It was a week where the world eagerly awaited further details of the incoming Trump administration. A slew of appointments from the world of high finance, including Goldman Sachs veteran Steven Mnuchin as Treasury secretary and billionaire Wilbur Ross as Commerce secretary, seemed to disappoint those who recalled Trump’s promise to “drain the swamp” in Washington.
But amid all the sniping, the U.S. president-elect will have been pleased to receive an endorsement from the Organization for Economic Cooperation and Development (OECD). The Paris-based research agency predicts that his public infrastructure plans will revive growth expectations, allowing monetary policy to return to normal. During the election campaign, Trump committed to spend $1 trillion on infrastructure. The OECD said spending on such as scale would boost U.S. economic growth over the next two years, with global benefits as U.S. demand for imports rises. However, it also warned that any slide towards protectionism could offset the advantages.
Commodity prices received a boost after a long-overdue agreement from the Organization of the Petroleum Exporting Countries (OPEC) to cut oil supplies. The energy cartel, which controls more than 30% of the world’s oil, said on Wednesday that it would reduce production by 1.2 million barrels per day (b/d) for the next six months. Non-OPEC producers also agreed to participate; Russia says it will reduce supplies by 300,000 b/d. The news sent crude oil prices soaring above $50 a barrel, marking an 8% increase on the day. Saudi Arabia, which will shoulder most of the burden, was the instigator two years ago of an attempt to undermine the high-cost North American shale industry. Saudi Arabia raised production, leading to a global price collapse, but shale proved remarkably resilient. While the agreement is good news for some of the more cash-strapped OPEC members, whether it holds remains to be seen.
Signs of stress at RBS
The Royal Bank of Scotland (RBS) was exposed as the UK’s weakest bank after failing the latest Bank of England stress test. The state-backed lender must make up a capital shortfall of around £2 billion (US$2.5 billion) to render it fit to survive another financial crisis. The test applied a hypothetical adverse scenario to RBS’s balance sheet, combining a 1.9% fall in the global economy, a crash in the UK property market and the effects of potential misconduct fines. RBS says it will act to make up the shortfall. Such actions could include asset sales and a cost-cutting plan that may include job losses and branch closures.
In the week to Thursday’s close, equity markets fell. The FTSE 100, the S&P 500 and the FTSE Europe (ex-UK) indices were down 1.28%, 1.01% and 0.62%, respectively.
Iceland’s dispute with, er, Iceland bubbled over into legal action this week. The country – famous for cod, hot springs and a cold, cold climate - has a long-standing grievance with the discount retailer that shares its name. The UK-based supermarket chain owns the European trademark for Iceland, the brand. That means companies like fish retailer Iceland Gold and wholesaler Clean Iceland are unable to register their trade names with the European Union. A government statement frostily described the situation as “untenable,” adding that multiple efforts to negotiate with Iceland Foods had been unsuccessful. While the opposing parties’ positions might seem poles apart, the supermarket chain denies that it had given the cold shoulder to the Nordic nation. It pointed out that it sponsored the Icelandic football team at this year’s European Championships (remember that, sports fans?). In a bid to thaw relations, it is sending a high-level delegation to meet with cabinet ministers. Let’s hope they can break the ice.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Companies mentioned in this article are for illustrative purposes only.