FinancialExpat's Blog

US president-elect Barack Obama says that the US government will do "whatever it takes" to revive the economy even if it means large budget deficits in both 2009 and 2010. In the short term, his priority will be avoiding a deepening recession and providing government assistance to the ailing car manufacturing industry. Obama considers the failing of the industry as unacceptable due to the dire consequences it would have for the whole US economy.

World leaders at the G20 financial summit in Washington have pledged to work together to restore global growth. They said they were determined to work together to achieve "needed reforms" in the world's financial systems. US president George Bush said that finance ministers would now work on detailed reform proposals and then report back. Leaders of emerging economies, including China, India, Argentina and Brazil, said the summit marked an historic shift of power away from the richer countries.

Investors are shifting funds into European government bonds at the expense of Treasuries on speculation policy makers have more scope to cut interest rates than the US Federal Reserve. An investor who bought USD 10 million of the debt in June would have an average profit of about USD 678,000, compared with USD 380,000 if the money went into Treasuries, Merrill Lynch & Co index data show. Even with those gains European fixed income assets may be a bargain, with two-year German bunds yielding 1.01% more than Treasuries. They typically yield 0.15% less than US debt based on data over the last decade.

Bearish economic news continue to put oil prices under pressure which may signal a further cut in OPEC production, possibly in December. Crude oil for December delivery has dropped to USD 55.60 in New York on Friday. Brent crude for January delivery has dropped to USD 53.00 in London. Hedge-fund managers and other large speculators increased their net-short position in New York crude-oil futures in week ended 11 November, according to US Commodity Futures Trading Commission data. Net-short positions rose by 403% from a week earlier.

The yen declined further against the euro to 122.97 as gains in stock futures encouraged purchase of higher yielding currencies financed with loans in Japan. The yen has remained little changed against the US dollar. According to JPMorgan & Chase Co, the British pound will drop 13% against the US dollar and 8% against the euro as UK banks shrink foreign borrowings and the country's policy makers favour a weaker currency.

The European Commission announced last Thursday that it has adopted an amending proposal to the savings tax directive that will widen the scope of the legislation. Effective since 2005, the savings tax directive seeks to ensure that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. The Commission proposal seeks to tighten the directive, so member states can tax more interest payments channelled through intermediate tax-exempted structures. The Commission proposes to extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurance products whose performance is strictly linked to income from debt claims.

China's stimulus package amounting to USD 568 billion announced on 9 November will have a ripple effect well beyond its borders. The Chinese economy is still the fastest growing among the world's 20 largest; and its plan, equivalent to 14% of gross domestic product over two years, would likely have the strongest impact in places that are its biggest supplier of goods, including Japan, Taiwan and South Korea. China aims to keep its growth close to 8% next year and Citigroup analysts in Hong Kong have commented that for every percentage point that China increases its growth, the rest of Asia will be boosted by half that.

Australia and China have agreed to speed up work on a free trade agreement, Prime Minister Rudd has said. He went on to add "this is really important for us and for the Chinese long term. China has great interest in the Australian market in terms of long-term access to energy and raw materials. We have a great interest to (having) greater access to China's market in goods and in services."

Malaysia's economic slowdown is prompting investors to bet the central bank will lower borrowing costs for the first time since 2003 by March as inflation cools, according to interest-rate futures contracts. The Kuala Lumpur interbank offered rate fell to 3.15%, 50 basis points lower than the 3.65% that local banks charge each other on three month loans at present.

Given recent turmoil in global markets, JPMorgan Asset Management analysts believe Japan has reached attractive levels of cheapness. They comment there are appealing levels of value to be found in world class companies such as Toyota, Nintendo and Canon. Many solid companies are now trading at less than book value - large profitable industrials that have been performing strongly for years. 40% of Japanese companies are cash positive, so they do not have to rely on borrowing so much at a time when credit is hard to come by. Japan should also benefit from increased trading links with it emerging market neighbours. Japan is prone to political uncertainty. But as a developed economy on the rim of the world's most dynamic economic region, with companies that have the strength to take advantage of global distress, JPMorgan believe Japan is well positioned for the next upturn in the cycle.