Financial Markets Feeling the Strain of A Breakdown in International Trade Relations

May 31, 2019

President Trump is imposing a tariff on all U.S. imports from Mexico in retaliation of that country’s failure to contain the flow of migrants crossing into the United States.

China is ramping up its response to President Trump’s recent protectionist acts against Chinese exports and especially the action against Huawei.

U.S.-EU trade talks also have bogged down.

The dollar leaped 2.6% against the Mexican peso and 1.1% versus the Canadian dollar but lost 0.8% relative to the Japanese yen overnight. The yuan has barely moved, however.

Share prices in Europe have dropped today thus far by 1.8% in Spain, 1.7% in Germany, 1.5% in Italy, 1.4% in France and 0.9% in Great Britain. Japan’s Nikkei lost 1.6% on this final day of May.

Ten-year sovereign debt yields fell today by 7 basis points in Australia, 9 bps in Greece, 4 bps in the U.K., 3 bps in Germany, and 5 bps in U.S. futures trading.

The price of WTI oil sank 1.0%, while Comex gold appreciated 0.7%.

The Central Bank of Sri Lanka cut its interest rates by a half percentage point, citing the Easter terrorist attacks there, easier monetary policies elsewhere, downward rigidity in Sri Lankan market rates, slowing private sector credit expansion, a narrowed trade deficit, and subpar domestic growth. A recent uptick of inflation was dismissed as not being a threat to the medium term inflation outlook.

Fading factors related to Easter that had boosted German inflation in April have receded rapidly. In five states reporting May CPI data, on-year inflation fell by 0.4-0.6 percentage points.

German retail sales volume had been projected to rise slightly in April but instead tumbled 2.0% following no change in March and a 0.5% increase in February.

The volume of Swiss retail sales recorded an on-year drop of 0.7% for a second straight month in April.

Italian CPI inflation slid 0.2 percentage points to a 4-month low of 0.9% in May. PPI inflation in Italy also declined, printing at 2.1%, down from 2.9% in April and 4.1% in January.

Italian GDP growth last quarter was revised downward to 0.1% from 4Q18 and minus 0.1% from the first quarter of 2018. Quarter-on-quarter and on-year growth had previously been estimated as +0.2% and +0.1%, respectively.

On-year Icelandic GDP growth slowed to a 5-year low of 1.7% last quarter from 4.0% in the final quarter of 2018 and 9.6% in the final quarter of 2016.

Portuguese revised 1Q GDP data confirmed the preliminary estimates of 0.5% growth from the final quarter of 2018 and 1.8% from the first quarter of last year. Portuguese CPI inflation of 0.5% in May hit a 4-month low.

Spain‘s EUR 26 million current account surplus in March was was 93% smaller, but the first-quarter surplus of EUR 4.2% billion was more than twice the size of the surplus in 1Q18.

The British Nationwide house price index fell 0.2% on month in May, it’s weakest monthly change in 5 months which resulted in only a 0.6% uptick from a year earlier.

British consumer confidence improved three index points to -10, a 7-month high.

Seasonally adjusted Tokyo consumer prices posted a 0.2% month-on-month drop in May, both overall and on a core underlying basis.

On-year growth in Japanese retail sales was halved to 0.5% in April, the smallest increase in over a half year.

On-year growth in Japanese jobs slowed to 0.6% in April from 1.0% in March and 1.7% at the end of 2018. The jobless rate of 2.4% lay midway between March’s 2.5% and February’s 2.3%, but the job offers-to-seekers ratio remained unchanged at 1.63.

Japanese industrial production recovered 0.6% in April after a 2.5% slump in the first quarter, but the year-on-year contraction of 1.7% matched the first quarter result.

Japanese consumer confidence slipped under 40.0 for the first time in over four years, to a 52-month low of 39.4. The last month-to-month increase in consumer sentiment occurred in November 2017.

Japanese housing starts posted a 5.7% 12-month decline in April, the biggest on-year drop since last June. Construction orders were 19.9% lower than a year earlier.

The government-authorized NBS Chinese purchasing manager indices were released. Manufacturing fell 0.8 points to a 3-month low of 49.4, indicating renewed contraction. The non-manufacturing PMI was unchanged at April’s 54.3 level, and the composite index dipped 0.1 index point to 53.3.

Indonesia’s manufacturing PMI increased 1.2 points to a 9-month high of 51.6 in May. This was the fourth straight reading above 50.0, which separates expansion from contraction.

Turkish real GDP rose 1.3% last quarter, it’s first time increasing since the first quarter of 2017. On-year growth remained negative at -2.6%, however.

New Zealand consumer confidence slumped 3.2% in May and was thus still 2.2% below its January level.

Growth accelerated in April in Australian on-year M3 money (4.2%) but slowed a tad in private credit to 3.7%.

The Bank of Korea kept its benchmark interest rate at 1.75%, citing heightened trade-relative uncertainties, sub-1% CPI inflation, and downside price prices.

In the year to April, South Korean retail sales rose 1.4%, while industrial production dipped 0.1%.

South African M3 money and private credit expansion rate each accelerated in April to 8.77% and 7.95%. The rise in M3 represents a 3-year high.

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

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