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INTERNATIONAL PERSPECTIVE

Geopolitical issues dominate
International Perspective - December 14, 2018
By Anne D. Picker, Chief Economist

  

Global Markets

Last week markets were dominated by geopolitical news. Trade between the U.S. and China continued to simmer. And the status of Brexit as it nears deadlines also stirred nerves. The ECB and SNB both did the expected with their monetary policies.


 

Swiss National Bank

There were no surprises from the Swiss National Bank in its updated Monetary Policy Assessment (MPA). Once again, the SNB opted to leave policy on hold so that the target corridor for 3-month CHF Libor stays at minus 1.25 percent – minus 0.25 percent with the key deposit rate remaining at minus 0.75 percent. Also, predictably, the SNB restated its willingness to intervene in the foreign exchange markets as and when necessary to prevent any unwanted Swiss franc appreciation. Its view of the currency was that it was still ‘‘highly valued''.

 

The SNB's new economic forecasts show real GDP expanding 2.5 percent in 2018, down from the 2.5 to 3.0 percent predicted in September and reflecting the surprise contraction in the third quarter. The 2019 call is 1.5 percent. At the same time, the inflation outlook has also been trimmed due to the slide in oil prices. The projection is now just 0.5 percent, down from 0.8 percent, in 2019 and 1.0 percent, down from 1.2 percent, in 2020. These forecasts assume the deposit rate remains at minus 0.75 percent over the entire period.

 

The SNB seems committed to negative interest rates over the foreseeable future. No doubt it will hope that additional Fed tightening and the end of the ECB's QE program may relieve some upward pressure on its currency but this is far from certain. Indeed, if anything, rising global political tensions and increasing signs of slowing world growth suggest that the balance of risks could be moving in the opposite direction.


 

European Central Bank

As universally expected, the European Central Bank Governing Council left key interest rates unchanged. The benchmark refi rate will close out 2018 at zero percent, the deposit rate at minus 0.40 percent and the marginal lending facility rate at 0.25 percent. More significantly, the ECB also confirmed that its planned net purchase of €15 billion of bonds this month will be the last under its current QE program which, as previously signaled, will be terminated at the end of the year.

 

There were no changes to the forward guidance that sees the ECB expecting ‘‘key interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium term''. In other words, money market rates look likely to remain sub-zero for at least another nine months, if not longer.

 

The end of quantitative easing raises the question as to what the ECB will now do with its balance sheet and, to this end, the ECB provided some enhanced guidance on its reinvestment policy. This now says that the central bank will ‘‘continue reinvesting in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation''. This will allow the ECB to keep its balance sheet stable and maintain a steady monetary stance. Policy will no longer be eased every month as it has been during QE, but neither will it be tightened. Opting not to cut back on reinvesting once interest rates finally start to rise, it will help to ensure that the prospective tightening is not as aggressive as it might otherwise have been.

 

The ECB also released its new economic projections and these strengthen the case for no early move on rates. Growth in 2018 has been shaded from September's 2.0 percent call to 1.9 percent and next year's rate is also a tick softer at 1.7 percent. The inflation projections are not very different from last time with the 2018 rate nudged up a tick to 1.8 percent but the 2019 forecast trimmed by the same amount to 1.6 percent. By 2021, inflation is put at 1.8 percent and so essentially in line with target. Against this backdrop, ECB Chief Draghi's press conference was somewhat cautious and while economic risks were still seen to be broadly balanced, they were also thought to be moving to the downside.


 

Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Dec 7 Dec 14 Week 2018
Asia/Pacific
Australia All Ordinaries 6167.3 5757.9 5678.8 -1.4% -7.9%
Japan Nikkei 225 22764.9 21678.7 21374.8 -1.4% -6.1%
Topix 1817.56 1620.45 1592.2 -1.7% -12.4%
Hong Kong Hang Seng 29919.2 26063.8 26094.8 0.1% -12.8%
S. Korea Kospi 2467.5 2075.8 2069.4 -0.3% -16.1%
Singapore STI 3402.9 3111.1 3077.1 -1.1% -9.6%
China Shanghai Composite* 3307.2 2605.9 2593.7 -0.5% -21.6%
India Sensex 30 34056.8 35673.25 35962.9 0.8% 5.6%
Indonesia Jakarta Composite 6355.7 6126.4 6169.8 0.7% -2.9%
Malaysia KLCI 1796.8 1680.5 1662.0 -1.1% -7.5%
Philippines PSEi 8558.4 7461.1 7524.4 0.8% -12.1%
Taiwan Taiex 10642.9 9760.9 9774.2 0.1% -8.2%
Thailand SET 1753.7 1650.0 1609.5 -2.5% -8.2%
Europe
UK FTSE 100 7687.8 6778.1 6845.2 1.0% -11.0%
France CAC 5312.6 4813.1 4853.7 0.8% -8.6%
Germany XETRA DAX 12917.6 10788.1 10865.8 0.7% -15.9%
Italy FTSE MIB 21853.3 18742.0 18910.8 0.9% -13.5%
Spain IBEX 35 10043.9 8815.5 8886.1 0.8% -11.5%
Sweden OMX Stockholm 30 1576.9 1454.0 1471.7 1.2% -6.7%
Switzerland SMI 9381.9 8741.0 8713.7 -0.3% -7.1%
North America
United States Dow 24719.2 24389.0 24100.5 -1.2% -2.5%
NASDAQ 6903.4 6969.3 6910.7 -0.8% 0.1%
S&P 500 2673.6 2633.1 2600.0 -1.3% -2.8%
Canada S&P/TSX Comp. 16209.1 14795.1 14595.1 -1.4% -10.0%
Mexico Bolsa 49354.4 41870.1 41312.2 -1.3% -16.6%

 

Europe and the UK

European equities advanced on the week with the exception of the SMI (down 0.3 percent). Advances ranged from OMX Stockholm 30 (up 1.2 percent) to the DAX (up 0.7 percent). Disappointing Chinese economic data weighed on the markets Friday. Reports on flash manufacturing PMI in the Eurozone, France and Germany contributed to the negative mood among investors. Investors shunned equities after data showed China’s November retail sales grew at the weakest pace since 2003 and industrial output increased the least in nearly three years as domestic demand softened further.

 

Borrowing costs in the euro area fell as the weak Chinese data added to Eurozone businesses ending 2018 in a gloomy mood and expanding their operations at the slowest pace in over four years. Adding to the poor sentiment, the European Central Bank cut its forecasts for economic growth and inflation on Thursday.

 

Prime Minister Theresa May’s attempt to renegotiate a Brexit deal with the European Union also did little to dispel investor concerns. Overall global earnings estimates for next year have begun to fall as analysts adjust to a slower pace of global growth with weak economic data piling up from Europe and China. On the week, the FTSE was up 1.0 percent, the CAC added 0.8 percent, the DAX advanced 0.7 percent and the SMI retreated 0.3 percent.

 

UK PM Theresa May faced a vote of no confidence in her leadership from Conservative Party members on Wednesday. The threat of such a move had been hanging over her for some weeks and Monday’s last-minute decision to cancel Tuesday’s key parliamentary vote on the Brexit deal seemed to have tipped the balance. Mrs May survived the vote by a respectable, but less than impressive, majority of 83. This effectively means that in terms of the government's overall stance, nothing has changed. Still, 117 Tory MPs voting against is significant. Mrs May will continue to push for a Brexit Bill that, as it stands, will neither pass the UK parliament nor be acceptable to the EU for any amendment. Moreover, her position has been at least partially undermined by her apparent decision to announce that she will not stand at the next general election due in 2022.


 

Asia Pacific

Worries about slowing global economic growth and skepticism about a trade deal between U.S. and China anytime soon weighed on Asian markets. Asian markets slumped Friday, hurt the disappointing pace of November industrial output and retail sales growth in China. Most Asian equities were down on the week. Losses ranged from the SET (down 2.5 percent) to the Kospi (down 0.3 percent). Increases ranged from the Taiex and Hang Seng (up 0.1 percent) to the PSEi and Sensex (0.8 percent).

 

Investors focused on China’s spate of economic data. The latest batch showed China's industrial output grew at its slowest pace in nearly three years, increasing by 5.4 percent in November, after growing by 5.9 percent a month earlier. Meanwhile, retail sales in China grew 8.1 percent in November, the weakest growth since 2003. In October, retail sales were up 8.6 percent. The slower pace of industrial output and retail sales growth was due to the impact of the ongoing trade disputes with the U.S. On the week, the Shanghai Composite retreated 0.5 percent. A Chinese statistics bureau spokesman said the November data showed downward pressure on the economy is increasing. The data “means that the worst is yet to come and policymakers will be very worried, particularly with consumption growth falling off a cliff”.

 

The Nikkei ended the week 1.4 percent lower despite a fairly decent quarterly Tankan survey report. The Bank of Japan said in its quarterly Tankan Survey that the index of business and manufacturing sentiment in Japan was steady in the fourth quarter of 2018. The large manufacturing index was unchanged with a score of plus 19, beating expectations for plus 18. The outlook reading was plus 15 and shy of forecasts for plus 17 and down from plus 19 in the previous three months. The large non-manufacturing index rose to plus 24 from plus 22.

 

The Sensex was up for the week as the market took in its stride the sudden exit of Urjit Patel as Reserve Bank of India governor and appeared to be quite encouraged by the swift move by the government that saw Shaktikanta Das taking charge on Wednesday. The new governor is expected to steer the central board of the RBI on Friday. The board meeting is expected to discuss micro, small & medium enterprises that are under stress due to demonetization and implementation of the Goods and Services Tax (GST).


 

Currencies

The U.S. dollar advanced against all of its major counterparts on the week. The dollar reached a 19-month high against a basket of currencies, as investors preferred the safety of the world’s reserve currency in the wake of worrisome political and economic news outside the United States. An analyst noted that it isn’t the dollar rallying so much as everyone else is falling.

 

The Chinese yuan fell after data showed retail sales grew in November at their slowest pace since 2003 and industrial output rose the least in nearly three years. The euro weakened as the Eurozone economy showed more signs of a slowdown. Sterling tumbled as traders worried British Prime Minister Theresa May was struggling to secure assurances from the EU over her Brexit withdrawal deal. The dollar’s gains were limited by bets the Federal Reserve might reduce the number of interest rate increases after next week’s widely anticipated 25 basis point increase to 2.25 to 2.50 percent at its policy meeting next Tuesday and Wednesday.

 

Sterling held steady following UK Prime Minister Theresa May’s prevailing in her party’s vote on her leadership Wednesday. It had rallied on Wednesday in anticipation as traders bet her win might allow her to negotiate more generous terms for Britain in its exit from the European Union in March. The pound gained against the euro and the dollar and moved away from 20-month lows. But traders said that only reflected relief in the market — likely to be fleeting — that May had survived and that Britain still had a chance to leave the EU in March with a deal.


 

Selected currencies — weekly results

2017 2018 % Change
Dec 29 Dec 7 Dec 14 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.721 0.718 -0.4% -7.9%
New Zealand NZ$ 0.709 0.686 0.680 -0.9% -4.1%
Canada C$ 0.796 0.752 0.748 -0.5% -6.0%
Eurozone euro (€) 1.194 1.141 1.131 -0.9% -5.3%
UK pound sterling (£) 1.344 1.274 1.259 -1.2% -6.4%
Currency per U.S. $
China yuan 6.534 6.874 6.908 -0.5% -5.4%
Hong Kong HK$* 7.816 7.814 7.811 0.0% 0.1%
India rupee 64.081 70.808 71.899 -1.5% -10.9%
Japan yen 112.850 112.660 113.360 -0.6% -0.4%
Malaysia ringgit 4.067 4.167 4.186 -0.5% -2.9%
Singapore Singapore $ 1.338 1.370 1.377 -0.5% -2.8%
South Korea won 1070.630 1119.690 1130.750 -1.0% -5.3%
Taiwan Taiwan $ 29.775 30.838 30.860 -0.1% -3.5%
Thailand baht 32.696 32.857 32.831 0.1% -0.4%
Switzerland Swiss franc 0.979 0.9898 0.998 -0.8% -1.9%
*Pegged to U.S. dollar
Source: Bloomberg

 

Indicator scoreboard

Eurozone

October goods production (ex-construction) increased a meagre 0.2 percent on the month and nowhere near large enough to reverse a steeper revised 0.6 percent decline in September. Annual workday adjusted growth climbed from 0.8 percent to 1.2 percent mainly courtesy of positive base effects. Headline monthly growth would have been stronger but for a 1.7 percent decline in energy output. Elsewhere, non-durable consumer goods were only flat but durables were up 0.4 percent, intermediates 0.2 percent and capital goods a solid 1.0 percent. Regionally, Germany (minus 0.6 percent) provided a major brake but France and Spain (both 1.2 percent) had a very good month and Italy (0.1 percent) at least edged firmer.


 

Germany

December ZEW survey found analysts even less confident about the current state of the German economy but a little less pessimistic about the outlook. The current conditions component declined a further sizeable 12.9 points to 45.3. Following an 11.9 point drop in November, this was the steepest fall since October 2014 and left the measure at its lowest level since January 2015. This gauge has now lost ground in eight of the last 10 months. However, expectations surprisingly improved again. A 6.6 point increase was the fourth advance in the last five months and, at minus 17.5, made for a 3-month high. That said, the latest reading is still well below its long-run average (22.8) and probably just means that economic growth expectations are now settling down around a decidedly modest rate for next year.


 

United Kingdom

October industrial production (ex-construction) dropped a monthly 0.6 percent following an unrevised flat reading in September and reduced annual growth from zero percent to minus 0.8 percent, a multi-year low. Manufacturing was even weaker, posting a 0.9 percent drop that made for a 1.0 percent contraction from a year ago. The monthly decrease was in large part due to a 3.2 percent slump in the transport subsector and this alone accounted for 0.4 percentage points of the headline drop. Most of the rest of the damage was done by chemicals (minus 1.6 percent) and pharmaceuticals (minus 5.0 percent). Elsewhere, goods output was boosted by a 1.8 percent bounce in mining and quarrying but knocked by small falls in water supply (0.3 percent) and electricity and gas (0.1 percent).


 

Asia/Pacific

Japan

The second estimate of GDP for the July through September months was revised lower from down 0.3 to down 0.6 percent, declining at an annualized pace of 2.5 percent. On the year, GDP inched up 0.09 percent. Annualized GDP also contracted in the January to March 2018 quarter. The decline in GDP in the quarter was mainly driven by weaker consumer and investment spending. Third quarter annualized CAPEX slid 2.5 percent after the preliminary decline of 0.2 percent. The CAPEX contribution subtracted 0.4 point, down from 0.0 percent in the first estimate. Consumption was revised to a decline of 0.2 percent from minus 0.1 percent initially. The estimates worsened reflecting the impact of severe natural disasters during this period.


 

October private sector machinery orders (excluding volatile items) increased 7.6 percent on the month (seasonally adjusted) in October, rebounding sharply from a drop of 18.3 in September. This series, which excludes orders for ships and those from electric power companies, is considered a proxy for capital expenditures. On the year, orders were up a seasonally adjusted 2.5 percent. The out-sized falls back in September, both on the month and on the year, largely reflected the impact of disruptions to production caused by severe natural disasters that befell Japan that month. Manufacturing orders increased 12.3 percent on the month in October after dropping 17.3 percent in September, while non-manufacturing orders (excluding volatile items) rose 4.5 percent after falling 17.1 percent previously.


 

Fourth quarter Tankan survey manufacturing sentiment was unchanged and slightly stronger in the non-manufacturing sector in the three months to December. The survey also indicates firms in the manufacturing sector revised down their plans for capital expenditure in the fiscal year ending March 2019, while firms in the non-manufacturing sector revised their plans higher. The business conditions index for large manufacturers was unchanged at 19 in the three months to December. The equivalent index advanced from 15 to 17 for medium-sized manufacturers and was unchanged at 14 for small manufacturers. Aggregating manufacturers of all sizes, the index was unchanged at 16. Business sentiment was mixed in the non-manufacturing sector but slightly stronger in aggregate. For non-manufacturers, the business condition index rose from 22 to 24 for large firms, fell from 18 to 17 for medium-sized firms, and advanced from 10 to 11 for small firms, with the aggregate index picking up from 14 to 15. For firms of all sizes across both the manufacturing sector and the non-manufacturing sector, the business conditions index rose from 15 in the three months to September to 16 in the three months to December. Capital expenditure across firms of all sizes in both the manufacturing and non-manufacturing sectors is forecast to increase by 10.4 percent in the fiscal year ending March 2019 compared with a previous estimate for an increase of 8.7 percent. This increase in the headline estimate reflects some divergence between the two sectors. Firms in the manufacturing sector forecast capital expenditure to grow by 15.4 percent in the current fiscal year, down from the previous estimate of 16.3 percent, while firms in the non-manufacturing sector forecast capital expenditure to increase 7.5 percent after a previous estimate for an increase of 4.2 percent.


 

China

November industrial production was up 5.4 percent on the year, slowing from 5.9 percent in October. The decline was mainly driven by the manufacturing sector. Output there rose 5.6 percent on the year, down from 6.1 percent in the previous month, reflecting weaker growth in most major categories including automobiles, chemicals, communication equipment, steel products and general equipment. Conditions also weakened in the mining sector, with annual growth in output there slowing from 3.8 percent to 2.3 percent, but strengthened in the utilities sector, with growth accelerating there from a seven-month low of 6.8 percent to 10.8 percent.


 

Bottom line

Worries about a slowdown in global growth sent equities lower. But there were other worries as well. The continuing trade issues between China and the United States weighed on investors’ morale. The continuing Brexit indecision also weighed on financial markets as the UK economy erodes. In Europe, data were mixed. Both the European Central Bank and Swiss National Bank kept their respective policies unchanged. November data from China mostly disappointed. In Japan, third quarter GDP was revised down further into negative territory but the Tankan was steady.

 

The upcoming week is the last full week of 2019. The Federal Reserve holds its last FOMC meeting of 2018. The Banks of England and Japan meet as well. All central bankers will be listen to carefully by investors. In the UK, third quarter GDP and retail sales will be carefully weighed. Both the CPI and PPI will also be released. Australia posts its labour market data for November. The trade situation will continue to wax and wane and Brexit will grind on.


 

Looking Ahead: December 17 through December 21, 2018

Central Bank activities
Dec 18, 19 United States FOMC Meeting and Announcement
Fed Chair Press Conference
Dec 20 UK Bank of England Monetary Policy Announcement & Minutes
Japan Bank of Japan Monetary Policy Announcement
 
The following indicators will be released this week...
Europe
Dec 17 EZ Merchandise Trade (October)
Harmonized Index of Consumer Prices (November, final)
Dec 18 Germany Ifo Survey (December)
Dec 19 UK Consumer Price Index (November)
Producer Price Index (November)
Dec 20 UK Retail Sales (November)
Dec 21 EZ EC Consumer Confidence (December flash)
France Gross Domestic Product (Q3.2018)
Consumption of Manufactured Goods (November)
UK Gross Domestic Product (Q3.2018 final)
 
Asia Pacific
Dec 19 Japan  Merchandise Trade Balance (November)
Dec 20 Australia Labour Force Survey (November)
 
Americas
Canada Consumer Price Index (November)
Dec 21 Canada Monthly GDP (October)
Retail Sales (October)

 

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


 

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