Growth Optimism Crowds Out Geopolitical Worries in Wednesday’s Session

August 16, 2017

Markets have turned a deafer ear to geopolitical concerns, but such is likely only a temporary lull. A Korean war seems less imminent, but world alarm about changes happening in the United States continues to mount. The title of a Tuesday Op-Ed article in the Financial TimesAmerica is now a dangerous nation — would have been unthinkable before 2017 or even two months ago.

The cue for today’s market action has been optimism that global growth is strengthening. This was fed yesterday by a buoyant report on U.S. retail sales, which climbed twice as fast in July as expected, and enhanced today by European second-quarter GDP reports.

Several financial beneficiaries last week of the Korean crisis (gold, the yen, Swiss franc and U.S. Treasuries) continue to subside. Gold fell 0.3% overnight. The dollar advanced another 0.2% against the Swiss franc and 0.1% versus the yen. And the 10-year Treasury yield of 2.27% compares to 2.19% last Friday.

Against other currencies, the dollar fell 0.5% against the Aussie dollar and 0.1% versus the kiwi and peso but rose overnight by 0.3% against the euro and 0.1% relative to the yuan.

Equities today rose 1.0% in Hong Kong, India and Indonesia, 0.5% in Australia and New Zealand, and 0.9% in South Korea, but Japan’s Nikkei slipped back 0.1%. In Europe, stocks have so far climbed 1.1% in Italy, 1.0% in France, 0.9% in Greece, 0.8% in Germany and 0.7% in the U.K. and Spain.

West Texas Intermediate crude oil advanced 0.4% after back-to-back dips on the week’s first two days, but the price remains under $48 per barrel.

Ten-year British gilt and German bund yields are 3 and 2 basis points firmer today.

The Bank of Thailand’s main interest rate was again left unchanged at 1.5%, a decision of the Monetary Policy Committee there that drew no dissenting votes. The rate has been at this “accommodative” level since a cut in April 2015.

FOMC minutes due this afternoon will be closely watched for additional guidance regarding the hope of many Fed officials to begin trimming the central banks balance sheet before the end of this year. A successor to Chair Janet Yellen’s four-year term that expires in January has still not been named.

Preliminary European GDP data released today show

  • On-year growth in Euroland was 2.2% last quarter, revised up from a flash estimate of 2.1%. Quarterly growth of 0.6% was unrevised and follows increases of 0.5% in the first quarter and 0.6% in the final quarter of 2016.
  • German GDP growth slowed to 0.6% in 2Q from 0.7% in 1Q but accelerated in on-year terms to 2.1% from 1.9%.
  • French GDP rose 0.5% quarterly for a third straight time, lifting the on-year increase to 1.8% from 1.1% recorded in the year to 1Q17.
  • Dutch GDP shot up 1.5% on quarter in 2Q, the second most since 2000. On-year Dutch growth of 3.8% was above 2.7% posted in the first quarter.
  • Real GDP growth rose 0.9% on quarter in Spain, Austria and Cyprus.
  • Italian GDP advanced 0.4% for a third straight time and 1.5% from a year earlier. Belgian GDP also went up 0.4% last quarter, but its on-year growth slowed to 1.4% from 1.6%.
  • Portuguese GDP disappointed with only a 0.2% quarterly advance following a 1.0% jump in 1Q, but the on-year growth pace stayed at 2.8%.
  • Finnish GDP contracted 0.5%, and this cut its on-year growth to 1.7% from 2.6% in the prior quarter.
  • Among economies in Eastern Europe where growth continued to be comparatively robust, GDP expanded quarterly by 2.3% in the Czech Republic, 1.6% in Romania, 1.1% in Poland and 0.9% in Hungary. On-year growth amounted to 5.7% in Romania, 4.5% in the Czech Republic, 4.4% in Poland, and 3.6% in Hungary.

U.S. Treasury-compiled capital flows released late Tuesday revealed a $34.4 billion net long-term inflow in June and a monthly average inflow of $43.8 billion in the first half of 2017. The total inflow, including short-term transactions, was only $7.7 billion in June, well below the first-half mean of $49.3 billion per month.

The latest batch of British labor market statistics included an unexpected 4.2K decline in jobless claims during July, higher but still subdued wage earnings growth of 2.1% in 2Q, and the lowest ILO-basis unemployment rate (4.4% in 2Q) since 1975.

Czech producer prices dipped 0.2% in July, trimming the 12-month increase to 1.1%.

Australia’s index of leading economic indicators edged up 0.1% in July, reversing a dip in June.

Aside from the aforementioned FOMC minutes, due at 18:00 GMT, U.S. housing starts and building permits will also be released today.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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