Trade tensions were at the forefront of investor concerns this month. The G7 held in Canada ended up on a sour note as President Trump accused Canada of taking advantage of Canadian workers through their trade practices. Moreover the Trump administration later imposed a 25% tariff on USD 50bln of Chinese exports, threatening to expand the scope of the tariffs if China retaliates. The job market appeared stretched as unemployment reached a level not seen since 2000.
Markets in Europe suffered as investors increasingly grew fearful of the threat of a global trade war. In response to the US steel tariffs, Europe imposed its own on a list of 185 US exports, which mainly seem to have been chosen for their symbolic nature. Germany, whose export orientated economy would be hit should trade tensions continue, saw its business sentiment faltering as well as soft manufacturing readings.
Retail sales jumped by 1.3% in May, easily beating analyst expectations, and inflation held steady at 2.4%. However, manufacturing output figures released in June saw the sharpest drop in more than 5 years, raising concerns about the strength of the economy. On the job front, unemployment remained at 4.2%, the lowest level in 43 years. This however did not help workers to negotiate higher salaries, as basic pay growth slowed to 2.8% per year in the three months to April. According to the British Chambers of Commerce, at 1.3% for 2018, the UK economy is set for its weakest growth since 2009.
The Swiss people rejected the “Vollgeld Initiative” which would have revolutionized banking practices and heavily impacted the way Swiss banks refinance themselves and lend money. The troubled political climate in Europe contributed to keep CHF in high demand, as the currency traded at an average price of 1.15 against the EUR during the month. Inflation increased higher than expected to 1%, which is mainly attributable to the high oil prices and the temporary weakness of the franc. The unemployment rate reached a 9 year low at 2.4%.
Federal Reserve (next meeting: August 1st)
On the back of a strong job market and business investment as well as a solid growth rate in the economy, the Federal Open Market Committee decided to raise the target range for the fed funds rate from 25 basis points to 1.75% to 2%. While the June rate hike was completely priced in, the Summary of Economic Projection report, which include the dot plot, was eagerly awaited, and it indicated a more aggressive stance going forward, signalling they would raise rates two more times in 2018 and at least three in 2019.
European Central Bank (next meeting: July 26th)
The ECB left its rates unchanged, as it was widely expected, and indicated its plan not to raise them until the summer of 2019. It also made clear its intention to reduce its asset purchase program to EUR 15bln a month from October until December and end its purchases thereafter, but will continue reinvesting the principal of previously purchased securities under the APP. Interestingly, during his press conference, Mario Draghi explained that the Asset Purchase Program was not disappearing but remains an integral part and normal instrument of the ECB toolbox.
Bank of England (next meeting: August 2nd)
The Bank of England Monetary Policy left its rates on hold at 0.5% after a first quarter slowdown. It was however a split vote, 6-3, raising the chances of an increase in August. In addition the Bank made significant changes to its QE program, indicating it will not consider reducing its securities holdings purchased under the program until the key interest rate reaches 1.5%, against the previous guidance of around 2%.
Swiss National Bank (next meeting: September 20th)
Maintaining an expansionary monetary policy, the ECB took the decision to leave its interest rate on sight deposits at -0.75% and its target range for the 3 months Libor between -1.25% and -0.25%. Concerned with a highly valued Swiss franc, they mentioned they would “remain active in the foreign exchange market as necessary”. The Swiss central bankers also made reference to the growing imbalances on the mortgages and real estate markets, mentioning the possibility of a correction.
■ In Germany, the ZEW indicator of business sentiment has reached its lowest level in five years, as trade tensions impacted on investors confidence.
■ OPEC met on June 22nd, and ministers agreed on a deal to hike oil output. The cartel has been cutting production in order to boost prices over the last 18 months.
■ Floating Rate Notes in EUR with a maturity around the five years horizon generally suffered a drop in prices, while fixed coupon bonds of the same issuers did not. Many investors were surprised by the move. This can be explained by the five year rate going down and widening credit spreads. The counterbalancing moves compensated each other for the fixed coupons and but FRNs, insulated from rates moves, were affected by wider credit spreads.
■ Turkey Sovereign bonds were under pressure this month, as investors grew worried of Recep Tayyip Erdogan seeking to gain extended powers on monetary policy settings.
■ Argentina bonds fell sharply, as the Central Bank raised rates close to 40% in order to fight rampant inflation and a rapidly devaluing peso. The country had to seek the IMF’s help.
■ Bahrain Government bonds sold off as investors were concerned about the country island deteriorating finances. Bonds bounced back toward the end of the months after other Gulf states pledged to help enhance the stability of the financial situation.
■ Italian bonds continued to remain volatile throughout the month, even though the government adopted a more conciliatory tone on how it will play along with its European counterparts.
■ As a consequence of the trade war, Harley Davidson, decided to move its production of motorcycles aimed at the European market out of the US, as the steel tariffs imposed by the Trump administration would hurt margins.
■ Bonds issued by Casino Guichard Perrachon SA and its holding company Rallye SA, where under selling pressure as Muddy Waters LLC continued claiming the company engaged in misleading accounting practices and that the company was strongly overvalued.
■ In the wake of the 11 days trucker strike protesting high fuel prices, Pedro Parente was pressured by President Temer to resign from his CEO position of Petrobras. He was criticized from being more focused on that market and less on the nation’s development.
■ Deutsche Bank failed the stress test of its combined US units, according to the Fed, it was found “widespread and critical deficiencies across the firm’s capital-planning practices” Out of 18 domestic and foreign banks DB was the only one to fail. The Board of Governors objected to the capital plan of DB USA Corporation.
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