Monthly Review: August 2018

Monthly Review: August 2018



United States
Trade talks between the US and China were again making headlines last month, bringing the total amount on which tariffs are levied to a combined USD 100bln, it however had little effect on the US economic performance which showed solid numbers for growth, employment and inflation. Probably buoyed by soaring stock indices, the consumer confidence index published by the conference board reached a record level not seen for almost two decades. US Q2 GDP grew 4.2%, its best performance in four years.
Euro area
Trade tensions, receding consumer and manufacturer confidence as well as the Turkey crisis and the contagion risks it poses, weighted heavily on European financial markets in August. These factors also dampened hopes of solid economic growth for the remainder of the year. Italy-EU relations remained tense as the nation populist administration is preparing to unveil its budget next month, which investors fear it will break the EU deficit rules, as the government said they are ready to increase the imbalance if it boosts their economy.
United Kingdom
Speculation about the probability of the UK cashing out of Europe without a deal were at the forefront of investors’ concerns again last month. Theresa May played down the risks claiming that a no deal-Brexit “would not be the end of the world” while others, such as Philipp Hammond, warned a disorderly walk out could cost as much as GBP 80bln. On the economic data front, higher fuel prices, an indirect effect of the falling pound, pushed up the rate of inflation for the first time this year. Household disposable income was further squeezed by falling wage growth, a trend that has been lasting for several months despite the record low unemployment.
Consumer sentiment in Switzerland has almost dropped back to its long-term average, as showed by the State Secretariat for Economic Affairs survey, which is conducted on a quarterly basis. Consumers anticipate positive developments in the economy and labor market, but with a somewhat reduced momentum, as uncertainty about the potential effects of trade tensions are unclear. On the other hand, the Federal Council announced it forecasted Switzerland to end 2018 with a budget surplus of CHF 2.8bln instead of the 300mln initially budgeted, the explanation being the solid state of the economy.


Central banks:

Federal Reserve (next meeting: September 26th)
The Federal Reserve skipped on another rate hike in August. The Federal Open Market Committee however paved the way for an increase in the Fed Funds at the September meeting, as the language of the statement was very upbeat about the current economic situation. They assessed strong labor market conditions as well as strong household spending growth. The statement did not contain any elements that showed the committee members were worried about Mr Trump’s protectionist trade policies, or that could lead to a slower growth rate in the economy.
European Central Bank (next meeting: September 13th)
Mario Draghi unrenewable mandate will come to an end in October 2019. Jens Weidman, the actual Bundesbank president and a stimulus hawk was seen as the favourite candidate likely to get the job with the help and support of Angela Merkel, in a move to assert Germany’s clout over European institutions. According to Handelsblatt, Mrs Merkel is now focused on securing the European Commission presidency, as the position is going to be vacant next year and where Germany would gain more political leverage than at the ECB.
Bank of England (next meeting: September 13th)
The Bank of England voted unanimously to raise Bank Rate by 0.25% to 0.75% from the level it set in March 2009 in order to face the financial crisis. The Bank’s decision was motivated by a very low unemployment level which could induce inflationary wage pressures. However, as fears about the economic impact of Britain leaving the EU without a deal are growing, Mark Carney said the Committee is prepared to adjust the path of rates if and when necessary.
Swiss National Bank (next meeting: September 20th)
SNB’s alternate governing board member Thomas Moser said it could take a very long time for the Central Bank to reduce the size of its balance sheet, which reached 120% of the size of the economy, a larger ratio than the ECB or BoJ. “The size of the balance sheet is not a goal or objective of the SNB, its expansion is the result of our policy” he said. The strategy differs from other major Central Banks, such as the Fed or the ECB, who are in the process of reducing the size of their balance sheets.

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Market issues:

■    Turkey was the issue making most headlines this month. Turkish President Erdogan interference with the Central Bank coupled with diplomatic and trade tensions with the US caused the currency as well as government bonds to fall, with investors fearing financial contagion.

■    President Donald Trump said that the US and Mexico reached a deal that revise the North American Free Trade Agreement previously in place. The bilateral deal suggest Mr Trump is ready to move on without Canada, if the Northern neighbor does not return to the negotiation table quickly.

■    Copper entered a bear market; the commodity having lost more than 20% since June. Traders were concerned that the Turkish financial situation could sparkle a bigger crisis and mounting trade tensions would potentially slow global economic growth.

■    The US Treasury curve continued to flatten, with the 10-year Treasury yield versus the 2 years yield being at its lowest since 2007. While it has not yet inverted, this would be particularly worrisome as yield curve inversion has proved to be a reliable predictor of recessions.

■    The Bank of Japan made small changes to its monetary policy settings, allowing more flexibility for the long-term yield target.


Credit Markets:

■    Elon Musk, Tesla CEO, tweeted its intention to take the company private. He however later pulled back the idea, citing resistance from investors and their wish to see the company remain public.

■    Following the collapse of a highway bridge in Italy which killed 43 people, the government blamed Autostrade per l’Italia for oversight and sought to revoke its concessions., Autostrade is 88% owned owned by Atlantia and represents more than 60% of its earnings.

■    A.P. Moller-Maersk, the world’s largest shipping company, cut its profit outlook for 2018 citing higher fuel prices and that a trade war would hurt their business.

■    The Chinese technology giant Tencent, reported its first drop in quarterly profits in nearly 13 years. Management cited a freeze on new games approval in China as regulators are restructured.

■    On August 2, Apple became the first US based company to reach USD 1trln in market capitalization. PetroChina reached the trillion-dollar mark back in 2007, before seeing its value decline due to the financial crisis.

■    The Swiss asset manager GAM Holding, froze withdrawals from one of its bond funds, after the company suspended the fund manager and investors requested redemptions in large numbers.

■    Credit Suisse will redeem USD 6 billion of contingent convertible (“coco”) bonds issued to the Qatar Investment Authority and Saudi Arabia’s Olayan family back in 2012 and 2013 to comply with Swiss “too big to fail” rules.  The notes were issued with coupons as high as 9.5 percent, but a stronger balance sheet has enabled the bank to replace them at a much lower cost, including a USD 2 billion coco priced at 7.5 percent last month.


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