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Shadows over the financial markets
International Perspective - May 25, 2018
By Anne D. Picker, Chief Economist


Global Markets

Geopolitics once again upset investors and overshadowed economic data. Investors sold equities after U.S. President Trump canceled his meeting with North Korea on June 12. At the same time the continuing trade uncertainties between China and the EU with the U.S. continued to make traders very cautious. Investors also continued to keep an eye on the political situations in Italy and now in Spain, after the country's Socialists called for a vote of no confidence in Prime Minister Mariano Rajoy’s government. Most equity indexes retreated on the week.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 May 18 May 25 Week 2018
Australia All Ordinaries 6167.3 6190.9 6141.0 -0.8% -0.4%
Japan Nikkei 225 22764.9 22930.4 22450.8 -2.1% -1.4%
Topix 1817.56 1815.25 1771.7 -2.4% -2.5%
Hong Kong Hang Seng 29919.2 31047.9 30588.0 -1.5% 2.2%
S. Korea Kospi 2467.5 2460.7 2460.8 0.0% -0.3%
Singapore STI 3402.9 3529.3 3513.2 -0.5% 3.2%
China Shanghai Composite 3307.2 3193.3 3141.3 -1.6% -5.0%
India Sensex 30 34056.8 34848.3 34924.9 0.2% 2.5%
Indonesia Jakarta Composite 6355.7 5783.3 5975.7 3.3% -6.0%
Malaysia KLCI 1796.8 1854.5 1797.4 -3.1% 0.0%
Philippines PSEi 8558.4 7672.3 7647.5 -0.3% -10.6%
Taiwan Taiex 10642.9 10830.8 10942.3 1.0% 2.8%
Thailand SET 1753.7 1754.2 1741.2 -0.7% -0.7%
UK FTSE 100 7687.8 7778.8 7730.3 -0.6% 0.6%
France CAC 5312.6 5614.5 5542.6 -1.3% 4.3%
Germany XETRA DAX 12917.6 13077.7 12938.0 -1.1% 0.2%
Italy FTSE MIB 21853.3 23449.7 22398.2 -4.5% 2.5%
Spain IBEX 35 10043.9 10112.4 9826.5 -2.8% -2.2%
Sweden OMX Stockholm 30 1576.9 1621.6 1587.0 -2.1% 0.6%
Switzerland SMI 9381.9 8940.5 8759.1 -2.0% -6.6%
North America
United States Dow 24719.2 24715.09 24753.1 0.2% 0.1%
NASDAQ 6903.4 7354.3 7433.9 1.1% 7.7%
S&P 500 2673.6 2713.0 2721.3 0.3% 1.8%
Canada S&P/TSX Comp. 16209.1 16162.3 16075.7 -0.5% -0.8%
Mexico Bolsa 49354.4 45666.8 45092.0 -1.3% -8.6%


Europe and the UK

Equities retreated on the week as mounting political uncertainties in two of the Eurozone’s biggest economies sent the euro lower and prompted vigorous buying of German debt, the continent’s premier safe haven. But not only internal issues drove equities lower. Investors also responded to the cancelation of the June 12 talks between the U.S. and North Korea. And declining oil prices also weighed on the indexes. On the week, the FTSE was down 0.6 percent, the CAC declined 1.3 percent, the DAX lost 1.1 percent and the SMI was 2.0 percent lower.


Italian and Spanish financial markets have taken blows thanks to growing concerns about both countries. The Italian FTSE MIB and Spanish IBEX 35 tumbled 4.5 percent and 2.8 percent respectively for the week. In Italy, investors are bracing for the formation of a populist, eurosceptic government. The development led investors to sell Italian government bonds, sending yields on the 10-year bond to their highest level since 2014. An unknown academic and lawyer with no political experience was named Italy’s prime minister, sending Italian bond yields to 14-month highs. President Sergio Mattarella grudgingly accepted the coalition government’s nomination of Giuseppe Conte and gave him the mandate to assemble a cabinet. At least there is progress and a government in place after having no government for 2½ months. Markets are nervous and await PM Conte to name his cabinet.


And in Spain, the odds of early elections have increased dramatically after calls for a no-confidence vote in the ruling government prompted by convictions of high-level officials in a graft case. A court ruled Thursday that Prime Minister Mariano Rajoy’s party had benefited financially from an illegal kickback scheme. The group has said it would appeal the ruling. While new elections can’t be called while the motion is running its course, it could eventually lead to Mr. Rajoy being unseated at a time when Spanish politics have been shaken by the independence push of Catalonia, one of its wealthier regions.


The European Central Bank published minutes of its April 26 Governing Council meeting. The minutes confirmed that the central bank, while still cautious about the outlook for underlying inflation, remained quietly confident about prospects for a solid and broad-based economic expansion in the Eurozone. Otherwise, there was little new of note in the minutes. Signs of some pick-up in nominal wage growth were welcomed but Governing Council members also noted that increasing risks related to global factors, including the threat of increased protectionism, had become more prominent and warranted monitoring with regard to their implications for the medium-term outlook for growth and prices. Even so, the marked slowdown in the Eurozone real economy last quarter was seen as probably temporary, albeit underlining the need for a sustained highly accommodative monetary stance.


Asia Pacific

Most Asian equity indexes retreated last week thanks primarily to geopolitical concerns. Uncertainty over U.S.-China trade relations and the back-and-forth between U.S. and North Korean officials over the denuclearization of the Korean Peninsula have clouded global investor sentiment. Asians were disappointed after U.S. President Donald Trump cancelled the planned summit with North Korean leader Kim Jong Un. Escalating oil prices also weighed on investors but prices eased amid signs that Russia is willing to gradually increase output to reduce pressure. Markets pared losses after North Korea said it is open to talks with the U.S. despite Trump's cancellation of the summit. Chinese stocks (down 1.6 percent) logged their worst week in more than one month as trade worries persisted.


On the week, the Jakarta Composite added 3.3 percent, the Taiex gained 1.0 percent and the Sensex was 0.2 percent higher. Losses ranged from 3.1 percent (KLCI) to 0.3 percent (PSEi).


The Nikkei suffered its biggest decline in two months Wednesday after comments from U.S. President Donald Trump rekindled worries about trade friction. Trump said he was not pleased with recent trade talks between the United States and China, checking hopes that the countries were on course to hammer out a deal. A stronger Japanese currency contributed to the Nikkei’s weakness. The yen’s moves are always a critical factor in Japanese markets: because so many of its major companies are exporters. The market usually underperforms when the yen rises.



The political situations in Italy and Spain sent the euro lower as Italian and Spanish bonds sold off. The political unrest has come at a time when economic data point to slowing economic growth across the Eurozone. The strong rally in Germany debt — a safe haven across Europe — highlights the difficulties in the two countries. Ten-year bond yields for Italy and Spain jumped 6 basis points each on Friday to 2.44 percent and 1.44 percent respectively while German bunds declined 7 basis points to 0.40 percent.


The pound sterling traded near a five-month low of $1.33 Friday, weighed down by worries over Brexit and signs of sustained weakness in Britain’s economy. Sterling had been one of the best-performing currencies in 2018, but weak economic data and a recent surge in the U.S. dollar have erased all of its gains for this year. Markets have radically scaled back expectations for when and how much the Bank of England will raise interest rates as economic growth slows.


The U.S. dollar advanced against the euro, pound and the Canadian dollar. It retreated against the safe havens yen and Swiss franc along with the Australian dollar.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 May 18 May 25 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.751 0.755 0.5% -3.2%
New Zealand NZ$ 0.709 0.692 0.691 -0.1% -2.4%
Canada C$ 0.796 0.777 0.771 -0.7% -3.1%
Eurozone euro (€) 1.194 1.177 1.166 -0.9% -2.4%
UK pound sterling (£) 1.344 1.348 1.331 -1.2% -1.0%
Currency per U.S. $
China yuan 6.534 6.380 6.392 -0.2% 2.2%
Hong Kong HK$* 7.816 7.850 7.845 0.1% -0.4%
India rupee 64.081 68.010 67.770 0.4% -5.4%
Japan yen 112.850 110.730 109.460 1.2% 3.1%
Malaysia ringgit 4.067 3.972 3.981 -0.2% 2.1%
Singapore Singapore $ 1.338 1.343 1.342 0.1% -0.3%
South Korea won 1070.630 1077.630 1077.910 0.0% -0.7%
Taiwan Taiwan $ 29.775 29.910 29.950 -0.1% -0.6%
Thailand baht 32.696 32.197 31.928 0.8% 2.4%
Switzerland Swiss franc 0.979 0.9978 0.991 0.7% -1.3%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


The Eurozone May flash composite output index declined to 54.1 from its final April mark of 55.1 and its weakest level in 18 months. The surprisingly sharp deceleration was broad-based and roughly evenly split between manufacturing and services. The flash manufacturing PMI fell from a final 54.7 in April to 53.9, a 15-month trough, and within which the output sub-index was off 1.7 points at 54.5. Its services counterpart declined 0.8 points to 53.9, its worst in 16 months. Weakness was particularly apparent in new orders (19-month low) where growth slowed for a fifth successive month. However, job creation was again robust and backlogs similarly continued to expand, albeit at the slowest rate since January 2017. Business confidence in the year ahead worsened but held above its long-run average. Among the core countries, the French composite output index fell a hefty 2.4 points from its final April reading to 54.5, a 16-month low, while Germany saw a 1.5 point drop to 53.1, its worst print in 20 months. However, elsewhere across the region, the news was more robust and growth was the strongest in three months. For comparison, the U.S. flash composite reading rose to 55.7 from 54.8.



First quarter gross domestic product advanced at an unrevised quarterly rate of 0.3 percent, just half the rate achieved at the end of 2017 and equaling the weakest print since the first quarter of 2015. Annual workday adjusted growth similarly matched its provisional 2.3 percent reading, 0.6 percentage points short of its fourth quarter rate. Unadjusted, GDP was up 1.6 percent on the year after 2.3 percent last time. However, the first look at the GDP expenditure components showed a stronger period for household spending which, at a 0.4 percent quarterly rate, saw its largest gain since the second quarter of 2017. Gross fixed capital formation expanded 1.7 percent after a 0.3 percent increase last time. Within this, investment in machinery and equipment (1.2 percent after 0.7 percent) again outperformed and construction (2.1 percent after 0.1 percent) was especially buoyant. Still, with government consumption down 0.5 percent and inventories subtracting 0.1 percentage points, the contribution of domestic demand to quarterly GDP growth was restricted to 0.4 percent. Even so, this was comfortably more than the minimal 0.1 percentage points in the previous period. Foreign trade, having boosted growth by 0.5 percentage point in the fourth quarter, made a 0.1 percentage point hit this time. Exports fell 1.0 percent while imports were off 1.1 percent.


United Kingdom

April consumer prices rose 0.4 percent on the month and were up 2.4 percent on the year for their lowest reading since March 2017. Headline inflation has now declined for three successive months and is 0.7 percentage points below its recent peak in November 2017. Core CPI increased 0.4 percent and 2.2 percent from a year ago. The main downward contribution to the monthly change in the annual CPI rate came from transport. Here, Easter timing effects were key and saw air fares falling 0.2 percent on the month compared with an 18.6 percent jump over the same period a year ago. Clothing and footwear (0.4 percent after 1.1 percent) also had a negative impact and, to a lesser extent, food and drink. A partial offset was provided by communications where telephone equipment gained a monthly 0.4 percent compared with a 1.0 percent drop last year.


April retail sales rebounded a monthly 1.6 percent after sinking a weather impacted 1.1 percent in March. On the year, volumes were up 1.4 percent after 1.3 percent last time. Excluding auto fuel, sales expanded only a slightly smaller 1.3 percent on the month — this too more than compensated for a 0.5 percent drop in March. Importantly within this category, both non-food (1.5 percent) as well as food (1.4 percent) posted healthy gains. For the former, household goods (2.5 percent), textiles and clothing (1.6 percent) and the other stores category (2.3 percent) were especially robust while non-specialized stores (down 0.9 percent) posted the only decline. Auto fuel was also up 4.7 percent. Underlying inflation was unchanged. On the year the overall deflator climbed 0.3 percentage points to 2.2 percent but this was on the back of more expensive fuel. Its ex-auto fuel counterpart was flat at 2.0 percent.


Second estimate of first quarter gross domestic product was unchanged. It inched up a quarterly 0.1 percent and was well short of the 0.4 percent gain recorded at the end of 2017. It was the weakest performance since the fourth quarter of 2012. The annual rate of expansion was 1.2 percent, also matching its provisional estimate and down from 1.4 percent in the fourth quarter. The first look at the GDP expenditure components showed that the quarterly deceleration was largely due to a smaller increase in household spending (0.2 percent after 0.3 percent) and sharply weaker business investment (minus 0.2 percent after 0.3 percent). This was the smallest rise in the former since the fourth quarter of 2014 and the first contraction in the latter since the end of 2016. Overall gross capital formation subtracted 0.2 percentage points as inventory accumulation had a significant negative impact. Elsewhere, growth of government consumption was a tick firmer (0.5 percent after 0.4 percent).




April merchandise trade surplus declined from ¥797 billion in March to ¥626 billion in April. Exports were up 7.8 percent on the year after increasing 2.1 percent the month before. Imports rebounded from a decline of 0.6 percent to an increase of 5.9 percent. The gain in exports was broad-based but largely driven by the United States and the European Union. Exports to the United States advanced 4.3 percent on the year, up from 0.2 percent in March, while those to the European Union increased 14.1 percent, up from 0.3 percent previously. Demand from regional trading patterns was generally stronger, with an increase in annual growth in exports to China, Hong Kong and Taiwan, partly offset by weaker growth in shipments to Korea. The pickup in imports was largely driven by a smaller annual decline in the volume of petroleum imports and a significant pick-up in the year-on-year growth in their value. Imports of manufactured goods also made a significant contribution to growth after declining in March, with coal and machinery imports also recording stronger growth.


Bottom line

Most equity indexes retreated on the week. While new economic data were thin, geopolitical news more than filled the gap. Political woes in Italy and Spain sent equities lower. In Japan, exports and imports improved. In the UK, consumer prices and retail sales improved while growth was confirmed at a meager quarterly 0.1 percent. There were no surprises in the minutes from the European Central Bank or the Federal Reserve.


Although the coming week begins with a holiday on Monday, the week will overflow with economic updates. The Bank of Canada announces its policy decision. It is expected to maintain its current interest rate of 1.25 percent. The Federal Reserve publishes its Beige Book for the upcoming FOMC meeting on June 12 and 13. Final May manufacturing PMIs will be released around the globe. France updates its first quarter gross domestic product data. Key May flash harmonized index of consumer prices will be reported. The U.S. May employment situation report will also be released.


Looking Ahead: May 28 through June 1, 2018

Central Bank activities
May 30 Canada Bank of Canada Monetary Policy Announcement
United States Federal Reserve Beige Book published
The following indicators will be released this week...
May 29 Eurozone M3 Money Supply (April)
May 30 Eurozone EC Businesss & Consumer Sentiment (May)
Germany Retail Sales (April)
Unemployment (May)
France Gross Domestic Product (Q1.2018 preliminary)
May 31 Eurozone Harmonized Index of Consumer Prices (May flash)
Unemployment Rate (April)
June 1 Eurozone Manufacturing PMI (May)
Germany Manufacturing PMI (May)
France Manufacturing PMI (May)
UK Manufacturing PMI (May)
Italy Gross Domestic Product (Q1.2018 final)
Asia Pacific
May 29 Japan Unemployment Rate (April)
May 30 Japan 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 Production Price Index (April)
May 31 Canada Gross Domestic Product (Q1.2018)
Monthly Gross Domestic Product (March)



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


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