2 weeks to 31 July 2018
General Macro Data & events
- In 2Q of 2018, GDP grew in the US by 4.1%, far higher than the 2% reported in the previous quarter and at the highest rate since June 2014.
Personal consumption for both Goods and Services had large positive contributions in the quarter.
Goods made up 1.24% of the 4.1% total growth and Services added 1.46%.
With Goods making up 21% of total GDP and Services at 47% (for a combined 68% of the U.S. economy), it is critical that these two segments of the economy do well.
Investors believe a lot of this demand came from Chinese pre-prurchasing soya beans to beat the incoming tariffs
- Housing exhibited weakness in the quarter, subtracting 0.04% from the economy as a result of rising mortgage rates and higher prices.
- Concerns over a slowdown in the Eurozone rose, as GDP expanded by only 0.3% in 2Q18 – its weakest rate in two years. Higher oil prices have weighed on businesses in the region this year, but the big fear is that growing tensions between the US and the rest of the world on trade barriers will unsettle businesses, leading to sluggish investment and fewer exports. Analysts believe rates are unlikely to rise until September 2019.
- On July 25, an agreement was made between U.S. President Donald Trump and European Commission President Jean-Claude Juncker to halt plans for additional U.S. tariffs on European goods – which was a positive surprise for markets.
Brexit and the UK
- With wage increases not matching price rises in 2017, household real incomes have faced a squeeze. However, consumers still seem to be spending and the savings ratio — measuring the proportion of income that is not spent — dropped to 4.1 per cent, its lowest rate for more than 50 years. This is most likely due to low rates of borrowing.
- In the first quarter of 2018, business investment was only 2.3 per cent higher than at the time of the Brexit vote almost two years earlier. This reflects the apprehension of businesses to invest without knowing the full impacts of what Brexit could bring, combined with current tariff war threats.
- International investment in UK shares, best measured in dollar terms by the FTSE 250 index, which comprises companies that primarily do business within the UK, has done reasonably well since the 2016 Brexit vote, increasing by 6 per cent. But the stock markets of other developed economies have risen 28 per cent over the same period, showing that investors have devalued UK assets.
- Some 98 per cent of the UK’s dairy imports come from the EU, according to an LSE study. These products could now become luxuries after Brexit if large tariffs are imposed.
- Inflation in the UK was softer than expected in June together with Wage growth stalling and a decline in retail sales volumes, casting doubt on an August interest rate rise and prompting a sharp fall in the pound to the lowest level since last September.
- July 20 – Comments from US president Donald Trump criticising the Federal Reserve’s interest rate rises and cautioning against a strong dollar had knocked the dollar from its 12-month high, lending support to the pound and the euro.
- July 22 – Barnier rejects the UK’s first put-forward Brexit plan that attempts to give ‘enhanced equivalence’ with regards to access to the single market by Financial Services and to have a system similar to the US and Singapore.
- China willing to negotiate a free trade deal with the UK post Brexit
- 2y, 10y and 30y bond yields are all edging higher as an expected rate increase is due to take place on 2 August
- End of July – Barnier softens his stance on Britain white paper after Britain clarifes white paper briefing and that the EU would have overriding power over access to the single market
- In America, yield curve has been at its flattest since 2014 – Banks make profits by borrowing short and lending long, so a flat yield curve eats right into profits.
- The first US government forecast incorporating the agricultural fallout from its trade war with China has come to a firm conclusion on soya beans: China will import less, American farmers will lose business and Brazil will be a beneficiary. Beijing last week increased duties on imported US soyabeans, cotton and other products from 13 per cent to 38 per cent, in response to tariffs on Chinese goods imposed by Donald Trump’s administration. Soya beans are the US’s largest agricultural export to China and are grown in rural states that mainly voted for Mr Trump.
- In earnings reports, major US companies such as General Motors, Whirlpool and Coca-Cola warned they are being hurt by higher costs due to tariffs. Farm groups have also complained of collapsing orders for commodities such as soyabeans and pork.
- The US Chamber of Commerce, the country’s largest business group, said the president’s tariffs were already erasing the economic benefits of tax cuts he pushed through Congress last year
- Trump’s comments about his distaste for a higher rates and a strong dollar could signal political problems ahead for the central bank if they are to increase rates again. Mr Trump also expressed unhappiness with the strength of the dollar against the euro and the renminbi.
- July 27 – The EU and US have declared a ceasefire in their trade war, agreeing to work together on eliminating transatlantic trade barriers for many industrial goods and on reforming the World Trade Organization. Auto manufacturer stocks went up.
Brent Crude Oil
- WTI Crude prices are expected to average $67.32 per barrel this year, and hold steady and range-bound for the rest of 2018 and 2019, as increased supply from OPEC and the United States is expected to meet rising Asian demand and offset supply disruptions from Iran and elsewhere around the world.
- Lower Iranian supply and lower stocks will continue to be bullish factors, while trade tensions that could hurt oil demand and market sentiment, coupled with rising U.S. oil production would keep a lid on prices. experts see the U.S. sanctions taking between 500,000 bpd and 1 million bpd of Iranian crude oil off the market.
- Gold Prices fell below $1220 hitting new 30-month lows as the Bank of Japan vows to suppress short- and long-term interest rates “for an extended period of time and allow 10-year Japanese government bond yields to move around its 0% target.
- On a 52-week basis, gold has shown a consistently positive relationship with the USD/JPY exchange rate since February 2013 – the longest such stretch since gold and then FX exchange rates began floating in the early 1970s. As the Yen weakens/Dollar gets stronger, the price of gold has been falling.
- In general, gold is remaining suppressed owing to a very strong dollar (making the metal more expensive for international investors). Despite volatility in the markets due to trade wars and tech stocks plunging, investors are still fairly confident in the market and are not running for a safe haven commodity.