Marius Paun | London, UK | Senior dealer | Wednesday, 14th August 2019
We had two important developments this week making headlines around the globe.
Firstly, bowing to pressure from concerned business leaders (according to Bloomberg), the US President Donald Trump delayed tariffs imposed on certain Chinese imports until December 15th this year. The decision (on Tuesday) sparked a relief rally in global stocks, after heavy selling seen on the previous session.
However, that was short lived as Wednesday, the markets were rattled again when the yield on the benchmark 10 year US Treasury note was at 1.623%, moving below the 2 year yield at 1.634%.
Why is that important? Because it has been a reliable, yet sometimes early, indicator for economic recessions over the past 50 years. Credit Suisse reported that when the inversion occurs a recession follows on average within 22 months. But they also included some positive news. The same report shows the S&P 500 is up, on average, 12% per year, from the time of inversion until the recession kicks in!!! (could the market be the final last gasp upsurge, the last bit of a price rally before collapse?)
Meanwhile, China’s National Bureau of Statistics reported the economy is growing at a stable pace and the reason for a slowdown in retail sales in July was weaker auto sales. It added that consumption has huge potential with employment also as expected. Nonetheless July industrial production was +4.8% year on year, versus expectation of +6.0%, the slowest growth rate since February 2002.
In the UK, there is now speculation that a general election could be on the cards. Britain leaving the European Union on Oct 31, deal or no-deal, does not seem to satisfy the opposition MPs as well as a good chunk of Conservatives. So much so that Prime Minister Boris Johnson accused the rebels from both parties of conspiring with Brussels. The ongoing political uncertainty has kept the GBPUSD under heavy downside pressure touching a low of 1.2014 on Monday.
Meanwhile the German economy, EU’s biggest, saw a slump in the second quarter GDP (albeit small one of 0.1%) which puts increasing pressure on Chancellor Angela Merkel to kickstart fiscal stimulus. It seems the US-China dispute has a heightened negative effect on the nations relying heavily on their manufacturing base. According to European Central Bank exports of goods and services accounted to 28% of the EU GDP in 2017 compared to only 12% for the US.