China Uncertainty Weighing on Stocks

November 20, 2019

For some time now, much of the day-to-day swings in financial market sentiment has been attributed to shifting perceptions about U.S.-Sino trade talks, and oftentimes in the absence of  concrete understanding of how those talks are really progressing. It makes one wonder if the trade talks have been a convenient excuse for explaining away normal volatility in market behavior.

But that’s not the case today. Tying a bow on Phase I of the trade talks is seemingly complicated by the U.S. Senate’s passage of a bill supporting Hong Kong protesters. Chinese officials, who appear to be losing  patience with street disorder in the former British colony, wasted little time condemning the senate action.

Share prices in the Pacific Rim fell 1.4% in Australia, 1.3% in South Korea, 0.8% in China and Hong Kong, and 0.6% in Japan, and this risk aversion has spread to U.S. futures and Europe, where stock markets are so far down 0.9% in the U.K. and 0.6% in Germany. Likewise, 10-year sovereign debt yields are down by four basis points in the United States and U.K. and by three basis points in Germany and Japan.

The dollar saw scant action overnight, holding unchanged on balance against the yen, firming 0.1% relative to the yuan and euro, and rising 0.2% against the loonie, Swiss franc, Aussie dollar, kiwi and sterling. Gold slipped 0.2%, while WTI oil traded up 0.8%.

Angst about China also relates to the country’s slower growth rate and fear that such could generate some instability problems on the mainland of that country. Unlike most western governments, China prefers a fiscal approach rather than massive monetary stimulus to combat insufficient private demand. The People’s Bank of China’s one-year LPR (loan prime rate) was reduced today by just five basis points matching October’s cut and following a slice of six bps in August when the new LPR framework was introduced. This incremental move followed Monday’s cut in the 7-day Chinese repo rate. Investors worldwide are wondering if the economy needs stiffer monetary support, but central bank officials so far have been determined not to go there.

Japan’s JPY 17.3 billion customs trade surplus in October was considerably smaller than forecast, and the on-year declines of 14.8% in imports (9.3% in volume) was also disappointing. The seasonally adjusted trade deficit of JPY 34.7 billion, however, was down from JPY 64 billion in September and JPY 99 billion in August.

German producer prices fell 0.2% on month in October, resulting in a 0.6% year-on-year decline, the biggest such 12-month decrease since September 2016. Excluding energy, PPI inflation slowed to 0.3% from 0.5%.

Canadian consumer price inflation held steady at 1.9% for a third straight month, which prior to August was the lowest pace since March. The Bank of Canada’s three measures of underlying consumer price inflation in October were identical to those in July. Unlike the U.S., Canadian CPI inflation is hovering very close to target.

South African consumer prices were flat on month and up 3.7% on year in October. That’s the smallest 12-month rate of increase since February 2011.

Malaysian CPI inflation of 1.1% in October matched September’s 4-month low.

The Greek January-September current account deficit of EUR 24 million was considerably smaller than that of EUR 1.357 billion a year earlier.

After drops of 1.1% in August and 0.5% in September, India’s index of leading economic indicators compiled by the Conference Board went up 0.8% last month.

Market attention today in the United States will be shared by the continuing impeachment hearings and the release at 14:00 EST (19:00 GMT) of FOMC minutes. President Trump has been ridiculing the Fed for maintaining a higher interest rate than those of the ECB or BOJ, but Chairman Powell and his colleagues continue to signal satisfaction with the 1.5-1.75% fed funds target range and a predisposition for a wait-and-see pause to assess the impact of the three rate cuts done recently.

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

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