Equities Rally Globally as Threatened Trade War Escalation Delayed by 3 Months

December 3, 2018

Stock markets rose 2.6% in China, 2.5% in Taiwan, 2.3% in Hong Kong, 2.3% in Singapore, 1.8% in Australia, 1.7% in South Korea, 1.5% in Japan, and 1.0% in Indonesia. European share prices so far today have climbed 1.9% in Germany, 2.2% in Italy, 4.7% in Greece, 1.4% in the U.K., 1.3% in Spain, and 1.1% in France. The DOW and S&P 500 show gains of 1.3% and 0.9%.

The U.S. will not increase the tariff rate on a slew of Chinese imports from the current 10% to 25% at the end  of this month as had been threatened. That risk has been kicked down the road to the end of the first quarter of 2019. Other than extending the truce between U.S. President Trump and Chinese President Xi Jinping, the details of their deal are murky but resemble the pattern of other staged deals of the Trump administration: first create a crisis, then eventually meet with one’s adversary, call the meeting a huge success, but announce concessions that the other side either disputes are ignores. According to U.S. officials, Chinese negotiators have promised to lower tariffs on autos and many other goods immediately and more broadly to secure a reduced bilateral trade surplus with the United States.

Trump and Xi met at the Group of Twenty leaders summit held in Buenos Aires over the weekend. The G20 released a statement that criticizes the current rules governing international trade and investment and, regarding foreign exchange policy, merely refers back to the previous G20 statement from last March:

International trade and investment are important engines of growth, productivity, innovation, job creation and development. We recognize the contribution that the multilateral trading system has made to that end. The system is currently falling short of its objectives and there is room for improvement. We therefore support the necessary reform of the WTO to improve its functioning. We will review progress at our next Summit.

We reaffirm the exchange rate commitments made by the Finance Ministers and Central Bank Governors last March. [That earlier document has said, ” Strong fundamentals, sound policies, and a resilient international monetary system are essential to the stability of exchange rates, contributing to strong and sustainable growth and investment. Flexible exchange rates, where feasible, can serve as a shock absorbent. We recognize that excessive volatility or disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.”]

The dollar is little changed against other major currencies like the yen, euro, Swiss franc or sterling but has traded lower against commodity-sensitive and emerging market currencies such as the loonie, kiwi, and Aussie dollar (each of which  have risen 0.8%), the yuan (up 1.1%), and the peso (+0.6%).

West Texas Intermediate crude oil surged 3.7% to $52.79 per barrel. Comex gold strengthened 1.0% to $1,238.50 per troy ounce.

Ten-year sovereign debt yields dropped 8 basis points in Italy, 6 bps in Greece, 3 bps in Great Britain, 1 basis  point in Japan but stayed flat in Germany and have climbed 3 bps in the United States.

This being the first business day of a new month, many manufacturing purchasing managers indices have been reported.

The Institute of Supply Management’s U.S. purchasing managers index jumped 1.6 points in November to a 2-month high of 59.3, whereas its IHS euro zone counterpart fell by 0.2 index points to a 27-month low of 51.8.

Among the larger individual members of Euroland, manufacturing PMI readings hit a 47-month low in Italy, a 31-month low in Germany, a 26-month low in France, and a 25-month low in the Netherlands but ticked up to a 3-month high in Spain. Weaker growth was attributed to trade tensions, political uncertainties, and lessening business investment.

The British manufacturing PMI rebounded 2.0 index points to a 2-month high and exceeded analyst expectations.

Japan’s manufacturing PMI dropped 0.7 points to a 15-month low of 52.2.

China’s factory PMI edged up 0.1 point to a 3-month high of 50.2 but suggested very scant momentum.

The two Australian manufacturing PMIs sent mixed messages, with the AIG index falling sharply to a 5-month low but the CBA index ticking 0.1 point upward to a 5-month high.

Russia’s manufacturing PMI rose 1.3 points to 52.6, a 16-month high, but the indices of Poland (a 4+ year low of 49.5) and the Czech Republic (a 27-month low of 51.8) went down.

Turkey’s manufacturing recession lessened in severity, as its PMI rebounded 0.4 points to a 3-month high of 44.7. Separate Turkish data releases today showed the first month-on-month drop in consumer prices since mid-2017, a retreat of on-year CPI inflation to 21.6% from 25.2%, and a 3-month low in PPI inflation at a still lofty 38.54%.

The Vietnamese manufacturing PMI increased 2.6 points to reveal the fastest rate of improvement since early 2011. And the Filipino PMI edged up 0.2 points to an 11-month high of 54.2. India’s PMI reading of 54.0 also constituted an 11-month high.

Weaker Asian November PMI surveys involve Malaysia’s 6-month low of 48.2, Taiwan’s 37-month low of 48.4, Indonesia’s 5-month low of 50.4, and South Korea’s 4-month low of 48.6. Thailand’s 49.8 reading was below the “50” break-even level for the third time in four months but still at a 2-month high.

Returning to some European PMI reports today, the Swiss index improved 0.3 points to a 3-month high of 57.7. Sweden scored a 4-month high of 56.7, and Norway’s reading of 56.1 was at a 3-month high.

The ABSA South African PMI was in sub-50 contractionary territory for a fourth straight month but, at 49.5, higher than the three prior readings.

Mexico’s 49.7 PMI was at a 13-month low and broke a string of 50 or better scores. Brazil, by contrast, had its fifth straight above-50 PMI reading, an 8-month high of 52.7.

Canada’s RBC-compiled PMI rose to a 3-month high of 54.9 from 53.9.

The volume of Swiss retail sales reversed a 1.6% slide in September with a 1.9% rise in October that was associated with a 0.8% advance from a year earlier.

Spanish consumer confidence eased to a 2-month low of 91.4 and was well below a 2018 peak  of 107.0 in June.

South Korea accumulated a $66.7 billion trade surplus over the first 11 months of 2018, which was 26% narrower than a year earlier.

New Zealand’s terms of trade (ratio of export prices to import prices) fell 0.3% last quarter.

Building permits in Australia fell 1.5% on month and 13.4% on year in October.

Indonesian total and core CPI inflation in November was at 3.2% and 3.0%.

Japanese business investment in the third quarter grew more weakly (4.5% on year) than had been assumed in the preliminary estimate of GDP. On-year growth in corporate profits slowed precipitously to just 2.2%.

U.S. construction spending in October dipped 0.1%. Analysts had expected an increase to be reported.

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


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