An Aura of Fear

An aura of fear’s been created
By actions both past and debated
Investors are scared
As they’re unprepared
Since models they’ve built are outdated

There is certainly more red than green on the screens this morning as the weekend brought us further complications across the board. The headline issue of note is the increased anxiety in Hong Kong as the ongoing protests spread to the airport forcing the cancelation of all flights there today, clearly a problem for a nation(?) that is dependent on international business and travel. President Xi is attempting to address this crisis with economic weapons rather than real ones, with the first shot fired by a state-owned company, China Huarong International Holdings Ltd, which instructed its employees to boycott Cathay Pacific Airways, the Hong Kong based airline. Given Hong Kong’s status as an open trading economy, it will have a great deal of difficulty handling boycotts from its major market.

Adding to the Chinese anxiety was word from the White House that September’s mooted trade talks may not happen at all as President Trump appears convinced that the Chinese need a deal more than the US does. As most of the escalation occurred late in the Asia day, the impact on markets there was more muted than might be expected. While it’s true the Hang Seng fell, -0.4%, Chinese stocks rallied as did Korea and India. At the same time, currency activity was less benign with the dollar continuing its strengthening pattern against most EMG currencies in APAC. For example, both INR and KRW are weaker by 0.55% this morning and the renminbi continues its measured decline, falling a further 0.1% with the dollar now trading above 7.10.

However, Europe has felt the brunt of the negative impact with early 1% rallies in equity markets there completely wiped out and both the DAX and CAC down by 0.4% as I type. Currency markets in Europe have also been less impacted with the euro edging just slightly lower, -0.1%, and the pound actually rallying 0.5% after Friday’s sharp sell-off.

But arguably, the real action has been in the bond market where Treasuries have rallied nearly a full point with the yield down 5bps to 1.68%. German bund yields are also lower, falling back to their record low of -0.59%. And adding to the risk-off feel has been the yen’s 0.5% rally, despite the fact that Japan was closed for Mountain Day, a national holiday. Finally, it wouldn’t be complete if we didn’t see pressure on US equity futures which are pointing to a 0.5% decline on the opening right now.

All told, I think it is fair to say that in the waning days of summer, risk is seen as a growing concern for investors. With that in mind, we do see some important data this week as follows:

Tuesday NFIB Small Biz 104.9
  CPI 0.3% (2.1% Y/Y)
  -ex food & energy 0.2% (1.7%Y/Y)
Thursday Initial Claims 214K
  Retail Sales 0.3%
  -ex autos 0.4%
  Empire State Mfg 2.75
  Philly Fed 10.0
  IP 0.1%
  Capacity Utilization 77.8%
  Business Inventories 0.1%
Friday Housing Starts 1.257M
  Building Permits 1.27M
  Michigan Sentiment 97.3

So, as you can see, Thursday is the big day, with a significant amount of data to be released. The ongoing conundrum of weakening manufacturing and still robust sales will, hopefully, be better explained afterwards, but my fear is as the global economy continues to suffer under the twin pressures of trade issues and declining inflation, that the path forward is lower, not higher.

In addition to this data, we see some important data from elsewhere in the world, notably Chinese IP (exp 5.8%) and Retail Sales (exp 8.6%) with both data points to be released Tuesday night and notably lower than last month’s results. It is abundantly clear that China is suffering a pretty major economic slowdown. The other noteworthy data point will be German Q2 GDP growth on Wednesday, currently forecast to be -0.1%, a serious issue for the continent and ample reason for the ECB to be more aggressive in their September meeting.

Wrapping it all up, there seems little reason for optimism in the near term as the key global issues, namely trade and growth, continue to falter. Central banks are also very obviously stretched to the limits of their abilities to smooth the process which means that unless there is a major change in governmental views on increased fiscal stimulation, slower growth is on the horizon. With it will come reduced risk and corresponding strength in haven assets like the yen, gold, Treasuries, Bunds and the dollar. While today offers no new information, these trends remain intact and show no signs of abating any time soon.

Good luck
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