Stockholm (Ekonamik) – The 31st week of 2019 was busy with central bank meetings. While most of the western world was tanning by the beach, the central banks of the USA and Brazil lowered their rates. Asides from central banks, the week also saw developments in geopolitics, an escalation in the trade war and the release of July jobs figures for the USA and the release of Apple’s, Berkshire Hathaway, ExxonMobil’s and Mastercard’s earnings figures. The figures and market timing suggests that President Trump’s latest round of tariff threats has crashed global markets.
The US Leviathan Takes Over the News
Geogaphically, the week was dominated by economic and political news coming fom the USA. Following the Fed’s 25bps rate cut, President Trump waited only one day before annoucing it would increase tariffs on the remaining US$300 billion of Chinese imports the USA has not yet ramped up tariffs on. Traders on the S&P 500 were none too pleased and the market closed Thursday’s trading session at US$2,955, down from an open at US$2,988. A representative of the Chinese government noted that “Beijing would have to take countermeasures if the U.S. was committed to putting more tariffs on Chinese goods”.
…during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…
— Donald J. Trump (@realDonaldTrump) August 1, 2019
The same day, the Trump administration also announced it would withdraw from the 1987 Intermediate-range Nuclear Forces Treaty (INF), which it signed with Russia, on the argument that the Kremlin was not complying either. Six months ago, the administration had announced its intention to withdraw should Russia continue to not adhere to the terms of the treaty. Finally, the week ended with the publication of job figures for the USA by the US Bureau of Labor Statistics, which showed that the American economy added 164,000 jobs, while the unemployment rate remained unchaged at 3.7%.
The Other Central Banks
Another 3 central banks met this week. On the same day as the Fed cut rates, the Central bank of Brazil (BCB) cut its rate by 50bps to 6%. The other two central banks, the BoE in the UK and the BoJ in Japan, both held rates constant, but are taking different positions. Whilst the UK seems conflicted about lowering rates, Japan appears to be taking a more defiant stance.
This week’s earnings season whale was Apple. Despite continuing to report declining profits and stagnant growth, according to the New York Times, revenue and earnings outperformed expectations, leading Apple’s stock to rise by 4%. The sage of Omaha continued to struggle to find investments suitable to his specifications as Berkshire Hathaway‘s cash reserves increased to US$ 122 billion this quarter from US$ 114 billion at the end of March. Warren Buffett likes to have US$ 20 billion on hand as cash reserves, so this suggests there’s US$ 100 billion of his money just laying around, looking for a good investment to go to. The company’s earnings were down to US$6.14 billion from US$6.89 billion in same quarter a year ago. Reports suggested that the company’s main issue seems to be the fact that insurance underwriting is down to US$353 million from US$943 million. ExxonMobil‘s earnings of 73 cents per share outperformed expectations of 66 cents per share. Revenues also exceeded expectations, even though they actually fell. The upstream business seemed to be driving revenues while downstream and chemicals lagged behind. Mastercard also exceeded expectations, with earnings of US$1.89 per share, 6 cents above market expectations.
Down with Term Spreads and Stock Markets
Following its steep rise during June, the price of gold seems to have stabilised while still trending upwards, trading at US$1437 ceiling. The week was much more turbulent for ICE Brent Crude Oil, which fell below US$ 61 after breaking above US$65 on Thursday, only to close the week at US$ 62.5.
Looking at global Equity markets suggests that despite the Fed’s decision, Trump’s subsequent tariff threats crashed global markets, including the S&P 500 index, Italy’s FTSE MIB, Portugal’s PSI 20, Stockholm’s OMX 30, the UK’s FTSE 100, Germany’s DAX as well as France’s CAC 40, Japan’s Nikkei, China’s Shangai SSE Composite index and the India’s Bombay stock exchange. The timing is consistent with a reaction to Trump’s tariff threats and reports suggest this was the worst week of 2019 in some cases.
Chinese and US bond markets continued to display the same trends as last week, the downwards-slopping US Treasury yield curve continued to steepen up with the 10yr-3month term spread falling from -6bps to -20bps. The move was driven by a 20bps fall at the ten-year year, without much happening at the short term. Given that we are confident in pinning stock market falls on Trump’s latest tariff threats, and that that fall in long term yields happened at the same time as the stock market crash, it seems plausible that a lot of that money could have gone to Treasuries as a result, bringing down its most liquid maturity. In China, the upwards-sloping yield curve flattened as the term spread decreased from 91bps to 78bps over the week.
Picture from Pixabay