Market Reports - Current Events


9/24/06 - The Thailand coup: what of the markets?

So far, Thai markets have successfully weathered the eighteenth coup d’etat since 1932. There were a complex set of reasons why the Army General Sonthi Boonyaratglin took power last week: Prime Minister Thaksin Shinawatra, a telecom tycoon, had won three elections since 2001 and was extremely popular with the rural poor. However, his relations with intellectuals, the media, and pro-democracy activists were strained as they said he initiated repression and failed to deal with corruption and nepotism. Consumers and investors were frustrated with the political malaise that had put the economy on hold. Another major factor was a deal that Thaksin and his family had made in January, selling their 49% stake in a giant telecommunications business tax-free to a company in Singapore, a prosperous country resented by many Thais.

Thaksin had been forced from office by mass demonstrations in April, although he still actually ran the nation. Thaksin also scheduled new elections for October, but, General Sonthi swept into power in a bloodless coup late last Tuesday, claiming the favor of King Bhumibol Adulyadej, who is revered by all classes of Thais. As Thaksin retreated to his London house, the baht immediately dove by 1.4%, dragging down several other Asian currencies. Thai stock markets were shut down on Wednesday as businesses nationwide closed. Overseas markets watched and worried, remembering the Asian Crisis of 1997, which had been triggered by the fall of the baht.

However, the new junta quickly revealed that they also wanted to avoid another 1997. General Sonthi, while cracking down on certain freedoms, is promising to step down by the beginning of next month and schedule elections. The Governor of the Central Bank, Pridiyathron Devakula, promptly announced that he saw no need for the Bank to intervene in the baht or on any other major policy issues. Bond and currency markets continued trading smoothly and stock markets reopened after one day off, quickly recovering to near-normal trading levels. Thailand now has an account surplus and foreign reserves to cushion political blows. Foreign investors plowed $2.8 billion into Thai equities last year and seem poised to start again as political paralysis lifts.

However, the changes mean that Thaksin’s ambitious 2006 GDP growth targets are thwarted, with a lesser 4-4.5% rate predicted. Singapore is worried about the ties it had forged with the former regime backfiring, and surrounding nations such as Malaysia, Australia, and Indonesia are unhappy with a military takeover so nearby.  U.S. Press Secretary Tony Snow said that America was “disappointed” in the coup, and will refuse to set up any new trade agreements until democracy is restored.

General Sonthi insists the interim regime has no intention of interfering with the markets or withdrawing from any international organizations or agreements. Stocks have been stable and taken the changes in stride; but if matters turn violent or turbulent, all bets are off.

  1. -FT, September 12, 19, 20, 21; CNN, September 20; NYT, September 20, 21; Canadian Press, September 20; AP, September 21; BBC, September 21

7/10/06 - UK and European Banks Announce No Changes in Interest Rates in July

European bourses rallied as the Bank of England and the European Central Bank posted their interest rate decisions last Thursday. As expected, neither institution changed their rates: the BoE kept to 4.5% for the eleventh month in a row, and the ECB held at 2.75% after two consecutive quarter-point hikes. However, this stability is not guaranteed to last, as inflation fears grow on both sides of the Channel.

In the UK, there is grumbling about the (usually) nine-person Monetary Policy Committee, which has not replaced one member who resigned this spring, nor David Walton, who died unexpectedly last month (he was also the only one to vote to increase rates in June). Chancellor Gordon Brown has yet to choose their successors and is getting sharp criticism from Bank President Mervyn King about it. There are also questions starting to arise about what might happen whenever Prime Minister Blair steps down.

The Bank does not issue immediate explanations of its decisions, but the City believes that they are in a “wait and see” position, as mixed economic news emerged in May and June. UK manufacturers posted stronger-than-expected growth figures, and the economy overall grew 0.7% in the first quarter, beating predictions. However, this is offset by the stagnant energy sector, a slight industrial output decrease, high oil prices, and recent market turmoil due to political disquiet. While the British public’s inflation worries have calmed, the MPC’s have not, and analysts are poised to see if the rate is hiked before the end of the year to head it off.

Such fears are more acute on the Continent, where inflation remained at 2.5% in June, over the 2.0% target level for the third month in a row. Again, high oil prices are being eyed, as well as low unemployment and six-year highs for manufacturing industries across the Eurozone.  Its economy is still improving, but a possible slowdown in the U.S. outlook and a too-strong euro might hurt European exporters, particularly in Germany. ECB head Jean-Claude Trichet used the phrase “stronger vigilance” to describe the bank’s attitude towards price risks in Thursday’s post-announcement press conference, which signaled to most analysts that a rate hike was probable at the August 3rd meeting.

The UK and European markets, after a sharp drop due to North Korean missile tests last Wednesday, reacted with small rallies on Thursday. The German DAX, French CAC-40, and London FTSE100 all increased, as did the pan-European Dow Jones Stoxx 600 index, while the euro and pound closed only slightly down. However, investor appetite for risk will remain low, said equity strategists from HVB Corporate and Markets. “The future monetary policy of the central banks and its ramifications for the economy and the supply of liquidity to the financial markets will remain a source of major uncertainty in the coming weeks.”

  1. -IRChannel 7/6; FT, 7/5,6; BBC 7/6; MW 7/6

8/21/06 - Bolivia and Brazil: market philosophies clash

In the 2005 Bolivian Presidential election, one of the key issues was the Gas War, the controversy over previous governments having awarded lucrative contracts on Bolivia’s vast natural gas fields to foreign companies in the 1990s. It was one of the chief reasons for the election of Evo Morales, who took office in Bolivia this past January, and on May 1, 2006, he decreed that all gas reserves were to be nationalized. All 53 energy installations would come under the full control of a state-controlled firm, and foreign companies had six months to re-negotiate their contracts.  However, the events of last week put the plan in severe jeopardy.

It was no coincidence that the President signed the law on a field owned by a major Brazilian oil firm. Brazil’s Energy Minister, Silas Rondeau, was not pleased with the prospect even when the Bolivian firm initially declared that companies would be paid about 50% of their production costs, and reacted with anger when Morales unexpectedly said that he’d meant no compensation for assets like gas stations, although he would still allow overseas companies to recover their investments and take home a small profit. After Morales said later he wanted to hike the price of gas sold to select Brazilian firms from US$4 per million BTUs to US$5-7, Brazil, reeling, took three steps: quickly investing in their own gas fields and pipelines to try to reduce dependence on Bolivia, talking to OPEC about ethanol and LNG options, and entering into talks with Bolivia to try to salvage the situation. The deadline for a deal was originally September 14th, but was extended August 15th for another sixty days.

On August 12th, watching investors from many countries flee, Bolivia announced that it was temporarily suspending the nationalization, as its state-owned energy firm did not have the funds to carry it out and would try to borrow the US$180 million needed from the central bank. Investment from Brazil has stopped as well, and the situation is very serious for the markets, even if the two countries reach agreement.  Also, the delay does not mean Bolivia has given up on nationalization, just postponed it. Said Luis Broad, an analyst at Rio’s Agora brokerage, “...the entire industry will remain extremely cautious. The spoiled image Bolivia has now won’t change. Companies won’t revive investment plans that have been axed in the wake of nationalization.” 

- Dow Jones Newswire, August 16; Bloomberg, August 12; Houston Chronicle, August 16; South African Press Association, August 15; BBC, May 11;, August 7; FT July 3, August 15