Main highlights last week were around the Jackson Hole summit and the BRICS summit:
Jackson Hole summit: Markets awaited Fed Chair Jerome Powell’s comments at the annual meeting of the world’s Central Banks. He kept all options open. In his statement, he said “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident inflation is moving sustainably down toward our objective”. He also added “Given how far we have come at upcoming meetings, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks”. He gave a strong hint there is still a long way to go despite recent price cooling. In other words, the Fed will remain data dependent. Powell was a little more hawkish than in the July Press Conference and went as far as to say the FOMC is “attentive to signs the economy may not be cooling as expected”. This was echoed by Loretta Mester (Cleveland Fed President) who said it was quite possible rates will have to rise again as there was likely more work to do in bringing inflation back to 2%. The Boston Fed President Susan Collins said, “We may need additional increments, and we may be very near a place where we can hold for a substantial amount of time,” (interview with Yahoo! Finance). “I do think it’s extremely likely that we will need to hold for a substantial amount of time but exactly where the peak is, I would not signal right at this point,”. Markets are placing a probability of a 78% chance on a pause at the next (September) meeting and 43% on at the November one.
BRICS summit: Overall, it looks like it was a successful one. Three key things were achieved:
An expansion in its membership base. This was important, at least for optics. Saudi Arabia, Iran, Ethiopia, Egypt, Argentina, and the UAE were admitted as part of the new gang. These six newbies will formally become members on 1st January 2024. It’s the Bloc’s first expansion in 13 years and leaves the door open to more joiners in future. Many more have voiced their desire to join. Including the newly admitted, they amount to some 28% of global GDP with China accounting for more than half of this (18%). They are home to some 40% of the world’s population.
The New Development Bank’s President, Dilma Rousseff (former Brazilian President) said the NDB can help finance African countries’ projects to tackle its most urgent challenges. She highlighted the importance of expanding payment mechanisms, notably local FX, and other financial instruments, to build a more inclusive financial system as well as the need for joint infrastructure projects seeing as Africa has the world’s largest untapped hydroelectric potential. The NDB was created in 2015 and is struggling due to sanctions enforced against founding shareholder Russia.
The Chinese Ministry emphasised the importance of expanding and strengthening cooperation on cross-border payment (local FX platforms and local settlement). Several countries (e.g. Russia, India) echoed this as an area of promise. It’s no secret BRICS et al are trying to wean themselves away from US$ reliance while reducing their dependency on the West. So, if you’re a FIAT-based investor, how concerning is this – will you wake up next week and find yourself poor? No! Think of the BRICS development as a journey.
Look at the evolution and development of the EURO. From humble roots borne out of the Treaty of Brussels, 1948, we then had the Treaty of Paris, 1951, then the Treaty of Rome, 1958, then came the Single European Act, 1987, then the Treaty of Maastricht, 1993 and then the Treaty of Lisbon, 2009. After its creation by just six states, 22 more joined the Union between 1973 and 2013. Today, the EU has its own currency, its own Central Bank, its own settlements and clearing systems, its own judicial laws, its own heath regulations…….etc., etc. It has had its on political issues along the way resulting in referenda over membership with countries actually choosing to leave. In true EU tradition, if at first you don’t want to remain…..make them vote again. Only one escaped the club, the UK in 2020.
Looking at the current cohort of BRICS and newbies – they are not without their issues and ideals. India and China have had tense relations over land for many years – something that flared up only recently. China, Russia and now Iran are vying to form a counterweight to the US and Europe. Others have different objectives – India and Brazil want close and even closer ties with the US and Europe. Brazil rejected the idea the BRICS bloc should seek to rival the US and the G7. There are some powerful states in this new bloc – and they have differing aspirations. Russia’s standing and powerbase has diminished hugely – Putin attended via a televised address as his foreign minister, Lavrov, attended in person on his behalf. The convenient and alleged death of Prigozhin has raised suspicions as a weakened Putin tries to rebuild his so-called ratings back home. Putting it bluntly, in the eyes of the West, this bloc is seen as an “axis of evil”. Even India’s Modi has had all sorts of allegations made against him for stirring up trouble amongst different religious and ethnic groups back in India.
In a nutshell, they have a lot to do but, in the fullness of time, they will steadily advance. It really depends on their initiatives. If they are striving for a common unit of currency – or at least their own currencies with credible backing – then they have a long road ahead. Look at the EU and the Euro! One thing is certain, the BRICS expansion has started. Its progress will come down entirely to politics as countries jockey for position, power, and influence. The latter could be its biggest failing given the degree of diversity and differences between themselves.
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