China, United States and Europe in May

May corresponds to the midpoint of the second trimester of the year. Due to its power to gravitate above the rest of the World's Economy, the relevant events happening in China, United States and Europe must be considered.

Due to the new capacity to consume luxury products, as well as high volumes of consumables and raw materials that China has been importing these last few years, the shadow of deceleration of their economic growth perturbs the endeavors mainly of North Americans, Europeans and Latin Americans. Now, close to half of the earnings to known brands such as Porsche, BMW, Audi and Mercedes-Benz come from sales to China; also those from feminine extravagance coming from France and Italy and the required goods for the housing construction boom and transport, coming from Latin America and Australia. The United States is concerned that the lack of continued Chinese growth would produce an imbalance in the World Economy that affects their own recovery. Therefore, it is important to note that China has started to adopt measures from stopping the deepening of this slowdown. A very important measure is revoking the tendency towards contraction of local government spending, which had been put in place to avoid bureaucratic expenditures and unnecessary and pharaonic constructions. Now, the funding towards these governments is facilitated through issuing bonds, lifting the restriction of keeping assets frozen to authorize selling them, as long as such bonds are for executing projects approved by the central government. In essence, what they are looking for is to ensure at least 7.1% annual growth for the second half of 2015, much less than the previous double-digit numbers, but enough to keep, in acceptable levels, exports towards China of raw materials and luxury articles demanded by the new rich class. In any case, it must be known that the debt of the local governments to Chinese banks is three trillion USD, of which close to 300 billion, or 10% of them will expire this year, an amount that is expected to be paid with the aforementioned bonds.

In the United States, the landscape is murky. After the large growth in 2014, there was a 0.7% contraction on the first trimester of 2015. Today, at the end of the month of May, the country shows a weak rebound of such contraction, which at the very least makes the growth on the second trimester, and the rest of the year, look uncertain. Although there are some favorable signs, such as an improvement in the employment index and an increase in product orders or requests and the spending index in construction, the consumer-spending index remains at its low level, with the consequent increase in savings. The analysis from this scenario suggests that is very likely for the Fed to raise interest rates before the end of the year, which could bring important changes, like an increase in value of the American Dollar against the Euro and Yen and a reduced competitivity of their export products, and the reduction of dividends on fixed yield papers and the dividends and corresponding prices of the corporate stocks of exporting companies.

On the other hand, in Europe, the accretion of stable growth looks rather flimsy. While favorable signs appear in Italy and Spain, where their manufacture output reached historical highs in May, what, if observed from a general vision works to compensate for the small loses of Germany, and like Italy where a tendency in reducing the national budget deficit is achieved (this month it was one third lower than the same month in 2014) showing that it will reach the standard established by the European Union of it being less than 3% of the Gross Domestic Product, what concerns the investment sector right now is the so-called Greek problem. In essence, it is about the imminent risk and consequences that Greece undergoes a technical default, meaning, a situation where there is a failure of payments of their duties with their creditors, in this case, in the month of June, with the International Monetary Fund. Although the parties involved are working hard to achieve at least a transitory agreement (the long night sessions, with bitter and undiplomatic accusations, of the main political figures, come one after another) if this were to happen, stemming from the lack of agreement between the Greek government and the bulk of its creditors, lead by Germany, due to Greece not receiving the pertinent amount of 7.2 million Euros from the “bailout” rescue loan that was lent by the joint European countries, the European Central Bank and the International Monetary Fund, an uncommon, and thus hard to forecast, situation will occur. In the most chaotic scenario, the Greek government, pressured from the lack of resources from their coffers, not only to pay for their dues, in Euros, with their foreign creditors, some holding sovereign bonds and others, institutions with expired receivables from rescue loans, but to cover their common operating expenses, could choose to issue their own currency to operate in-house, which would be equivalent to leave the use of the Euro as single currency and as a consequence, abandon the Eurozone and the European Union. To avoid this situation all the interested parties are looking for an agreement. But the positions are hard to reconcile as there are political and ideological impediments; the current government was elected with the mandate of not obeying with the “austerity” measures required by their creditors, and these demand compliance with same, which were agreed upon at the negotiations for the rescue loans. In such situation, beyond speculating whether Europe can ride out the exit of Greece and stopping a domino or contagion effect to other countries that could also opt, or be forced to, by similar solutions, one of the possible exits is that the mentioned mandate is revised through new elections or a referendum, that can avoid the so-called “Grexit”, or that the creditors, in order to avoid uncertainties that can cause the exit of Greece for the rest of Europe, agree in relaxing some of the demands imposed on this country. Truth is, that for the immediate future there is no comprehensive solution to the problem. What investors hope for is to achieve a bridging commitment, that drives away the immediate possibility of collapse.

Meanwhile, the European bonds have shown a tendency for small increases on their yields. The American treasury bonds and the stock market indexes of their corporate stocks remained stable. The Chinese stocks of the Shanghai Stock Exchange registered growth close to 4% and those from Brazil, from the IVOBESPA index, sank close to 6%.

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