Thanks to my friends at London & Capital I receive a regular, digestible, bite size update on the international financial markets which I like to share with you:

“Positive economic momentum from developed markets”

In the US, the bounce in Q2 growth turned out to be much stronger than expected, with GDP revised up to an annualised 3.7% (vs 3.2% consensus) and led by strong personal consumption and upward revisions to nearly all components of GDP. This together with comments from the Fed’s Fischer kept alive the prospect of a rate rise this year, possibly as early as this month.

In Europe, there were further encouraging signs for the economy. Eurozone broad money supply grew 5.3% in the year to July, accelerating from 4.9% in June. The EC’s Economic Confidence Indicator reached a new recovery high of 104.2 in August, up 0.2 points.

In the UK, Q2 GDP was unrevised at +0.7% QoQ. There was a stronger contribution from business investment, raising optimism that productivity can improve if the trend continues. Elsewhere the housing market showed signs of moderating, with prices +3.2% yr/yr in August, the slowest rise since June 2013.

In China, the central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months, to underpin growth. Stock markets in China (and elsewhere) bounced from the lows, but sentiment still remains fragile. ‘’
London & Capital Investment Desk Bulletin 2nd September 2015

In short the data shows that the US’s economy is on the up, which mean that the markets are expecting a US interest rate rise. If that happens money may flow into the US, because they get a better return, which means it will flow out of Sterling and the Euro. So Sterling and the Euro should drop in value against the US Dollar. Cheaper to sell into the US but more expensive to buy or visit. And since most raw commodities are priced in US Dollars, they will increase in costs but as most international exporters quote in US Dollars and so get paid in US Dollars, is it really just swings & roundabouts.

The UK seems to be faring well this quarter. Its GDP, which as you know is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, is up. However there are concerns about UK property prices, a mainstay of the economy. This will defiantly be negatively effected if UK interest rates have to rise to counteract the rise in US interest rates.

China, the great unknown. From my experience of doing business there the Chinese stock market is not a good indication of the Chinese real economy. It is distinct from it and driven, in the main, by margin/credit buying and great speculation. I would be weary of using this as a test of what the real economy is doing. Having said that, the real economy in China I still very much controlled by the government and the four major banks. They determine access to money and credit, which is channelled through the State Owned Enterprises. What seems to be the trend is that the Chinese economy is not growing as fast as it was and this has knock on effects on the bulk purchase of raw materials, of which it is a major buyer. Take this, with the view that raw material prices, quoted in US Dollars, will increase if US interest rates are raised and the knock on effect is that we’ll have less demand, in general, for goods and services around the world.