If cities are your cup of tea, then here is some good news. The 2016 Worldwide Cost of Living Report compares the prices of 160 products and services – from food and drink to domestic care and private schools – in cities around the world. It found the cost-of-living in many cities fell during 2015 thanks to lower commodity prices, weakening currencies, and geopolitical unrest.
Be warned: a lower cost-of-living doesn’t mean a city offers good value. Take Zurich, for instance. Remember the uproar when the Swiss unpegged their currency early in 2015? The Swiss franc realized double-digit gains, the Swiss stock market swooned, and the Swiss people went shopping in neighboring countries. Well, the cost of living in Zurich fell from September 2014 to September 2015, but the decline wasn’t proportionate to declines elsewhere in Europe, and Zurich currently reigns as Europe’s most expensive city.
In September 2015, the most and least expensive cities in the world were:
Republic of Singapore
Hong Kong, China
Cities in the United States didn’t fare well, either. A strong U.S. dollar helped push all 16 of the U.S. cities that were in the survey up at least 15 places. New York and Los Angeles both rank among the 10 most expensive cities in the world.
Last week, global financial markets were churning, but it really only mattered if you were an oil trader, Chinese bureaucrat or hedge fund manager.
Now it’s starting to get scary for everyone.
An 8.5 percent drop in the Shanghai Composite index in Monday’s trading session spread to financial markets across the world. In the United States, the broad Standard & Poor’s 500 index was down 2.5 percent in Monday morning trading, after steeper declines in Asian and European stock markets, falling prices for oil and other commodities, and a rush of money into the safety of United States Treasury bonds.
What’s fascinating is that there is no clear, simple story about what is different about the outlook for United States and European corporate profits; interest rates; or economic growth compared with one week ago, when the S.&P. 500 index was 8 percent higher.
Here’s how to make sense of what is a truly global story, stretching from the streets of Shanghai, where stock investing has become a middle class sport in recent years, to the oil fields of both the Middle East and Middle America, to the hallways of power in the Federal Reserve in Washington.
This Started in China, but Is a Lot Bigger Than China
The immediate trigger to the outburst of global volatility was China, where the sharp drop in stocks Monday continued a rout that has been underway — with periodic pauses thanks to government interventions — all summer.
The Chinese economy is slowing, and the 38 percent drop in the Shanghai Composite Index since June 12 is indeed a huge number. There is no question that this giant economy is struggling with a transition from the investment-and-export-led boom of the last generation toward something more sustainable.
But a few facts make China’s problems less satisfying as an explanation for the turmoil across world markets. The Chinese stock market has risen sharply over the past year as millions of middle-class Chinese citizens took to making investments. Even after its steep drop this summer, the Shanghai index is down less than 1 percent for the year and still up 43 percent from one year ago.
There may be a more complex story for why a sharp drop in the Chinese market should cause bigger ripples in the global economy than the sharp gain over the six months that preceded it. The fact that the Chinese government has pulled out unprecedented steps to try to contain the stock market sell-off, to little avail, may suggest limitations on the power of even the mighty Chinese state.
In other words, the sell-off in Chinese stocks may not matter much in isolation. But it tells us much about the inability of Chinese leaders to bring its economy in for a soft landing. And that is something scarier.
Other Emerging Markets Are Getting Hammered
Some of the key evidence for the “this is about more than China” story come from other emerging markets, stretching from Malaysia to Mexico, that are also taking it on the chin. Their currencies, stock and bond prices have fallen sharply over the last week. Some of that most likely reflects exposure to the Chinese economy. But some of it reflects something bigger.
Call this the Taper Tantrum 3.0.
The original taper tantrum happened in June 2013. It is a cute name for what happened when global financial markets collectively went berserk over the realization that the Fed was serious about tapering its program of quantitative easing — or for regular folks, that the Fed would wind down its injections of money into the financial system over time.
In effect, the Fed’s easy money policies led global investors to search for higher-yielding securities, which they found in many faster-growing emerging markets. Money gushed into these countries in search of better returns from 2010 until 2013, driving up prices of assets.
But as the end of the era of cheap dollars has approached, that hot money has pulled out — and created volatile spikes in interest rates and damage to those emerging economies. (Look at this presentation by Hyun Sung Shin of the Bank for International Settlements for a more detailed argument around how and why this happens).
Falling Oil Prices Are a Cause and Effect
The carnage in financial markets has had a particularly big impact of the price of commodities, including oil, the most economically significant commodity of them all.
The price of a barrel of oil fell from around $60 in late June to under $40 on Monday. Over time, that will be good news for American and European energy consumers, but there are complex feedback loops that probably make the commodity sell-off both a cause and a result of the broader emerging markets panic.
When oil prices first plummeted in the second half of last year, there were widespread forecasts that the price drop would cause oil exploration to shutter around the world, helping keep the market in balance. Instead, American producers have kept up production, keeping supplies high despite lower prices.
Here’s the feedback loop: The slowdown in China and other emerging markets lowers demand. High supplies and weak demand equals lower prices — which feeds back into weaker economic conditions for energy-producing countries like those in the Middle East, Latin America and Russia.
Then the Fed Makes Its Move
In the background of all of this is a crucial decision looming for the United States Federal Reserve. Fed officials have expressed confidence that the domestic economy is on track and that the time is right to raise interest rates after nearly seven years of keeping them near zero. It could make that move at its policy meeting Sept. 16 and 17.
Fed officials have indicated a determination to base interest rates on what is most appropriate given the state of the American economy and not to overreact to fluctuations in markets. The latest volatility will test that resolve.
Futures markets are increasingly betting that the Fed will indeed hold off to assess the damage to the economy, if any, from the latest global financial strains. On Monday, the market priced in a 24 percent chance of a rate increase in September, compared with a 48 percent chance just a week ago.
And the value of the dollar on currency markets fell 1.6 percent Monday (as measured by the dollar index) as investors priced in greater likelihood of the Fed’s keeping rates lower for longer.
Commentators have long accused that the Fed of overreacting to the latest financial market moves, a complaint that makes Fed officials bristle; they argue they are making their decisions based on measures of the real economy like inflation and employment data. If markets remain volatile heading into the next meeting but economic data remains consistent with recent solid readings, that will make for a tough decision.
Of course, it is the Fed’s job to set policy based on where the economy is going, not where it has been. If markets keep falling, that could endanger American growth prospects. On the other hand, the Fed’s job isn’t to try to protect investors from the risks of a downturn.
And if the last few days have taught anything, it is that global markets will be poised for a big reaction, no matter what the central bank does.
Wall Street released a deluge of positive reports about Fitbit on Monday, as the quiet period following its June IPO was lifted, giving the stock a boost.
Fitbit, which makes wearable fitness trackers, is dominating a fast-growing space. The company lays claim to a whopping 85% of the U.S. market, up from 59% just two years ago.
Fitbit is a “brand that has become synonymous with the category,” writes PiperJaffray analyst Erinn Murphy. In other words, it has become the Kleenex of fitness trackers.
Analysts are excited about Fitbit’s ability to continue capitalizing on the wearables space, which is hot and getting hotter. Consumer spending is growing faster on these devices than on any other consumer electronics gadgets out there, according to IDC.
“While some investors argue wearables are a niche or fad, our work suggests penetration is approaching levels enjoyed by notebooks in the US and will increase over the next year,” writes Morgan Stanley analyst Katy Huberty.
Here’s what Wall Street is so rosy on:
Fitbit looks poised for long-term growth
Fitbit has room to run, agree analysts, who love that the consumer brand is so well-known. For instance, the company can do more with corporate wellness programs subsidized by employers. Right now, Fitbit gleans just 7% of sales from such programs.
It can also look to international markets to drive growth. It’s already the global leader in the wearables space, with 34% market share, but international markets remain largely untapped. “The bottom line is that very few consumers own fitness trackers to date,” writes Deutsche Bank analyst Ross Sandler. He figures that even 5% penetration in developed markets and 2% penetration in emerging markets would trigger demand for nearly 31 million fitness bands. (Last year, Fitbit sold 10 million devices.)
Plus, product innovation should help fuel growth.
“We believe devices are just one part of the Fitbit story – the part that is immediately visible and has been the growth driver to date,” writes SunTrust analyst Robert Peck, who notes that Fitbit has the potential to expand into fitness-oriented services that complement its physical trackers. Fitbit could become a “one-stop hardware/service solution to peoples’ health and fitness concerns,” he posits.
Deutsche Bank’s Sandler goes even farther, envisioning a Fitbit that goes beyond health and fitness: “There is no reason why your Fitbit device (in the future) couldn’t display email and text messages, turn on the lights to your home, unlock your car, and many other basic life-improving functions – in addition to tracking your health stats.”
Apple Watch is not a death sentence
The Apple Watch has gotten a lot of buzz and is frequently cited as a key threat to Fitbit. But while attention is great, buying is better. People are three times more likely to hear about Fitbit and actually go out and purchase one than they are an Apple Watch, according to a SunTrust survey.
This could change, some analysts point out, when the next generation of Apple Watch comes out and it becomes easier to buy.
Still, there are key distinctions between the two devices and who wants to buy them. For instance, Fitbit is cheaper and therefore accessible to more people. It also has a much longer battery life (it’s hard to monitor your sleeping if you have to charge your device every night) and you don’t have to own an iPhone to use it, like you do with an Apple Watch.
Morgan Stanley’s Huberty sums it up like this: “Apple is too big and Fitbit share too high to not assume some share loss but overlap will be limited by different price points and features.”
It’s actually making money
The San Francisco-based company swung to a profit last year, earning $132 million on revenue of more than $745 million. It has been helped by the rapid popularity of its fitness trackers: Last year it sold 10.9 million devices, more than double the 4.5 million devices it sold in 2013.
These financials are “robust,” says SunTrust’s Peck, who points to Fitbit’s strong revenue growth rate (up 150% in 2014) and gross margins (45-50%). He sees $140 million in profit this year on revenues of $1.4 billion.
Fitbit has drawn comparison to consumer growth stocks like Under Armour UA+3.61% and GoPro from several analysts. It has “superior growth metrics to-date,” writes PiperJaffray, and combines “a powerful consumer brand with technology.” Its stock is also trading at similar levels to other consumer growth stocks in the post-IPO period.
When Fitbit made its public debut last month, the stock gained nearly 50% on its first day of trading to close at $29.68 per share. Since then, it has gained 110% from its IPO price to $42 per share. Share were up another 5% to $44.24 on Monday.
U.S. stocks closed more than 1 percent higher in light volume trade Monday, following gains overseas on news of a bailout agreement between Greece and its creditors.
“I think it’s just a sigh of relief that it’s over, but let’s face it, they just kicked the can,” said Maris Ogg, president of Tower Bridge Advisors. “It seems like we kicked the can on a number of fronts. Earnings probably will be front and center int he next couple of weeks.”
About 11 stocks advanced for every 4 decliners on the New York Stock Exchange, with an exchange volume of 571 million and a composite volume of 2.8 billion as of 3:59 p.m. Average volume for the entire day is 3.4 billion.
“You’ve got a relief going on, short covering going on,” said Quincy Krosby, market strategist at Prudential Financial. “What you want for confidence buying is to see a market close with buying orders on the close.”
The Dow Jones industrial average traded about 220 points higher, with Microsoft and DuPont leading most blue chips higher. The index recovered recent losses to trade about 0.80 percent higher for the year.
The Nasdaq Composite jumped 1.5 percent as Apple and the iShares Nasdaq Biotechnology ETF (IBB) rose more than 1.5 percent.
The S&P 500 held near 2,100, led by a rise in information technology stocks and consumer discretionary’s 1.3 percent gain to an all-time high.
The Dow transports also briefly advanced more than 1 percent, with airlines leading gains.
“I think the market’s technically very oversold,” said Bruce Bittles, chief investment strategist at RW Baird. “The market’s poised to go up but to break this trading range (we’ve been in) since January you need to see volume pick up… number of stocks hitting 52-week highs expand.”
He said the S&P 500 breaking past 2,100 would be an encouraging sign.
European Council President Donald Tusk said early on Monday that euro zone leaders reached an unanimous agreement with Greece after all-night talks in Brussels to move forward with a bailout loan for the cash-strapped nation, provided Athens implement tough reforms.
“The jury’s still out on whether or not this is going to be accomplished,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
To receive this third bailout, Greece’s parliament must pass the new rules in areas such as privatization, labor laws and pension reforms by Wednesday. The 86 billion euro ($95.2 billion) in funds would come over three years.
In the meantime, euro zone finance ministers were expected to discuss Monday how to keep Greece financed before the bailout deal is reached. Athens faces a 7 billion euro repayment deadline on July 20 to the European Central Bank.
The ECB announced it maintains the emergency assistance cap for Greek banks, which will remain closed for at least two more days.
The Dow Jones industrial average futures were about 140 points higher before the open.
European stocks jumped on news of the conditional Greece deal, with the German DAX up about 1.5 percent and the STOXX Europe 600 up nearly 2 percent
In Asia, stocks surged with the Nikkei up 1.57 percent and the Shanghai Composite leaping 2.4 percent as it extended a recovery from a recent plunge.
Art Hogan, chief market strategist at Wunderlich Securities, said the domestic response will likely be less exuberant since the major averages ended last week little changed. Only the Dow eked out a gain, of a mere 0.17 percent.
Stocks rose slightly past their opening levels, while bond yields held steady. The U.S. 10-year note yield was 2.44percent and the 2-year held near 0.67 percent. The German 10-year bund yield fell to 0.85 percent.
The U.S. dollar extended gains with the euro dipping below $1.10.
Also in focus is the Iranian nuclear deal, which would allow more oil exports. Talks on a deal were extended past a June 30 deadline and are expected to reach a conclusion Monday.
Crude oil futures settled down 54 cents, or 1.02 percent, at $52.20 a barrel on the New York Mercantile Exchange. Gold futures fell $1.70 to $1,156.20 an ounce in afternoon trade.
No economic data or earnings of note were expected Monday.
Second-quarter earnings season gets underway with a slew of major reports on Tuesday that include JPMorgan Chase and Wells Fargo. On the economic front, retail sales are due Tuesday morning.
“Each data point in and of itself may not be important, but collectively they’re important, especially since there’s a premium on the data,” Krosby said.
Federal Reserve Chair Janet Yellen delivers her semi-annual testimony on the economy to Congress on Wednesday and Thursday.
“If she focuses on (international news and the dollar) that will give the market a huge boost because she’s more concerned about it than she suggested in her speech Friday,” Krosby said.
In other news, the United States posted a budget surplus of $51.8 billion in June, down 27 percent from the same period last year, the U.S. Treasury Department said on Monday.
The Dow Jones Industrial Average traded up 211, or 1.19 percent, at 17,972, with Microsoft and Caterpillar leading gains and Merck and UnitedHealth the only decliners.
The S&P 500 traded up 21 points, or 1.05 percent, at 2,098, with information technology leading nine sectors higher and utilities the only decliner.
The Nasdaq traded up 72 points, or 1.45 percent, at 5,070.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.
Oil prices fell sharply on Monday after Greece rejected debt bailout terms and as China rolled out emergency measures to prevent a full-blown stock market crash, adding to worries about poor demand growth at a time of global oversupply.
The result of Greece’s referendum has put in doubt its membership in the euro, pulling down the single currency (EUR=) against the dollar.
A strong dollar tends to pressure commodities as it makes fuel more expensive for holders of other currencies.
Commodities were also sucked into market turmoil that has seen Chinese shares (.CSI300) fall as much as 30 percent since June due in part to an economy that is growing at its slowest pace in a generation.
Chinese brokerages and fund managers have agreed to buy massive amounts of stocks to support markets, helped by China’s state-backed margin finance company, which in turn would be aided by a direct line of liquidity from the central bank.
“Uncertainty over Greece is bearish for oil. It adds an extra negative factor on top of the turmoil in Chinese financial markets, the recent rise in U.S. drilling rigs, and a potential increase in Iranian oil supply,” said Olivier Jakob, senior energy analyst at Petromatrix in Zug, Switzerland.
“The main implication is for euro/dollar and I think it will put additional pressure on the euro,” he added.
Benchmark Brent crude oil (LCOc1) fell $1.42 a barrel to a low of $58.90 before recovering a little to around $59.00 by 0925 GMT. U.S. light crude (CLc1) fell as low as $54.34, down $2.59 from its close on July 2. July 3 was a U.S. holiday.
The falls left both crude benchmarks at their lowest since mid-April.
With markets already nervous due to the turmoil in Europe and China, fundamentals were also bearish.
U.S. drilling increased for the first time after 29 weeks of declines, the strongest sign yet that higher crude prices are coaxing producers back to the well pad.
Production in Russia and the Organization of the Petroleum Exporting Countries is also at or near records.
“Demand is good, but supply is better,” said Bjarne Schieldrop, chief commodities analyst at SEB in Oslo.
Putting further pressure on oil markets is a possible nuclear deal between global powers and Iran, which could add more oil to oversupplied markets if sanctions are eased.
“Reports increasingly suggest a deal is likely before July 9,” Morgan Stanley analysts said in a report.
Oil is expected to spiral even lower, as concerns about global growth collide with record production and the potential for more supply from Iran.
West Texas Intermediate crude futures plunged 7.7 percent Monday and were in official correction territory, with a decline of more than 11.5 percent since July 1. Brent was more than 6 percent lower.
Oil plummeted on fresh worries that Greece’s anti-austerity referendum could lead to its exit from the euro zone, creating negative fallout across the region’s economy.
“The drop in oil is going to stop, but not for now,” said Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch. “You’ve got every cylinder pointing south. You don’t want to try to grab this falling knife.”
Other factors that contributed to the drop were apparent movement in Iran’s nuclear negotiations and new focus this weekend on China’s stock market collapse. The stronger dollar could also add pressure, as the euro skids.
Strategists see the floor for WTI oil at around $50, but some say it could continue to fall toward the lows of about $42 from mid-March.
WTI crude futures settled down nearly 8 percent Monday, down $4.40 at $52.53 per barrel.
“This week is a huge week. We have two things that people in the markets have been worried about literally for years, and they’re both happening at the same time,” said Michael Wittner, head of commodities research Americas at Societe Generale. “The oil market is a little twitchy,”
Strategists say the market is worried about potential Greek contagion that would impair the European economy. But the situation is unclear, and the uncertainty could stretch on for weeks, which could also dampen economic activity and keep the market on edge.
“On the Iran deal, I think people are waking up to the fact that Iran is … saying it wants to double its exports once the ban is lifted,” said John Kilduff of Again Capital.
Blanch said while there is no agreement yet, the deal over Iran’s nuclear program appears closer and the market is beginning to price in the flow of Iranian oil.
“If a deal gets done this week, maybe it’s a few more dollars down. That may be a buying opportunity,” Blanch said. Blanch said the 30 million to 40 million barrels Iran currently has in floating storage could be on the market fairly quickly.
Negotiators have set a deadline of this week for the talks between Iran, the U.S. and five other powers. Iran is reportedly pushing for a complete lifting of the United Nation’s arms embargo.
Views vary on how quickly Iran will start to get more oil out onto the world market if there is a deal.
“I think oil markets understand very well, depending on what gets decided one way or the other, it’s going to be months,” said Wittner. “The only thing fast is the floating storage, but again, that’s going to have to wait until restrictions are lifted.”
Analysts agree it will take time for Iran to reach its potential. “You’re going to have 600,000 barrels a day of incremental supply heading into the middle of next year,” Blanch said. “All of that in my view creates a very negative backdrop for the oil market.”
As for China, traders have been watching its high-flying stock market melt down.
“So far, it’s the stock market. The argument is whether the Chinese government is worried. Are they acting aggressively on the stock market because they are worried about the real economy?” said Wittner. “That’s the issue. It’s too early to say on that one.”
But markets have been worried about slower Chinese growth, and the China stock market collapse has the potential to hurt the broader population of individual investors.
Blanch said another catalyst for lower prices will come with the Fed’s interest rate hikes, expected to begin later this year or early next year, because they could have a negative impact on emerging market economies.
A more near-term negative for crude, however, could be the slowdown in U.S. gasoline demand, expected to be peaking this week with Fourth of July holiday driving.
Blanch does expect some relief with a pending slowdown in U.S. oil production, so far holding near 40-year highs of 9.6 million barrels a day. He said the lower prices could make production to decline by 500,000 barrels a day, before picking up again some time next year.
Strong U.S. production has also been met by a pickup in Saudi Arabian production, also believed to be near record highs.
Gene McGillian, an analyst with Tradition Energy, said the market is waiting for new data on traders’ positioning, expected later Monday. As of last week, longs outnumbered shorts by a wide margin.
“The question is, does the market hold $50 and do we pivot back to the $40s?” he asked, adding at some point the longs could start bailing, adding further pressure on prices.
After Sunday’s landslide “no” result in Greece, the survival of the country’s banks — closed for the past week and with a daily ATM withdrawal limit of €60 per customer — hangs in the balance as the European Central Bank considers its next move.
The ECB’s governing council was due to meet Monday in Frankfurt, Germany, to discuss whether to continue propping up the Mediterranean country’s struggling lenders after Greeks voted 61.3% to 38.7% to reject the terms of a European Union-led bailout to replace the one that expired on June 30.
With the prospect of a Greek exit from the eurozone now very real, that puts the already fragile banking system in even more of a capital crunch, observers warned.
“Bad blood, closed banks and no more bailout,” tweeted ING-DiBa Economist Carsten Brzeski, while Berenberg Bank Chief Economist Holger Schmieding blogged that the absence of an immediate bailout deal makes it “very hard” for the ECB to authorize continuing emergency support for Greek lenders.
The Greek banks most at risk are the country’s largest: National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank Ergasias. They account for more than 90% of Greek banking assets.
All four had their long- and short-term issuer default ratings, along with their viability ratings, downgraded last week by Fitch Ratings, which warned that they would have defaulted had capital controls not been imposed at the start of the week.
However, shares in the banks rose sharply on Monday, with Alpha Bank closing up almost 13%.
As for how to plug the capital holes, Credit Suisse Group analysts Neville Hill and William Porter suggested three possible courses in a Monday research note: bankruptcy; a recapitalization from the European stability mechanism that would put Greek banks under EU ownership; or, in the case of a ‘Grexit,’ or Greek exit from the eurozone, capitalization by the Bank of Greece. The latter would entail converting all euro contracts into a new currency, meaning that a Greek banking system as such would cease to exist.
For now, the ECB is staying mum on whether to lift its €88.6 billion ($97.7 billion) ceiling on emergency liquidity assistance for Greek lenders, two weeks before another crucial deadline when Greece has to repay €3.5 billion to the ECB.
“Regarding Greece, we currently have no communication planned for today,” an ECB representative said.
Besides the ECB meeting, Sunday’s referendum outcome left politicians scrambling to prevent a major Greek financial meltdown and unprecedented eurozone exit.
EU Council President Donald Tusk spoke by phone earlier in the day with ECB President Mario Draghi and Eurogroup chief Jeroen Djisselbloem, while German Chancellor Angela Merkel and French President François Hollande are due to compare notes over dinner in Paris. Euro-area finance ministers will gather in Brussels on Tuesday afternoon, followed by an evening summit of EU leaders likely to drag on for most of the night.
In a short statement Monday, Djisselbloem called the referendum outcome “very regrettable for the future of Greece,” warning that difficult measures and reforms are inevitable for the economy to recover.
As politicians and monetary policy makers try to figure out what happens next and await a revised bailout proposal from Greek Prime Minister Alexis Tsipras, observers weighed in on the consequences of a Grexit.
“A Greek exit from the common currency would be a financial, economic, social and potentially also political catastrophe for Greece, aggravated by the chaotic way a new currency would have to be introduced,” analysts at the Brussels-based European Policy Centre wrote on Monday.
They added: “Greece would be cut off from international financial markets, with disastrous repercussions for Greek banks and companies, while capital flight and emigration would become endemic … The political system might well be undermined, with potential dire consequences for stability and democracy in Greece, which is already under strain because of the deep split in society.”