Some Geopolitical Relief but Not Out of the Woods

September 4, 2019

The British Parliament passed a bill late yesterday by a 328-301 margin to stop Prime Minister Johnson from engineering a no-deal breakaway from the EU on October 31. BoJo, as he is known, is expected to lose more votes today and to call snap elections for October 14th. It’s not clear the Parliament will authorize the election nor, if it should, how voters will respond. The situation remains fluid and a potential disaster for the U.K. and Europe.

Hong Kong’s Chief Executive, Carrie Lam, rescinded the extradition bill that had triggered the street protests in that former British colony. But investors would be wise to understand that street protests, whether in Asia, Eastern Europe, North Africa or the Middle East, have generally not ended well. The protests are unlikely to dissipate quickly.

Hurricane Dorian has begun to turn northward but is only 100 miles from Florida and affecting weather in that state. The Cat 2 storm could still inflict great damage on the Southeastern U.S. and is a reminder of the peril faced by ignoring and being unprepared for climate change.

In stock market action overnight, share prices rallied 3.9% in Hong Kong, 0.9% in China and Taiwan, 1.2% in South Korea, but only 0.1% in Japan. Equities in Europe are up 1.1% in France, 1.6% in Italy, 1.0% in Germany, but just 0.4% in the U.K..

The dollar, which had been bid higher by risk aversion previously, fell overnight by 1.0% against sterling, 0.9% versus the peso, 0.4% relative to the euro and Australian dollar, 0.3% vis-a-vis the yuan, Swiss franc and kiwi, and 0.1% against the loonie. The yen fell 0.2% against the dollar.

Ten-year sovereign debt yields rebounded nine basis points in the U.K., 7 bps in France and the Netherlands, 6 bps in Germany, Spain and Switzerland, and 4 basis points in Italy and U.S. futures. The Japanese JGB yield edged a basis point higher.

WTI oil rallied 1.3%, while gold slid 0.7%.

The Central Bank of Chile became the latest monetary authority to cut interest rates in the face of a deteriorating global landscape. Chile’s monetary policy rate was cut by 50 basis points for the second time in three months and now becomes 2.0%, its lowest level since early September of 2010. The vote to ease was unanimous, and a released statement cites several risks:

The trade conflict is compounded by the greater likelihood of a non-deal exit of the United Kingdom from the European Union, various geopolitical risks and a severe deterioration of the situation in Argentina. … financial markets continue to show high volatility and risk aversion. Thus, further declines in interest rates were observed in the fixed-income market, together with stock market relapses, depreciation of most currencies against the dollar and widespread falls in commodity prices. Inflationary figures remain contained in many economies around the world.

Service sector purchasing manager data reported today and Euroland retail sales accentuate the weakness of global growth and subdued nature of inflation.

Although Euroland’s services PMI printed at a 2-month high of 53.5, a 6-year low in business sentiment and 3+ year low in jobs growth suggest that the extreme weakness of manufacturing is starting to infect other areas of that economy. Euroland’s composite PMI held below 52.0 for a third straight month.

The British services PMI dropped 0.8 index points to a two-month low of 50.6. Profit margins are being squeezed by accelerating cost push inflation.

Japan’s services PMI improved 1.5 points to a 22-month high, but orders declined for a third straight time. Japan’s composite PMI was only 51.9.

China’s August services and composite PMI readings of 52.1 and 51.6 represented 3- and 4-month highs. But India’s services and composite PMIs of 52.4 and 52.6 were at 2-month lows. India is experiencing historically weak inflationary pressure, moreover.

Australia’s CBA service-sector and composite PMIs fell below the 50 threshold to six-month lows.

Singapore’s 48.7 private purchasing managers index was 2.3 points below July’s level and at a 7-year low.

Hong Kong’s private sector PMI score, 40.8 in August, represents a 128-month low.

The South African private sector PMI as in the three prior months was slightly undere 50.

Russia’s composite PMI of 51.5 was 1.3 points higher than in July.

Lebanon’s private PMI rose to a 43-month high but remained 2.2 points below the 50 level that separates improving conditions from deteriorating ones.

The global manufacturing purchasing managers index compiled by JP Morgan edged 0.2 points above July’s 81-month low to a still sub-50 level of 49.5.

Retail sales volume in the euro area dropped 0.6% in July, which cut its 12-month rate of increase to 2.2% from 2.8% the month before.

Greek real GDP growth accelerated last quarter to 0.8%, which lifted the year-on-year pace to a 3-quarter high of 1.9%.

Real GDP in Australia grew 0.5% last quarter, matching the quarterly pace seen in 1Q19. On-year growth still managed to ease to 1.4% from 1.8% in 1Q, 2.3% in the final quarter of 2018, and 3.0% in the second quarter of 2018.

Norway’s current account surplus last quarter of NOK 30.6 billion was 48% smaller than a year earlier.

The U.S. goods and services trade deficit fell by $1.5 billion to $54.0 billion in July due to an 8.9% leap in goods exports juxtaposed against a 0.2% monthly dip in merchandise imports. But the year-to-date deficit of $373.8 billion was 8.2% wider than in the first seven months of 2018, and July exports and imports were each over 1.0% smaller than a year earlier. Bilateral year-to-date deficits shrunk by 10.3% against China and 1.6% versus Germany but widened 36% in trade with Mexico and by 6.7% versus Japan.

Canada’s trade position swung to a C$ 1.124 billion deficit in July from a surplus of C$10 million a year earlier. Exports fell 2.9% on year.

Canadian labor productivity rose 0.2% on quarter and just 0.3% on year in the second quarter of 2019. Unit labor costs were 2.8% greater than a year earlier.

Still ahead: Bank of Canada reveals its interest rate decision. Many analysts foresee a rate cut.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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