Market Watch 29.03.2021

25-year agreement. Last Saturday, Mohammad Javad Zarif, Iran’s foreign minister, and China’s foreign minister, Wang Yi, signed a 25-year agreement to extend ties between them. The Islamic republic is struggling to show the resilience of its economy against US sanctions that persist for decades. The content of the agreement has been presented last year, but the actual signed deal was not disclosed to the public. The latest draft covered co-operation in energy, petrochemicals, and nuclear power to the high-tech and military sectors and maritime projects to promote Iran’s role in China’s Belt. The proposal did not contain any information regarding China’s investments in Iran. Due to the US sanctions, China became an important commercial partner of Iran over the past decades, replacing 30 years of Germany’s leading role in the region. China became an ally for Iran’s economy despite cutting oil imports after former President Donald Trump pulled the US out of the 2015 nuclear agreement that Tehran had signed with major powers, including China. During the last year, Iran’s total trade figure was $73bn, with China the top partner. Iran’s exports to China reached $8.9bn, and imports from China stood at $9.7bn. The new deal can bring new opportunities for both countries, however the Iranian people felt that by signing the agreement, they sold their country. The refusal to disclose any details regarding the deal was interpreted as a sign to avoid public criticism.

Suez Canal blockade. Last week one of the most important maritime canals, the Suez Canal, has been blocked by one of the world’s largest container ships, Ever Given, causing a world market disruption. The Ever Given container ship, which is almost as long as the Empire State Building is tall, is blocked across the southern end of the canal, with tug boats trying to free it. The route is crossed by almost 50 vessels sails every day, handling at least 10 % of global seaborne trade and a similar amount of oil shipments. Due to the current situation, Brent crude, the international oil benchmark, rose almost 6% to $64 a barrel. The US has offered to help Egypt unblocking the Suez Canal. The head of the shipping company warned that businesses relying on essential supply chains would have to find other solutions to replace the respective components. An attempt to free the giant container ship failed last Friday, raising concerns that the disruption to global trade will soon start impacting various manufacturing industries from cars to plastics. Efforts were continuing on Saturday, with experts deploying high-powered dredgers and tugboats however, Osama Rabie, who heads the authority, said they might have to take the “plan C”, meaning to remove at least some of the thousands of containers on board. The process may take weeks, causing severe disruptions to supply chains all over the world. The canal, which was built to connect the Mediterranean to the Red Sea and Asia, is also a key route for consumer goods and bulk raw materials.

Massive Confidence Boost for UK Businesses. Optimism within British business has reached its highest level since 2004. According to HIS Markit and the Chartered Institute of Procurement and Supply (CIPS), business activity rose at its fastest rate in seven months. The immense roll out of the Covid-19 vaccine in the UK has precipitated a call to arms for British businesses, as the outlook for summer looks relatively positive. Boris Johnson, the Prime Minister, has stated that most businesses will reopen fully by June 21st, with very little Covid-19 oriented regulation. This is positive as it will prompt the UK economy back into profitability and stability. Additionally, many firms, spurred on by the prospect of a summer with loose business restrictions, have hired and rehired staff. This has also been made easier by the Chancellor’s extension of the furlough scheme until September. This does raise some questions as to why the Chancellor would extend the furlough scheme beyond the economy’s planned reopening. That being said however, I do feel that this is somewhat of a grace period, allowing business to find their footing, if it is infeasible for them to open fully by June 21st. Getting down to empirics, the Purchasing Managers’ Index (PMI), signalled a boost in business confidence with a rise to 56.6 this month from 49.6 in February, conveying that British business is bullish about the near future. The hospitality industry is set to benefit hugely from the Prime Minister’s roadmap for exiting lockdown, especially due to pent up demand for hotels, restaurants and cafes. No doubt this demand has spiked considerably as the months in lockdown have progressed. That being said, whilst many businesses are waiting patiently to trade again, on the whole, they are quietly confident. For those economically minded readers, Tobin’s Q is alive and well.

US Growth Forecast reaches 7%. Bank of America has upgraded its forecast for GDP for this year. Roughly, it predicts GDP to grow by 7% throughout 2021. Similarly, unemployment is expected to fall to 4.5%. Naturally, the majority of this was sparked by exceptional government spending. President Biden’s $1.9 trillion stimulus package is a prime example of this. In fact, the bank compiled data that showed that the $1,400 payments have led to a 40% month-over-month rise in consumer spending. And, that this could only just be getting started. Furthermore, the data concluded that total card spending had increased by 45% which is wholly significant for demand of goods and services. There is considerable hope for further stimulus packages from the US government, and the President will most likely oblige. Talks are in place for a further $3 trillion in government spending, with the main focus being on improving infrastructure, education and the environment. Bank of America has postulated that this will deliver better prospects of economic growth in the longer term, naturally a component of Biden’s “Build Back Better” policy proposal. How will this be paid for? The obvious caveat to these proposals is that tax revenues will be required, but, consumers can’t have their cake and eat it too. The positive upswing in GDP growth should benefit unemployment figures for the year. Projections suggest roughly 6.1% by the end of Q2, but with a modest and consistent downward move to around 4.5% throughout the rest of 2021. Bank of America is not alone in its bullish estimates for increased growth in the US. Morgan Stanley is extremely confident; the US economy will expand 8.1%, with output returning to its pre-Covid-19 level by the end of Q1. I find this is slightly overoptimistic, but stranger things have happened – like a global pandemic that has stopped most economies in their tracks.

Bitcoin banned? There have been many whispers over the last week regarding the US perhaps banning Bitcoin at some point in the future. The famed cryptocurrency has risen above the $60,000 level, after losing some ground during this week. But crypto-heads should tread lightly, as legendary investor and CEO of Bridgewater Associates, Ray Dalio, thinks the US government may ban the cryptocurrency, in a similar manner to FDR’s ban of Gold in the 1930s. The former US president sought to prohibit the US public from owning gold as a means of stockpiling the Fed’s gold reserves – in order to print more money with ease. Rumours of India banning Bitcoin have also emerged, with Dalio seeing it as a springboard for other states to follow; principally the US. I can see Dalio’s prophecy coming true, as the Fed have not been keen fans of the currency, Janet Yellen calling it an “inefficient way” to save money, along with its connotations with “illicit finance”. Whilst Dalio has been a critic of Bitcoin in the past, he has come to accept the coin as a genuine form of speculative asset in the financial markets. He feels that it has “proved itself” which signifies that even in the eyes of critics, it has achieved its goal: to become a store of value.

Thank you to James Ballentine for his collaboration and in-depth analysis!

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