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Geopolitics (cont'd)
International Perspective - May 18, 2018
By Anne D. Picker, Chief Economist


Global Markets

With earnings season just about over, geopolitical issues came to the fore for investors during the week. There are numerous issues that investors are currently tracking — Brexit, Italy’s government, Korean peninsula political issues and ongoing NAFTA and U.S./China trade negotiations. On the week, global equity indexes were mixed. Most Asian emerging nation indexes declined along with the developed economies. Europe too was mixed with Italy’s FTSE MIB (down 2.9 percent) dropping the most on the week.


Painful Brexit negotiations are ongoing between the European Union (EU) and the UK. After two and a half months, Italy finally has the possibility of a new government after the March 4 election did not provide a clear winner. North Korea canceled talks with South Korea and the June 12 talks between the North and the U.S. look tenuous. Reformulation of the NAFTA treaty between Canada, Mexico and the U.S. continues to grind on with no clear rewrite in sight. And the critical China/U.S. trade talks began their second round, this time in Washington. The first round took place in Beijing.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 May 11 May 18 Week 2018
Australia All Ordinaries 6167.3 6216.4 6190.90 -0.4% 0.4%
Japan Nikkei 225 22764.9 22758.5 22930.36 0.8% 0.7%
Topix 1817.56 1794.96 1815.25 1.1% -0.1%
Hong Kong Hang Seng 29919.2 31122.1 31047.91 -0.2% 3.8%
S. Korea Kospi 2467.5 2477.7 2460.65 -0.7% -0.3%
Singapore STI 3402.9 3570.2 3529.27 -1.1% 3.7%
China Shanghai Composite 3307.2 3163.3 3193.30 0.9% -3.4%
India Sensex 30 34056.8 35535.79 34848.30 -1.9% 2.3%
Indonesia Jakarta Composite 6355.7 5956.8 5783.31 -2.9% -9.0%
Malaysia KLCI 1796.8 1846.5 1854.50 0.4% 3.2%
Philippines PSEi 8558.4 7752.1 7672.28 -1.0% -10.4%
Taiwan Taiex 10642.9 10859.0 10830.84 -0.3% 1.8%
Thailand SET 1753.7 1765.9 1754.17 -0.7% 0.0%
UK FTSE 100 7687.8 7724.6 7778.79 0.7% 1.2%
France CAC 5312.6 5541.9 5614.51 1.3% 5.7%
Germany XETRA DAX 12917.6 13001.2 13077.72 0.6% 1.2%
Italy FTSE MIB 21853.3 24159.3 23449.65 -2.9% 7.3%
Spain IBEX 35 10043.9 10271.4 10112.40 -1.5% 0.7%
Sweden OMX Stockholm 30 1576.9 1603.3 1621.61 1.1% 2.8%
Switzerland SMI 9381.9 8993.5 8940.46 -0.6% -4.7%
North America
United States Dow 24719.2 24831.17 24715.09 -0.5% 0.0%
NASDAQ 6903.4 7402.9 7354.34 -0.7% 6.5%
S&P 500 2673.6 2727.7 2712.97 -0.5% 1.5%
Canada S&P/TSX Comp. 16209.1 15983.3 16162.31 1.1% -0.3%
Mexico Bolsa 49354.4 46728.9 45666.770 -2.3% -7.5%


Europe and the UK

European equities were mixed on the week. Investors monitored the political situation in Italy after the anti-establishment Five Star Movement and the far-right League reached an agreement to form a coalition government that could assume power as early as next week. The euro tumbled on the news. Uncertainty about the outcome of the second round of trade talks between the U.S. and China also weighed on investor sentiment. On the week the FTSE added 0.7 percent, the CAC gained 1.3 percent and the DAX was 0.6 percent higher. The SMI however, declined 0.6 percent. Italy’s FTSE MIB tumbled 2.9 percent.


Traders were cautious due to renewed concerns over North Korea after it threatened to cancel the meeting on June 12 between leader Kim Jong Un and President Donald Trump. In a statement published by the state-run Korean Central News Agency, North Korean First Vice Minister of Foreign Affairs suggested that Trump must accept the reclusive communist country as a nuclear power.


Following protracted negotiations that have been ongoing since March 4, Italy’s anti-establishment Five Star Movement (M5S) and the far-right Northern League settled on a compromise deal to form a new government. If accepted by party members (expected to vote on the arrangement over the weekend), it would be the first time that a founding member of the EU has been led by a populist, anti-EU administration. No prime minister has been named at this writing (late Friday US ET). The two party heads are scheduled to meet Italy’s President Sergio Mattarella on Monday. Mattarella must give his blessing to the program and to their candidate for prime minister before a government can be formed. After agreeing on a prime minister and cabinet team, the coalition will have to overcome confidence votes in parliament where it has only a slim Senate majority of fewer than 10 seats.


Both parties have toned down their original anti-EU rhetoric and, in particular, are no longer calling for a referendum on membership of the euro. Nonetheless, their combined policies are built upon increased government spending, lower taxes and rolling back pension reform. Such a combination could make an already dangerously fragile fiscal position (Italy's debt/GDP ratio is about 132 percent) untenable. There is also talk than the ECB may be asked to cancel €250 billion Italian debt. The development is a major blow to deeper European integration and, depending upon the economic impact, it could also reduce the chances of the ECB ending its asset purchase program in September. The euro sank on the latest developments Friday and was headed for its fifth straight weekly decline against the dollar, in what would be a first for the currency since 2015.


Asia Pacific

Most equities retreated last week given the tensions in the Korean Peninsula and concerns about ongoing trade war between the U.S. and China. Both the Nikkei and Topix advanced (0.8 percent and 1.1 percent respectively) thanks to a weakening yen. The Shanghai Composite ((0.9 percent) and the KLCI (0.4 percent) also advanced. Both emerging and developed countries in the Asia Pacific are closely monitoring the ups and downs in the U.S./China trade negotiations — the outcome will affect them all directly. The focus is also on the Korean peninsula and the on again off again talks between the North and South.


In Japan, a weaker yen and rising U.S. bond yields contributed to rising equities. Economic data were dismal with first quarter growth declining and an indicator of capital spending tumbling in March. First quarter GDP was down 0.2 percent on the quarter (or at an annualized rate of decline of 0.6 percent) for the first quarterly decline since the fourth quarter of 2015. Core machine orders which exclude volatile orders tumbled a surprising monthly 3.9 percent in March.


A second round of talks between senior Trump administration officials and their Chinese counterparts began Thursday and focused on cutting China’s U.S. trade surplus and improving intellectual property protections. Judging from how the talks are proceeding so far, there is a greater chance of the negotiations ending in some sort of a compromise.



The U.S. dollar climbed to a five-month high against a basket of major currencies Friday, helped by weakness in the euro thanks to the political uncertainty in Italy. The U.S. currency has risen about 5 percent since mid-February, with investors betting U.S. interest rates will need to rise further to curb inflation. The euro was going in the opposite direction and retreated for its fifth successive weekly decline against the U.S. dollar, its first such drop since 2015. A founding member of the EU and the euro, Italy accounts for 15.4 percent of Eurozone GDP and the Italian parties’ hostility toward the European Union is the biggest challenge to the bloc since Britain voted to leave two years ago. On the week, the U.S. currency was up against five of six of its major counterparts — euro, pound sterling, yen and the Canadian and Australian dollars. It declined against the Swiss franc.


The Canadian dollar tumbled Friday after the latest round of inflation and retail sales data beat back some expectations that the Bank of Canada would step up the pace of its interest rate increases. The decline followed the latest consumer price index data for April indicating that the country’s inflation slowed slightly in April. Consumer prices were up 2.2 percent on the year after increasing 2.3 percent in March. And although the monthly increase in retail sales was better than expected (0.6 percent), excluding auto sales, retail sales slid 0.2 percent. The Bank of Canada is expected to maintain its cautious approach when it next meets on May 30.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 May 11 May 18 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.755 0.751 -0.5% -3.7%
New Zealand NZ$ 0.709 0.697 0.692 -0.8% -2.4%
Canada C$ 0.796 0.782 0.777 -0.7% -2.4%
Eurozone euro (€) 1.194 1.195 1.177 -1.5% -1.5%
UK pound sterling (£) 1.344 1.354 1.348 -0.5% 0.3%
Currency per U.S. $
China yuan 6.534 6.334 6.380 -0.7% 2.4%
Hong Kong HK$* 7.816 7.850 7.850 0.0% -0.4%
India rupee 64.081 67.334 68.010 -1.0% -5.8%
Japan yen 112.850 109.300 110.730 -1.3% 1.9%
Malaysia ringgit 4.067 3.950 3.972 -0.6% 2.4%
Singapore Singapore $ 1.338 1.336 1.343 -0.5% -0.4%
South Korea won 1070.630 1069.400 1077.630 -0.8% -0.6%
Taiwan Taiwan $ 29.775 29.767 29.910 -0.5% -0.5%
Thailand baht 32.696 31.910 32.197 -0.9% 1.5%
Switzerland Swiss franc 0.979 1.0000 0.998 0.2% -1.9%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


First quarter gross domestic product was up a quarterly 0.4 percent matching the preliminary flash estimate. On the year, GDP was up 2.5 percent. The flash report offers no details on the GDP expenditure components but it does provide some insight into individual member performances. To this end, among the four larger states, quarterly growth slowed from 0.7 percent to just 0.3 percent in France and from 0.6 percent to also 0.3 percent in Germany. Italy was unchanged at 0.3 percent while Spain saw its third successive 0.7 percent gain. All reporting countries registered an increase in GDP.



First quarter flash gross domestic product was up a modest 0.3 percent quarterly rate and only half the unrevised 0.6 percent rate posted at the end of 2017. It also equaled the worst performance since the first quarter of 2015. Calendar and seasonally adjusted annual growth was 2.3 percent, down from 2.9 percent in the fourth quarter, while the unadjusted yearly rate dropped 0.7 percentage points to 1.6 percent. As ever with the flash report, there are no details of the GDP expenditure components available. However, it was indicated that quarterly growth was buoyed by a positive contribution from investment, particularly in construction and investment. Household spending was only marginally higher while government consumption declined for the first time in almost five years. On the external side, both exports and imports contracted.


May ZEW survey found analysts' views on the German economic situation little different from April. The current conditions index was just 0.5 points weaker at 87.4. However, this still constituted its fourth consecutive drop and its lowest reading since last October. Expectations, which tumbled dramatically last month, were flat at minus 8.2 and equaled their least optimistic mark since November 2012. The long-run average is 23.4. ZEW attributed the relative softness of the May results to a combination of growing concerns about the Eurozone economy and worries about the U.S. decision to back out of the nuclear treaty with Iran. Fears of a further escalation of the international trade conflict with the U.S. as well as the latest rise of crude oil prices were also seen as important factors.


United Kingdom

April claimant count statistics showed a hefty 31,200 increase in the number of people out work following an upwardly revised 15,700 rise in March. This lifted the jobless rate to 2.5 percent. By contrast, the first quarter ILO statistics were much more upbeat. Employment jumped 197,000 (the largest since the fourth quarter of 2015) and unemployment fell a sizeable 46,000. This left the jobless rate at 4.2 percent for a second month. However, the single month rate for March jumped 0.4 percentage points to 4.4 percent. A 16,000 decline in vacancies, the first fall since the three months to July last year, was consistent with this view. Annual growth of wages in January through March was only 2.6 percent, 0.2 percentage points short of their December through February reading. The slowdown was essentially attributable to bonuses as the ex-bonus rate edged up from 2.8 percent to 2.9 percent.




First quarter gross domestic product was down a quarterly 0.2 percent and 0.6 percent on an annualized basis. On the year, GDP increased 1.0 percent. The contraction snapped an eight-quarter streak of growth that was the longest stretch of uninterrupted growth since a 12-quarter run that ended in 1989. Fourth quarter GDP was revised downward to an annualized 0.6 percent from 1.6 per cent previously. Private demand dropped 0.3 percent on the quarter, pulling headline growth down 0.2 percentage points as private residential investment fell 2.1 percent. Exports rose 0.6 percent on the quarter and imports grew 0.3 percent.



April employment increased 22,600 in the number of employed persons in April (seasonally adjusted), down from a revised increase of 25,100 in March. The unemployment rate rose from 5.5 percent in March to 5.6 percent in April while the participation rate advanced from 65.5 percent to 65.6 percent. The employment increase was driven by full-time employment, up 32,700 falling 25,100 in March. This was partly offset by a decline in part-time employment of 10,000 after an increase of 24,700. The total numbers of hours worked in April increased 1.1 percent on the month after increasing 0.3 percent in March. Over the last 12 months, full-time employment has increased by 265,200 persons, while part-time employment has increased 66,900 persons.



April industrial production increased 7.0 percent on the year, up from 6.0 percent in March. On the month, industrial production rose 0.61 percent after an increase of 0.35 percent in March. The increase was broad-based. Manufacturing picked up from 6.6 percent on the year in March to 7.4 percent in April and the strongest growth since last September. It reflected improved conditions in textiles, chemicals, electrical machinery, steel and autos. Growth in the utilities sector also accelerated but mining output declined.




March retail sales increased a monthly 0.6 percent. This was the third consecutive month that retail sales increased. Higher sales at motor vehicle and parts dealers more than offset lower sales at food and beverage stores and gasoline stations. Sales were up in 6 of 11 subsectors, representing 53 percent of retail trade. Excluding sales at motor vehicle and parts dealers, retail sales were down 0.2 percent in March. After removing the effects of price changes, retail sales in volume terms increased 0.8 percent. On the year, retail sales were up 4.1 percent.


Bottom line

Geopolitical concerns captured the attention of investors during the week as earnings season wound down. There were no central bank meetings during the week. In Asia, economic data from Japan disappointed while China’s data were mixed. In Europe, it was also mixed. UK labour market report was mixed, Eurozone first quarter GDP met expectations while Germany’s was weaker than anticipated.


While there are no central bank meetings in the upcoming week, minutes of Federal Reserve (May 2) and European Central Bank (April 26) most recent meetings will be published. May flash composite PMIs will be released for the Eurozone, Germany, France and the US. In Japan the flash manufacturing PMI will be reported. The UK reports April consumer and producer price indexes and retail sales along with second estimate of first quarter gross domestic product.  


Looking Ahead: May 21 through May 25, 2018

Central Bank activities
May 23 United States FOMC Minutes Published
May 24 Eurozone ECB Minutes Published
The following indicators will be released this week...
May 23 Eurozone Manufacturing, Services & Composite PMI (May flash)
EC Consumer Comfort (May flash)
Germany Manufacturing, Services & Composite PMI (May flash)
France Manufacturing, Services & Composite PMI (May flash)
Unemployment (Q1.2018)
UK Consumer Price Index (April)
Producer Price Index (April)
May 24 Germany Gross Domestic Product (Q1.2018)
UK Retail Sales (April)
May 25 Germany Ifo Business Survey (May)
UK Gross Domestic Product (Q1.2018)
Asia Pacific
May 21 Japan Merchandise Trade Balance (April)
May 23 Japan PMI Manufacturing (May flash)


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


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