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INTERNATIONAL PERSPECTIVE

Brexit roils markets
International Perspective - November 16, 2018
By Anne D. Picker, Chief Economist

  

International Perspective will be taking off next week to celebrate

Thanksgiving. IP will return on November 30.


 

Global Markets

Equities gyrated through disappointing earnings, tremulous tech thoughts, disappointing economic data to end the week mixed. Markets worried about Italy’s intransient position on its budget and the ongoing drama with Brexit. And on the other side of the globe, the continuing ebb and flow in the trade negotiations between China and the U.S. sent equities fluctuating.

 

Prime Minister Theresa May fought to gain approvals of the Brexit draft with the EU from her cabinet and then Parliament. She survived Thursday’s crucial cabinet meeting called to discuss her draft Brexit agreement with the EU. However, indications are that her backing was far from unanimous and discontent within the party ranks on both sides of the debate looks more entrenched than ever. This increases the risks of the deal failing to win parliamentary approval and Mrs May’s position as PM now looks all the more vulnerable. The threat of a fresh wave of cabinet resignations and the support of the Democratic Unionist Party (DUP), vital to the government as they have no majority in the House of Commons, is now in serious doubt.


 

Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Nov 9 Nov 16 Week 2018
Asia/Pacific
Australia All Ordinaries 6167.3 6011.0 5822.8 -3.1% -5.6%
Japan Nikkei 225 22764.9 22250.3 21680.3 -2.6% -4.8%
Topix 1817.56 1672.98 1629.3 -2.6% -10.4%
Hong Kong Hang Seng 29919.2 25601.9 26183.5 2.3% -12.5%
S. Korea Kospi 2467.5 2086.1 2092.4 0.3% -15.2%
Singapore STI 3402.9 3078.0 3083.6 0.2% -9.4%
China Shanghai Composite* 3307.2 2598.9 2679.1 3.1% -19.0%
India Sensex 30 34056.8 35158.55 35457.2 0.8% 4.1%
Indonesia Jakarta Composite 6355.7 5874.2 6012.4 2.4% -5.4%
Malaysia KLCI 1796.8 1708.1 1706.4 -0.1% -5.0%
Philippines PSEi 8558.4 6968.8 7083.3 1.6% -17.2%
Taiwan Taiex 10642.9 9830.0 9797.1 -0.3% -7.9%
Thailand SET 1753.7 1668.5 1635.0 -2.0% -6.8%
Europe
UK FTSE 100 7687.8 7105.3 7013.9 -1.3% -8.8%
France CAC 5312.6 5106.8 5025.2 -1.6% -5.4%
Germany XETRA DAX 12917.6 11529.2 11341.0 -1.6% -12.2%
Italy FTSE MIB 21853.3 19258.1 18878.3 -2.0% -13.6%
Spain IBEX 35 10043.9 9134.8 9056.8 -0.9% -9.8%
Sweden OMX Stockholm 30 1576.9 1530.5 1499.4 -2.0% -4.9%
Switzerland SMI 9381.9 9074.0 8907.4 -1.8% -5.1%
North America
United States Dow 24719.2 25989.3 25413.2 -2.2% 2.8%
NASDAQ 6903.4 7406.9 7247.9 -2.1% 5.0%
S&P 500 2673.6 2781.0 2736.3 -1.6% 2.3%
Canada S&P/TSX Comp. 16209.1 15274.4 15155.5 -0.8% -6.5%
Mexico Bolsa 49354.4 44263.7 42319.3 -4.4% -14.5%

 

Europe and the UK

European equities retreated on the week. Losses ranged from 0.9 percent (IBEX) to 2.0 percent (MIB and OMX). Worries over Brexit and the Italian budget continued. But there was optimism over the trade talks between the U.S. and China.

 

According to European Central Bank President Mario Draghi, Eurozone growth will continue at a gradual pace. However there is a chance that core inflation may be slow in picking up in the future if uncertainty regarding the economic situation persists. He said that there is no reason why the expansion in the euro area should abruptly come to an end. However, if firms start to become more uncertain about the growth and inflation outlooks, the squeeze on margins could prove more persistent. This would affect the speed with which underlying inflation picks up and therefore the inflation path that is expected in the quarters ahead.

 

The spread between Italian and German bond yields has widened to levels not seen in five years following the formation of a coalition government comprised of the anti-establishment 5-Star Movement and the eurosceptic League in the summer. Investors fear a clash between Rome and the European Commission over budget rules could trigger a new debt crisis like that of 2010-12 and might even push Italy outside the currency bloc. Lack of fiscal consolidation in high-debt countries increases their vulnerability to shocks, whether those shocks are autonomously produced by questioning the rules of the Eurozone’s architecture or are imported through financial contagion. Draghi noted, however, that “contagion” to other indebted countries has been limited.


 

Asia Pacific

Asian equities were mixed on the week. Losses ranged from 3.1 percent (All Ordinaries) and 2.6 percent (both the Nikkei and Topix) to 0.1 percent (KLCI). Gains ranged from 3.1 percent (Shanghai Composite) to 0.2 percent (STI). Both the Shanghai Composite and Hang Seng rebounded from last week’s losses despite the less than satisfying spate of economic data.

 

The Chinese data — and especially the weak credit growth — have spurred talk of its first cut in benchmark lending rates in three years. However, economists and policy insiders say concerns about a potential knock to its currency will likely give the People’s Bank of China pause. The PBoC has already slashed banks’ reserve requirements four times this year and pushed money market rates lower.

 

China’s economic growth has cooled to its weakest pace since the global financial crisis and is expected to soften further in coming months if domestic demand is slow to recover and the United States piles more tariffs on Chinese goods. Beijing has announced a raft of growth-boosting measures in recent months to cushion the fall. But business conditions are expected to get worse before they get better. Data this week showed credit growth slowed sharply in China in October, despite increased injections of liquidity by the central bank into the financial system and pressure on banks from regulators to help keep cash-starved companies afloat.

 

The PBoC has not cut its benchmark 1-year lending rate since October 2015 — it is now 4.35 percent — opting instead to use other more targeted policy tools to influence borrowing costs, such as extending more loans specifically to struggling sectors. Authorities are also concerned that more aggressive easing measures could undermine their recent campaign to reduce a mountain of debt left over from the last stimulus binge during the global crisis. But speculation about a possible rate cut was stirred after the PBoC changed some wording in its latest policy report. Its second-quarter report said the PBoC would “resolutely not engage in flood-like strong stimulus”. That phrase was missing from the third-quarter report released on November 9.

 

Some economists believe the central bank will wait to gauge the impact of the trade war and slowing global growth next year before deciding on another round of broad-based easing. China’s exports to the U.S. have been remarkably resilient so far, but face much higher tariffs from January 1.

 

All eyes are now on a meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping later this month (November 30 and December 1) to see if the two sides can de-escalate their feud, giving Beijing more room to concentrate on domestic policy issues.


 

Currencies

The U.S. dollar was down against its major counterparts including the euro, yen, Swiss franc and the Canadian and Australian dollar for the week. However, the pound sterling was down against the U.S. currency primarily on Thursday. Sterling was on track for its worst weekly performance since August as the government and Prime Minister May grapple with the political turmoil over the terms of the proposed Brexit treaty and threats of a vote of no confidence. The currency recovered somewhat on Friday but was still down for the week.


 

Selected currencies — weekly results

2017 2018 % Change
Dec 29 Nov 9 Nov 16 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.723 0.734 1.5% -5.9%
New Zealand NZ$ 0.709 0.674 0.688 2.2% -2.9%
Canada C$ 0.796 0.757 0.760 0.4% -4.5%
Eurozone euro (€) 1.194 1.133 1.142 0.7% -4.4%
UK pound sterling (£) 1.344 1.296 1.283 -1.0% -4.6%
Currency per U.S. $
China yuan 6.534 6.957 6.938 0.3% -5.8%
Hong Kong HK$* 7.816 7.832 7.829 0.0% -0.2%
India rupee 64.081 72.495 71.925 0.8% -10.9%
Japan yen 112.850 113.820 112.780 0.9% 0.1%
Malaysia ringgit 4.067 4.179 4.191 -0.3% -3.0%
Singapore Singapore $ 1.338 1.378 1.372 0.4% -2.5%
South Korea won 1070.630 1128.130 1128.600 0.0% -5.1%
Taiwan Taiwan $ 29.775 30.768 30.887 -0.4% -3.6%
Thailand baht 32.696 33.060 32.846 0.7% -0.5%
Switzerland Swiss franc 0.979 1.0051 1.000 0.5% -2.1%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

Third quarter flash gross domestic product was up a quarterly 0.2 percent, just half the pace posted in the previous period and the weakest performance since the first quarter of 2013. Annual workday adjusted growth fell from 2.2 percent to 1.7 percent. In contrast to the second quarter when every member state bar Luxembourg (zero percent) recorded positive quarterly growth, the latest period saw contractions from both Lithuania (0.4 percent) and Germany (0.2 percent). There are no GDP expenditure details available in this report but the German FSO has already indicated that weak consumer spending was a factor.


 

Germany

ZEW's November current conditions index fell to 58.2, a near-18 point drop from October. Following a 5.9 point drop last time, this was the eighth decline since the start of the year and leaves the measure at its weakest level since September 2016. Expectations fared better, gaining a modest 0.6 points to minus 24.1. Even so, this was still nearly 43 points below the November 2017 result and made for one of the poorest results seen since late 2011.


 

Third quarter gross domestic product retreated for the first time since the first quarter of 2015. A 0.2 percent quarterly contraction was weak enough to reduce annual workday adjusted growth from 2.0 percent to just 1.1 percent. The unadjusted yearly rate was also 1.1 percent, down from 2.3 percent in the April-June period. The flash report gives no real details on the GDP expenditure components. However, the FSO did indicate that there were negative quarterly contributions from both household consumption and net foreign trade, the latter reflecting a combination of lower exports and higher imports. More optimistically, investment in equipment saw positive growth as did construction. Government spending was also slightly firmer.


 

United Kingdom

The September/October labour market report was mixed with some indications of slowing business activity but further upside pressure on wages. Claimant count unemployment rose a further 20,200 in October following an upwardly revised gain of 23,200 in September. This put the jobless rate at 2.7 percent after 2.6 percent at quarter-end. The ILO data found a 23,000 pick-up in employment in the third quarter within which full-time jobs were up 82,000. However, this failed to prevent a 21,000 increase in joblessness which put the unemployment rate at 4.1 percent, a tick higher than market expectations and the first increase since the fourth quarter of last year. Vacancies last quarter climbed a healthy 14,000 to a new record high of 845,000. This suggests that skills shortages continue to dampen the employment growth figures.


 

October consumer prices were just 0.1 percent firmer on the month. This left the annual inflation rate at 2.4 percent, matching its September result and still within the 2.4 percent – 2.7 percent range seen since February. The stability of the 12-month rate masked downward contributions from food and non-alcoholic drinks, where prices fell 0.2 percent on the month after a 0.4 percent increase a year ago, and clothing and footwear down 0.5 percent after 0.2 percent. Transport (down 0.4 percent after down 0.2 percent) also subtracted. However, downward pressure here was offset by the positive effects of housing and utilities (0.3 percent after 0.1 percent), miscellaneous goods and services (down 0.1 percent after down 0.5 percent) and communication (0.7 percent after down 0.2 percent). As a result, the core CPI was only unchanged at September's level, in turn yielding a steady annual underlying rate of 1.9 percent.


 

Retail sales dropped a monthly 0.5 percent following a smaller revised 0.4 percent drop in September and reduced annual growth of purchases from 3.3 percent to 2.2 percent. This was the first back-to-back decrease since December/January and put sales at their lowest level since June. Excluding auto fuel, the picture was much the same with a 0.4 percent monthly decline reducing yearly growth from 3.6 percent to 2.7 percent. The headline decline would have been even more marked but for a 0.4 percent rise in food purchases, their first increase since July. Excluding auto fuel, non-food demand contracted 1.3 percent, the first negative print in four months. Within this, household goods (down 3.0 percent) were particularly weak and there were also significant declines in textile and clothing (1.0 percent) as well as the other stores category (1.4 percent). The only advance was in non-specialised stores (0.1 percent). Auto fuel (down 1.2 percent) fell for a fourth consecutive month.


 

Asia/Pacific

Japan

Preliminary third quarter gross domestic product declined 0.3 percent on the quarter thanks to the impact of severe natural disasters during this period. GDP fell 0.3 on the quarter after increasing 0.8 percent in the three months to June. The annualized decline was 1.2 percent for the three months to September. The drop in third quarter GDP growth was mainly driven by weaker consumer and investment spending. Private consumption fell 0.1 percent on the quarter after increasing 0.7 percent previously, while private non-residential investment fell 0.2 percent after increasing 3.1 percent previously. Public investment also weakened, while net exports and public consumption were relatively steady and private residential investment recorded stronger growth.


 

Australia

October labour force increased a monthly 32,800 (seasonally adjusted) after an increase of 7,800 in September. The unemployment rate was steady at 5.0 percent, its lowest level since mid-2011 while the participation rate increased slightly from 65.5 percent to 65.6 percent. The increase in headline employment was driven by full-time employment, up 42,300 persons after a revised increase of 24,600 persons in September. Part-time employment fell by 9,500 persons after dropping by 16,800 persons previously. The total number of hours worked increased 0.43 percent on the month after increasing 0.3 percent in September. Over the last 12 months, full-time employment has increased by 238,800 persons, while part-time employment has increased by 69,400 persons.


 

Bottom line

Equities were mixed on the week. In Asia, they worried about the state of trade negotiations between China and the United States. In Europe, they monitored closely the standoff between Italy and the EU on the country’s budget deficit. And Brexit continues to dominate the news as the deadline for an agreement nears. In the U.S., investors are already estimating the trajectory of Federal Reserve rate increases.

 

Next week is Thanksgiving in the U.S. with many taking an extended four day weekend. But there still will be new economic data including the flash November PMIs over the next two weeks. Canada will release its third quarter GDP along with consumer prices and retail sales. And Japan posts its end of month data for unemployment, merchandise trade balance and industrial output. In Europe, the Brexit and Italian crises will continue. On November 30 and December 1, the Group of 20 meets in Argentina. The presidents of the United States and China are expected to meet to try to resolve the trade dispute.


 

Looking Ahead: November 19 through November 23, 2018

The following indicators will be released this week...
Europe
Nov 20 Germany Producer Price Index (October)
France Ifo Unemployment (Q3. 2018)
Nov 23 EZ Manufacturing, Services & Composite PMI (November flash)
Germany Manufacturing, Services & Composite PMI (November flash)
Gross Domestic Product (Q3.2018 final)
France Manufacturing, Services & Composite PMI (November flash)
 
Asia Pacific
Nov 19 Japan Merchandise Trade Balance (October)
 
Americas
Nov 23 Canada Consumer Price Index (October)
Retail Sales (September)

 

Looking Ahead: November 26 through November 30, 2018

The following indicators will be released this week...
Europe
Nov 26 Germany Ifo Survey (November)
Nov 28 EZ M3 Money Supply (October)
Nov 29 EZ EC Consumer and Business Sentiment (November)
Germany Unemployment (November)
France Consumption of Manufactured Goods (October)
Gross Domestic Product (Q3.2018)
Nov 30 EZ Harmonized Index of Consumer Prices (November flash)
Germany Retail Sales (October)
 
Asia Pacific
Nov 26 Japan Manufacturing PMI (November flash)
Nov 29 Japan Retail Sales (October)
Nov 30 Japan Unemployment Rate (October) 
Industrial Production (October)
China Manufacturing PMI (November)
 
Americas
Nov 30 Canada Gross Domestic Product (Q3. 2018)
Monthly GDP (September)
Industrial Product Price Index (October)

 

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


 

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