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INTERNATIONAL PERSPECTIVE

Investors are nervous
International Perspective - March 16, 2018
By Anne D. Picker, Chief Economist

  

Global Markets

Equities were mixed last week — investors continued to be very sensitive to current politically driven events. A combination of worries about a trade war persisted along with personnel turnover in the U.S. administration and left investors feeling insecure.

 

A key issue roiling investors is U.S. President Donald Trump's move to place duties on steel and aluminum. The European Union wants to be exempted from U.S. duties of 25 percent on steel and 10 percent on aluminum. The European Commission, which coordinates trade policy for the 28 EU members, has said that if the EU is not exempted, it should set duties of 25 percent on a range of U.S. products, whose annual imports to the European Union are worth €2.8 billion. The list of products ranges from rice to orange juice, make-up, motorcycles, motor boats and stainless sinks. It also includes many metal products for use in construction and industry. The EU says the U.S. cannot use national security as a justification for its metals tariffs. That means Europe can respond with "rebalancing" measures. The EU's 28 member states would also have to agree on any action.


 

Swiss National Bank

As widely expected, the Swiss National Bank in its quarterly monetary policy assessment left its 3 month Libor at minus 0.75 percent — within the minus 1.25 to minus 0.25 percent range. There was very little new in the MPA. However, it underlines the SNB's willingness to keep negative interest rates along with its preparedness to intervene in the foreign exchange markets in order to cap the safe haven Swiss franc.

 

The pick-up in CPI inflation from a low of minus 1.4 percent in November 2015 to plus 0.6 percent in February thanks to the slide in the Swiss franc began in earnest around the middle of last year. Domestic price pressures are still quite benign despite some increase in capacity utilization and slowly falling unemployment. To this end, any renewed strength in the local currency could seriously jeopardize the progress on inflation made so far and push the normalization of monetary policy even further into the future.

 

Chairman Thomas Jordan noted that Switzerland was "dependent upon an open world market", adding: "If customs duties or non-tariff restrictions are built up, that would not be good for Switzerland." He said U.S. protectionism could become a threat to the export-dependent Swiss economy and could quickly trigger safe-haven flows that would drive up the value of the currency despite the Bank's expansive monetary policy.


 

Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 March 9 March 16 Week 2018
Asia/Pacific
Australia All Ordinaries 6167.3 6069.2 6054.94 -0.2% -1.8%
Japan Nikkei 225 22764.9 21469.2 21676.51 1.0% -4.8%
Topix 1817.56 1715.48 1736.63 1.2% -4.5%
Hong Kong Hang Seng 29919.2 30996.2 31501.97 1.6% 5.3%
S. Korea Kospi 2467.5 2459.5 2493.97 1.4% 1.1%
Singapore STI 3402.9 3485.6 3512.14 0.8% 3.2%
China Shanghai Composite 3307.2 3307.2 3269.88 -1.1% -1.1%
India Sensex 30 34056.8 33307.14 33176.00 -0.4% -2.6%
Indonesia Jakarta Composite 6355.7 6433.3 6304.95 -2.0% -0.8%
Malaysia KLCI 1796.8 1843.9 1846.39 0.1% 2.8%
Philippines PSEi 8558.4 8372.5 8238.15 -1.6% -3.7%
Taiwan Taiex 10642.9 10864.8 11027.70 1.5% 3.6%
Thailand SET 1753.7 1775.4 1811.76 2.0% 3.3%
Europe
UK FTSE 100 7687.8 7224.5 7164.14 -0.8% -6.8%
France CAC 5312.6 5274.4 5282.75 0.2% -0.6%
Germany XETRA DAX 12917.6 12346.7 12389.58 0.3% -4.1%
Italy FTSE MIB 21853.3 22745.6 22857.69 0.5% 4.6%
Spain IBEX 35 10043.9 9686.1 9761.00 0.8% -2.8%
Sweden OMX Stockholm 30 1576.9 1589.6 1573.48 -1.0% -0.2%
Switzerland SMI 9381.9 8931.9 8882.53 -0.6% -5.3%
North America
United States Dow 24719.2 25335.74 24946.51 -1.5% 0.9%
NASDAQ 6903.4 7560.8 7481.99 -1.0% 8.4%
S&P 500 2673.6 2786.6 2752.01 -1.2% 2.9%
Canada S&P/TSX Comp. 16209.1 15577.8 15711.33 0.9% -3.1%
Mexico Bolsa 49354.4 48556.5 47445.090 -2.3% -3.9%

 

Europe and the UK

Equities were mixed on the week in choppy trading. A drop in Eurozone inflation combined with continued worries over a potential trade war weighed on investor sentiment. Investors were nervous over the political uncertainty in the U.S. due to White House personnel changes. Traders were also looking forward to the upcoming policy statement from the Federal Reserve next week along with Fed Chairman Jerome Powell's first press conference. Investors are hoping the Fed will provide some clarity on the number of rate increases it is planning this year. On the week, the FTSE was down 0.8 percent and the SMI declined 0.6 percent. The CAC edged up 0.2 percent while the DAX was 0.3 percent higher.

 

New economic data were sparse in the week. February harmonized index of consumer prices was revised down to an annual increase of 1.1 percent from the preliminary estimate of 1.2 percent. January industrial output tumbled a monthly 1.0 percent while labour costs slowed to an increase of 1.4 percent on the year in the fourth quarter. And in Italy, retail sales declined 0.5 percent in January.

 

According to European Central Bank President Mario Draghi, the ECB will end its asset purchase program only when inflation makes sufficient progress in its path towards the target of 'below, but close to 2 percent' over the medium term. Although inflation is converging towards the target, the Bank requires more evidence, "We still need to see further evidence that inflation dynamics are moving in the right direction," he said. Monetary policy will remain patient, persistent and prudent to guarantee the return of inflation to the target.


 

Asia Pacific

Equities were mixed for the week — U.S. political tumult upset investors here as well. And of course, traders are awaiting the looming FOMC meeting scheduled for next week. The past week started on an upbeat note but was mostly downhill from there. And Asian stocks slid Friday as reports of more chaos in the Trump administration tested investors' nerves, already frayed by fears that U.S. tariffs could hurt the global economy and trigger a trade war. The developments, together with a report earlier this week that Trump is seeking to impose tariffs on up to $60 billion of Chinese imports, cemented investor concerns that the administration is increasingly leaning towards protectionism. Fears that the tariffs could disrupt synchronized global growth dwarfed recent strong economic data. On the week, losses ranged from 0.2 percent (All Ordinaries) to 2.0 percent (Jakarta Composite). Gains ranged from 0.1 percent (KLCI) to 2.0 percent (SET).

 

On Friday, the Japanese Diet approved in a majority vote the government nomination of Haruhiko Kuroda for a second five-year term as Bank of Japan governor. The Diet also approved the government nominees for the two deputy governors posts — Masayoshi Amamiya, executive director in charge of monetary policy at the BoJ, and Masazumi Wakatabe, an economics professor at Waseda University. Following approval by the Upper House earlier on Friday, a majority 'yes' vote at the Lower House finalized the parliamentary process of endorsing the incoming top BoJ policymakers. Kuroda's current five-year term ends on April 8 while Amamiya and Wakatabe will replace Hiroshi Nakaso and Kikuo Iwata, whose five-year terms end on March 19. At a news conference after the latest BoJ policy meeting, Kuroda repeated his recent remarks that the central bank is "not at a stage to consider the specifics of an exit" from large-scale monetary easing because "there is still some distance" toward the bank's 2 percent inflation target.


 

Currencies

The U.S. dollar tumbled last week against the yen. Since the start of 2018, the currency has declined steadily against the yen, weighed by factors including fears of U.S. protectionism, more turmoil in the Trump administration and mounting fears of Washington's ballooning budget deficit. The U.S. currency is also down in 2018 against the euro, pound sterling and Swiss franc as well. Only the commodity currencies — the Australian and Canadian dollars are down against the U.S. dollar so far this year.

 

Concerns that U.S. trade tariffs could hurt the global economy along with the personnel changes have rattled markets in recent days, pushing the dollar lower and leaving the yen as the main beneficiary. Some analysts said the yen was also boosted by domestic factors especially the confusion about when and how the Bank of Japan could start to ease record levels of monetary stimulus.


 

Selected currencies — weekly results

2017 2018 % Change
Dec 29 March 9 March 16 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.785 0.771 -1.7% -1.0%
New Zealand NZ$ 0.709 0.729 0.721 -1.1% 1.8%
Canada C$ 0.796 0.780 0.764 -2.1% -4.0%
Eurozone euro (€) 1.194 1.231 1.229 -0.2% 2.9%
UK pound sterling (£) 1.344 1.385 1.394 0.7% 3.7%
Currency per U.S. $
China yuan 6.534 6.334 6.335 0.0% 3.1%
Hong Kong HK$* 7.816 7.838 7.843 -0.1% -0.3%
India rupee 64.081 65.168 64.940 0.4% -1.3%
Japan yen 112.850 106.840 106.070 0.7% 6.4%
Malaysia ringgit 4.067 3.912 3.907 0.1% 4.1%
Singapore Singapore $ 1.338 1.316 1.318 -0.1% 1.5%
South Korea won 1070.630 1069.820 1066.150 0.3% 0.4%
Taiwan Taiwan $ 29.775 29.299 29.121 0.6% 2.2%
Thailand baht 32.696 31.314 31.236 0.2% 4.7%
Switzerland Swiss franc 0.979 0.9510 0.953 -0.2% 2.7%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

January Eurozone industrial production excluding construction declined 1.0 percent on the month following an unrevised 0.4 percent rise in December. This was its first decline since last September and its worst performance since December 2016. Annual workday adjusted growth slowed sharply from 5.3 percent to 2.7 percent. A monthly 6.6 percent slump in energy production did much of the damage but there were also hefty declines in both intermediates (1.0 percent) and durable consumer goods (1.9 percent). Partial offsets were provided by capital goods (1.2 percent) and, to a much lesser extent, consumer non-durables (0.1 percent). Regionally, the monthly headline decline was led by France (minus 2.0 percent) and Spain (minus 2.5 percent). Germany (up 0.3 percent) at least reversed most of December's 0.4 percent drop while elsewhere the picture was very mixed.


 

Italy

Fourth quarter unemployment rate was down to 11.0 percent from 11.2 percent in the previous quarter. This was the lowest quarterly reading since the third quarter of 2012. Unemployment has been trending down since early last year and reached a trough in December at 10.9 percent. January 2018 saw a 0.2 percentage point rise to 11.1 percent but this could prove only temporary given the inherent volatility of the monthly data. Even so, the latest readings still leave Italy with the third highest rate in the entire EU and compare with an average national rate of just 6.1 percent in 2007 before the onset of the Great Recession.


 

Asia/Pacific

Japan

January private sector machinery orders (excluding volatile items) increased 8.2 percent on the month (seasonally adjusted), rebounding from a decline of 9.3 percent in December. The data, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, machinery orders (excluding volatile items) advanced 3.6 percent, rebounding from a 5.0 percent decline the month before. Both the manufacturing and non-manufacturing sector orders improved. Manufacturing orders rose 9.9 percent on the month after a decline of 8.5 percent in December, while non-manufacturing orders (excluding volatile items) increased 4.4 percent after falling 5.3 percent previously. On the year, manufacturing orders accelerated from 3.0 percent to 16.8 percent but declined 7.0 percent for the non-manufacturing sector after dropping by 10.9 percent in December.


 

China

January and February industrial production was up 7.2 percent on the year after increasing 6.2 percent in December. Data for January and February are not published separately because of the impact of differences in the timing of lunar New Year holidays. The pick-up in headline industrial production growth in the first two months was broad-based. Growth strengthened in the manufacturing sector, with output up 7.0 percent on the year in January and February after an increase of 6.5 percent in December, though there was some divergence within the sector. In particular, growth strengthened for cement, steel products and general equipment but weakened for automobiles, textiles, chemicals and communication equipment. The utilities sector accelerated while mining output rebounded from a decline to a gain.


 

Bottom line

Equities were mixed last week. Investors fretted about a possible trade war and uncertainties regarding the U.S. White House personnel. The Swiss National Bank published its quarterly monetary policy assessment and left its policies unchanged.

 

In the upcoming week are the FOMC (Wednesday) and the Bank of England and the Reserve Bank of New Zealand (Thursday). Flash March PMIs will be released for Japan, the Eurozone, Germany, France and the U.S. Japan posts February merchandise trade report along with consumer prices. Key data for the UK including consumer and producer prices and the labour market report will be released.


 

Looking Ahead: March 19 through March 23, 2018

Central Bank activities
March 21 United States FOMC Monetary Policy Announcement and Press Conference
FOMC Economic Projections
March 22 New Zealand Reserve Bank of New Zealand Monetary Policy Announcement
UK Bank of England Monetary Policy Announcement & Minutes
 
The following indicators will be released this week...
Europe
March 19 Eurozone Merchandise Trade Balance (January)
Italy Industrial Production (January)
March 20 Eurozone EC Consumer Confidence (March flash)
Germany ZEW Survey (March)
UK Consumer Price Index (February)
Producer Price Index (February)
March 21 UK Labour Market Report (February)
March 22 Eurozone Manufacturing, Services & Composite PMI (March flash)
Germany Manufacturing, Services & Composite PMI (March flash)
Ifo Survey (March)
France Manufacturing, Services & Composite PMI (March flash)
UK Retail Sales (February)
 
Asia Pacific
March 19 Japan Merchandise Trade Balance (February)
March 22 Japan Manufacturing PMI (March flash)
March 23 Japan Consumer Price Index (February)
 
Americas
March 23 Canada Consumer Price Index (February)
Retail Sales (January)

 

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


 

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