Business News Weekly Roundup: May 22 2015

European economy growth concerns

European Central Bank head, Mario Draghi, criticized the European economy at a conference on the unemployment problem in the EU this week saying that “Growth is too low everywhere.”

Draghi is reported in the Economic Times as saying: "Economic conditions have improved somewhat in Europe but growth has not. People in Europe are frustrated by the lack of growth they have witnessed in recent years."

Draghi’s comment comes in spite of the Eurozone posting growth of 0.4% in the first quarter of the year - something which economists believe could bring down the European economy’s 11.3% unemployment rate. The situation across the Eurozone’s member countries, however, is quite varied. Youth unemployment remains as high as 50% in Greece, for instance, and with the country struggling to pay off its debts despite two bailout loans from the EU and the International Monetary Fund, a mooted default could lead to Greece leaving the currency union. This would create huge uncertainties for both the European economy and the global economy.

In an effort to fan the flames on yet more European economic uncertainty, Bank of England chief, Mark Carney, said this week that Britain’s EU referendum should take place “as soon as possible” to deter businesses from halting investments into UK companies until the outcome is agreed.

Record fines for foreign exchange market currency fix

The BBC has released a damning report into the banking scandal that has rocked the foreign exchange market this week.

Five banks have been charged for manipulating the foreign exchange market and have been ordered to pay a record US$5.7bn in charges. The fines have broken a number of records and are the largest anti-trust fines ever implemented by the US Department of Justice (DOJ).

RBS, J.P. Morgan, Barclays and Citigroup have all pleaded guilty to US criminal charges while UBS will plead guilty to rigging benchmark interest rates. Out of this group, Barclays will be fined the most for failing to join other banks in settling negotiations in November – the bank is also sacking eight employees involved with the scandal.

Traders are accused of using chatrooms to manipulate foreign exchange market prices in their favor. One blatant message to a trader, and released to the press, came with the thinly-veiled threat: “Mess up and sleep with one eye open at night.”

Foreign market exchange prices were also being influenced around the daily fixing of currency levels at 4pm. This is when a daily exchange rate fix is established to help investors value their assets and liabilities. During this time certain employees would amass a large portion in currency and, just before the fix, would exit that position, thus leaving others – who were aware of the scheme – able to profit from the fixing.

New York’s superintendent of financial services Benjamin Lawsky said: "They engaged in a brazen 'heads I win, tails you lose' scheme to rip off their clients.”

Chinese economy defies critics

It was widely speculated in April that the Chinese economy is slowing down due to a decrease in manufacturing. However, western investors are being silenced by traders in the region who say that Chinese hedge funds are at a 14-year best.

In data released by CNBC today, findings have found that the US$1.8 billion Golden China Fund gained 18% in April, bringing the fund’s year-to-date gain to 23%. In another boost to the Chinese economy, the Springs China Opportunities Fund gained a further 10% which moves it up to 29% for 2015.

William Ma, Hong Kong-based deputy chief investment officer of Gottex Penjing Asset Management, said: “It's a question of the glass being half empty or half full. Global allocators focus more on top-down macro like GDP slowdown in China, while domestic investors and managers are more optimistic from a bottom-up perspective."

London hedge fund manager, Brendan Howard, is skeptical of the Chinese economy's supposed growth and says: "Activity in China has not yet shown any clear signs of a turnaround. The transmission mechanism from interbank rates to economic growth is less clear. Without an acceleration in credit and investments, it is questionable whether China will be able to engineer a sustainable recovery from this point."

OECD report blames record inequality on stunted economic growth

A global OECD report has revealed that the gap between rich and poor in the world’s advanced economies has never been higher and argues that this level of inequality is stunting economic growth.

The Organization for Economic Cooperation and Development secretary-general, Angel Gurría, says: “Inequality in OECD countries is at its highest since records began. By not addressing inequality, governments are cutting into the social fabric of their countries and hurting their long-term economic growth.”

The OECD report found that the countries with the biggest gaps in equality are the US, Israel, Turkey, Chile and Mexico. It is lowest in Norway, Denmark, Slovenia and the Slovak Republic. On average, the 34 countries analyzed in the report show that the richest 10% of the population earns nearly 10 times the income of the poorest 10%.

The study concludes that measures to reverse the growing share of low-quality jobs and to improve women’s experience in the world of work  is crucial to reducing income inequality and unlocking economic growth.