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4XP foresees much on the financial front of 2011. The previous financial year really did witness a lot of ground-breaking events from the global economy. Oil prices rose from right under the eyes of traders, and currently threatens a global recession if they rise further past $100 a barrel. And what about the euro? The single currency seemed so promising and immune to the global economic crisis that we witnessed in recent years. This all came to a climax with the Greek and Irish debt crises in late 2010.
The US Federal Reserve under Ben Bernanke has to top this all off with the extension of the QE2 policy. On one hand helping the US economy, whilst on the other the QE2 will continue to weigh in on US and global liabilities.
2011 has already seen stocks extend their bullish run past expectations. This has been largely driven by investors dropping the euro as an investment, and throwing their money into US and Far East stocks. When translated into euros, the S&P 500 rose 23 percent in 2010. This is the highest level since the euro was established back in 1999. This is just one example of the interdependency of the global financial system.
What may be a problem as 2011 continues to unfold is that a further weakening of the euro may spur investors to invest their money elsewhere. This was seen already with the Nikkei bringing a 20 percent dividend for Europeans in 2010.
The European bailouts did scare European and other global investors, as the euro dipped by over eight percent last year. Leading investment firms have already seen huge investments in US equities in 2010-11. Despite the possible negative effects of QE2 on the US dollar, the European currency may reach as low as $1.15 per €1 by the beginning of the fourth quarter of 2011. A lot of this does depend on the pace of deterioration of the eurozone.
Threats to stability on the horizon?
Investors are already dropping Spanish, Irish and Greek stocks on a rapid scale in favour of the US markets. Leading economists at the moment even point out that the US market will be the winner this year. This is with even taking in that the US economy still hasn’t shown a clear direction to a one way economic recovery. Economists point out that despite the faults that lie in the US economy; the problems are far worse on the periphery and non-periphery of Europe.
Don’t forget about oil prices: If the dollar and US markets continue to pick up throughout 2011, there may be a reversal on the recent strength of the oil prices we have seen in the past several months. The latest global economic recession was sparked by unrealistic oil prices. Many analysts out there do always like to underestimate this thaw that constantly poses a threat to the health of the global economy. OPEC has already stated that they will not raise production this year, which reduces the likelihood of a dramatic fall in oil prices in the short term. What is a real possibility as 2011 unwinds is if the dollar strengthens primarily from investment and economic growth, investors could pull out of commodities like oil and gold, subsequently reducing the threat of high oil prices to global economic stability.
Oil, oil and oil
For the next few months at least oil will be dominant on headlines of the leading financial newspapers and magazines. Whether economies such as the US, Germany, Britain and France grow isn’t always the dominant issue at stake, because oil prices seem to overshadow everything else. This is understandable considering that oil prices are nearing $100 a barrel. The higher prices will affect the way companies work and will inevitably lead to supply-side inflation. The other concerns may be higher prices for consumers that may dampen economic growth.
If the winter season in the US continues to show much of the same cold weather, then the upward pressure on oil may continue. With US consumer confidence lower than many analysts originally anticipated, the dollar may face downward pressure. In turn, the price of oil is likely to go higher.
The pace of economic growth in India and China is forecasted at about 10 percent for 2011. This will surely weigh in on higher oil demand, as the consumer and business demands of one quarter of humanity increases.
This problem isn’t likely to go away as these two economies outpace the growth of their American and European counterparts.
On the other hand, there are influences that may bring oil prices marginally lower in the coming months. There are fears of an imminent interest rate rise in China and the euro debt crisis could dampen the pace of the global recovery.
The best of both worlds
The best case scenario is a strong dollar and euro. Both of these currencies are vital for the stability and rejuvenation of the global economy – investors know that if either crumbles, the consequences could be catastrophic. There have been many mistakes made by US and European policymakers that have put negative pressure on their currencies – 2011 is the year of a possible reversal of these fortunes.
Not only is a strong dollar and euro what most investors want, but a consumption growth powered by the US is what’s needed to bring confidence to the markets this year. Up until now, the factors driving the equity and currency markets have been speculation and to some extent weaknesses of the developed economies. But a clear economic message from the US could bring confidence to levels we haven’t seen since the first half of the last decade.
Sustained growth of the developing economies may be just what’s needed to bring business confidence to new highs, because if things do go well globally, economic growth in the main developed and developing economies will exceed expectations.
Rising borrowing costs
Rising borrowing costs in Europe is the main consequence that has come out of the eurozone debt crisis. This is already making it more expensive for banks and businesses in Europe to borrow money. After the $1trn bailout package for Europe was approved the negative consequences were inevitable. The truth is that the cracks in Europe and in Britain are already appearing. The rising government debts of the governments of the eurozone and soaring unemployment are a great burden for policymakers to handle.
In Britain, David Cameron and Nick Clegg have already come up with effective plans to curb the rising borrowing costs and government debts. But Britain is already witnessing escalating unemployment and there is a wide consensus that things will get worse before they get better.
The problem of rising borrowing costs has just recently appeared on the surface. Therefore, it will take some time for this to become a full-fledged crisis. If it does, the euro could pay the price with investors opting for the dollar.
Dollar investors may be happy, but more problems for the euro is something that no one wants to see. The consequences could be negative for economies like Japan and China, as they are very dependent on exports. Now may be too early to talk about rising borrowing costs, but it is good to know what the future may bring in the financial world. With this and other issues set to impact the global economy for the rest of 2011, a lot weighs on what the future may bring.
What lies ahead
There are other important factors that will play on the strengths and weaknesses of the dollar, euro and global economic growth going into mid-2011. President Barack Obama has to prove that he is able to show his bipartisanship in the US and abroad. In recent weeks he has done just that by extending the Bush-era tax cuts.
This has already led to more confidence in the US markets. As Obama aims to take control of the US economy and show that he is a centrist economically, there is a good chance that more private and public stimulus will be invested in the US economy.
When looking at the prospects of the eurozone, the main leaders, including German Chancellor Angela Merkel and President of the European Central Bank Jean-Claude Trichet will need to show their leadership skills.
There will be voices all around Europe with the motto that the euro is too big to falter. Trichet and Merkel do believe in this and are likely to use all the resources at their disposal to prevent a further deterioration of the euro and the eurozone. In the process, more and more investors may flee the eurozone as the debt crisis threatens Spain, Portugal, Italy and the rest of Europe’s periphery.
Danny Lake is Business Development Manager at 4XP. For more information: danny@4xp.com
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