The Fickle Nature of Investor Anxiety about a Trade War

April 5, 2018

Flip-flopping attitudes about the likelihood of a full-fledged intensifying trade war between China and the United States continues to be a big source of day-to-day changes in market behavior. There was panic earlier this week. Today, investors believe Trump and Jinping will negotiate a truce and forestall a trade meltdown. One problem with such optimism is that a large U.S. deficit will persist so long as a big gap exists between U.S. investment and savings, and the Trump Administration’s expansionary changes in fiscal policy in fact point to a widening deficit, all other things being the same.

The dollar has benefited today from the more sanguine view regarding tensions over trade. The U.S. currency has risen 0.3% against the Australian dollar and sterling, 0.2% relative to the yen and euro, and 0.1% vis-a-vis the Swiss franc, Mexican peso and loonie. China, Hong Kong and Taiwan are closed for the Ching Ming Festival.

Stock markets in the Pacific Rim rose 1.5% in Japan, 1.8% in India, 2.0% in Singapore, 1.2% in South Korea and 0.5% in Australia. In Europe, equities have advanced between 1.5% and 2.5% thus far in Germany, France, Spain, Italy, Greece and Britain.

Lessening risk aversion lifted 10-year sovereign debt yields by 3 basis points in the U.K., 2 bps in Germany and a basis point each in the United States and Japan. Gold fell back 0.5%. WTI oil is 0.2% softer.

The U.S. global trade deficit in goods and services widened in February for a sixth consecutive month, reaching $77.0 billion. More importantly because this is what President Trump follows, the merchandise trade deficit (i.e. goods only) also climbed for a sixth straight time and was 19% bigger than in August 2017. Likewise, the January-February combined merchandise trade deficit of $153.7 billion was 14.5% greater than in the first two months of 2017 when Trump’s presidency had just begun.

Canada also recorded a trade deficit in February. At C$ 2.686 billion, such was 87% greater than the January deficit and 57% above the February 2017 deficit’s size.

The Reserve Bank of India’s 6.0% repo rate was left unchanged at 6.0% after the second policy review of calendar 2018. The last change was a 25-basis point cut in August 2017. RBI monetary officials now project a somewhat lower inflation trajectory than had been assumed at the prior meeting.

Producer prices in the euro area edged up just 0.1% on month in February, which kept the year-on-year pace steady at a subdued 1.6%.

Retail sales volume in Euroland only edged 0.1% higher in February versus an expected 0.6% increase, and that kept the 12-month rate of increase below 2% at 1.8%.

German industrial orders in February were also disappointing, as such rebounded merely 0.3% following a 3.9% plunge in January. Taken together, orders in the first two months of 2018 on average were 1.6% below the mean of the final quarter of 2017. Even more disturbing, domestic demand for capital goods, a leading indicator of future business investment, was 3.5% lower in January-February than the prior quarter’s average level.

Euroland’s composite purchasing managers index (manufacturing and services) fell to a 14-month low of 55.2 in March from 57.1 in February and 58.1 at the end of 2017. The services PMI slipped to a 7-month low, but the data still suggest that real GDP grew about 0.6% in the quarter, according to IHS which compiles the figures.

Service sector PMIs for March among reporting Ezone members ranged from a 7-month low of 56.9 in France to a 7-month low of 53.9 in Germany. Those for Italy and Spain were at 3-month lows, and Ireland’s index was the lowest since November. Ireland’s composite PMI, however, fell to a 57-month low, and Italy’s composite score was at a 14-month low. Those for Germany, France and Spain were the lowest composite scores in eight, seven and 3 months. So economic momentum tailed off as the economy unfolded, but because March momentum was adversely affected by unseasonably harsh weather, the April results due in a month become particularly important.

India’s composite PMI of 50.8 and services PMI of 50.3 show a weak pulse in March  but one slightly better than in the previous month.

The British services purchasing managers index slumped to a 20-month low of 51.7 in March from a score of 54.5 posted in February.

Australia’s service-sector purchasing managers index, in contrast, rose 2.9 points in March to a 2-year high of 56.9.

Standard Bank reported a 0.3-point dip in South Africa’s private sector PMI in March.

Australia’s A$ 825 million trade surplus in February was closer to January’s A$ 952 million surplus than analysts were anticipating.

Swiss CPI inflation edged up 0.2 percentage points to 0.8% in March.

Filipino consumer price inflation accelerated half a percentage point to 4.3% last month.

Greek industrial production in March showed a bigger 2.0% on-year drop.

Swedish industrial production grew 5.7% between February 2017 and February of this year.

Danish GDP growth in the final quarter of 2017 got revised downward to a quarter-0n-quarter 0.9% increase, and that reversed a 0.9% decline in 3Q17.

U.S. new jobless claims increased by 24K last week to 242K, but the rolling 4-week average only moved 3K higher.

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


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