The International Monetary Fund (IMF) recently warned that global debt has hit a record high of $152 trillion, weighing down economic growth and adding to risks that recovery could turn into stagnation or even recession.

The debt figure highlights the apparent paradox between ultra-low interest rates imposed by many central banks in an attempt to encourage borrowing and boost sluggish economies, and the dangers that arise from excessive debt levels.

The warning from IMF came after it cut growth forecasts for a series of countries around the world, leaving Britain the fastest growing economy in the G7. According to IMF, global growth is expected to slow to 3.1 percent in 2016 before recovering to 3,4 percent in 2017. The forecast, revised down by 0,1 percentage point for 2016 and 2017 relative to April.

China

After a reasonable performance in August, Chinese trade data is proven to be a major disappointment for financial markets. China’s September exports fell 10% from a year earlier, posted the biggest drop since February, while imports unexpectedly shrank by 1.9 percent to $142.5 billion, suggesting signs of steadying in the world’s second-largest economy may be short-lived. Economists had expected exports to fall 3.3 percent and imports to rise 1 percent. The figures are likely to put further pressure on China’s yuan currency.

Currencies

The Chinese yuan has recorded its biggest weekly drop in nine months, as the US dollar strengthened to a seven-month high. The dollar has been underpinned by recent strong U.S. economic data that cemented expectations of an interest rate hike by the Federal Reserve at its December monetary policy meeting.

The British pound recently traded at a 31-year low against the dollar, and a six-year low against the euro, on Tuesday it hit a historic low against a basket of global currencies. British Prime Minister Theresa May put a further pressure on the currency by announcing that Article 50, a piece of legislation that launches the exit process, could start by the first quarter of 2017.

Precious metals

Since the beginning of 2016 there has been a positive trend for gold prices with a Fed rate hike being a distant prospect and other central banks easing. This is despite weak jewelry and industrial demand. Gold prices peaked on 6 July 2016 at USD 1,375 per ounce. Since 27 September gold prices have fallen considerably by 6% signaling the end of the uptrend this year. Hawkish Fed comments, expectations of ECB tapering, some better-than-expected US economic data releases all weighed on gold prices.

Silver prices have declined in line with gold prices. Silver prices plunged more than 8% last week, as the US dollar soared to seven-month high against a basket of other world currencies. A firmer dollar is usually viewed as a negative for precious metals, which are themselves priced in the US currency.

Oil in a global economy

Organization of Petroleum Exporting Countries (OPEC) may want to cut or curtail production to raise oil prices, but the latest statistics show the OPEC is pumping oil at record levels as members including Venezuela and Iraq crank out more barrels. OPEC said its production rose in September to the highest in at least eight years.

According to OPEC figures, it pumped 33.39 million barrels per day (bpd) last month, up 220,000 bpd from August, and as much as 890,000 bpd above the new supply target.

The overall situation looks like all producers want to increase production by as much as possible to give themselves a higher base for negotiations.

Investment recommendations from Jefferson Trust

Equities

  • Overweight in equities;
  • Prefer Emerging Markets Equities. Valuations are attractive and with slowly improving fundamentals;

Bonds

  • Underweight in bonds;
  • Bonds continue to provide important diversification benefits against equity risks;

On the basis of expected total returns we prefer US High Yield Bonds over Europe.

Endnotes

1. Fortune: “China’s Gloomy Trade Numbers Trigger Fears of a Faltering Recovery”, 2016, <http://fortune.com/2016/10/13/china-trade-economy-slowdown-yuan/>;

2. The New York Times: “China’s Exports Last Month Post Biggest Drop Since February”, 2016, <http://www.nytimes.com/aponline/ 2016/10/12/world/asia/ap-as-china-trade.html?_r=0>;

3.  The Economic Times: “China exports dive in September on weak global demand”, 2016, <http://economictimes.indiatimes.com/news /international/business/china-exports-dive-in-september-on-weak-global-demand/articleshow/54826788.cms>;

4. Business Insider: “China’s trade data has delivered some unwanted news”, David Scutt, 2016, <http://www.businessinsider.com/chinas -trade-data-exports-september-unwanted-news-2016-10>;

5. ET Energyworld.com: “Oil prices fall on higher OPEC output, rise in U.S. crude stocks”, 2016, <http://energy. economictimes. indiatimes.com/news/oil-and-gas/oil-prices-fall-on-higher-opec-output-rise-in-u-s-crude-stocks/54823706>;

6. Reuters: “Oil ends lower on OPEC output hike; U.S. stockpile rise seen”, Barani Krishnan, 2016, <http://www.reuters. com/article/us-global-oil-idUSKCN12C01N>;

7. Barron’s: “OPEC Oil Cuts? Try Record Production”, Dimitra DeFotis, 2016, <http://blogs.barrons.com/emerging marketsdaily /2016/10/12/opec-oil-cuts-try-record-production/>;

8. Market Watch: “Oil futures end lower as IEA reports a jump in OPEC output”, Myra Saefong, 2016, <http://www.market watch. com/story/oil-prices-hover-near-highs-supported-by-view-opec-deal-may-happen-2016-10-11>;

9. ABN-Amro: “Precious Metals Watch – Downward revision gold forecast”,  GeorgetteBoele, 2016, <https://insights. abnamro.nl /en/2016/10/precious-metals-watch-downward-revision-gold-forecast/>;

10. Economic Calendar: “Silver Prices Rebound After Plunging to Four-Month Low”, Sam Bourgi, 2016, <http://www. economiccalendar. com/2016/10/10/silver-prices-rebound-after-plunging-to-four-month-low/>;

11. South China Morning Post: “Yuan records biggest weekly drop in nine months, as greenback continues to strengthen”, Jenifer Li, 2016,<http://www.scmp.com/business/article/2028062/yuan-records-biggest-weekly-drop-nine-months-greenback-continues-strengthen>;

12. Reuters: “Speculators boost U.S. dollar bets to eight-month high: CFTC”, Sam Forgione, 2016, < http://www. reuters.com/article/us-cftc-forex-idUSKBN12E2BN>;

13. The Australian: “Pound hits historic low against currency basket”, 2016, < http://www.theaustralian.com.au/busi ness/markets/ pound-hits-historic-low-against-currency-basket/news-story/3e187e7e722c41f8553b3a94fba80138>;

14. South China Morning Post: “Pound’s plummet to 31-year low “not unwelcome”, says UK trade under secretary”, 2016, <http://www. scmp.com/business/money/money-news/article/2025974/pound-hammered-after-hollande-promises-tough-stance-brexit >;

15. Herald: “IMF paints gloomy picture of world economy”, 2016, <http://www.herald.co.zw/imf-paints-gloomy-picture-of-world-economy/>;

16. The Telegraph: “Global debt hits all-time high of $152 trillion as IMF warns of world-wide economic stagnation”, 2016, <http://www. telegraph.co.uk/business/2016/10/05/global-debt-hits-all-time-high-of-152-trillion-as-imf-warns-of-w/>.

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