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ARTICLE ARCHIVES

INTERNATIONAL PERSPECTIVE

War of words leads to risk averse trading
International Perspective - June 22, 2018
By Anne D. Picker, Chief Economist

  

Global Markets

Most equity indexes tumbled on the week with investors becoming more cautious given the heightened rhetoric on tariffs. The escalating trade dispute between the United States and China raised concerns among investors about the consequences for global growth. U.S. President Trump said on Monday that his administration was prepared to impose tariffs on a further $200 billion of Chinese goods, and warned of more penalties if Beijing fought back. Beijing replied saying it would place its own tariffs on $50 billion worth of American goods. The dispute — part of an intensifying protectionist drive by the Trump administration that has also targeted allies including Canada, Mexico and the European Union has already disrupted global trade. There are also fears that it could have a negative impact on the world economy which, until recently, had shown strong growth.

 

Mid-week, a central bank leaders meeting in Sintra, Portugal discussed how the developing trade dispute is weighing on business confidence and could force central banks to downgrade their respective outlooks. The heads of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia all took a gloomy view on the escalating conflict, arguing that the consequences are already evident. According to Fed Chair Powell, the changes in trade policy could cause a reassessment of the outlook.

 

Such a trade war would come at an especially sensitive time for central banks, as they try to move past crisis-era unconventional measures and build policy buffers for any potential downturn at the end of the current business cycle. ECB president Mario Draghi said he had little reason to be optimistic, arguing that the ECB would have to incorporate the newest wave of punitive measures into its calculations. He warned that the impact could come through reduced confidence, lower investments and a drop in exports — all potentially exacerbated by retaliatory moves.


 

Swiss National Bank

The SNB’s Monetary Policy Assessment (MPA) contained few surprises and left its policy line unchanged from March. The target range for 3-month CHF Libor was left at minus 1.75 percent to minus 0.25 percent and the key deposit rate is still pegged at minus 0.75 percent. On the Swiss franc, the central bank retained its view that the currency was still ‘highly valued' and, predictably, noted the risks of renewed appreciation due to the rising threat of a global trade war and political instability in Europe.

 

In terms of the economic outlook, real GDP growth is still put at 2.0 percent this year, in line with the forecast made in the March MPA. Inflation expectations have been revised up in the short-term due to higher oil prices and the 2018 forecast (0.9 percent) is 0.3 percentage points above the previous call. However, from the middle of 2019 the profile has been trimmed on the back of a softer outlook for economic activity in the Eurozone. As a result, predicted inflation is unchanged at 0.9 percent next year and at 1.6 percent in 2020.


 

Bank of England

The June monetary policy committee decision remained unchanged as anticipated. Bank Rate stayed at 0.5 percent and the overall ceiling on quantitative easing remained at £445 billion (gilts £435 billion, corporate bonds £10 billion). However, there was a surprise in the vote which saw the Committee's two main hawks, Ian McCafferty and Michael Saunders, joined by Chief Economist Andy Haldane in calling for an immediate 25 basis point tightening. This made for a 6 to 3 split on the MPC.

 

The updated forward guidance showed the MPC retaining a tightening bias and still anticipating any future increases in the Bank Rate being at a gradual pace and to a limited extent. However, the guidance was effectively tightened as the Committee also decided to reduce the Bank Rate threshold for when it will start to unwind QE. Previously the Bank had indicated that its benchmark rate would need to be close to 2 percent before it would start to shrink its balance sheet but it has now lowered the potential trigger level to around 1.5 percent. However any reductions in the stock of purchased assets will be conducted over a number of years and at a gradual and predictable pace.

 

The minutes of the meeting showed that the majority of members still want to see additional data before pulling the trigger on interest rates. Moreover, they thought that the balance of risks to the economic outlook had shifted to the downside in respect of slower global growth although they still regard weak first quarter UK GDP as temporary. The three dissenters emphasized upside risks stemming from a strong labour market and rising pay settlements. The next MPC meeting is scheduled for August 2 when the new Quarterly Inflation Report will be available.


 

Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 June 15 June 22 Week 2018
Asia/Pacific
Australia All Ordinaries 6167.3 6205.3 6322.1 1.9% 2.5%
Japan Nikkei 225 22764.9 22851.8 22516.8 -1.5% -1.1%
Topix 1817.56 1789.04 1744.8 -2.5% -4.0%
Hong Kong Hang Seng 29919.2 30309.5 29338.7 -3.2% -1.9%
S. Korea Kospi 2467.5 2404.0 2357.2 -1.9% -4.5%
Singapore STI 3402.9 3356.7 3287.4 -2.1% -3.4%
China Shanghai Composite 3307.2 3021.9 2889.8 -4.4% -12.6%
India Sensex 30 34056.8 35622.14 35689.6 0.2% 4.8%
Indonesia Jakarta Composite 6355.7 5993.6 5821.8 -2.9% -8.4%
Malaysia KLCI 1796.8 1761.8 1694.2 -3.8% -5.7%
Philippines PSEi 8558.4 7529.5 7063.2 -6.2% -17.5%
Taiwan Taiex 10642.9 11087.5 10899.3 -1.7% 2.4%
Thailand SET 1753.7 1704.8 1635.0 -4.1% -6.8%
Europe
UK FTSE 100 7687.8 7633.9 7682.3 0.6% -0.1%
France CAC 5312.6 5501.9 5387.4 -2.1% 1.4%
Germany XETRA DAX 12917.6 13010.6 12579.7 -3.3% -2.6%
Italy FTSE MIB 21853.3 22190.5 21888.5 -1.4% 0.2%
Spain IBEX 35 10043.9 9851.0 9792.1 -0.6% -2.5%
Sweden OMX Stockholm 30 1576.9 1570.4 1549.6 -1.3% -1.7%
Switzerland SMI 9381.9 8642.6 8616.6 -0.3% -8.2%
North America
United States Dow 24719.2 25090.48 24580.9 -2.0% -0.6%
NASDAQ 6903.4 7746.4 7692.8 -0.7% 11.4%
S&P 500 2673.6 2779.7 2754.9 -0.9% 3.0%
Canada S&P/TSX Comp. 16209.1 16314.4 16450.1 0.8% 1.5%
Mexico Bolsa 49354.4 46938.8 46737.6 -0.4% -5.3%

 

Europe and the UK

All but the FTSE tumbled last week even though all advanced on Friday. Another tariff threat from U.S. President Trump was unleashed, this time aimed at the European auto industry. Investor sentiment received an early boost Friday on news that finance ministers from 19 nations finalized plans to get Greece out of its eight-year bailout program. Also, a top lawmaker in Italy's far-right League party reportedly said the government doesn't want to exit the euro. The FTSE added 0.6 percent on the week while the CAC retreated 2.1 percent, the DAX dropped 3.3 percent and the SMI slipped 0.3 percent.

 

The markets were uneasy as early German elections became possible thanks to fractious opinions regarding immigration. Also unsettling was the appointment of two Eurosceptics to the new Italian government. Flash June PMIs indicate that services improved while manufacturing retreated. French business confidence remained steady.


 

Asia Pacific

All but two equity indexes followed here retreated for the week. Worries about tariffs and a potential trade war persisted and investors waited for the OPEC meeting outcome where new production quotas were to be established. Only the All Ordinaries (up 1.9 percent) and the Sensex (up 0.2 percent) managed to gain on the week. Both the Hang Seng (down 3.2 percent) and Shanghai Composite (down 4.4 percent) suffered the large declines, posting their worst weekly loss since early February on worries over a continuing trade battle with the U.S. The Hang Seng posted its worst weekly loss in three months on tightening liquidity conditions and lingering worries over the impact of an escalation in Sino-American trade tensions.

 

Chinese shares fell to their lowest level in nearly two years, as investors nervous about the prospect of an escalating trade war between the U.S. and China dumped everything from large insurers to small tech firms. The pessimism spread to most corners of the country’s financial markets, hitting China’s recently resilient currency and commodities including iron ore and rubber.

 

The Nikkei (down 1.5 percent) and the Topix (down 2.5 percent) retreated thanks to a stronger yen and tariff concerns that pulled down automakers. Weak U.S. economic data and trade war headlines are all hurting the Japanese market’s sentiment and prompting a sell-off in blue chip stocks. An earthquake near Osaka on Monday caused damage to infrastructure such as water and gas lines.


 

Currencies

The U.S. dollar was mixed for the week. It advanced against the pound and the Canadian dollar and was virtually unchanged against the Australian dollar. It declined however, against the euro, Swiss franc and the yen. The pound sterling rose to a six-day high Friday after a Bank of England meeting revived expectations of an interest rate increase this year. However, sterling’s gains were checked by fears of a breakdown in the looming Brexit talks next week.

 

Sterling has struggled through much of June, weighed down by worries about a slowdown in the economy and attempts by British diplomats to secure a deal to exit the European Union in March. The currency rallied Thursday after the Bank of England’s chief economist unexpectedly voted for an interest rate increase. The BoE kept interest rates on hold but the decision by Andy Haldane to join two other policymakers in calling for rates to rise to 0.75 percent lifted the pound off a seven-month low as expectations grew that the BoE could tighten policy in August.

 

OPEC agreed Friday to boost crude oil output by about 600,000 barrels a day in an effort to cool crude prices.


 

Selected currencies — weekly results

2017 2018 % Change
Dec 29 June 15 June 22 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.744 0.744 0.0% -4.5%
New Zealand NZ$ 0.709 0.694 0.692 -0.3% -2.3%
Canada C$ 0.796 0.758 0.754 -0.6% -5.3%
Eurozone euro (€) 1.194 1.161 1.166 0.5% -2.4%
UK pound sterling (£) 1.344 1.328 1.326 -0.1% -1.3%
Currency per U.S. $
China yuan 6.534 6.439 6.505 -1.0% 0.4%
Hong Kong HK$* 7.816 7.850 7.847 0.0% -0.4%
India rupee 64.081 68.018 67.831 0.3% -5.5%
Japan yen 112.850 110.610 109.960 0.6% 2.6%
Malaysia ringgit 4.067 3.985 4.002 -0.4% 1.6%
Singapore Singapore $ 1.338 1.352 1.358 -0.5% -1.5%
South Korea won 1070.630 1097.810 1107.530 -0.9% -3.3%
Taiwan Taiwan $ 29.775 30.011 30.294 -0.9% -1.7%
Thailand baht 32.696 32.666 32.917 -0.8% -0.7%
Switzerland Swiss franc 0.979 0.9969 0.988 0.9% -1.0%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

June flash composite PMI picked up a little steam to end the second quarter. At 54.8 the flash composite output index was 0.7 points above its final May reading. However, this was still the second weakest reading in the last seventeen months. The overall acceleration was wholly attributable to services where the flash PMI rose 1.2 points from its final May print to 55.0, its best mark in four months. By contrast, manufacturing continued to slow and at also 55.0, its flash PMI was 0.5 points short of its final mid-quarter mark and an 18-month low. Manufacturing output saw its slowest growth since November 2016 and while services posted their largest increase in new orders since February, manufacturing recorded their weakest rate in twenty-two months. However, backlogs rose modestly in both sectors and a solid advance in employment was also broad-based. Even so, overall business expectations deteriorated to their weakest point in nineteen months. Inflation developments were positive. Aggregate input costs rose at their fastest rate in five months and output prices also accelerated, albeit with stronger gains in services offsetting smaller rises in manufacturing. For comparison, the U.S. flash composite PMI is included in the graph.


 

Asia/Pacific

Japan

May consumer price index increased 0.7 percent on the year, up slightly from 0.6 percent in April, but still well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI advanced 0.1 percent on the month after falling 0.4 percent in April. Price increases were relatively steady for most categories of consumer spending. Utilities charges, representing around 7 percent on the index, saw the biggest change, increasing 3.1 percent on the year in May after increasing 3.6 percent in April, while food prices, which account for just over a quarter of the total index, rose 0.7 percent on the year, down slightly from 0.8 percent previously. Housing costs, just over fifth of the index, fell 0.1 percent on the year after dropping 0.2 percent previously, while the year-on-year increase in transport and communication costs, representing around 15 percent of the index, picked up from 1.1 percent to 1.3 percent. Core CPI, which excludes fresh food prices, also rose 0.7 percent on the year, unchanged from April. This measure of inflation had trended higher since early 2017 and into the New Year beginning in April but has stalled over the last three months.


 

Americas

Canada

May consumer price index edged up 0.1 percent on the month and was 2.2 percent higher from a year ago. All eight major components increased on an annual basis in May, although five of the eight major components grew at a slower rate. The transportation index rose 5.6 percent in May, following a 4.7 percent increase in April. Energy prices rose 11.6 percent on the year after increasing 6.3 percent the month before thanks to the gasoline index, which rose 22.9 percent in the 12 months to May. The electricity index (down 0.8 percent) posted a smaller decline on the year than in the previous month. Prices for fuel oil and other fuels were up 22.2 percent in the 12-month period ending in May. The all-items excluding energy index increased 1.6 percent on the year after a 1.9 percent increase in April. The principal factor offsetting the increase in May was a decline in the telephone services index. The traveler accommodation index declined 4.2 percent. On a seasonally adjusted monthly basis, the CPI increased 0.1 percent, matching the increases in April and March.


 

April retail sales disappointed, declining 1.2 percent on the month following three consecutive monthly increases. The decrease was primarily due to lower sales at motor vehicle and parts dealers. Inclement weather in many parts of Canada also may have contributed to the overall decline in April. Excluding sales at motor vehicle and parts dealers, retail sales slipped 0.1 percent in April. Sales were down in 8 of 11 subsectors, representing 65 percent of retail trade. In volume terms, sales declined 1.4 percent. Motor vehicle and parts dealers declined 4.3 percent. Sales at new car dealers fell 5.1 percent, after increasing 3.7 percent in March and 2.2 percent in February. Ontario, which accounted for the majority of the decline in dollar terms at motor vehicle and parts dealers, experienced cooler than usual temperatures throughout the month, as well as freezing rain in mid-April. Sales were down at general merchandise stores for the first time in four months. Building material and garden equipment and supplies dealers reported a decrease in sales for the fifth time in six months. Food and beverage stores were up following three consecutive monthly declines. Receipts at gasoline stations increased reflecting higher prices at the pump. In volume terms, receipts at gasoline stations were down 0.1 percent.


 

Bottom line

Both the Swiss National Bank and the Bank of England maintained their respective policy interest rates. However, the Bank of England’s monetary policy committee was split 6 to 3 on whether the Bank should increase its policy rate confirming it should not. It was a quiet week for economic data. Equities retreated on worries about the increasing rhetoric regarding tariffs. Investors shed risk.

 

Only the Reserve Bank of New Zealand meets in the coming week. Key surveys with final UK first quarter GDP are on tap along with the June Ifo business survey and the June EC economic sentiment survey. A first look at June Eurozone inflation via the flash harmonized index of consumer prices will be on tap. Japan will release May retail sales, unemployment rate and industrial production.


 

Looking Ahead: June 25 through June 29, 2018

Central Bank activities
June 28 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
June 25 Germany Ifo Business Survey (June)
June 27 Eurozone M3 Money Supply (May)
June 28 Eurozone EC Economic Sentiment (June)
June 29 Eurozone Harmonized Index of Consumer Prices (June flash)
Germany Retail Sales (May)
France Consumption of Manufactured Goods (May)
UK Gross Domestic Product (Q1.2018 final)
 
Asia Pacific
June 28 Japan Retail Sales (May)
June 29 Japan Unemployment Rate (May)
Industrial Production (May)
 
Americas
June 29 Canada Monthly  Gross Domestic Product (April)
Industrial Product Price Index (May)

 

Anne D Picker is the author of International Economic Indicators and Central Banks.


 

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