Weekend Economic Glance, Sep. 6-12, 2015

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This article is the first in series of weekly reviews, which intend to bring the global news from the world of business and economics closer to our readers. 

Weekend Economic Glance, Sep. 6-12, 2015

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Global financial markets are still in upheaval after China continues to struggle with increased stock market volatility. Chinese foreign exchanges reserves fell to $ 3.58 trillion after the central bank backed up the currency market in a bid to prop up the Yuan and stop capital outflows. The Chinese stock market has seen a 40% slump since middle of June. The Chinese government has had several people arrested on charges of spreading fake and false rumors about the securities and futures market. Some of the accused, among them high-level executives, have already confessed to the allegations. Meanwhile the Chines market turbulences are already affecting international stock markets. The Euro Stoxx 50 dropped nearly 10% in the face of Chinese market woes. Especially the export oriented sector suffered from a weakening Yuan.

Italian Eni Corp. made a discovery which could be the biggest gas field ever found in the Mediterranean Sea. According to Eni’s press release the gas field , which was discovered at its Zohr Prospect, stretches across 100 square kilometers and could hold 30 trillion cubic feet of lean gas – in comparison, Russia’s largest gas field “Yurengon” officially holds 335 trillion cubic feet of lean gas. The discovery was made at a convenient time for Washington. Its sheer magnitude may the US hope it could diversify Europe’s demand for gas and thus mitigate its dependence on Russia as an energy supplier. Of course in order for this gas field to be developed and economically viable – deep sea harvesting naturally comes at a higher price tag than if the gas were accessible by land – the price for gas would need to stabilize after it dropped a whooping 31,6% during the last 12 months. However, Claudio Descalzi, CEO of Eni said “We will fast track this project and production will begin as soon as possible,” as quoted by the Wall Street Journal. Meanwhile UK’s Oil and Gas Authority (OGA) sees the North Sea’s oil industry before an immediate collapse and warns of “serious and urgent risk” of it being abandoned due to dropping oil prices.

Putin unleashed a new Bill in an effort to eliminate the use of the US-dollar in trade between the CIS countries. The move aims to create greater macroeconomic stability and higher liquidity for local currency markets. Roughly 50 percent of turnover in the countries of the Eurasian Economic Union (EEU) is in Dollars and Euro, thus creating a dependency on the monetary policies of the central banks issuing these currencies. However, this move is in line with a series of other agreements previously made by China, Russia and their trade partners. For a while now these countries have been eliminating the US-Dollar in their mutual trade in a move that has Washington worried. The ultimate goal of this policy is to bring down the Dollar as the worlds leading currency and to replace it with a multi-polar system potentially based on the gold standard.

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The EU is about to use another € 500 Million of taxpayers money to appease angry farmers. The EU-Commission gave in to the demands of protesters accusing the policies of the power block to be the deep-down reason for their recent losses threatening their existence. During the last couple of days thousands of farmers took to the streets of Brussels their anger and dissatisfaction about the recent price drops for agricultural products caused by the sanctions regime imposed on Russia. The protesters came from France, Germany, Belgium and the Netherlands and brought along a total of 1,500 tractors and farm vehicles to reinforce their protest. The sanctions imposed by the EU which lead Russia to introduce a retaliatory import ban for agricultural products caused the supply to increase, bringing down the prices as a result. Declining exports to China due to a weak Yuan amplified this effect. Meanwhile the French government estimates that a total of ten percent of French farmers could go bankrupt as a result of the current market situation.

The US-Federal Reserve is about to decide on the future of its interest rates. High-ranking employees of the Fed will meet on the 16th and 17th of September to discuss a long awaited raise of the interest rates. The rates have been kept at 0% since the peak of the financial crisis in 2008. However, the recent market turbulences caused by the Chinese stock markets make an increase of interest rates particularly risky. Raising interest rates could increase the likelihood of a new crisis in the event of renewed liquidity shortages on the market. Furthermore, it will show whether the US economy is stable enough to sustain such a measure. The bond market is pricing an increase in interest rates with a chance of one third. The Fed is officially being positive about the outlook for the US economy by claiming that it sees a low oil-price and soaring US-Dollar as temporary anomalies. Noble-prize winner Joseph Stiglitz is strongly advocating for leaving the rates at 0%. In his opinion the measures will cause a credit crunch and will cost a strong amount of economic growth.

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