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24/11/2016

Weekly News Bites: Heavy metal

Our top picks from this week's Morning Chat

Heavy metal: Gold has sunk below $1,200. Through most of this year’s paroxysms, it has shone, soaring by 20% over January and February, and mostly oscillating between $1,250 and $1,350 since. However, with yields rising – and investors more sanguine on risks that once kept them awake at night – the opportunity cost of gold is getting increasingly unattractive. (24/11)

It was his first time: In Chancellor Phillip Hammond’s Autumn Statement premiere, he made no major changes to existing taxes or benefits, and his plans for infrastructure were a tad underwhelming relative to expectations. But the Exchequer will borrow more and spend more in the face of slashed growth forecasts, putting a dagger through George Osborne’s vision of a “lower tax, lower welfare” country, at least for now. This is what happened (or didn’t) yesterday:

  • GDP: Much lower, but we knew that... Economic growth in 2016 will be slightly better than expected in March (2.1% vs. 2.0%) but then get hit hard over the next two years as “Brexit” begins to hurt (1.4% vs. 2.2% in 2017; 1.7% vs. 2.1% in 2018). 
  • Deficit: No longer expected to balance this decade... The government will keeping spending more than it collects in taxes well into the next decade, when, magically, the desire to borrow money it hasn’t actually got will have lessened.
  • Overall debt: Increasing for a while… We will be a nation with a 90% debt-to-GDP burden for at least two more years. In the rosy future when we no longer borrow to spend, it may come down.
  • Infrastructure: Nice, but not a game changer... £23 billion to be spent on infrastructure over five years. For context, the already approved Hinkley Point nuclear power plant and HS2 rail railway project will cost £18 billion and £42 billion, respectively. A new runway at Heathrow runs at about £18 billion.
  • Benefits: Major cuts to benefits announced by Mr. Osborne remain… But no more cuts will be announced during this Parliament. (24/11)


Draghed this long enough: Senior European Central Bank officials, including President Mario Draghi, finally made definitive statements about extending the ongoing €80 billion in monthly bond purchases past its statutory March deadline. Ironically, the ECB may not having enough bonds to buy. Europe being Europe, there are set rules obligating purchases in exact national proportions. Oh well, one thing at a time. (23/11)

small caps: Yesterday, all four major US equity indices reached record highs, the first time since December 31, 1999. Recently, the most prolific has been the small cap Russell 2000 – it has surged by 10% since the US election – on expectations of a torrent of domestic spending. In 1999, the expectation was the internet would transform the world, and some companies surged to unimaginable valuations; they were crushed soon after. However, valuations now are much more reasonable. (22/11)

Right place, wrong time: Of seven candidates competing to represent the French Republican Party in upcoming elections, ex-Prime Ministers Francois Fillion and Alain Juppe – both centrists – are the last two standing. Given incumbent Socialist President Francois Hollande's 4% approval rating, it is likely whoever wins the Republican nomination will ultimately go head-to-head with arch-nationalist Marine Le Pen in 2017. Interestingly, ex-President Nicolas Sarkozy – who pivoted sharply to the right in recent months – appears to have misjudged the centre of gravity. (21/11)

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