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Investors remain calm
International Perspective - May 26, 2017
By Anne D. Picker, Chief Economist


Global Markets

Crude oil prices, the terrorist attack in Manchester, England and meetings of leaders of the world's major countries dominated the news this week. Investors however, were rather sanguine and took developments in stride. On the week, most equity indexes advanced.


OPEC extends output cuts for nine more months

OPEC members and non-member oil producing countries led by Russia decided to extend cuts in crude oil output by nine months to March 2018. The glut of crude has seen prices plunge and revenues drop sharply in the past three years. Just Thursday, oil prices dropped more than 5 percent because markets were disappointed — they had been hoping oil producers could reach a last-minute deal to deepen the cuts or extend them further, until mid-2018.


OPEC's cuts have helped to push oil back above $50 a barrel this year, a far cry from just 10 years ago when a barrel of crude was close to $140! However, the latest cuts in production will give a fiscal boost to producers, many of which rely heavily on energy revenues and have had to utilize foreign currency reserves to plug holes in their budgets. Oil's earlier price decline, which started in 2014, forced Russia and Saudi Arabia to tighten their belts and led to unrest in some producing countries including Venezuela and Nigeria. The price increase this year has spurred growth in the U.S. shale industry, which is not participating in the output deal, thus slowing the market's rebalancing with global crude stocks still near record highs.


OPEC produces a third of the world's oil. Its production reduction of 1.2 million barrels per day (BPD) was made based on October 2016 output of around 31 million bpd, excluding Nigeria and Libya. OPEC members Nigeria and Libya would still be excluded from cuts as their output remained curbed by political unrest. OPEC also faces the dilemma of not pushing oil prices too high because doing so would further spur shale production in the United States, the world's top oil consumer which now rivals Saudi Arabia and Russia as the world's biggest producer.


Refiners in Asia however, were mostly concerned with whether it meant they would need to go hunting for crude. In physical markets, where tankers can take weeks or months to deliver up to $100 million in crude oil, refiners want to know if they will be forced to search for new suppliers. The extended cuts could mean demand may exceed supply in 2017 for the first time in years. This would force refiners to start using reserves, pushing up prices at least until production catches back up with consumption. So far, though, the cuts that started in January have barely dented supply in Asia, home to three of the world's four biggest oil consumers.


Bank of Canada remains on hold

As expected, the Bank of Canada (BoC) left its policy interest rate unchanged at 0.5 percent saying that it was "appropriate at present". The Bank Rate is correspondingly 0.75 percent and the deposit rate is 0.25 percent. While economic news has turned more positive recently, it follows a prolonged period of weakness triggered by the decline in oil prices. The BoC's inflation target is 2 percent with a control range of 1 percent to 3 percent. Annual inflation is currently 1.6 percent, below the 2 percent midpoint. Moreover, administrative measures aimed to stem house price inflation are starting take effect and this could also add downward pressure to inflation. There was no press conference this time so there was only a brief statement.


According to the statement, the BoC said that inflation is broadly in line with the Bank's projection in its April Monetary Policy Report (MPR). Food prices are declining mainly because of intense retail competition. The Bank's measures of core inflation remain below its two percent focus and wage growth is still subdued, consistent with ongoing excess capacity in the economy.


The BoC said that the economy's adjustment to lower oil prices "is largely complete and recent economic data have been encouraging, including indicators of business investment." It also said that consumer spending and the housing sector continue to be robust thanks to an improving labour market, and these were becoming more broadly based across regions. However, the statement said that export growth remained subdued as anticipated in the April MPR. Economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter. The BoC sees the global economy gaining traction and believes that "growth will gradually strengthen and broaden over the projection horizon."


During the week, the U.S. administration gave written notice to Congress of the impending renegotiation of the NAFTA agreement with Canada and Mexico as required under the Bipartisan Congressional Trade Priorities and Accountability Act of 2015. The law mandates that the president give Congress at least 90 days notice before opening trade negotiations with another country.


Global Stock Market Recap

  2016 2017 % Change
Index Dec 31 May 19 May 26 Week 2017
Australia All Ordinaries 5719.1 5769.0 5792.1 0.4% 1.3%
Japan Nikkei 225 19114.4 19590.8 19686.8 0.5% 3.0%
Topix 1518.61 1559.73 1569.4 0.6% 3.3%
Hong Kong Hang Seng 22000.6 25174.9 25639.3 1.8% 16.5%
S. Korea Kospi 2026.5 2288.5 2355.3 2.9% 16.2%
Singapore STI 2880.8 3216.9 3219.4 0.1% 11.8%
China Shanghai Composite 3103.6 3090.6 3110.1 0.6% 0.2%
India Sensex 30 26626.5 30464.92 31028.2 1.8% 16.5%
Indonesia Jakarta Composite 5296.7 5791.9 5716.8 -1.3% 7.9%
Malaysia KLCI 1641.7 1768.3 1772.3 0.2% 8.0%
Philippines PSEi 6840.6 7767.6 7867.5 1.3% 15.0%
Taiwan Taiex 9253.5 9947.6 10102.0 1.6% 9.2%
Thailand SET 1542.9 1549.6 1569.3 1.3% 1.7%
UK FTSE 100 7142.8 7470.7 7547.6 1.0% 5.7%
France CAC 4862.3 5324.4 5336.6 0.2% 9.8%
Germany XETRA DAX 11481.1 12638.7 12602.2 -0.3% 9.8%
Italy FTSE MIB 19234.6 21567.5 21210.6 -1.7% 10.3%
Spain IBEX 35 9352.1 10835.4 10904.2 0.6% 16.6%
Sweden OMX Stockholm 30 1517.2 1629.2 1635.8 0.4% 7.8%
Switzerland SMI 8219.9 9022.5 9042.0 0.2% 10.0%
North America
United States Dow 19762.6 20804.84 21080.3 1.3% 6.7%
NASDAQ 5383.1 6083.7 6210.2 2.1% 15.4%
S&P 500 2238.8 2381.7 2415.8 1.4% 7.9%
Canada S&P/TSX Comp. 15287.6 15458.5 15416.9 -0.3% 0.8%
Mexico Bolsa 45642.9 49067.5 49688.3 1.3% 8.9%


Europe and the UK

Investors here had quite a bit to contend with during the past week, not the least the terrorist attack in Manchester, England. Investors were also monitoring closely both the NATO meeting midweek and the Group of Seven meeting on Friday and Saturday, especially with several heads of state attending for the first time. However, despite geopolitical concerns, the indexes were mixed, with the FTSE closing at a new high thanks to the retreat of the pound sterling after opinion polls showed that Prime Minister Theresa's lead in the upcoming June 8 election has narrowed.


The European markets ended the week with mixed results in lackluster trading. Investors were unimpressed by the results of Thursday's OPEC meeting. OPEC members and some non-OPEC producers agreed to extend a pledge to cut around 1.8 million barrels per day until the end of the first quarter of 2018. On the week, the FTSE was up 1.0 percent and the CAC and SMI each edged up 0.2 percent. The DAX however, was down 0.3 percent.


While the second estimate of UK first quarter gross domestic product eased to 0.2 percent from 0.3 percent, Spain's final first quarter was revised upward to 0.8 percent from 0.7 percent in the previous estimate. The data had little impact on equities. In the Eurozone, the flash PMIs for May painted a positive picture of growth for Germany, France and the euro area. The OPEC decision to extend cuts in oil output had little impact on equities but sent oil prices sharply lower, dragging down the energy sector and making it the biggest weight on the FTSE.


According to European Central Bank President Mario Draghi, any unwarranted side-effects from the unconventional monetary policy have so far remained limited and therefore, there was no need to change the policy path currently being projected. Further he said that when the unconventional policy instruments were introduced in order to secure a return of inflation towards our objective, the ECB was aware that those new instruments could result in somewhat more pronounced side effects than conventional instruments. Draghi said in a speech in Madrid. "These side effects have remained contained."


Asia Pacific

Despite the ups and downs in crude oil prices during the week, only the Jakarta Composite retreated (down 1.3 percent). Equities also overcame Moody's downgrades of Mainland China and Hong Kong's credit ratings on Wednesday to finish in the positive column. Gains ranged from 0.1 percent (STI) to 2.9 percent (Kospi). Both the Hang Seng and Sensex added 1.8 percent. Investors in the Asia Pacific region continued to monitor political events in the U.S. along with crude oil prices both in the run-up to Thursday's OPEC meeting and in its aftermath.


Thursday's drop in crude oil futures followed news that OPEC agreed to extend cuts in oil output by nine months to March 2018. Investors had been hoping for deeper production cuts however and sent crude prices tumbling.


On Wednesday, the Shanghai Composite edged up after declining earlier in the day after Moody's downgraded China's credit rating for the first time since 1989. Moody's cut China's rating by one notch to A1 from Aa3 in its first downgrade of the country in nearly 30 years, saying it expects the financial strength of the economy to erode in coming years as growth slows and debt continues to rise. Chinese markets were briefly rattled after Moody's downgraded its credit rating. The Shanghai Composite at one point fell more than 1 percent before trimming losses. The index has been pressured of late by worries that Beijing's clampdown on speculative excess would curtail bullish spirits.


Later in the global market day, Moody's cut Hong Kong's local and foreign currency ratings by a notch to A1 amid concerns over the country's rising debt and slow pace of economic reforms. Moody's said: "The downgrade in Hong Kong's rating reflects Moody's view that credit trends in China will continue to have a significant impact on Hong Kong's credit profile due to close and tightening economic, financial and political linkages with the mainland." Meanwhile, Hong Kong equities largely ignored the investment rating downgrade late Wednesday.



The U.S. dollar was mixed last week, gaining on the yen, pound sterling, euro, Swiss franc and the Australian dollar. The currency retreated against the Canadian dollar. Sterling tumbled Friday — a poll showed the Conservative Party's lead over the main opposition Labour Party had narrowed to just five percentage points. That came after weeks of surveys showing a bigger Tory lead that had made the vote all but a foregone conclusion for the market. The tighter poll prompted a measure of expected volatility that covers the June 8 election to jump by the most since October's flash crash.


The People's Bank of China is changing the way it sets the daily renminbi (yuan) exchange rate. The PBoC said it was adding a "countercyclical" component to its model to prevent big swings. It is a move that appears to be designed to discourage renminbi depreciation at a time when authorities are still concerned about capital flight. The PBoC permits the U.S. dollar's value against the renminbi to fluctuate by two percent above or below a so-called "central parity rate" published each morning, also known as the midpoint price. The midpoint is ostensibly formulated by compiling quotes from a group of large banks that are active as dealers in the onshore forex market, but the price is understood to be influenced by the central bank.


In August 2015, the People's Bank of China announced a change to the way it would formulate the midpoint, saying that it would formulate the fixing based primarily on the previous day's closing price in the spot market. In December, it modified the formula, saying that the midpoint would also reference changes in the renminbi's value against a trade-weighted basket of global currencies.


Under the latest formula announced on Friday, dealers will incorporate a "counter-cyclical factor" in their quotes, according to a statement on the website of the China Foreign Exchange Trading System, an industry body controlled by the PBoC. The additional variable will prevent excessive one-way movements in the midpoint at a time when the other two factors are pushing in the same direction, the statement said.


Selected currencies — weekly results

2016 2017 % Change
Dec 30 May 19 May 26 Week 2017
U.S. $ per currency
Australia A$ 0.7215 0.746 0.745 -0.1% 3.2%
New Zealand NZ$ 0.6948 0.693 0.707 1.9% 1.7%
Canada C$ 0.7443 0.740 0.743 0.4% -0.2%
Eurozone euro (€) 1.0534 1.120 1.117 -0.3% 6.0%
UK pound sterling (£) 1.2333 1.303 1.281 -1.7% 3.9%
Currency per U.S. $
China yuan 6.9450 6.885 6.856 0.4% 1.3%
Hong Kong HK$* 7.7533 7.783 7.792 -0.1% -0.5%
India rupee 67.9238 64.638 64.445 0.3% 5.4%
Japan yen 116.8100 111.170 111.250 -0.1% 5.0%
Malaysia ringgit 4.4862 4.322 4.269 1.2% 5.1%
Singapore Singapore $ 1.4465 1.385 1.382 0.2% 4.7%
South Korea won 1205.8300 1126.910 1120.820 0.5% 7.6%
Taiwan Taiwan $ 32.3260 30.188 30.112 0.3% 7.4%
Thailand baht 35.8100 34.320 34.050 0.8% 5.2%
Switzerland Swiss franc 1.0174 0.9733 0.9749 -0.2% 4.4%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


May flash composite PMI reading was 56.8, unchanged from its final April mark and equaled that month's six year high. The stable headline was attributable to manufacturing where the flash PMI gained 0.3 points to 57.0 (a 73-month peak) and offset a 0.2 point dip in its service sector counterpart to 56.2. Aggregate new orders growth slowed to a 4-month low but was still historically firm and backlogs posted their second sharpest gain in six years. At the same time, employment recorded its second largest increase since August 2007 with manufacturing adding jobs at a new record rate. Reflecting all this, overall business optimism regarding the year ahead saw its joint highest mark since the question was first introduced five years ago. Prices pressures remained marked although input cost inflation eased slightly on the back of euro strength. Output prices rose at the second strongest pace since mid-2011. Regionally, developments were strong across the board, notably within the core. The composite output index in France rose a full point to 57.6 and in Germany was up 0.6 points at 57.3. Both are multi-year highs. Elsewhere, growth eased just marginally and remained close to a 10-year high. Japan and the U.S. have been added to the graph for comparison.



First quarter gross domestic product was up a quarterly 0.6 percent matching its flash reading as did annual workday adjusted growth of 1.7 percent. Unadjusted, the yearly rise was 2.9 percent, again in line with its flash estimate. Final domestic demand added 0.6 percentage points to the quarterly change in GDP largely thanks to a solid 1.7 percent jump in gross fixed capital investment which alone contributed half of this. Equipment spending (1.2 percent) and, in particular, construction (2.3 percent) were especially robust although the latter was probably boosted by seasonally good weather. Private consumption was up a modest 0.3 percent while government expenditure gained 0.4 percent. Business inventories subtracted a sizeable 0.4 percentage points and unwound their positive impact in the previous period. However, this effect was wiped out by a significant improvement in the real net foreign trade balance. With exports 1.3 percent higher and imports up only 0.4 percent, the net contribution here was 0.4 percentage points after a cumulative minus 0.6 percentage points in the third and fourth quarters of 2016.


May Ifo business sentiment index climbed 1.6 points to 114.6 — a new post-Great Recession high. The headline advance was the fourth consecutive increase and reflected gains in both of its constituent parts. Current conditions were up 2.2 points at 123.2, their ninth successive increase and also their strongest reading since the financial crisis. Expectations recorded a 1.3 point rise to 106.5, their third gain in the last four months and their best print since February 2014. At a sector level, morale improved in all areas apart from retail but even a near-2 point decline here reversed only a fraction of April's sizeable 6.9 point jump.


United Kingdom

First quarter gross domestic product was revised down to a quarterly increase of 0.2 percent from the first estimate of 0.3 percent. This reduced annual growth by 0.1 percentage point to 2.0 percent from 2.1 percent. Among the components of domestic demand, quarterly growth of household consumption dropped from 0.7 percent in the fourth quarter to 0.2 percent, its worst performance since the fourth quarter of 2014. Business investment held up better, posting a 0.6 percent rate after 0.9 percent last time, while government spending jumped 0.8 percent, its strongest rise in almost two years. Net trade had a significant negative impact with exports falling 1.4 percent from the previous period and imports rising a sizeable 2.7 percent. Taken together, the net impact was to subtract fully 1.4 percentage points off quarterly growth, equaling the largest hit since comparable records began at the start of 2014.




April merchandise trade surplus narrowed to ¥481.7 billion in April from ¥614.7 billion in March. Exports increased 7.5 percent on the year, down from 12.0 percent in March. Imports were up 15.1 percent on the year, down from 15.8 percent in March. Exports to most of Japan's major Asian trading partners again showed strong growth. Exports to China were up 14.8 percent while exports to Korea, Taiwan and ASEAN countries were up 22.3 percent, 14.7 percent, and 6.7 percent respectively. Exports to the United States and the EU were up 2.6 percent and 2.2 percent respectively in April.


Bottom line

Equities were mostly higher on the week. The week was light on new economic news. Second estimates of GDP in the UK and U.S. were released. UK growth was revised downward while growth in the U.S. was revised upward. European flash composite PMIs indicated that the economies continued to grow in May. The Bank of Canada maintained the status quo but acknowledged that growth picked up in the first quarter. We will find out on Wednesday just how much the economy expanded.


The coming week is packed with economic data despite holidays in the U.S., UK and China. Final May manufacturing PMIs will be released globally. Japan posts key data for April industrial production, household spending, unemployment and retail sales. Canada posts first quarter gross domestic product and its merchandise trade balance and we will get to see if the Bank of Canada's optimism is warranted. And in the U.S., key data for the upcoming FOMC policy decision, April personal spending and international trade data will be released along with the May employment situation report.


Looking Ahead: May 29 through June 2, 2017

Central Bank activities
May 31 United States Federal Reserve Publishes Beige Book
The following indicators will be released this week...
May 30 Eurozone EC Consumer & Business Confidence
France Gross Domestic Product (Q1.2017 preliminary)
Consumption of Manufactured Goods (April)
May 31 Eurozone Harmonized Index of Consumer Prices (May flash)
Unemployment Rate (April)
Germany Retail Sales (April)
June 1 Eurozone Manufacturing PMI (May)
Unemployment Rate (April)
Germany Manufacturing PMI (May)
France Manufacturing PMI (May)
UK Manufacturing PMI (May)
Italy Gross Domestic Product (Q1.2017)
Asia Pacific
May 30 Japan Household Spending (April)
Unemployment (April)
Retail Sales (April)
May 31 Japan Industrial Production (April)
China CFLP Manufacturing PMI (May)
June 1 Japan Manufacturing PMI (May)
China Manufacturing PMI (May)
May 30 Canada Industrial Product Price Index (April)
May 31 Canada Gross Domestic Product (Q1.2017)
Monthly Gross Domestic Product (March)
June 2 Canada International Trade (April)


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


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