Political Strains Batter Equities Again

January 28, 2019

Prospects weakened over the weekend for a border security deal between President Trump and Congressional Democrats by the February 15th deadline. The president attaches less than even odds to that happening and insists that a wall will be built.

The negotiation of withdrawal terms for Brexit is going nowhere. The EU rejects any renegotiation of the Plan A deal that British Parliament overwhelmingly rejected. Many companies are going forward with plans that assume the U.K. will leave without a plan in place.

The U.S. and Europe are experiencing extreme weather. President Trump remains in denial that man-made climate change is happening.

There’s no decline of the $1 trillion plus U.S. federal deficit in sight. Uncertainties connected with the Mueller investigation represents another disconcerting force weighing on investor and consumer sentiment.

U.S. stocks are poised for a big decline at today’s open on more indications that trade strains have slowed global growth and corporate profits. In Europe, equities are down 0.9% in Spain, 0.6% in the U.K., France and Italy, 0.5% in Switzerland and 0.4% in Germany. Japan’s Nikkei fell 0.6%, while shares declined 1.0% in India and 0.2% in China. Australia’s market was shut for Australia Day.

The move out of equities has lifted long-term interest rates. Sovereign debt yields climbed 5 basis points in Italy, 3 and in Germany, France and the Netherlands, 2 bps in Spain and a basis point in Britain.

Gold, which moved above $1,300 late last week, is holding on to the $1,305 per ounce level, whereas West Texas Intermediate crude oil sank 1.8% to $52.75 per barrel.

The dollar rose 0.5% against sterling but is barely changed today against other major currencies.

Minutes from the Bank of Japan’s December 19-20th Board meeting reveal diverse views about managing the yield curve. Some sentiment for a negative yield was expressed, but others preferred to see the 10-year JGB yield rise so as to alleviate strain on bank profits. The yield today is at negative 0.01%.

Japanese corporate service price inflation slid 0.1 percentage point to a 3-month low of 1.1% in December.

Chinese corporate profits, which had advanced by 21.0% in 2017, posted a second straight on-year decline in December, falling by 1.9% from the last month of 2017. As recently as July, profits had been some 16% higher than a year earlier, but recent weakness depressed the average advance for 2018 as a whole to 10.3%.

Hong Kong trade has also grappled with global protectionism. The deficit widened from HKD 481 billion in 2017 to HKD 563 billion last year, and in December exports and imports were each down over 5.0% compared to a year earlier.

Trade barriers are particularly harmful for emerging market economies. Brazil’s current account deficit roughly doubled to $14.56 billion last year, or roughly 1.0% of GDP, from $7.23 billion in 2017.

M3 money growth in the euro area accelerated to 4.1% on year in December, but the 3.9% on-year increase in the final quarter of 2018 was down from 4.8% in the final quarter of 2017. Mortgage loans and bank loans to non-financial firms recorded 12-month increases of 3.3% and 2.8% in December.

Finland’s consumer confidence index rebounded 0.9 index points to 17.2 in January, but aside from December’s reading, it was lower than in all earlier months of 2018.

Sweden’s trade deficit tripled to SEK 32.9 billion last year, and exports in December were some 44% below their year-earlier level.

A year-on-year 0.4% drop in Danish retail sales followed a 3.3% increase in November and was the first decline in eight months.

Irish retail sales recorded negative month-on-month changes in both December and January, the latest being a decline of 0.4%, and the average 3.4% on-year rise in December-January was down from a 6.3% year-over-year increase in October-November.

The Chicago Fed National Activity Index increased 0.06 index points in December to a four-month high.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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