Markets React as Trump Stirs Pot of Global Disorder Further

July 11, 2018

Share prices dropped 1.8% in China, 1.4% in Hong Kong, 1.2% in Japan, and 0.7% in Taiwan and Australia.

In European markets, equities today are down over 1.0% in Germany, Italy, Spain, France and Switzerland, and the DOW dropped some 160 points in the first quarter hour of U.S. trading.

There have also been outsized declines in metal prices such as copper (off 3%) and WTI oil (-1%).

The dollar advanced solidly against many commodity-sensitive currencies, such as the yuan (0.6%), the Aussie dollar (0.9%) and the kiwi (0.7%). The dollar gained 0.3% versus the peso, 0.2% vis-a-vis the loonie but is barely changed today relative to sterling, the yen, the  euro, or Swiss franc.

The 10-year German bund yield jumped five basis  points.

Further cementing his reputation for creating geopolitical uncertainty, Trump did the following:

  • Broadly expanded the list of pending tariffs to include thousands of more Chinese products totaling a quarter trillion dollars.
  • Characterized Germany as a pawn of Russia on all sorts of policies.
  • At the NATO summit in Brussels, labeled that organization obsolete and reiterated the criticism that European members are greatly lagging behind in supporting the common defense financially.
  • Nominated another extreme conservative to fill the vacancy on the U.S. Supreme Court.

U.S. producer prices rose more than forecast in June, increasing 0.3% on month and by a 79-month high 3.4% on year. Core PPI inflation advanced 0.4 percentage points to 2.8%. Energy posted a 17.2% 12-month rise.

The specter of a multilateral trade war is transforming the outlook for inflation from innocuous to a mounting concern. In price reports released elsewhere today,

  • Domestic Japanese producer prices rose 0.2% in June and 2.8% on year. Import prices were 10.5% higher than a year earlier, while export prices advanced by 3.5%.
  • Portuguese CPI inflation accelerated from 1.0% in May to 1.5% in June.
  • Czech CPI inflation increased 0.4 percentage points to 2.6% last month.
  • Romanian consumer prices in June were 5.4% greater than a year earlier.

Central bank reviews of monetary policy were completed today in Canada, Malaysia and Poland.

  • The Bank of Canada raised its overnight policy rate by another 25 basis points to 1.5% in a move that was widely anticipated. The rate change was accompanied by a new quarterly Monetary Policy Report. The “Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data. In particular, the Bank is monitoring the economy’s adjustment to higher interest rates and the evolution of capacity and wage pressures, as well as the response of companies and consumers to trade actions.”
  • Bank Negara Malaysia left its overnight overnight policy rate unchanged at 3.25%. Such had been raised by 25 basis points a half year ago in response to higher inflation, but officials now project less inflation during 2018 than presumed then in part as a result of the start of rate normalization begun in January, which had been the first rate change of any sort since a 25-basis point reduction in July 2016 and the rate’s first increase since 2011. Although leaving policy unchanged, officials took the opportunity to warn, “the intensification of global trade tensions could affect sentiments and weigh on trade, investment and consumption. Coupled with ongoing monetary policy normalization in the advanced economies, shifting investor expectations and sentiments could lead to further capital outflows and financial market adjustments in some emerging economies.”
  • Poland’s central bank reference rate was left unchanged as well at the record low 1.5% level where such has been since a pair of 50-basis point cuts in January and March of 2015 (prior to 2012, such had been as high as 4.75%). A released statement from officials at the Bank of Poland expressed sanguine thoughts about inflation: “Notwithstanding relatively high economic growth and wages rising faster than in the previous year, consumer price growth remains moderate. The slightly higher annual CPI rate than in the previous months reflects the growth in fuel prices. At the same time, inflation net of food and energy prices stays low.”

Core private domestic Japanese machinery orders retreated 3.7% in May, which still left there average level in April-May some 6.0% greater than the first-quarter mean and May’s level 16.5% above a year earlier. Between May 2017 and May 2018, government machinery orders and foreign orders for Japanese machinery respectively climbed 36.4% and 11.6%.

But Japan’s tertiary index, a monthly supply-side measure of service sector activity, showed continuing weakness, with a monthly uptick of just 0.1% and on-year growth of 1.2%. The tertiary index had risen 0.7% in 2016 and 0.8% in 2017.

Australian consumer sentiment according to the Westpac index leaped 3.9% in May to its highest level since November of 2013. Home loans in Australia grew 1.1% that month following three straight declines totaling nearly 4%.

South Korea’s index of leading economic indicators, which had dropped 0.9% in April, rebounded 0.5% in May.

Turkey’s current account deficit of $5.89 billion in May was the widest deficit since January and also bigger than a deficit of $5.37 billion in May 2017.

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

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