitations for European countries. An official letter to Italian Premier Minister Giuseppe Conte says that Euro commission took in the account the latest changes in fiscal measures by his government which, ‘in case if they will be implemented by the Parliament by the end of the year, that will allow Brussels to refuse recommendations for the sanctionary procedure launch’. “Let’s be honest, the decision is not perfect. But it allows avoiding the procedure of excessive deficit. This decision corrects the serious mismatch of the Italian budget deficit to the Pact of Stability and Development in the European Union at this stage”, - European commissionaire for Euro affairs and social dialogue Valdis Dombrovskis said. The preliminary reading of the Italian budget, presented by the current government, was taking into the account the budget deficit at the level of 2.4% of the GDP instead of 1.8% recommended by Brussels. Both sides have agreed on 2.04% as the result of negotiations. The Italian government also agreed to lower the GDP forecast from 1.5% growth to a more realistic figure of 1.0%. Expense items, related to the implementation of basic income for unemployed and the poorest population stratum, have been also lowered. At the same time, the government did not completely cancel those reforms including new retirement age. Premier Minister Conte had declared the arrangement as a victory and stated that the government did not forget about its promises, making concessions.

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