Peso Panic and Some Deescalation of the U.S.-Sino Trade dispute

August 13, 2019

Sunday’s primary election in Argentina served notice that populism is making a big comeback there and has generated a stampede out of the peso (down nearly 22%) and local stocks, whose share prices tumbled nearly 50% and by the second largest day-to-day slump in seven decades. Investors fear a return to protectionism and other state interference in the marketplace.

The Dow Jones Industrial Average today ricocheted nearly 500 points, or close to 2%, in the first hour of trading in response to an announcement by the U.S. Trade Representative Office that planned import tariff hikes on Chinese goods are being modified, with some products taken off the list and the scheduled imposition on some other products pushed back to December. President Trump wants a more protectionist agenda, certainly so long as China runs a big merchandise trade surplus with the U.S., but he circles back on threats when U.S. share prices sink sharply as they did Monday. If markets continue to rally strongly each time he does this, the long-term likelihood of much bigger tariffs in six months becomes much greater.

Stock markets in Europe have not shared in the U.S. bounceback, and Asia closed lower. Share prices fell 2.1% in Hong Kong, 1.7% in India, 1.1% in Japan, 0.8% in South Korea, 0.7% in Singapore, and 0.6% in China and Indonesia.

The dollar leaped 1.1% against the yen and 0.4% versus the Swissie, two currencies that previously had been sought against perceived risks associated with the trade dispute. The dollar alternatively slid 0.1% against the yuan and firmed only 0.2% relative to the euro. The greenback also is unchanged against the loonie and sterling but 0.6% weaker relative to Mexico’s peso.

Ten-year sovereign debt yields rebounded 4 basis points in the U.S. and 3 bps in Great Britain but slid 2 bps in Japan and stayed flat in Germany. A 1.8% advance in the price of West Texas Intermediate crude oil also reflects lessening fear of an imminent escalation of the trade war.

The ZEW Institute’s monthly indices of investor sentiment regarding the German and euro area’s economic outlook “worsened considerably” in August. The German expectations index tumbled to a 92-month low of -44.1 from -24.5 in July and +3.1 as recently as April. That plunge was accompanied by a 12.4-point slide in current conditions to a reading of -13.5. The euro area scores in August were similar to Germany’s at -43.6 on expectations and -14.5 for the current situation.

Few economies around the world have been insulated from President Trump’s protectionist crusade as attested by today’s reports on Singapore GDP and Japan’s service sector activity.

  • Singapore GDP tanked 5.3% quarter-on-quarter in 2Q, worst in 83 quarters, and year-on-year growth of 0.1% was the lowest in 10 years and down from 4.2% over the previous four quarters.
  • Japan’s tertiary index dipped 0.1% in June on top of no change in May. That was the fourth time in five months with no increase in service sector activity and left the index just 0.6% above its year-earlier level.

The National Bank of Australia’s monthly indices of Australian business confidence and business conditions did a dosey doe in July, with the former rising to a value of 4 from 2, while the later fell to 2 from 4. Ten months earlier, conditions had a reading of 14 and confidence was at 7.

With British departure from the European Union on bad terms soon approaching, the U.K. labor market is showing greater uneasiness. Jobless insurance claims rose 28k in July on top of gains of 31.4k in June and 29.5 in May, and the associated unemployment rate has edged up 0.1 percentage point in each of the past two reported months. The ILO-basis jobless rate also climbed, and average weekly earnings show an acceleration into the upper part of the 3-4% range from the low end of those boundaries.

Price data reported today revealed

  • A 2-month high of 1.8% in U.S. CPI inflation and a 6-month high in the in core inflation to 2.2% happened in July. Energy went up 1.3% on month but slid 2.0% on year.
  • Indian consumer price inflation slipped marginally to 3.15% in July from an 8-month high in June.
  • Final data on Spanish CPI inflation in July confirmed the preliminary estimate of 0.5%. That was up from June’s 3-year low of 0.4% and still only a third April’s 1.5% level.
  • New Zealand food price inflation rose to a 2-month high in July but stayed under 1.0% for a second straight month.
  • After monthly dips of 0.1% in May and 0.5% in June, Japanese domestic producer prices stagnated in August and were 0.6% lower than a year earlier. Import prices sank 1.8% on month and 8.1% on year.
  • German CPI inflation edged up 0.1 percentage point to 1.7% in July, but the EU harmonized inflation dropped by 0.4 percentage points to 1.1% in the euro area’s largest economy.

Copyright 2019, Larry Greenberg. All rights reserved. N0 secondary distribution without express permission.



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