27 August 2015
Week in Brief: BUSINESS AND THE CITY 
BLACK MONDAY?: So the Tuesday headlines might have had you believe. Certainly stock markets round the world dropped very abruptly, and the cause is very easy to find – the faltering of the Chinese economy. China has had a long run of economic growth, around twenty years, with rapid industrialisation of that enormous country. In that time China has moved from a small scale maker and exporter of low technology consumer goods to what might almost be described as “workshop of the world”. Your watering can might still be of Chinese extruded plastics, but your car electronics, the steel it is made out of, the computers that control it, the car itself, may well be made there as well. Chinese cash surpluses are funding many worldwide businesses through the banking market, and are an increasingly important part of the inward investment flows into Western real estate and massive infrastructure projects.
But one of the problems in understanding and analysing the Chinese economy is government control over information flows. Most large corporates are government owned, in the model of state capitalism. Statistics are notoriously unreliable and there seems to be little doubt that over the last year and more, much of what has been published to do with economic performance is based on wish rather than reality. There are many stories of factories producing goods that are simply stock-piled, and indeed of supposedly bustling enterprises that are actually closed and derelict. But equally China is a huge economy still, with a large and very hard-working population and much new infrastructure. There clearly must be structural difficulties – not least, the population is starting to age and soon will decline (further disclaimer on reliability of statistics) because of the long-standing one child family policy – and central direction of the economy has made for a lack of flexibility in output. But China has huge advantages as well – strong cash reserves, careful investment into raw material sources overseas, very low energy prices so long as the oil price remains low, low wage costs.
Whatever is really happening now, if (emphasising “if”) the government handles its response with skill, China could recover from its current doldrums quickly and strengthen its trading position still further.
Which brings us back to Black Monday. Fear and Greed are commonly regarded as the main drivers of markets, and the relatively long period of economic growth post the 2008 recession has had the Greed side doing rather well. The UK stock market has clearly been trading at toppy levels for some time, and this year the old adage of “sell in May and go away” has been good advice, with August showing low volumes and prices slowly drifting down. Monday 24th might be characterised as a bear raid by the Fear side. The cited causes of that sudden slide are well known, nothing new seems to be driving the sudden nervous sell-off. In fact, there is much to be said for the contra arguments of a strengthening USA economy, low raw material costs (especially oil), some modest economic recovery and hopes of more in Europe, low funding costs as markets resist central bankers’ attempts to start pushing interest rates up and banks continue to (slowly) rebuild their balance sheets and management competence. So what we are seeing? Just a minor outbreak of panic, an over-reaction to silly season stories in the press? It is unusual to see economic collapse when key components of economic production are cheap. But at the end it is all about confidence. Wait and see is always a good policy at times like this.
BLACK GOLD: It’s that oily stuff yet again. No apologies for dwelling on it once more; it is such a key component of our economic lives. A couple of weeks ago we speculated that the Saudi’s were maybe starting to rein in their production a little to try to get the price to stop its long decline (not so much a slide, more a long tumble down a staircase). But if they are, and the production statistics for the next period are not due until next month, it is not having any discernable effect; the price per barrel has dropped further steps – 10% or so in the last week – now at US$42.6.
Not only can we not see the supply side statistics, the user figures are not very clear either, but the suspicion is that China is importing much less and this may be true across south east Asia. South America may also be using less due to economic stagnation there and some heavy energy users such as raw material processing must also be down. And of course we are all getting more efficient in how we use energy and materials generally. But these factors do not really account for this extraordinary continuing weakness, which is fundamentally down to over-production. Whether that is a deliberate ploy on the part of low cost Saudi dominated OPEC to try to force the high cost producers in difficult terrain and the frackers out of the market, or whether it is to do with cash flow needs in oil rich but politically unstable countries, will doubtless become clearer over time. But trying to force out high cost producers has to be a long term strategy as those producers marginal costs of production remain low until further capital investment is needed.
FRACK OFF: Or, says the British Government, frack on. The government announced further changes to the planning regulations governing applications for fracking. This, in another blow to last term’s agenda of “localism”, will place much more power in the hands of the Planning Inspectorate to approve fracking applications if they have been delayed or refused by local authority planning committees. This, the government says, recognises that the national need for cheap energy should outweigh local fears as to the intrusion and environmental effects of fracking – which it says is much exaggerated and mostly based on suspect evidence from limited and rare USA experiences. It is the potential ground water contamination and minor earthquake effects that worry local communities and have led to applications been turned down on grounds such as “heavy transport intensification” and “urbanisation”. The drilling sites themselves are generally unobtrusive – and especially so compared with, for example, wind turbines.
But whether anybody can make a business case for fracking at current oil price levels is another matter.
ELECTRIC STORM: Npower, the German owned major consumer supplier of gas and electricity, this week sacked both its chief executive Paul Massara, and its finance director Jens Madrian. The immediate cause was poor half year results – profits were down 65% to £38m, but Npower has had major problems with its billing systems to consumers which have led to a mass of complaints, both to the firm and to the regulator. This is now severely affecting its customer retention rates and its ability to recruit new customers. In a “compliment” which should appear in any future compilation of half-hearted farewells, the company said “…we would like to thank them [the departing executives] for their contribution toward moving Npower from sixth to fifth in customer service…”
KEY MARKET INDICES: (at 25 August 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.58% (steady); 5 year 1.43% (falling).
Europe€: 1 mth -0.7% (steady); 3 mth -0.5% (falling); 5 year 0.31% (rising)
US$: 1 mth 0.40% (steep rise); 3 mth 0.41% (steady); 5 year 1.51% (falling)
Currency Exchanges:
£/Euro: 1.37, £ falling
£/$: 1.58, £ steady
Euro/$: 1.15, € steady
Gold, oz: $1166, rising
Oil, Brent Crude barrel: $42.69, steep drop from previous range.
Wheat, tonne: £120.15, steady
London Stock Exchange: FTSE 100: 6,057. FTSE 350: 3,380
Briefly: The quiet declines of August came to an abrupt end over the weekend with stock markets world wide dropping steeply on Monday 24th. At the time of writing there is something of a recovery, but the market remains around 7% down on last Friday. The root of the turmoil is in the China markets and consequent spillage into other Far Eastern markets –see article above. Oil has dropped still further – also see above.
