Stockholm (Ekonamik) – The 32nd week of 2019 witnessed a range of back and fros between the USA and China in what was one of the most active and disrupting weeks in the two country’s trade war. In other news, more central banks cut rates, the UK economy contracted and Italy was on the brink of new elections. Markets crashed and then recovered somewhat, and reporting companies had mixed results.
Trade War Unleashed
Following the previous week’s threat from President Trump to extend tariff increases to cover the remaining set of Chinese exports to the USA, China allowed its currency – the Chinese Yuan (CNY) – to depreciate below US$1 to CNY7, in a move that was reported to potentially have cancelled much of the effects of the existing tariffs. Lacking any major tools with which to retaliate, the US Treasury Department resorted to designating China as a currency manipulator.
UK Economy and Italian Government Turbulence
In what would have normally been front news, the UK‘s economy shrank for the first time since 2012 at during the second quarter of 2019. Much of the contraction was blamed on Brexit. Although a possibility, it remains unclear whether this is the start of a recession or just a blip. A lot seems to be riding on the future position of the country’s trade balance and the path of its investments and capital formation.
Meanwhile, Italy was also in the news due to the increased instability of its coalition government. Follow their latest spat, Italy’s interior minister and radical right Lega’s leader, Matteo Salvini, said that the struggles with its partner, the radical left Five-Star movement, might warrant early elections.
Central Banks Continued to Cut Rates
Among central banks, the Reserve Bank of India (RBI) and the Bank of Thailand (BOT) both cut rates, by 50bps and by 25 bps, respectively. Further South, the Reserve Bank of New Zealand (RBNZ) also cut rates as expected. Australia’s RBA held steady.
“In reviewing global developments, the MPC noted that global economic activity has slowed down since its meeting in June in an environment rendered hostile by elevated trade tensions and geo-political uncertainty,” explained RBI Governor Shaktikanta Das.
“The Committee would monitor external risks from intensifying trade tensions, the economic outlook of China and advanced economies that could affect domestic demand, as well as geopolitical risks,” explained the Titanun Mallikamas, BOT’s MPC Secretary. Other concerns included high household debt and the potential that the government’s expansionary fiscal policy could crowd out private investment
Financial Market Roller Coaster
To answer the question we asked last week, “Yes, Trump and the trade war crashed the markets”. Over the last week and a half, global stock and bond markets have been through a roller coaster. However, the continued trend of rate cuts across global central banks reinforces the sense of urgency created by the crisis.
Gold benefitted the most from this instability, with rising safe-haven demand pushing the commodity above the crucial psychological threshold of US$ 1,500 for the first time since 2013. 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 from US$61 on Monday to below US$57 on Thursday, only to close the week above US$58.
The crash in global Equity markets which started with Trump’s comments on Thursday, August 1st, transformed into volatility as Trade War concerns continued to dominate. However, by Monday the S&P 500 had bottomed out at US$ 2838.19, and the index closed the week trading session at US$ 2918.57. Market reactions varied substantially across European. France’s CAC 40,the UK’s FTSE 100 and Portugal’s PSI 20 followed a trend similar to the S&P although their recoveries were considerably more subdued. However, Stockholm’s OMX 30, Germany’s DAX and Italy’s FTSE MIB were virtually unchanged by the end of the week. The recovery was most visible across Asian markets with Japan’s Nikkei and China’s Shangai SSE Composite index all recovering about half the losses of Monday by the end of the week. The outlier is of course India’s Bombay stock exchange, which closed on Friday at the same level as at the end of July.
Some factors seem to have aided the market. Psychologically, there seems to be some hope that a resolution might be found for the Sino-American dispute. Strategically, the increase in volatility will bring Vol-Traders to the market. Policy-wise, the decisions of the RBI, the RBNZ and the BOT, following on the heels of the PBoC’s decision to devalue CNY, would have provided some confidence to investors that decision-makers were not just going to sit back and watch the Asian market collapse.
Chinese and US bond markets reacted to the recovery of equity markets as one would expect. The downwards-slopping US Treasury yield curve flattened somewhat with the 10yr-3month term spread falling from -30bps to -26bps. The move was driven by a 5bps fall at the short end, which was accompanied by a 1bp fall at the long end. In the Eurozone, the average AAA-rated yield curve fell but the term spread decreased from -20.5bps to -19.4bps. In China, the upwards-sloping yield curve flattened as the term spread decreased from 73bps to 70bps over the week.
Disney and UBER Disappoint, Activision Outperforms
Disney, reported a 59% fall in earnings per share from continuing operations for the quarter decreased to $0.79 from $1.95 in the prior-year quarter. “Our third-quarter results reflect our efforts to effectively integrate the 21st Century Fox assets to enhance and advance our strategic transformation,” said Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney Company. Films from the 21st Century Fox, such as the latest iteration of the X-Men movie franchise underperformed the box-office, largely compensating for the success of other blockbusters including properties acquired from Marvel Studios and live-action versions of Disney’s original properties. Going forwards, Disney is betting on the future success of its proprietary streaming service, Disney+.
UBER also underperformed, reporting losses of US$ 5.2 billion. This is the sixth consecutive quarter that UBER’s revenue growth has slowed down and the one it has slowed the most by. The ride company’s performance is particularly salient in light of competitor Lyft‘s performance, which showed losses of only US$ 1.1 billion and revenue growth of 72%, compared to UBER’s 14%.
At Activision Blizzard, the results were much better with the video game company’s earnings outperforming expectations. Going forward, Activision intends to focus on expanding Call of Duty, Candy Crush, Warcraft, Hearthstone, Overwatch and Diablo, their most emblematic properties. HSBC and CVS Health also reported their earnings with both companies also outperforming expectations.
The noisy corner
This week was marked by the distressing news that Jeffrey Epstein was found dead, from an apparent suicide, in the cell that he was being held at following his arrest for the alleged sex trafficking of minors. The news added tragedy to an already disturbing story. However, President Trump managed to contribute even more oddity to this story by retweeting conspiracy theories that linked the death of the financier to the Clintons…
Picture from Pixabay
