Monthly Review : August 2019

Monthly Review : August 2019



United States

The US President hinted Europe could be the next trade war victim, as he said in a speech that “The European Union is worse than China, just smaller. It treats us horribly: barriers, tariffs, taxes”. The numbers of the Eurozone trade balance did nothing to counter the statement as figures relaeased showed the EU trade surplus with the US stood at nearly EUR 75bln, more than 11% from last year.



Euro area

Germany, Europe’s first economy and world’s fourth biggest, continued its slide toward recession, with its GDP contracting 0.1%, with much of the decline coming from the large manufacturing sector, suffering from trade tensions and the slowdown in China. The trend was not showing signs of reversal, as business confidence eroded, and plunged to its lowest level in seven years, figures from ifo showed.


United Kingdom

Fears that the UK economy was heading toward recession grew stronger in August as figures released showed the GDP contracted 0.2% between April and June, for the first time in six and a half year. Manufacturing output accounted for most of the drop. A weakening GBP as well as increasing probabilities of a disorderly Brexit led to speculations that the UK economy might suffer two consecutive quarter of negative growth, the definition of a recession.




The Swiss economy is facing increasing challenges. The surging CHF is making Swiss export, a large part of the economy, more expansive, acting like a brake on GDP growth. The slowdown in Germany, Switzerland’s main trading partner, is also pushing Swiss companies to revise their sales and earnings projection lower.


Central banks:


Federal Reserve (next meeting September 18th)

At the central banker’s symposium held in Jackson Hole, Fed Chairman Jerome Powell said that when looking at employment and inflation, the US economy was in a “favorable place” but was still facing significant risks. He further acknowledged that “Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States”. He pressed that the Fed “will act appropriate to sustain the expansion” increasing bets the Fed will cut rates again in September.



European Central Bank (next meeting: September 12th)

Minutes of the ECB released for the July meeting showed the central bank was growing more and more concerned about future growth and inflation prospects. Members expressed the view a bundle of monetary policy tool, that they defined as “a combination of instruments with significant complementarities such as the combination of rate cuts and asset purchases”, would be more effective than a sequence of selective actions, hinting that a more stimulus might be close.



Bank of England (next meeting September 19th)

Mark Carney, the Governor of the Bank of England, has raised the idea of using a central bank controlled currency, such as Libra, as reserve currency saying that “in the longer term we need to change the game”. pointing that “Given the widespread dominance of the dollar in cross border claims, it is not surprising that developments in the US economy, by affecting the dollar exchange rate, can have large spillover effects to the rest of the world via asset markets”.



Swiss National Bank (next meeting: September 19th)

A surge in the Swiss National Bank sight deposits account suggested the central bank is starting to intervene again in order to stop the Swiss Franc appreciating, as the currency has hit its highest level againt the EUR since 2017. While the upward tick in the sitht deposits is the largest move since 2017, it is still small in comparaison to early 2015 or post 2016 UK Brexit referendum, where the bank confirmed it intervened.


Market issues:


  • Italy Prime minister Giuseppe Conte announced its intention to resign, deepening the country political crisis. The resignation took place after Matteo Salvini pulled the plug on his coalition with the 5 Star Movement, in a bid to capitalize on favourable polls suggesting his party could seize power if election were held. Later in the month, Conte got the mandate to form a new government, after the Five Star Movement and the Democrats formed a coalition.
  • Gold rose to its highest in almost 6 years, as global outlook darkened at investors sought refuge in the precious metal. The World Gold Council reported that global gold-backed ETFs and similar products had USD 2.6 billion of net inflows in the month of July. Silver was also sought after, rallying almost 20% over the summer.
  • Protests in Hong Kong continued throughout July, with demonstrators occupying Hong Kong airport and forcing it to close at some point, as protesters continued calling for a complete withdrawal of the extradition bill and more generally were fighting the erosion of the “One Country, Two System” rule that has been associated with the city island.
  • The US 2-10 year yield curve inverted, reinforcing view a recession was looming. Curve inversions have been a reliable indicator of recession in the past, as each of the past seven recession was preceded by a yield curve inversion. The US 30 year Treasuries also hit an all-time low, breaching the 2% level, as recessionary scenarios gained traction.


Credit Markets:


  • Swedbank issued a USD 500 million Additional Tier 1 instrument, in order to strengthen its capital structure. The bank is alleged to have participated in a money laundering scheme in the Baltics. The conclusion of the probe by the Swedish Financial Supervisory Authority will be published by the beginning of next year.
  • For the first time in history, Germany sold 30 year maturity Government bond with a negative yield to maturity The note bears a zero coupon, matures in 2050 and was sold slightly above par, yielding a minus 0.11% if held to maturity. This is the third country in Europe, with Switzerland and Denmark, to have a whole yield curve yielding below zero.
  • General Electric credit spread widened in August, as a report from the Analyst who foresaw the Madoff scheme, alleging accounting fraud by the conglomerate. The team said they uncovered a USD 38 billion fraud, potentially bigger than the Enron and WorldCom fraud combined. GE responded calling the report “market manipulation”.
  • Argentina bonds plunged after Alberto Fernandez, a leftwing populist opposition politician, received more than 47% of the votes in a nationwide primary election, used to determine the candidates for the presidential election, which is going to be held in October. Market feared a return to costly populist policies that would lead the country to another bankruptcy.
  • Jyske Bank, Denmark third biggest lender, launched the first negative rate mortgage, where the charge will be minus 0.5%. Borrower make monthly payment, but the mortgage balanced is reduced by an amount bigger than the amount reimbursed by the loan taker. In this negative rate environment, UBS said it would lower the threshold at which it starts to apply negative interest rate for individual clients.
  • Marboro makers Philip Morris International and Altria Group announced they were in talks to merge, after they split apart in 2008. Altria has exclusively sold Marlboro and other cigarette brands in the US while Philip Morris operates internationally. If the merger proceeds it will create the world’s largest tobacco group with a market value of around USD 200 billion.
  • Germany’s Berlin Hyp sold 3-year covered bonds at a record low yield of -0.59%. Strong demand for the issue enabled the lender to raise EUR 1 billion from a single issue for the first time in six years.


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