TRUCE BETWEEN TRUMP AND XI
Although the year-end is quickly approaching, politics and policymakers are keeping financial markets and investors on their toes. US President Trump and Chinese President Xi met in Argentina. Depending on which media outlet you read, the takeaway from the G20 meeting may differ significantly. An overview of these takeaways are:
- the US and China have finally agreed to engage to reform the World Trade Organization (WTO),
- the countries will initiate negotiations on intellectual property and cyber security,
- the US may refrain from further imposition of tariffs (at least temporarily),
- China agreed to buy more products from the US.
From a macroeconomic point of view this may not appear to be too meaningful, but from the aspect of international politics and global market sentiment, such progress is meaningful enough. This outcome may not smooth out volatility in markets but should be just enough to floor further downside risks to asset prices, especially within the emerging universe.
This is the last week this year when the US presents its monthly jobs report. Markets will focus on nominal wage growth, as it is broadly acknowledged by investors by now that labour market tightness has already reached its cyclical peak in terms of the level of employment and rate of unemployment. In addition, various voting and non-voting Fed members will deliver speeches, highlighting their monetary policy outlook. Compared to the US, Europe and Japan will not provide too much excitement in terms of data releases.
Within the emerging universe, Asian economies will start the week by publishing PMI figures from November, including the Caixin manufacturing PMI from China. Furthermore, the central bank of India will have its last monetary policy decision in 2018, and later, China publishes a barrage of economic indicators. In Latin America, the Chilean central bank may keep the policy rate stable at 2.75% and provide guidance on the trajectory of interest rates going forward. In addition, a wide variety of tier-one monthly economic indicators will be published by Mexico, Colombia and Brazil. In Africa, Q3 GDP data are published by South Africa, Kenya and Morocco.
S&P 2,760 +4.85%, 10yr Treasury 3.04% -5.11bps, HY Credit Index 392 -24bps, Vix 18.07 -3.45Vol
The minutes from the last FOMC meeting and Chair Powell’s latest speech pointed out that the FOMC is poised to shift towards a more data dependent approach in the short-term future. Such a dovish message resonated well with financial markets. In addition, markets also speculated that the G20 meeting will have a positive outcome. Consequently, the S&P 500 rose 4.9% during the week, lifting the year-to-date gain to 3.2%. The Nasdaq Composite outpaced the S&P 500 by increasing 5.6% on the week, bringing the year-to-date rise to 6.2%. The Treasury market exhibited similar movements, as the yields along the whole curve eased. The Treasury curve flattened (2s10s spread at 20bp), as markets repriced the forward-looking trajectory of the Fed funds rate. According to the Fed funds futures, a 25bp hike is fully priced in for this December. However, the market foresees only one additional 25bp throughout 2019.
The second release of the Q3 real GDP growth in the US was unchanged compared to the flash estimate, as the seasonally-adjusted annual growth figure was 3.5%. Details revealed that consumption growth was solid at 3.6%, business fixed investments grew strongly by 2.5%, while inventories rose 2.3ppt. On the other, net exports were a large drag (-1.9ppt). Meanwhile, PCE inflation – the Fed’s preferred gauge – surprised to the downside, as the headline measure was flat at 2% YoY in October, while the core measure slipped to 1.8% YoY. Furthermore, previous data points were revised downwards.
Eurostoxx 3,241 +0.97%, German Bund 0.33% -2.70bps, Xover Credit Index 320 -3bps, USDEUR .880 +0.20%
Sentiment in European markets visibly improved during the week, as the less harsh tone between the EU and Italy helped ease the pressure on European assets in addition to a more dovish Fed. Due to the improved market sentiment, both fixed income and stock markets gained in the Euro Area, while the risk premia on periphery sovereign bonds moderated. During the week, the German sovereign yield hovered around 0.31%, while the spread of the Italian 10-year yield over the German Bund decreased to 290bp vs. the peak of 327bp a couple of weeks ago. Stock markets resembled a similar pattern, as the Italian stock index outperformed (+2.4% in USD) Germany, Spain and France. Meanwhile, due to the Brexit-related worries, the UK’s stock market went sideways in USD.
Inflation in the Euro Area remains subdued, as both the headline and core measure slowed in October. Headline CPI inflation decelerated to 2% YoY, while core inflation dropped to 1% YoY. Both gauges were unsurprisingly dragged down by the sharp decline in domestic fuel prices. It is important to note that domestic inflationary pressures remain very limited, since inflation of products and services sensitive to changes in demand was underwhelming, again.
Despite the weaker-than-expected macroeconomic data releases within the Eurozone, the President of the European Central Bank (ECB) stuck to his previous claim that the ECB will terminate the asset purchases by the end of December.
HSCEI 10,873 +2.24%, Nikkei 22,574.76 + 2.65%, 10yr JGB 0.09% 0bps, USDJPY 113.480 +0.72%
The vast majority of Asian markets headed north, as the good mood in developed markets spilt over. The MSCI AC Asia Pacific ex. Japan index gained 2.9% in USD during the week. India was one of the best performers, as the Nifty index rose 5.2% in USD. In contrast, Pakistan disappointed, as the Karachi stock index’s value dropped 3% in USD.
Retail sales in Japan increased 3.5% YoY in October, accelerating from 2.2% YoY seen in September. The performance was stronger than the median market projection. On a seasonally-adjusted monthly basis, retail sales increased 1.2% in October after a 0.1% rise in September.
Official manufacturing PMI in China dipped to 50 in November. The figure itself was slightly below the median market estimate, however, came as no surprise, as the index has been gradually decreasing for months, due to the ongoing trade tensions. Non-manufacturing PMI remained well-above 50, as it was 53.4 in November.
Details reveal that domestic drivers of economic growth remained solid, as the weakness mostly stems from external sources related to trade tensions.
Total industrial profit of Chinese enterprises rose 13.6% YoY YTD in October, slowing from September’s 14.7% YoY YTD. On a single-month basis, profits grew 3.6% YoY in October, as the profit growth of state-owned enterprises continue to slow, while the profit growth of privately-owned enterprises remained stable.
The central bank of Pakistan raised the policy rate by 150bp to 10% and let the Pakistani rupee depreciate to 144 vs. the USD, from around 134. Following the policy rate and FX adjustment, the USDPKR exchange rate stabilised around 137 by the end of the week. In its post-decision statement, the Monetary Policy Committee cited that there is a need for the adoption of a flexible inflation targeting regime.
Headline CPI inflation in Vietnam was 3.5% YoY in November. Since the beginning of the year, inflation increased 3.6% YoY, below the government’s 4% target for 2018. Meanwhile, year-to-date core inflation remained modest at 1.5% YoY, which is below the government’s target range of 1.6-1.8%.
MSCI Lat Am 2,600 +1.64%
The general mood within the Latin American universe was positive. Consequently, the broad MSCI EM Latin America index gained 1.6% in USD during the week. Brazil and Argentina outperformed by increasing 2.2% and 1.8% in USD, respectively. Colombia was the only visible exception, as the country’s stock index lost 2.7% of its value in USD.
Argentine economic activity declined in September, and to a greater degree than expected. The official monthly GDP proxy indicated that economic activity fell 5.8% YoY in September. Overall, the index dropped by 3.5% YoY (1.6% QoQ) in Q3, which is not as sharp as the contraction in the previous quarter (-4.2% YoY). All sectors contracted in Q3, led by manufacturing (-6.5% YoY), followed by agricultural, fishing and mining activities (-2.0% YoY) and services (-2.2% YoY).
Year-to-date figures imply that Argentine GDP may contract 2-2.5% this year. Due to the challenges internal demand faces, the economy might not be able to emerge from the recession next year.
The central bank of Mexico published the minutes of its meeting in November, when the majority of the Monetary Policy Committee decided to increase the reference rate by 25bp to 8%. The tone of minutes was hawkish. Surprisingly, one of the members, who were perceived rather dovish before, voted for a 50bp hike. The majority of the MPC members agreed that tighter monetary conditions might be needed in the future, depending on the incoming government’s policy measures and the external market risk appetite.
Retail sales in Mexico accelerated to 4.1% YoY in September from 3.9% YoY in August. During Q3, retail sales volume growth strengthened by 0.4ppt to 4.1% YoY. Retail sales growth remained solid in spite of a weakening of the real wage growth dynamics, as the annualized growth rate was 1.5% Q3.
Brazilian GDP growth bounced and expanded by 0.8% QoQ SA in Q3. In an annual comparison, GDP growth was 1.3%, weaker than in late 2017, i.e. before the truckers’ strike. On the demand side, fixed capital investment climbed 7.8% YoY, while household spending rose 1.4% YoY.
The Q3 reading reinforces forecasts that Brazilian GDP may grow by about 1.1-1.3% in 2018. Growth might bounce in 2019, to 2-2.5%, as economic confidence returns.
The Brazilian current account surplus was USD 329mn in October, while the 12-month-rolling deficit narrowed to USD 15.4bn (or ca. 0.8% of GDP). Within the financial account, direct investment flowing into Brazil amounted to USD 10.4bn, hitting USD 75bn (or 3.9% of GDP) on a 12-month-rolling basis.
The national unemployment rate in Colombia rose to 9.1% in October, from 8.6% a year ago. The deterioration of the indicator stemmed from the urban unemployment rate reaching 10.2%. The participation rate fell 0.2ppt to 64.6%, to the lowest rate since the October 2012. Employment growth also moderated to 0.7% YoY.
MSCI Africa 760 +0.67%
The majority of African stock markets gained in USD terms during the week. The modestly upbeat market mood was captured by the broad MSCI EFM Africa index as well, since it rose 0.7% in USD. Kenya was the bright spot in Africa, as the country’s index rose 1.3%, as South Africa’s broad market index went sideways, while Nigeria underperformed by falling 2.7% (all in USD).
The Ghanaian central bank kept the policy rate unchanged at 17%. According to Governor Addison, the Monetary Policy Committee left the rate stable to cushion the economy against possible global market pressures on emerging economies.
The central bank of Kenya held the policy rate at 9%, claiming that economic fundamentals did not call for tighter financial conditions. The Monetary Policy Committee pointed out that inflation remained around the midpoint of the preferred inflation target band (5% +/-2.5%), while the Kenyan GDP grew by 6% YoY in the first half of 2018, i.e. almost at its potential rate. Furthermore, the current account deficit was projected to shrink to 5.2% of GDP this year.
According to the World Bank, the Nigerian economy may grow by less than 2% in 2018. GDP growth has been mainly driven by the non-oil industry and services sector. The World Bank claimed that although the country’s economy emerged from a recession, economic growth remains frail and sluggish. In conclusion, the World Bank argued that upcoming elections weigh on the sentiment in financial markets and economic confidence. Thus, once political noise fades, both GDP growth and foreign portfolio flows to Nigeria should strengthen.
The central bank of Egypt is terminating the use of a mechanism guaranteeing foreign investors US dollars when they liquidate their positions in local currency-denominated Egyptian securities. As a result, foreign investors pulling their holdings will need to translate Egyptian pounds to hard currency in the actual FX market instead of relying on the local central bank.
Although the Egyptian pound was officially floated in November 2016, the exchange rate vis-à-vis the USD has been relatively stable ever since, due to the central bank’s efforts to keep the currency stable. Now that the country has made meaningful progress with structural reforms addressing the inherent deficiencies of the economy, the central bank carries on with the gradual liberalisation of the domestic FX market. It could be viewed that as a result, one of the consequences of this measure is that the EGP could become more volatile, while on the other hand a more flexible exchange rate will allow for more policy flexibility in the future.
This week’s global market outlook is powered by Alquity www.alquity.com