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Trade talk undermines investor confidence
International Perspective - June 29, 2018
By Anne D. Picker, Chief Economist


Global Markets

Although equities rallied Friday, the gains did not compensate for losses incurred earlier in the week. Global equities tumbled on the week, in June and for the first six months of the year. June was not a pretty month with most equity indexes bouncing lower in volatile trading.


Fears of a trade war waxed and waned and as a result, so did equities. Pressure on world shares from the U.S.-driven trade dispute mounted. And oil prices rose even though OPEC agreed to increases in production quotas. White House pressure on other countries to stop all imports of Iranian oil is expected to create a shortage while a power struggle in Libya has left it unclear whether its internationally recognised government or rebels will handle oil exports. The combination has pushed Brent crude prices to just below $80. Economic data were mixed last week.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 June 22 June 29 Week June 2018
Australia All Ordinaries 6167.3 6322.1 6289.7 -0.5% 2.7% 2.0%
Japan Nikkei 225 22764.9 22516.8 22304.5 -0.9% 0.5% -2.0%
Topix 1817.56 1744.83 1730.9 -0.8% -0.9% -4.8%
Hong Kong Hang Seng 29919.2 29338.7 28955.1 -1.3% -5.0% -3.2%
S. Korea Kospi 2467.5 2357.2 2326.1 -1.3% -4.0% -5.7%
Singapore STI 3402.9 3287.4 3268.7 -0.6% -4.7% -3.9%
China Shanghai Composite 3307.2 2889.8 2847.4 -1.5% -8.0% -13.9%
India Sensex 30 34056.8 35689.6 35423.5 -0.7% 0.3% 4.0%
Indonesia Jakarta Composite 6355.7 5821.8 5799.2 -0.4% -3.1% -8.8%
Malaysia KLCI 1796.8 1694.2 1691.5 -0.2% -2.8% -5.9%
Philippines PSEi 8558.4 7063.2 7193.7 1.8% -4.0% -15.9%
Taiwan Taiex 10642.9 10899.3 10836.9 -0.6% -0.3% 1.8%
Thailand SET 1753.7 1635.0 1595.6 -2.4% -7.6% -9.0%
UK FTSE 100 7687.8 7682.3 7636.9 -0.6% -0.5% -0.7%
France CAC 5312.6 5387.4 5323.5 -1.2% -1.4% 0.2%
Germany XETRA DAX 12917.6 12579.7 12306.0 -2.2% -2.4% -4.7%
Italy FTSE MIB 21853.3 21888.5 21626.3 -1.2% -0.7% -1.0%
Spain IBEX 35 10043.9 9792.1 9622.7 -1.7% 1.7% -4.2%
Sweden OMX Stockholm 30 1576.9 1549.6 1558.9 0.6% 0.6% -1.1%
Switzerland SMI 9381.9 8616.6 8609.3 -0.1% 1.8% -8.2%
North America
United States Dow 24719.2 24580.89 24271.4 -1.3% -0.6% -1.8%
NASDAQ 6903.4 7692.8 7510.3 -2.4% 0.9% 8.8%
S&P 500 2673.6 2754.9 2718.4 -1.3% 0.5% 1.7%
Canada S&P/TSX Comp. 16209.1 16450.1 16277.7 -1.0% 1.3% 0.4%
Mexico Bolsa 49354.4 46737.6 47663.2 2.0% 6.7% -3.5%


Europe and the UK

Trade tensions and political concerns weighed on European shares as investors positioned for a potentially divisive two day European Union summit on migration. While equities rallied Friday, only the OMX also was up for the week. Concerns over a global trade war calmed at the end of the week after China eased restrictions on foreign investment and investors breathed a sigh of relief after EU leaders reached an agreement on migration. The deal should help avert a political crisis in Germany, where Chancellor Angela Merkel's coalition government was under strain over migrant policy.


On the week, the FTSE was down 0.6 percent, the CAC retreated 1.2 percent, the DAX dropped 2.2 percent and the SMI slipped 0.1 percent. In June, the FTSE lost 0.5 percent while the DAX was down 2.4 percent. However, the SMI and IBEX gained 1.8 percent and 1.7 percent respectively. For the first six months of the year, only the CAC was positive, edging up 0.2 percent.


Asia Pacific

All equity indexes tumbled (except the Philippine PSEi) for the week as investors fled risk given the uncertainties surrounding U.S. trade policies and the condition of the Chinese economy.


In China, months of struggling with economic problems at home and bickering with President Trump over trade have started to take their toll on country’s financial health. On the week, the Shanghai Composite was down 1.5 percent and the Hang Seng was 1.3 percent lower. In June, the indexes lost 8.0 percent and 5.0 percent respectively. And for the six months through June, the indexes lost 13.9 percent and 3.2 percent.


Elsewhere in Asia, the Nikkei was down 0.9 percent for the week but managed to gain 0.5 percent in June — one of three in Asia that was higher on the month. Although it was down 0.5 percent for the week, the All Ordinaries increased 2.7 percent in June. The Sensex edged up 0.3 percent for the month but was 0.7 percent lower for the week.


On Sunday June 24, the People's Bank of China (PBoC) announced a reduction in the required reserves ratio for a wide range of banks, paving the way for additional lending to take place as part of efforts to support domestic growth. This move followed the release of data in recent week showing slower growth in industrial production, retail sales and investment in May.


The reserves ratio — currently set at 16 percent for large banks and 14 percent for smaller banks — will be cut by 50 basis points for eligible banks, effective July 5. The PBoC estimates that this move will free up around CNY700 billion for banks to lend, with officials advising that large banks will be encouraged to use these funds for debt-for-equity swaps with state-owned enterprises. Smaller banks were encouraged to boost their lending to small businesses. This is the third cut in required reserves so far this year and indicates that officials believe that some policy easing is required following earlier efforts to curb over-investment in parts of the economy. Concerns about the impact of trade tensions with the United States may also have been a factor contributing to this move. Officials, however, continue to characterize the current stance of monetary policy as "prudent and neutral".


Reserve Bank of New Zealand

As anticipated, the Reserve Bank of New Zealand left its overnight cash rate (OCR) unchanged at 1.75 percent where it has been since November 2016. In its statement, the RBNZ said its previous assessment of the economic outlook "remains intact". Nevertheless, the RBNZ noted that trade tensions represented a risk to global economic growth while slower than expected domestic growth earlier in the year suggested there is more spare capacity in the economy than previously anticipated. Looking forward, officials also expected that government spending will provide less support to domestic growth than previously anticipated. Consumer prices are expected to rise in the near term in response to higher fuel prices and then gradually increase towards the mid-point of the RBNZ's target range of 1.0 percent to 3.0 percent.


The RBNZ said it would change the day and time of its announcements on interest rates starting in 2019 as it shifts to decisions made at board meetings. The RBNZ said announcements would be made at 2:00 pm (0200 GMT) for monetary policy statements and Official Cash Rate (OCR) reviews, compared to the current 7:00 am. These would be made on a Wednesday, a day earlier than currently. Media conferences would be held following the release of each MPS at 3:00 pm.



The U.S. dollar was down against the euro and the Canadian dollar but up against the pound sterling, Swiss franc, yen and the Australian dollar. Sterling rallied sharply Friday after a better than expected revision to Britain’s first quarter economic growth raised expectations of monetary policy tightening later in the year. Adding to the bounce, the European Union’s chief negotiator Michel Barnier said that EU leaders had made progress in Brexit talks though big differences still remained.


Sterling rallied Friday after a bruising week and month as worries about the lack of progress in Brexit talks and weakness in the British economy hit the currency. Against a euro buoyed by European Union leaders agreeing a deal on migration, the pound recovered its earlier losses and advanced. The state of Brexit talks should feature high on the agenda of EU leaders on the second day of a summit on Friday but expectations for progress towards an actual post-departure deal have been pushed back to October. Sterling has been caught between contrasting signals from policymakers over whether the economy is performing well enough to justify raising rates for only the second time since the 2008-09 financial crisis.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 June 22 June 29 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.744 0.740 -0.6% -5.1%
New Zealand NZ$ 0.709 0.692 0.677 -2.1% -4.4%
Canada C$ 0.796 0.754 0.761 0.9% -4.4%
Eurozone euro (€) 1.194 1.166 1.168 0.1% -2.2%
UK pound sterling (£) 1.344 1.326 1.319 -0.5% -1.9%
Currency per U.S. $
China yuan 6.534 6.505 6.621 -1.7% -1.3%
Hong Kong HK$* 7.816 7.847 7.846 0.0% -0.4%
India rupee 64.081 67.831 68.470 -0.9% -6.4%
Japan yen 112.850 109.960 110.740 -0.7% 1.9%
Malaysia ringgit 4.067 4.002 4.039 -0.9% 0.7%
Singapore Singapore $ 1.338 1.358 1.363 -0.3% -1.8%
South Korea won 1070.630 1107.530 1114.670 -0.6% -4.0%
Taiwan Taiwan $ 29.775 30.294 30.475 -0.6% -2.3%
Thailand baht 32.696 32.917 33.016 -0.3% -1.0%
Switzerland Swiss franc 0.979 0.9881 0.992 -0.4% -1.3%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


June economic sentiment (ESI) reading was 112.3, just 0.2 points short of its unrevised May reading. The June reading was the weakest since August 2017. The latest drop extended the run of monthly declines to six. The modest decline reflected weaker household confidence (minus 0.5 after 0.2) as well as softer morale in construction (5.6 after 7.1). However, industry (6.9) and services (14.4) were unchanged and retail (0.8 after 0.7) marginally firmer. Regionally, Germany (111.9 after 112.7) was the only country among the larger four member states to see a decline in its ESI. Spain (109.4) was unchanged while both France (109.6 after 108.6) and Italy (109.6 after 108.4) posted limited gains.


June flash harmonized index of consumer prices was up 2.0 percent from a year ago. The narrowest core index which excludes energy, food, alcohol and tobacco, saw its yearly rate dip a tick to 1.0 percent while without just energy and unprocessed food, inflation similarly stood 0.1 percentage points lower at 1.2 percent. The main drivers behind the headline gain were energy, where the rate rose from 6.1 percent to 8.0 percent, and food, alcohol and tobacco (2.8 percent after 2.5 percent). Non-industrial goods inflation edged a tick firmer but only to a still subdued 0.4 percent while services fell 0.3 percentage points to 1.3 percent.



Ifo's June survey found little change in economic sentiment. At 101.8, the June business climate indicator was just 0.5 points short of its marginally firmer revised May reading. However, this was the measure's fourth decline in the last five months and equaled its weakest mark since March 2017. Morale was lower across all of the major production sectors with wholesale (11.3 after 14.5) recording the steepest drop. Manufacturing (23.8 after 24.1) and retail (19.4 after 20.4) held up better but still saw multi-month lows, as did services (25.9 after 27.1). The headline deterioration reflected a renewed worsening in current conditions where the sub-index dropped a full point to 105.1. This more than reversed May's increase, the first since January, and made for the lowest reading since June 2017. Expectations at least held steady at 98.6 although, following six successive declines, this was hardly reason for optimism.


United Kingdom

Final estimate of first quarter gross domestic product was revised up to a quarterly increase of 0.2 percent but still equaling its worst performance since the fourth quarter of 2012. Annual growth was unchanged at 1.2 percent. The minor adjustment to the quarterly rate came from net foreign trade where exports were now seen flat and imports off 0.2 percent. This made for a 0.1 percentage point contribution, up from the zero impact estimated last time. Within the domestic GDP components, household consumption was unrevised at a 0.2 percent quarterly rate and so still down from 0.4 percent in the fourth quarter. Moreover, the third lowest household savings rate on record (4.1 percent) does not bode well for any significant pick-up in the current period. Meantime, the fall in business investment was doubled to 0.4 percent, its worst result since the fourth quarter of 2016, and government consumption was trimmed from 0.5 percent to 0.4 percent.




May retail sales advanced 0.6 percent on the year, down from a revised 1.5 percent in April. On the month, sales dropped 1.7 percent after climbing a revised 1.3 percent in April. Sales growth moderated in May despite stronger growth in sales of food and beverages and fuel, with most other categories of consumer spending posting weaker sales growth. Motor vehicle sales fell 2.8 percent on the year after dropping 0.6 percent in April. Annual growth also declined for general merchandise, clothing, machinery & equipment, non-store retailers and others. Sales of food and beverages were up 0.8 percent on the year after a 0.6 percent increase previously. Fuel sales rose 13.4 percent, up from 10.9 percent.


May industrial production declined 0.2 percent on the month after increasing 0.5 percent in April. On the year, output was up 3.7 percent. The monthly swoon reflected declines in transport equipment, iron & steel and electrical machinery. The declines were partly offset by increases in the output of electronic parts and devices, general purpose, production and business oriented machinery.




April real gross domestic product (GDP) edged up 0.1 percent and was 2.5 percent higher than the same month a year ago. Twelve of 20 industrial sectors increased. After a decline in January, GDP has risen every month since the beginning of 2018. Goods-producing industries rose 0.2 percent with gains in the manufacturing and utilities sectors more than offsetting declines in construction and in mining, quarrying and oil and gas extraction. Services producing industries were essentially unchanged overall as a notable decline in retail trade was offset by increases in the majority of subsectors. Activity was affected by unseasonably inclement weather.


Bottom line

Most equity indexes were down for the week and month as trade war worries continued to depress investors’ morale. The Reserve Bank of New Zealand continued to leave its policy overnight cash rate (OCR) at 1.75 percent where it has been since November 2016.


As usual, the first week of a new month is a busy one with many updated indicators to be parsed. Aside from the June PMIs, both Canada and the U.S. report their respective June labour reports. It is a holiday shortened week in the U.S. Investors will be closely monitoring Germany’s May manufacturing orders and industrial production especially given the apparent slowdown in growth there.


Looking Ahead: July 2 through July 6, 2018

Central Bank activities
July 3 Australia Reserve Bank of Australia Monetary Policy Announcement
The following indicators will be released this week...
July 2 Eurozone Manufacturing PMI (June)
Germany Manufacturing PMI (June)
France Manufacturing PMI (June)
UK Manufacturing PMI (June)
July 3 Eurozone Retail Sales (May)
July 4 Eurozone Manufacturing, Services  & Composite PMI (June)
Germany Manufacturing, Services  & Composite PMI (June)
France Manufacturing, Services  & Composite PMI (June)
UK Services PMI (June)
July 5 Germany Manufacturing Orders (May)
July 6 Germany Industrial Production (May')
France Merchandise Trade )May)
Asia Pacific
July 2 China Manufacturing PMI (June)
India Manufacturing PMI (June)
July 4 Australia Retail Sales (May)
Merchandise Trade (May)
July 6 Japan Household Spending (May)
July 6 Canada International Trade (May)
Canada Labour Force Survey (June)


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


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