Global Markets

Trade tensions continued to addle investors as Canadian and U.S. negotiations were coming down to the wire at this writing (4 PM Friday) with the gap between the two countries on the independent dispute settlement mechanism continuing to impede resolution. Canada wants to maintain it while the U.S. wants to scrap it. This very issue also proved to be the most contentious in the original negotiations three decades ago. Resolving agricultural issues were also contentious and at an impasse.

It was reported that U.S. President Trump said he was ready to impose more tariffs on $200 billion worth of goods from China just as soon as the public comment period on the plan ends September 5. Trump also threatened in an interview with Bloomberg to withdraw from the World Trade Organization if “they don’t shape up” — a move that would further undermine one of the foundations of the modern global trading system. In addition, he said the European Union’s proposal to eliminate auto tariffs is not good enough and called the EU’s trade policies “almost as bad as China.”

On Wednesday, the leaders of the United States and Canada expressed optimism that they could reach a new North American trade deal by a Friday deadline, although Canada warned that a number of tricky issues remained. Analysts said the NAFTA talks boosted the appetite for riskier assets. Global trade tensions heated up after U.S. President Donald Trump was cited by Bloomberg News as saying he would pull out of the World Trade Organization if it doesn't treat the U.S. better.

The U.S. and Mexico reached a breakthrough in efforts to revamp the NAFTA trade agreement, potentially ending an acrimonious impasse in relations between the countries. At that time, it was unclear if Canada, NAFTA’s third partner, would sign on to the deal. A spokesman for Chrystia Freeland, Canada’s foreign minister, said Canada was “encouraged” by the “optimism” shown by the U.S. and Mexico but cautioned that a full NAFTA deal was not a foregone conclusion.

Even if a comprehensive deal is reached including Canada, approval by all three countries’ legislatures presents a complicated final hurdle. The U.S. Congress is likely to vote at the earliest in a “lame duck” session of Congress after the midterm elections in November, or next year, when it is possible that the political landscape may change.

As markets closed Friday, the Canadian and U.S. negotiations ended with without reaching an agreement. On Friday, talks between the United States and Canada remained deadlocked over several contentious issues, including Canada’s dairy sector, its rules governing movies, books and other media and a mechanism for settling trade disputes between the two countries. It is unclear where dispute will go from here.

Global Stock Market Recap

Europe and the UK

Uncertainty surrounding Brexit and U.S. trade policy dented the outlook for global growth, sending equities lower for the week and month. The talks between Canada and the United States to revamp NAFTA appeared to stumble over the independent dispute settlement mechanism as top negotiators struggled for a fourth day to meet President Donald Trump’s Friday deadline. On the week, the FTSE dropped 1.9 percent, the CAC was down 0.5 percent, the DAX slipped 0.2 percent and the SMI was 0.9 percent lower. For the month, OMX advanced 2.6 percent but the FTSE tumbled 4.1 percent, the CAC retreated 1.9 percent, the DAX slid 3.4 percent and the SMI dropped 2.2 percent.

Investors are monitoring the ongoing Brexit negotiations between the UK and the European Union. It was reported that the UK and EU now aim to finalize divorce terms by mid-November, later than the October deadline regularly mentioned in public.

The pound’s plunge in the wake of the Brexit vote in June 2016 had previously supported the FTSE. Even though the pound is still at relatively depressed levels, Wednesday’s comments from the European Union’s chief Brexit negotiator Michel Barnier saying the bloc was prepared to offer Britain an unprecedented close relationship after it quits the EU provided a boost. Barnier also said Thursday that the EU must prepare for a no-deal Brexit, even if its goal was an orderly exit. A stronger pound means that companies that rely on exports don’t benefit as much when they translate their revenues from dollars into sterling.

EU Brexit negotiator Michel Barnier’s comments that the bloc was prepared to offer Britain an unprecedentedly close relationship after it quits the EU sent sterling higher, in turn weighing on the FTSE and its predominantly dollar-earning constituents.

Asia Pacific

Equities ended the last week in August on a down note after media reports suggested that U.S. President Donald Trump is eager to push ahead with higher tariffs on Chinese exports as soon as next week. Trump's threat to pull out of the World Trade Organization and his comments that the European Union is "possibly almost as bad as China" when it comes to trade, also stoked fears of a worsening trade war. However for the week, only the Shanghai Composite retreated. And for August, four of 13 indexes declined. The Shanghai Composite tumbled 5.3 percent, the STI lost 3.2 percent, the Hang Seng dropped 2.4 percent and the Topix was 1.0 percent lower.

Chinese equities declined thanks to renewed concerns over the United States and China trade spat. But trade is not the only worry — investors are concerned that growth may be leveling off. The CFLP PMI inched up to a reading of 51.3 from 51.2 in August. And the CFLP Non-Manufacturing PMI rose from 54.0 in July to 54.2 in August. The Hang Seng ended the month 2.4 percent lower.

Even though the Nikkei was up 1.2 percent on the week while the Topix added 1.5 percent, investors remained jittery over the persistent emerging market currency woes. And Japanese economic data painted a mixed picture — July industrial output dropped marginally while the unemployment rate edged upward from a month earlier. In August the Nikkei added 1.4 percent but the Topix retreated 1.0 percent.

Currencies

The U.S. dollar was mixed last week. It advanced against the euro and the Canadian and Australian dollars but retreated against the yen, pound sterling and Swiss franc.

But emerging market currencies that rely on foreign capital to finance their current account deficits were hit hard. The Argentine peso, the world’s worst-performing currency this year due to the country’s poor economic health, tumbled.

The Central Bank of Argentina, at an emergency meeting on Thursday, voted unanimously to raise its benchmark rate to 60 percent from 45 percent. However, the unexpected move failed to stabilize the peso. That knocked the Brazilian real to near its record low touched in September 2015. And the Turkish lira, which has been hit by concerns over President Tayyip Erdogan’s interference in monetary policy and his diplomatic spats with Washington, also slipped towards record lows from about two weeks ago.

The pound sterling held near a one-month high Friday as hopes of a breakthrough on Brexit this week prompted some traders to cut back on aggressive short bets on the British currency. The European Union was ready to offer Britain an unprecedentedly close relationship after it leaves, according to EU negotiator Michel Barnier. British Brexit minister Dominic Raab is due to meet Barnier in Brussels Friday in an attempt to speed up their talks.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

August harmonized index of consumer prices was up 2.0 percent on the year and down from July’s 2.1 percent. The core measures also edged downward. The narrowest gauge, which excludes energy, food, alcohol and tobacco, saw its yearly rate dip from a final 1.1 percent last month to 1.0 percent while omitting just energy and unprocessed food, inflation eased from 1.3 percent to 1.2 percent. The rate in non-energy industrial goods declined 0.2 percentage points to 0.3 percent, equaling its lowest mark since March, while its services counterpart was a tick weaker at 1.3 percent. Food, alcohol and tobacco (2.5 percent) was unchanged and energy (9.2 percent after 9.5 percent) retraced just some of July's bounce.

Germany

August Ifo business climate indicator reading was 103.8, up more than 2 points from its unrevised July mark and at its highest level since February. Expectations gained 3 points to 101.2, their strongest reading since January, while current conditions were a point firmer at 106.4, a 5-month peak. At a sector level, morale was more optimistic across the board. In particular, manufacturing rose from 22.5 to 24.3 and services from 26.7 to 32.3. However, retail (10.6 after 10.5) was little better than flat and well short of the levels recorded earlier in the year. This is consistent with the recent slide seen in consumer confidence and could warn of a reduced contribution to economic activity from the household sector.

France

Second quarter gross domestic product expanded at an unrevised 0.2 percent quarterly rate in the final look at the April to June period. This matched the sluggish first quarter reading and so equaled and was the weakest since the last contraction back in the second quarter of 2016. Annual growth was 1.7 percent, also in line with its previous estimate and down 0.5 percentage points from the start of the year. Quarterly growth was held in check by a soft household sector where spending fell 0.1 percent. This reflected a second successive outright decline in purchases of goods (0.3 percent after 0.1 percent) and a marked deceleration in services consumption (0.1 percent after 0.5 percent). However, gross fixed capital formation (0.8 percent after 0.2 percent) picked up well with business investment (1.3 percent after 0.1 percent) especially robust. With government consumption up 0.3 percent, domestic final sales again added 0.2 percentage points to the quarterly change in GDP. Business inventories added 0.2 percentage points but, having had a cumulative minus 0.1 percentage point impact over the previous three quarters, this should not hinder output significantly going forward. By contrast, foreign trade subtracted 0.3 percentage points as exports rose 0.2 percent and imports a much sharper 1.0 percent.

Asia Pacific

India

Gross domestic product increased 8.2 percent on the year in the three months to June, picking up from an increase of 7.7 percent in the three months to March. This is the fourth consecutive increase in annual growth and the strongest growth seen since mid-2016. Stronger growth was broad-based, with most major sectors of the economy recording solid growth in gross value added including agriculture, public administration, manufacturing, utilities and construction. However, severe flooding in parts of the country in recent weeks may weigh on economic activity in the near-term.

Americas

Canada

Second quarter real gross domestic product (GDP) growth accelerated to 0.7 percent in the second quarter, following a 0.4 percent gain in the first quarter. Meanwhile, final domestic demand rose 0.5 percent. On an annualized basis, GDP grew 2.9 percent after increasing 1.3 percent in the first quarter. Growth was mainly driven by a 2.9 percent increase in export volumes — the largest gain since the second quarter of 2014. Exports of goods, led by energy products, rose 3.6 percent after increasing 0.3 percent in the first quarter. Exports of services edged down 0.2 percent, the first decline since the fourth quarter of 2015. Household spending rose a quarterly 0.6 percent, after increasing 0.3 percent in the first quarter. The largest increase was from services (0.8 percent). Rebounds in semi-durable and non-durable goods and continued growth in durable goods also contributed to the gain. Business investment in non-residential structures (0.5 percent), machinery and equipment (0.3 percent) and intellectual property products (0.2 percent) all decelerated in the second quarter. Housing investment reversed direction and grew 0.3 percent, following a 2.7 percent decline in the previous quarter.

Bottom line

Equities were mixed last week, with Asian indexes advancing and European indexes retreating along with those in the U.S. For the month of August, gains and losses were mixed. The ebb and flow of morale regarding international trade plus a discernible slowdown in growth weighed on the markets.

New economic information in Asia was sparse. India released its second quarter GDP which was up 8.2 percent from a year ago and China’s August manufacturing PMI edged up 0.1 point to 51.3. Japan’s industrial production slipped along with consumer confidence while retail sales inched up 0.1 percent. And in the U.S., most data were positive but the international trade in goods deficit widened and pending home sales swooned.

Both the Reserve Bank of Australia and the Bank of Canada hold monetary policy meetings. Neither is anticipated to change their current interest rates. The first of the month brings final PMI readings for manufacturing, services and a composite reading. Australia finally releases second quarter gross domestic product data. And Canada releases important merchandise trade (July) and labour force report (August). In the US, international trade, construction spending, factory orders and the employment situation are among the key releases on the calendar.  

Looking Ahead: September 3 through September 7, 2018

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