Stronger Dollar, Weaker Equities, Softer Gold Price But Rebound in Oil

July 19, 2018

The dollar climbed overnight by 0.8% to a one-year high against the Chinese yuan. The greenback also gained 1.0% relative to the kiwi, 0.9% vis-a-vis the peso, 0.8% versus the Australian dollar, 0.6% against sterling, 0.5% versus the loonie and 0.3% against the euro and Swiss franc. Dollar/yen is unchanged.

Stocks dropped 0.9% in Hong Kong, 0.5% in China and New Zealand, 0.3% in South Korea and Indonesia, and 0.1% in Japan. European share price losses so far amount to 1.1% in Greece, 0.7% in Germany, 0.6% in Italy and France, and 0.5% in Spain. U.S. stocks are also down about 0.5%.

Whereas Comex gold slid 0.9%, the price of WTI crude oil recovered 1.8% to hover around $70 per barrel.

Ten-year sovereign debt yields declined four basis points in the U.K. and a basis point each in Japan and the United States.

Concerns about an escalating global trade war and the grinding rise of the federal funds target are making investors nervous and lending the dollar an upside bias despite the continuing criticism of Trump‘s comments at a joint press conference with Putin.

Emerging market currencies are proving particularly vulnerable to Fed policy, general dollar strength, and protectionism. Central banks in Indonesia and South Africa just completed monetary policy reviews that kept key interest rates unchanged at 5.25% and 6.50%, respectively, but released statements highlighting the risks of global uncertainties. Indonesian monetary officials spoke of the

 efforts by Bank Indonesia to maintain domestic financial market attractiveness against a backdrop of pervasive uncertainty blighting the global financial markets in order to maintain stability in general and Rupiah exchange rate stability in particular.

And a statement released by the South African Reserve Bank warns,

Key uncertainties in the global environment remain. The continued strength of the US dollar (which has appreciated against most currencies), any sustained elevation of oil prices, escalating trade tensions as well as geopolitical developments continue to pose risks to the inflation outlook. The rand will remain sensitive to changes in global monetary policy settings and investor sentiment towards the emerging
markets.

Several developments this week have thrust the direction of U.S. monetary policy back onto center stage:

  1. Chairman Powell’s two-day Humphrey Hawkins testimony depicted a solid U.S. growth outlook.
  2. The Fed Beige Book identified moderate or modest growth continuing in 10 of the 12 districts and a strong expansion the Dallas District. Growing labor market shortages were also highlighted.
  3. New U.S. jobless insurance claims dropped 8K last week to 207K, the lowest weekly amount since December 1969, that is going all the way back to the time of the first Vietnam draft lottery.
  4. Another piece of strong U.S. data reported today was the Philly Fed manufacturing index that rebounded more sharply in July than analysts were anticipating to a reading of 25.7 from 19.9 the month before.

There was a mixed message in the British retail sales figures reported today. A 2.1% second-quarter increase was the biggest such gain since the first quarter of 2004, but in just June, sales fell 0.5% on month and to a 2.9% on-year increase after 4.1% in May. In this week of negative Brexit news, investors chose to focus on the June decline, not the second-quarter healthy rise of sales.

Japan’s customs basis trade balance swung back to a JPY 721 billion surplus last month from a JPY 580 billion deficit in May. A JPY 433 billion surplus had been recorded in June 2017. The seasonally adjusted surplus of only JPY 66 billion in June remained low, however. The second estimate of Japanese machine tool orders growth for June, 11.4% higher than a year earlier, matched the preliminary indication, continuing the shrinking trend from on-year gains of 14.9% in May, 28.1% in March, and 48.3% last December.

Switzerland posted a larger CHF 4.6 billion merchandise trade surplus in the second quarter than had been seen in 1Q18, but the first-half surplus of CHF 8.2 billion was CHF 4.5 billion smaller than experienced a year earlier.

Australian employment grew by a robust 50.9 workers in June, and the increment mostly involved full-time positions. The 5.4% jobless rate was the same level as in May but below April’s 5.6%. The labor participation rate went up 0.2 percentage points to 65.7%.

Irish real GDP shrank 0.6% in the first quarter of 2018. There were negative contributions from net foreign demand and personal consumption, and business investment and government spending each grew more slowly than in the previous quarter. Nonetheless, on-year GDP growth quickened to a heady 9.1%, and the first quarter’s current account surplus equaled a whopping 12.4% of GDP.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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