Two Games of Chicken and an Uncertain U.S. Election Unnerving Investors

November 5, 2018

Chinese President Xi Jinping did not budge from his previous posture on trade, throwing cold water on U.S. President Trump’s pre-weekend comments that much progress had been made to defuse the trade war. In response, equity markets in the Pacific Rim slumped today by 1.8% in Hong Kong and Singapore, 1.6% in Japan, 0.9% in South Korea, and 0.8% in New Zealand. Also, the yuan fell 0.6% against the dollar.

The new Italian government remains at loggerheads with Italy’s euro area partners over its stimulative fiscal proposals that violate the joint currency group’s guidelines. Unlike Greece, Italy seems to big to fail without destroying the whole euro experiment.

U.S. political polls give a tiny edge to the Democrats regaining control of the House of Representatives but a larger margin for the Republicans retaining the Senate in tomorrow’s mid-term elections. Adjusting this information for what was learned from the 2016 elections — a systemic error that causes opinion polls to under weigh the Republican performance and Russian interference — chances actually seem quite plausible that President Trump will emerge with control of all branches of government.

The dollar aside from its relationship with the yuan is largely marking time. The greenback is unchanged against the loonie, up 0.2% versus the euro and Swiss franc and 0.1% vis-a-vis the yen and Aussie dollar by down 0.1% against the kiwi and sterling.

European stocks have risen mostly but only slightly, with gains of 0.5% in the British Ftse, 0.7% in Spain, 0.3% in France and Switzerland and 0.2% in Germany. Equities so far are down 0.3% in Italy and 0.4% in Greece.

Ten-year sovereign debt yields rose 4 basis points in Italy and 2 basis points in the U.K. and Greece. But such yields in Japan and German are unchanged, and the 10-year U.S. Treasury yield suggests a basis point drop.

Gold and oil are steady. Copper prices have weakened.

A speech by Bank of Japan Governor Kuroda and minutes from the BOJ Board’s September policy meeting show increasing attention paid to the potential damage of prolonged quantitative stimulus and negative interest rates.

Investor sentiment toward the euro area economy fell to a 25-month low, according to the Sentix measure that fell 2.6 points to a November reading of 8.8. Such began the year at 32.9 last January and was at 19.2 just six months ago.

A number of purchasing manager surveys from October were reported today.

Japan’s service-sector and composite PMI’s increased to six-month highs of 52.4 and 52.5, respectively. Being above 50 and higher than September readings, the data indicate a faster pace of improving conditions.  But the positives may be exaggerated because September was distorted adversely by a series of natural disasters.

China’s services PMI dropped 1.3 points to a 13-month low of 50.8, while its composite PMI that embodies manufacturing as well as non-manufacturing dropped 1.6 points to a 28-month low in October of 50.5. Escalating tit-for-tat tariffs with the United States are hurting China, but Chinese officials refuse to comply with U.S. demands.

India’s services and composite PMI each rose to 3-month highs — 52.2 and 52.1, respectively.

Britain’s services PMI slid 1.7 points to a 7-month low of 52.2, and that economy’s 53.0 composite PMI reading for October also conveys the weakest growth since March, with business sentiment at more than a 2-year trough.

Australia‘s AIG Performance of Services index slid 1.4 points to a 20-month low of 51.1. Australia’s CBA-compiled services and composite PMI scores of 51.7 and 52.0 constitute a 2-1/2 year low and a 2-month low.

Hong Kong’s private purchasing managers index, a 6-month high of 48.3, showed continuing deterioration but the slowest rate of decline since April.

The Filipino manufacturing PMI jumped 2.0 points to a 10-month high of 54.0.

Singapore‘s manufacturing PMI climbed back across 50 to a 3-month high of 52.6 versus 49.6 posted in September.

Non-oil Middle Eastern PMI surveys produced a 10-month low of 48.6 in Egypt and a 2-month low of 55.0 in the United Arab Emirates but a 5-month high of 46.2 in Lebanon and a 2-month Saudi Arabian high of 53.8.

South Africa’s private PMI stayed below the 50 line of separation between improvement and deterioration for a fourth straight month, sinking 1.1 points to a 51-month low of 46.9.

The global manufacturing PMI compiled by JP Morgan dipped 0.1 to 52.1, which is near to a 2-year low.

Indonesian on-year GDP growth edged down 0.1 percentage point to 5.17% in 3Q18. Growth has been powered by private domestic demand, but net exports remain a depressant. Consumer confidence, however, weakened in October rather sharply to a 20-month low. The threat to China from U.S. trade policy is reverberating throughout Asia.

Turkish CPI inflation rose to 25.2% in October, highest since July 2003, and PPI inflation remained highly elevated at a 2-month low of 45.0%.

CPI inflation in Cyprus settled back a tad to 2.97% in October but remained above August’s 2.5% on-year pace.

On-year growth in Romanian and Czech retail sales of 2.8% and 1.4% in September constituted a 2-month high and a 19-month low, respectively.

Spanish consumer confidence, which had dropped 3 straight times to 90.6 in September from a reading of 107.0 in June, bounced up to 93.0 last month.

British car sales in October were 2.9% smaller than a year earlier.

Malaysia’s trade surplus in January-September of MYR 85.7 billion was 20% wider than a year earlier. But Hungary in August recorded its smallest trade surplus since mid-2008.

Still ahead: U.S. non-manufacturing purchasing managers survey for October and the Federal Reserve’s employment trends index.

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

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