British Election Lifts Sterling… U.S.-Sino Phase I Progress Boosts Stocks

December 13, 2019

Boris Johnson’s Conservative Party won 365 parliamentary seats, clearing the majority threshold by 39 seats. The Conservatives won 43.6% of the votes to Labour’s 32.2% share. Sterling in response catapulted to an 18-month high of $1.3515 but has settled back to a still impressive 1.3% net overnight advance against the dollar. The greenback also touched an intra-day low of $1.1200 per euro, representing a 4-month  low, but shows little net change against the common European currency or any other major relationships.

Several global stock markets show big gains today. There were advances in the Pacific Rim of 2.6% in Japan and Hong  Kong, 1.8% in China, 1.5% in South Korea, 1.1% in India, and 0.9% in Indonesia. Share prices so far in the U.K. and Spain are up by 1.9% and 1.8%, and the rises in Germany and France have also cleared the 1.0% threshold. The U.S. is notably absent from this rally. A 0.2% rise in retail sales last  month was less than half what analysts were anticipating, and  import prices posted a 0.2% rise in November after falling 0.5% in October. Also, investors may be concerned that the trade deal with China, like the nuclear weapons negotiation with North Korea, is another example of President Trump’s modus operandi of speaking loudly but carrying a small stick.

Ten-year sovereign debt yields rose 2 and 1 basis points in the U.K. and Germany but slipped a basis point in Japan and the United States.

Oil prices shot up 1.5%. WTI cleared the $60 per barrel level.

The closely watched Bank of Japan quarterly survey of corporate conditions and expectations reflects at least three depressants: trade concerns, October’s sales tax hike, and that month’s massive weather storm. The diffusion index for large manufacturers fell to zero in December from +5 in September, +7 at midyear, +12 last march and +19 a year ago. The diffusion index for all participating firms in the so-called Tankan report was halved to a reading of +4. Large manufacturers now project drops this fiscal year of 1.6% in sales and 15.1% in profits, and they pared down projected investment spending by a half percentage point to 11.3%. All firms — large and small, manufacturing and other — foresee only a 3.3% collective rise in business investment.

A separate Japanese data release revised October’s industrial production decline to a larger 4.5% from the preliminary estimated decrease of 4.2%. Industrial shipments also plunged 4.5%, and so did capacity utilization.

Due to food price pressures, Indian CPI inflation accelerated in November to a 40-month high of 5.54%. Such was as low as 1.97% last January and now exceeds the Reserve Bank of India’s desired 4% objective. Also in November, India experienced its largest trade deficit in 3 months, a gap of $12.12 billion.

Spanish CPI inflation rose to a 7-month high in November but remained very low at 0.4%.

Finnish CPI inflation matched October’s 21-month low of 0.7%. Polish CPI inflation ticked 0.1 percentage point higher back to September’s 2.6%.

Turkish industrial production fell 0.9% in October, which resulted in a considerably smaller-than-expected 12-month advance of 3.8%.

In politically unsettled Hong Kong, industrial production dipped 0.1% last quarter and posted on-year growth of only 0.4%.

Chinese foreign direct investment recorded a much small on-year 1.5% rise in November after a 7.4% increase in October, and the year-to-date FDI increase of 6.0% was down from 6.6% in October and 7.3% in July.

Italian industrial orders contracted 1.5% between October 2018 and October 2019 despite a 0.6% monthly increase in the latter month.

German wholesale prices slid 0.1% for a second straight month, causing an increase in their 12-month rate of decline to 2.5%, most in 43 months.

Irish real GDP rebounded after a marginal second-quarter contraction to post a 1.7% rise in the third quarter. GDP was also 5.0% greater than a year earlier.

The National Bank of Serbia policy interest rate was left unchanged at 2.25% at the final scheduled policy review of 2019, having undergone recent 25-basis point cuts in July, August, and November. A released statement mentions that inflation is low and stable and expected to hover near the low end of its 1.5-3.5% target through mid-2020. Trade uncertainties are an identified concern.

The Central Reserve Bank of Peru likewise retained a 2.25% reference interest rate. Cuts of 25 basis points had been engineered at the August and November’s policy reviews earlier this year. Peruvian inflation of 1.87% now is expected to hover near the 2% target over the forecast horizon. Primary industries have been  performing weakly, but other industries are supporting a gradual closing of Peru’s output gap.

The Central Bank of the Russian Federation reduced its key interest rate by a further 25 basis points to 6.25%, bringing the accrued decline since July to 150 basis points. Moreover, a released statement provides forward guidance that officials during the first half of 2020 will ease further if conditions continue to warrant such. Inflation has fallen faster than policymakers were anticipating in part because the ruble has appreciated. Economic growth now looks likely to be close to the upper end of a previous projected 0.8-1.3% range. CPI inflation should slip under 3.0% early next year but to be between 3.5% and 4% at the end of the year.

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


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