Global Markets

Investors were nervous during this past week — tariff concerns flared and then ebbed again causing equities to gyrate in concert with investors’ fears. It was a relatively light week for new economic data to deflect attention from the trade imbroglio and investors had no choice but to await the onset of earnings season which officially got underway on Friday.

Wednesday’s global equity decline occurred thanks to trade war concerns after U.S. President Donald Trump ordered U.S. Trade Representative Robert Lighthizer to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports. The move came after the U.S. imposed a 25 percent tariff on $34 billion worth of Chinese imports last Friday, leading China to retaliate by imposing tariffs on $34 billion worth of U.S. exports.

On the week, though, most equity indexes advanced.

Bank of Canada increases rates

As widely anticipated, the Bank of Canada increased its policy interest rate by 25 basis points to 1.50 percent. The Bank Rate is correspondingly 1.75 percent and the deposit rate is 1.25 percent.

In its statement, the BoC anticipated that the global economy would grow by about 3.75 percent in 2018 and 3.50 percent in 2019. The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the U.S. dollar. This in turn, is contributing to financial stresses in some emerging market economies. The Canadian dollar is lower, reflecting broad-based U.S. dollar strength and concerns about trade actions. The possibility of more trade protectionism is the most important threat to global prospects. The BoC sees Canada’s economy continuing to operate close to its capacity. CPI and the Bank’s core measures of inflation remain near 2 percent, consistent with an economy operating close to capacity.

Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data. In particular, the Bank is monitoring the economy’s adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.

Global Stock Market Recap

Europe and the UK

European equities were mostly higher last week with the exceptions of the FTSE MIB which slipped 0.2 percent and the IBEX which lost 1.7 percent. However, the FTSE was up 0.6 percent, the CAC added 1.0 percent, the DAX added 0.4 percent and the SMI was 1.9 percent higher. Sentiment gyrated from day to day regarding the U.S. and Chinese trade concerns.

Traders had been keeping a close eye on the UK as it hosts a visit from U.S. President Trump. The pound sterling weakened Friday after Trump remarked that Prime Minister Theresa May's current "soft-Brexit" proposal with the EU would probably "kill" any future trade deals with the United States. However, later in the day, the rhetoric changed.

The FTSE continued to climb Monday after the resignation of Brexit minister David Davis had little immediate effect on Prime Minister Theresa May’s hold on power and fueled talk that a soft Brexit was more likely. Davis, who resigned to protest at May’s strategy for leaving the European Union, said on Monday he would not encourage his colleagues to try to oust May and did not want to see her replaced. Davis’ resignation was followed by the resignation of Foreign Secretary Boris Johnson.

Asia Pacific

Equities advanced on the week as trade tensions eased after U.S. Treasury Secretary Steven Mnuchin said the U.S. could reopen trade talks if Beijing was willing to make serious efforts to make structural changes. Gains on the week ranged from 0.7 percent (Hang Seng) to 4.4 percent (Jakarta Composite) and 3.7 percent (Nikkei). Only the All Ordinaries slipped 0.1 percent.

China's Shanghai Composite dropped both on Wednesday and Friday. Friday’s swoon occurred after China’s June merchandise trade surplus with the United States swelled to a record, adding to fears the U.S. may increase tariffs on Chinese products. Chinese exports climbed 11.3 percent while imports advanced 14.1 percent from a year ago. The trade surplus totaled $41.61 billion in the month — the expected surplus was $27.72 billion. A Chinese customs agency report said that “there will be challenges facing foreign trade with rising instabilities and uncertainties in the global environment."

The United States had imposed tariffs on $34 billion worth of Chinese goods on Friday July 6, drawing immediate retaliatory duties from Beijing on U.S. imports in the first shots of a heated trade war. U.S. President Donald Trump warned that his country may ultimately impose tariffs on more than $500 billion worth of Chinese imports — roughly the total amount of U.S. imports from China last year. A sell-off in Chinese markets sent Asian stocks lower as well on Wednesday after U.S. threats of tariffs on an additional $200 billion worth of Chinese goods. Washington proposed the extra tariffs after efforts to negotiate a solution to the dispute failed to reach an agreement, senior administration officials said on Tuesday.

Japan’s equities rallied to post their best weekly gain since March as the U.S. dollar hit a fresh six-month high against the yen. Japan is illustrating once again the perils of just in time supply chains. The most damaging rainfall in three decades has killed more than 200 people and brought businesses and transport to a halt in western Japan, indicating just how weak the nation's infrastructure is with respect to floods. The storms dealt a heavy blow to companies big and small, flooding stores and factories, disrupting supply chains, cutting off water and power, and keeping employees at home.

An example of insufficient disaster planning at many companies has compounded the impact of the flooding. An electronic components maker said it had drawn up a business continuity plan in case of earthquakes "but not for torrential rains." Quake-prone Japan had also put far more energy into protecting buildings from temblors than from water damage to factories and stores. The government plans to designate the rains and flooding a severe disaster, enabling it to mobilize subsidies for ravaged communities. In addition, Tokyo will consider a supplemental budget for fiscal 2018 if current disaster recovery funding and financial reserves prove insufficient. Opposition parties have offered to put aside differences over casino legislation and other issues for now to concentrate on disaster relief and recovery.

Currencies

The U.S. dollar rallied against all of its major counterparts on the week including the euro, pound sterling, Swiss franc, yen and the Canadian and Australian dollars. At week’s end, sterling fell after U.S. President Donald Trump, in an interview with The Sun newspaper published late Thursday, said UK Prime Minister Theresa May’s plan for a so-called soft Brexit would damage the likelihood of a trade deal between Britain and the U.S.

On Thursday, May’s government published a 120-page report that provided further details on the vision for the UK’s future relationship with the European Union, which was agreed at a Cabinet meeting last week. The strategy calls for frictionless trade in goods between the UK and the EU, prompting critics to say that wouldn’t amount to a clean break by the UK from the bloc.

U.S. Treasury Secretary Steven Mnuchin said on Thursday that the United States and China could reopen trade talks, briefly easing concerns about the trade dispute. But data showing China’s trade surplus with the United States swelled to a record in June as exports grew could further inflame tensions. Trump this week pledged to impose tariffs on $200 billion more of Chinese imports and Beijing has vowed to retaliate. Some U.S. companies frontloaded their imports from China in June as tariffs kicked in on July 6.

The dollar’s broad rally on Friday was also fueled by U.S. consumer prices data a day earlier. That showed a steady buildup of inflation pressure that could allow the Federal Reserve to raise interest rates as many as four times in 2018. While rising inflation is largely expected by markets, it will reinforce the view of a “widening in monetary policy divergence” between the Federal Reserve and other central banks.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

EZ industrial production excluding construction expanded 1.3 percent on the month and easily more than reversed April's smaller revised 0.8 percent decline. This was the largest monthly increase since last November and enough to lift annual workday adjusted growth from 1.7 percent to 2.4 percent. May's jump was broad-based. Both durable and non-durable consumer goods output climbed a monthly 2.1 percent while intermediates were up 1.6 percent and capital goods 0.7 percent. Energy gained 0.5 percent. Regionally, the monthly rebound was dominated by Germany where production was up 2.5 percent. Italy (0.7 percent) and Spain (1.0 percent) also made progress but France (down 0.2 percent) saw a third successive decline.

United Kingdom

May industrial production was down a monthly 0.4 percent and followed a sharper revised 1.0 percent drop in April. Annual growth was halved to just 0.8 percent. The key manufacturing sector held up better and output here advanced at a 0.4 percent monthly rate and only dented April's 1.3 percent decline. Yearly growth rose to 1.1 percent. The monthly increase was led by transport equipment (1.1 percent) and pharmaceuticals (2.4 percent) alongside textiles and leather (2.6 percent). The main negative impact came from metal products (down 1.7 percent). Overall industrial production was hit by a 4.6 percent drop in mining and quarrying and a 3.2 percent decline in electricity and gas supply. Water supply was up 1.2 percent.

May goods trade deficit was £12.36 billion, essentially unchanged from a smaller revised £12.40 billion in April and amongst the largest seen over the last year or so. Exports were up 4.1 percent on the month while imports expanded 2.7 percent. However, over the last three months the former shrank 3.6 percent while the latter grew 1.6 percent. The deficit with the rest of the EU was £8.87 billion after £8.06 billion. The deterioration here effectively was offset by an improvement in the shortfall with the rest of the world which weighed in at £3.49 billion. The underlying position worsened with the red ink excluding oil and other erratic items rising from £11.31 billion to £11.71 billion, its weakest performance since March 2017. Core exports increased 2.8 percent and imports 3.1 percent. The respective 3-monthly rates were markedly poorer with the former at minus 4.0 percent and the latter 0.5 percent.

Asia/Pacific

Japan

May private sector machinery orders (excluding volatile items) tumbled a seasonally adjusted monthly 3.7 percent but jumped 10.8 percent on the year. On an unadjusted basis, orders were up 16.5 percent from a year ago. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. Manufacturing orders were up 1.3 percent in May after jumping 22.7 percent the month before. Non-manufacturing orders (excluding volatile items) rose 0.2 percent after increasing 0.4 percent previously. Manufacturing orders were up 26.2 percent from a year ago while nonmanufacturing orders (excluding volatile orders) were up 8.4 percent. Even though volatile items are excluded from the main series, machine orders continue to be volatile from month to month.

China

June consumer prices were up 1.9 percent on the year as anticipated. In June, the CPI slipped for a fourth month, this time by 0.1 percent. For the year to date, the CPI was up 2.0 percent when compared with the same months the year before. Urban CPI was up 1.8 percent on the year while the rural CPI was up 1.9 percent. Among the annual changes in the major categories, food prices were up 0.3 percent after edging up 0.1 percent in May. Non-food prices were up 2.2 percent for a second month. Clothing prices were up 1.1 percent for the fifth consecutive month. Health care was up 5.0 percent, the slowest gain in the last eight months. Transportation prices jumped 2.4 percent after 1.8 percent the month before.

June producer price index was up 4.7 percent from a year ago after increasing 4.1 percent in May. On the month, the PPI was up 0.3 percent. On a year to date basis, the PPI was up 3.9 percent after 3.7 percent in May. Among the annual changes in key categories, production materials prices were up 6.1 percent from a year ago after increasing 5.4 percent in May. Mining & exploration was up 11.5 percent after increasing 8.1 percent the month before. Consumer goods edged up 0.4 percent after gaining 0.3 percent the month before. Among consumer goods, prices for food & related products increased 0.7 percent after a 0.3 percent gain in May and durable goods prices retreated 0.5 percent after declining 0.7 percent in May.

June merchandise trade balance in US dollar terms was $41.6 billion. Exports were up 12.8 percent on the year while imports were 19.9 percent higher. The trade surplus was the highest since December and up from $24.23 billion in May. China's merchandise trade surplus in yuan terms was 261.88 billion, up from May's 156.14 billion yuan. Exports improved, increasing 4.9 percent from a year ago after increasing only 3.2 percent on the year. Imports however, declined to an increase of 11.5 percent after jumping 15.6 percent in May from a year ago. It was noted that in the release that foreign trade challenges were rising. Trade was facing rising international instability and uncertainty.

Bottom line

Equities mostly advanced in a volatile week of trading. The U.S. dollar rallied against its major counterparts. The Bank of Canada increased its policy interest rate by 25 basis points to 1.5 percent. The U.S. proposes 10 percent tariffs on an additional $200 billion worth of Chinese goods. Fed Chair Jerome Powell said the U.S. economy is in a ‘good place’. The European Central Bank’s minutes notes that an ample degree of monetary stimulus is still needed.

The Federal Reserve publishes its Beige Book in preparation for its August 1 policy announcement. Fed Chair gives his semi-annual testimony to Congress on July 17 and 18. China’s second quarter gross domestic product and June retail sale and industrial production data will be released. Japan’s merchandise trade data will be posted. And the UK reports on the labour market, retail sales and consumer and producer price indexes.

Looking Ahead: July 16 through July 20, 2018

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