Financial market updates in Guildford

This week European leaders gathered in Brussels for the EU summit. While we might have expected Brexit to be the main topic of discussion, most of the drama has centred on how to handle the large numbers of migrants coming across the Mediterranean. This was in no small part the making of the new populist Italian Prime Minister, who basically threatened to derail the event unless the issue was addressed. Migration is also causing trouble for the German Chancellor, who is facing a small rebellion over the issue back home. The summit has provided an important reminder that the leaders of EU countries have their own problems to deal with and their own domestic politics to consider and may be thinking less about Brexit than we imagine.

Elsewhere news emerged of a planned summit between Donald Trump and Vladimir Putin in July. This followed on from the release of satellite images of North Korea which suggest that after talking a good game in Singapore, the rogue nation is continuing to develop its nuclear capability. While this doesn’t necessarily mean the agreement was a bust, it will no doubt come up in Trump’s appraisal next month.

The benchmark Shanghai Composite Index has fallen more than 20% from its January peak in local currency terms. In addition to ongoing concerns about the impact of US tariffs, investors also had Trump’s threat of restrictions on Chinese investment in the US to digest. The strengthening Dollar has also raised concerns about the ability of Chinese firms and the government to service their dollar-denominated debts. Tighter banking regulation, as well as a recent slew of underwhelming data, have also fed into concerns about company earnings.

The People’s Bank of China announced that it would cut the reserve requirements of some of the country’s biggest banks by 50 basis points in a bid to accelerate the pace of debt-for-equity swaps and stabilise growth. The move is expected to raise liquidity by $108bn, more than had been anticipated before the decision was taken. Further reductions later in the year have not been ruled out. They might be needed to stabilise both markets and the real economy, especially if the trade situation deteriorates further.

The popular cryptocurrency Bitcoin has crashed to a four-month low against the dollar following calls by Japan’s financial regulator for digital exchanges to improve their anti-money-laundering systems. Japan’s Financial Services Agency told six exchanges including bitFlyer, QUOINE and BTC Box to take additional steps towards tackling money laundering. This has helped the major cryptocurrency Bitcoin to fall to a four-month low of below $6000. In the year to date, the benchmark cryptocurrency has fallen 56%.

This is not the only development that has hit the cryptocurrency market recently. Last week the South Korean exchange Bithumb was hacked, resulting in $35bn worth of coins going missing. As well as being susceptible to hackers, cryptocurrencies aren’t regulated by central banks or governments which makes them attractive for money laundering. According to an academic study sponsored by the American virtualization technology company Bromium, virtual currencies have become the primary tool used by cybercriminals for money laundering, with cybercriminals moving away from popular cryptos like Bitcoin towards lesser-known currencies like Monero.

After calling a snap election in April, Recep Tayyip Erdogan has retained the presidency of Turkey for at least another five years and strengthened his grip on power by triggering a switch to an executive presidency. This further reduces checks on power and moves the country closer to a one-party state. Erdogan’s ruling Justice and Development party (APK) garnered 52.6% of the vote with the help of their ultranationalist de facto coalition partners the Nationalist Movement party. The two parties together defeated the secularist opposition, led by Muharrem Ince, which won 30.6% of the vote.

The lira initially rallied on news of Erdogan’s re-election but began to slide back as the president’s unorthodox economic views came back to the fore. This is after all the man who called interest rates “the mother and father of all evil” back in May. This had raised questions over the capacity of the central bank to reign in rampant inflation. However, as in other emerging markets, rates were later raised significantly in a failed attempt to stabilise the country’s currency before the election.