At their meeting in Vienna on Friday, the OPEC+ countries agreed on a production cut. Starting in January, the daily production volume will be reduced by 1.2 million barrels (1 barrel = 159 litres) for six months. Of these, the OPEC countries are cutting 800,000 barrels per day, with Saudi Arabia alone providing a 500,000-barrel cut. The 10 leading oil-producing countries outside of OPEC, which form OPEC+ together with the oil cartel, are to cut a further 400,000 barrels, with Russia reducing its output by 130,000 barrels per day.

Iran, Venezuela and Libya are exempted from the agreement. The production cut will be upheld for six months, and reassessed in April 2019.

At present, the 15 OPEC members alone produce around 33 million barrels of oil per day, covering around one third of the world's crude oil production. According to the International Energy Agency, however, the demand for 2019 is only 31.3 million barrels of OPEC oil per day, and current production levels are already based on a daily production limit of 32.5 million barrels. The restriction has been in effect since the beginning of 2017 and was only extended in June 2018 until the end of the year.

With this cut, OPEC aims to stabilise the crude oil market. However, analysts are sceptical about the cut and its proposed effect. According to market experts, around two million barrels of oil – almost twice as much as announced – would have to be withdrawn from the market every day in order to achieve a sustained positive effect on the oil price.

The reduction was also met with criticism in the USA. US President Donald Trump had already spoken out against possible production cuts in the run-up to the official decision, writing that OPEC would hopefully not cut their production. “The world does not want to see, or need, higher oil prices,” he added in a Tweet.

Brent bounces after 30-per-cent drop since early October

Following the decision, oil prices rose sharply on Friday in accordance with OPECs intentions. After the agreement was announced, Brent saw a 5-per-cent bounce and climbed to just over 63.0 USD. In early trading on Monday, the price pulled back a little to around 62.0 USD. Viewed over the year as a whole, however, the Brent oil price still shows a minus of just under 7 per cent. Since early October, the price has dropped by a whopping 30 per cent.

The fact that the lower price of crude oil does not manifest in lower petrol prices for car owners seems paradoxical at first, but is due to the low water levels of rivers important for the oil market. Refineries and depots distribute most of the processed crude oil by ship, but since river levels are very low this year along important waterways, ships can only travel to a limited extent or not at all. This hampers logistics and requires oil deliveries to be increasingly shifted to rail or truck, which is expensive and only possible to a certain extent due to limited capacity. This leads to a shortage of petrol and consequently to higher prices at the pumps.

Disclaimer: Forecasts are not a reliable indicator for future developments.

Ten years ago, the investment bank Lehman Brothers’ insolvency escalated the financial crisis, driving the global economy to the brink of collapse. Although the worst consequences of the crisis have been averted and stock markets have risen again, the after-effects of the crisis can still be felt today.

The crisis on the US real estate market began with mortgage banks increasingly granting badly secured real estate loans. These were securitised and placed with investors as a form of investment. When US housing market prices plummeted, rendering many mortgages worthless, global interdependencies caused a cascade. This reached its peak with the bankruptcy of the renowned US investment bank Lehman Brothers in September of 2008.

The Lehman bankruptcy made huge waves in the stock markets; distrust of the financial system spread rapidly around the globe. World trade saw a significant dip, plunging many countries into a recession.  In the US, the economy shrank for four consecutive quarters, and unemployment rose to its highest level since the 1980s.

Bailout packages and rate cuts saved banks and markets from collapse

Governments and central banks responded to the crisis with immediate emergency measures. The US as well as many European countries provided massive government aid and bailout packages, saving numerous banks and insurers from collapse. A few weeks after the Lehman bankruptcy, the world’s premier central banks lowered their key interest rates in a theretofore unseen concerted effort.

With further cuts, the central banks lowered their key interest rates to zero in order to re-ignite loans and investments, and boost the economy. The European Central Bank (ECB) successively lowered its interest rates until 2014 and finally even demanded penalty interest rates for bank deposits. Meanwhile, central banks attempted to lower interest rates on the financial markets through large scale bonds acquisition. The ECB began buying bonds in 2010, with an extensive EUR 60bn-per-month purchasing program to follow later.

In Europe, the crisis exacerbated Greece’s financial situation. Starting in 2010, the EU partner countries and the International Monetary Fund saved the debt-ridden country from bankruptcy with a total of EUR 289bn in subsidised loans. The Greek debt crisis reached its peak in 2015, when Greek banks were forced to close for three weeks following the country’s imminent insolvency. In the summer of 2017, the last part of the euro bailout package for Greece expired, so the country has to carry its own weight again financially.

In the meantime, the stock markets have recovered again. Leading international indices such as the Dow Jones and the German DAX have returned to their pre-crisis levels and climbed to new all-time highs, and the US recession has long since passed. However, key interest rates paint an ambiguous picture. While the US Federal Reserve has already begun to raise its interest rates again, the ECB’s interest rates practically remain at zero. The crisis is also affecting the real estate market; in countries such as Germany and Austria, prices for apartments have risen sharply in view of record low interest rates. The general conditions in the financial sector have also changed as a result of the crisis: since 2008, international supervisory authorities’ strict capital requirements have forced banks to be more robust.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

2018 could be a record year for mergers, at least if the exceptional first half of the year is any indicator. According to data from the Bloomberg news agency, the transaction volume of announced mergers and acquisitions in the first half of the year amounted to USD2.1tn, a year-on-year increase of around 36 per cent. In 24 deals, the transaction volume exceeded the USD10bn mark. Projected over the year as a whole, this figure could exceed the previous record of USD4.1tn set in 2007.

According to experts, the main drivers of this development were the US tax reform, high stock valuations and robust global economic growth. This year, the largest mergers have so far been announced in the health care and media industries. Japanese pharmaceutical company Takeda announced the purchase of the Irish pharmaceutical manufacturer Shire for USD62bn. In addition, health insurer Cigna offered USD54bn for a takeover of service provider Express Scripts.

Meanwhile in the media and telecommunications industry, T-Mobile US and their competitor Sprint drew attention with a USD26bn merger deal. In addition, the US cable tv giant Comcast and the media group 21st Century Fox are currently competing for the British broadcasting group Sky. With 34 billion dollars, the highest offer here has so far come from Comcast.

Analysts eyeing merger activity with caution

However, the current bout of mergers could soon come to an end. With an annual transaction volume of more than USD2.5tn, the past few years have gone well, according to the Bloomberg calculations. However, it is this development that makes analysts sceptical as to whether and for how long this pace can be maintained.

The experts cite geopolitical risks such as the trade war between the USA and China as potential obstacles. In addition, key interest rates in the USA are continuing to rise, and there are concerns about a weakening economy and increasing regulatory uncertainties. In March, for instance, US President Donald Trump prohibited the takeover of the 140-billion-dollar Qualcomm chip group by a Singapore competitor Broadcom. The reason given was that the deal could compromise the US national security. However, the regulatory risks were somewhat mitigated by the US ruling in June that approved the USD85bn purchase of Time-Warner by AT&T despite criticism from the US government.

History also shows that very strong mergers and acquisitions activity does not necessarily have to be a positive sign. The last two times the transaction volume reached similar levels, market specialists noted, saw the dot-com bubble burst of 2001 and the financial crisis of 2007 in the following year respectively.

The Brexit negotiations between Great Britain and the EU are in full swing. An agreement on the conditions for the exit has to be reached by October, otherwise the so-called hard Brexit, i. e. a disorderly exit from the EU, could occur.

British companies are aware of this danger, and therefore some companies are already taking precautionary measures for the event of an emergency. The London Stock Exchange (LSE) has initiated emergency measures to protect itself from the consequences of a disorderly exit. New subsidiaries are to be established in the EU and additional licenses applied for. The high-street bank Barclays is also preparing for the Brexit by relocating jobs from London to the EU mainland.

However, the Brexit has so far been of limited importance in the current British reporting season. Following a clear loss in the first quarter of 2018, Q2 saw a return to form for Barclays with a profit in the billions. The competition, insofar as results have been made public, has also started the second half of the year with substantial profits. In addition, the LSE exceeded the forecasts with its half-year figures. Meanwhile, oil companies such as BP and Royal Dutch Shell benefited mainly from the sharp rise in oil prices in recent months, while commodity companies listed in the British FTSE-100 Index saw profits surge due to higher commodity prices and increased production volumes.

Numerous remaining disagreements between EU and Great Britain in Brexit negotiations

Even if companies are already beginning to protect themselves against a hard Brexit, both the UK and the EU want to avoid this option. However, it cannot be ruled out completely, because a fair number of points are not yet agreed. The British plan presumes a free trade zone for goods with the EU, but accepts restrictions on the free movement of services and persons. This contradicts the EU’s fundamental principle of the four internal market freedoms (goods, services, capital and persons), which can only be had together in one package, emphasised EU negotiator Michel Barnier. Nor is there a solution to the future border regime for the border between Ireland and Northern Ireland.

The uncertainty surrounding the Brexit is making itself felt in the British economy. In 2017, economic growth in the United Kingdom was 1.8 per cent, well below the eurozone average (2.3 per cent). In Q1 of 2018, the UK economy grew by a meagre 0.2 per cent.

One reason for the slow economy is the Pound, which has been weak since the 2016 Brexit vote. And while a weak currency is more likely to help export-oriented companies in the FTSE-100, boosting the index, it also causes import prices to rise. This in turn causes an increase in inflation, decreasing the purchasing power of the populace: in June, inflation stood at 2.4 per cent year-on-year. To contain this, the Bank of England (BoE) raised its key interest rate on Thursday by a quarter point to 0.75 per cent, the highest level since the financial crisis, by unanimous decision.

Disclaimer:

Forecasts are not a reliable indicator for future developments.

Despite the ongoing trade disputes between the USA and other countries, the head of the US Federal Reserve (Fed), Jerome Powell, remains confident about the U.S. economy. At the bi-annual hearing before the US Congress on Tuesday, he emphasised that, with the right monetary policy, the job market could remain strong with inflation close to the two-per-cent mark. The Fed’s current strategy of gradually raising the interest rate is therefore the best way to stay abreast of the economic upswing without throttling it. The Fed's key interest rate currently lies between 1.75 and 2.00 per cent. The central bank has announced two further interest rate hikes for the current year.

However, in their economic report, the Beige Book, which was published on Wednesday, the US monetary authorities also pointed out US companies’ concerns about the negative consequences of the current US trade policy. Industry representatives in all 12 Fed districts have expressed concerns about this, according to the report. In addition, some regions have already reported higher prices and supply problems due to the new trade measures.

The USA is currently in a trade conflict with several countries, but the dispute with China has recently escalated most. In early July, the US imposed 34bn USD in tariffs on the People’s Republic for alleged unfair trade practices, in response to which China immediately imposed retaliatory tariffs of the same magnitude. Last week, the US escalated again and threatened China with further tariffs worth 200bn USD. Should these also become effective, roughly half of all Chinese imports into the US would be subject to duties.

China also remains optimistic for 2018

In China, the additional tariffs have currently not yet led to a lack of economic optimism. The state planning authority expects the gross domestic product (GDP) to grow by around 6.5 per cent for the year 2018, and, in addition, the People's Republic remains ostensibly resistant to crisis. A spokesman for the National Development and Reform Commission (NDRC) recently said that China has sufficient political leeway to deal with shocks.

Q2 shows no visible effects of the trade dispute on China’s GDP. While economic growth slowed slightly compared with the same period of last year, economists expected this, as the Chinese government has been fighting risky loans for years. Q2 growth was 6.7 per cent, while the increase in previous quarters had been 6.8 per cent.

In the USA, growth has also slowed somewhat. GDP extrapolated for the year rose to 2.0 per cent in Q1 of 2018; in the last quarter of 2017 this figure was still at 2.9 percent. However, economists expect an acceleration for the second quarter of this year. In a survey conducted in late June, economists predicted a GDP growth of 3.7 per cent for the period from April to June.

Disclaimer:

Forecasts are not a reliable indicator for future developments.