Foolish Weekly Macro Wrap Up

global-news logo Understanding the macroeconomic environment is important in investing as it influences market sentiment and affects the stock market directly. Let’s take a look at three global economic updates or interesting key developments that happened last week which investors should take note of.

Europe show signs of Recovery

A lot of the calm in markets over the past six months was due to the announcement last year by European Central Bank President Mario Draghi that he will do “whatever it takes” to protect the euro and ensure the monetary union holds together.

Recently, Europe is showing signs of recovery as the unemployment rate have now stabilized around 12% and Cyprus has seen some good progress over the summer. The Euro zone has also exited recession with GDP increasing by 0.3% quarter on quarter in the second quarter of this year.

Even though Eurogroup President, Jeroen Dijsselbloem, expressed cautious optimism in the light of recent economic developments, he warned that there was no room for complacency and said, “We need to carry on with resolve”.

China cutting coal consumption

Air pollution has always been a long term area of concern for the Chinese citizens and brought immense pressure on the China government. In a bid to tackle air pollution, China has unveiled several sweeping measures, with reducing coal consumption being one of them.

China said its new plan would aim to cut total coal consumption to below 65% of total primary energy use by 2017, down from 66.8% last year. China will also stop approving new thermal power plants in key industrial areas in order to achieve “negative growth” in coal consumption in the regions.

A fall in demand of coal from China may hurt Geo Energy (SGX: RE4) as it counts China and India as the two destinations for majority of their exports. On the other hand, SembCorp Industries  (SGX: U96) can benefit from the sustained weakness in coal prices for its power plant. Furthermore, it has an arsenal of renewable energy sources which China will likely tap on for alternative energy sources.

Gold under pressure from Syria deal and U.S. Tapering

After a recent bounce of gold prices (up to US$1,423.65) due to the mounting Syria tension, the precious yellow metal took a hammering on more diplomatic progress in Syria and attention turned towards the Fed meeting next week.

In the latest news release on 14 September, the United States and Russia announced an agreement to eliminate Syria’s chemical weapons arsenal, thus warding off the possibility of any immediate U.S. military action against the Syria government.

Following which, many economists are predicting that the Federal Reserve is likely to cut stimulus this time round. The confirmation of tapering may help in strengthening of the greenback and indirectly hurt the gold price, which generally moves in the opposite direction to the US currency.

Tumbling gold prices may have significant downside impact on the listed gold plays too. GLD 10US$ (SGX: O87), a first gold-backed exchange-traded fund to be listed in Singapore, has fallen around 21.36% year to date.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.