Monthly Review : July 2019

Monthly Review : July 2019



United States

Figures released by The Commerce Department in July showed the US trade deficit widened in May, as businesses likely stocked goods ahead of an increase in tariffs on Chinese merchandise. While recession jitters continued in the US, economic figures still seemed to indicate a robust economy with strong housing and employment numbers, as well as GDP figures. The economy has grown for 121 consecutive months, the longest run on record.



Euro area

Industrial production in the Eurozone grew 0.9% in May, more than the 0.2% increase that the consensus expected. However, in its Summer Economic forecast the European Commission warned that “a projected weakening of the growth outlook for the remainder of 2019 fully offsets the positive growth surprise in the first quarter”. Much like the European Central Bank, the institution views risks to the outlook are skewed to the downside.



United Kingdom

The selection of hard-line Brexiteer Boris Johnson to succeed Theresa May as prime minister has increased the probability of a no-deal Brexit according to Moody’s. The rating agency warned that ““with the election of Mr Johnson, the likelihood of a sustainable compromise appears lower than before…Our view remains that a no-deal Brexit would have significantly negative credit effects for the UK sovereign and related issuers.”




According to a study made by the Swiss broadcaster RTS, Switzerland has decreased its reliability on Germany for its exports, and for the first time, exports to the United States exceeded those to Germany by more than CHF 1bln. The share of exports to China also grew significantly from 3% to nearly 8% today. This might be explained by the sluggish European growth rate of the last few years which contributed to dampening demand for Swiss products.


Central banks:


Federal Reserve (next meeting September 18th)

In a widely expected move, the Federal Reserve cut its benchmark rate by 25 basis points, the first cut in a decade. Jerome Powell said the FOMC decision was an insurance against downside risks, and Aldi said it was not the beginning of a long series of rate cuts, but rather a mid-cycle adjustment to the policy. He explained the cut was mainly defensive, aimed at supporting the economy in a world of low inflation, weakening global growth and trade tensions. He underlined the US economy grew at a healthy pace in the first half and that the outlook remained favorable. The Fed also decided to pre-emptively end its balance sheet shrinking process two months ahead of schedule.


Bank of England (next meeting: August 1st)

In its financial stability report, The Bank of England warned that “the perceived likelihood of a no-deal Brexit has increased since last year. Although the degree of preparedness for such scenario has improved, material risks still remain.” In the same report the BoE also assessed that, “the core of the UK financial system, including banks, dealers and insurance companies, is resilient to, and prepared for, the wide range of risks it could face, including a worst-case disorderly Brexit.”


European Central Bank (next meeting: September 12th)

The ECB left its rate unchanged but altered its language, to open the door for a rate cut at its next meeting on September 12th.  “The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020”. The monetary policy decision statement also mentioned that the Governing Council recognized the need for a “highly accommodative stance of monetary policy for a prolonged period of time”


Swiss National Bank (next meeting: September 19th)

Pressure on the SNB continued to build as the global monetary policy easing trend put upward pressure on the CHF which reached its highest level in a year. Its room for manoeuvre is however limited, as the size of its balance sheet is already important and interest rates are at record lows. Further cuts could be counterproductive as banks and pension funds already suffer from the negative rates.


Market issues:


  • Turkish President Recep Tayyip Erdogan dismissed the central bank governor Murat Cetinkaya after he refused to cut interest rates by 300 basis points. The Turkish president has long been hostile to high interest rates, stating they encourage inflation.
  • US stock indices hit record highs in July as prospects of a rate cut by the Federal Reserve, as well as progress in trade negotiations between the US and China, fuelled the rally. Weak growth data did nothing to dampen investor optimism.
  • Christine Lagarde, who is currently running the International Monetary Fund, was nominated to replace Mario Draghi as president of the European Central Bank. Investors expect her to continue with the dovish stance adopted by her predecessor.
  • Mexico’s finance minister handed his resignation citing “many” disputes with President Andres Manuel Lopez Obrador and the “imposition of officials who do not know about public finances”. The Mexican Peso tumbled on the announcement and the stock market retreated.
  • Gold reached a six year high as global economic fears persisted, geopolitical tensions increased and investors anticipated a rate cut by the Federal Reserve.



Credit Markets:


  • Boeing’s credit rating outlook was revised to negative from stable by rating agencies Fitch and Moody’s. The plane maker faces serious cash flow drain as inventories of grounded 737 Max jetliner continued to build up while regulators around the world ban the plane from carrying out commercial flights.
  • In another example of a market characterized by investors hunting for yield, Banco di Desio e della Brianza issued a 7-year covered bond backed by Italian mortgages. The EUR 500 million issue, which was rated AA by Fitch and offered a yield of 0.43%, drew orders of close to EUR 2 billion.
  • Negative sovereign and corporate yields in EUR also pushed investors to heavily subscribe to the new 7-year Greek government bond. The B+ rated EUR 2.5 billion offer attracted EUR 13 billion in orders for a 1.9% yield. The initial pricing talk was around 2.1%
  • Austria increased the size of its “century bond” maturing in 2117 by EUR 1 billion. The bond was issued with a 2.1% coupon two years ago and the new tranche came with a 1.17% yield. The interest from investors amounted to EUR 5 billion and in comparison the yield on the 5 year bond sold at the same time came to minus 0.43%.
  • Deutsche Bank, Germany’s largest lender, announced it will cut 18’000 jobs, or 20% of its workforce, in a major restructuring effort that is expected to lead the bank back to profitability. The plan will also scrap its equity business and downsize its investment bank.
  • The UK sold 10-year bonds at the second-lowest rate in history as no-deal Brexit concerns grew. The GBP 2.75 billion sale of bonds at a yield of 0.789%, barely above the Bank of England’s benchmark interest rate, attracted orders of more than GBP 6 billion.
  • Fitch cut South Africa’s BB+ credit rating outlook to negative due to concerns over the country’s spiraling debt and weak growth. The move comes after the government announced a further USD 4.2 billion in bailout funds for Eskom, the state power monopoly, which is expected to increase the budget deficit to 6.3% in the current fiscal year.  The economy is projected to grow just 0.5% in 2019 and Fitch sees its debt-to-GDP ratio climbing to 68% next year.

The Czech Republic’s EP Infrastructure, which operates Europe’s biggest gas pipeline connecting Russian and the EU, pulled in orders of EUR 2.3 billion for its EUR 600 million bond sale in just two hours.  The BBB- rated 7-year bond was issued with a yield of 1.698%, more than 0.5% below initial price guidance.  It is also the lowest ever yield on a 7-year bond issued by a central and eastern European company.



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