The global capital markets have stabilized today after yesterday’s rout in equities, softer yields, and US dollar. The implementation of US tariffs on China and China’s retaliatory tariffs on the US is still ten days off. The immediate focus is on actions expected to curb the technology transfer.
However, there have been conflicting signals over the intent. Treasury Secretary Mnuchin, who is seen as one of the remaining voices that try to minimize or soften, the administration’s conflict with, well, the world, sought to broaden the actions on intellectual property, by downplaying that it is aimed at China. Navarro, head of the National Trade Council, has pushed aside Mnuchin’s comments and reaffirmed that the Section 301 investigation was about China.
Last week in Sintra, there was nearly universal agreement among central bankers that the escalating trade tensions posed risks to the economic outlook. This assessment resonates among investors, many, like ourselves, are watching late-cycle data accumulate in the US, Europe, and Japan. The large fiscal stimulus that is in the pipeline in the US, and the relatively closed nature of the US economy (exports plus imports as a percentage of GDP), leaves the world’s largest economy in a better position to weather the storm. However, as has repeatedly been experienced, American prosperity is limited if large parts of the world economy are under duress.
Equity markets have steadier today, though quarter-end adjustments continue. Japanese equities rose fractionally, and those bourses open late tended to do better. China’s Shanghai Composite, the Hang Seng, an index H-shares that trade in HK, and Korea and Taiwan’s markets extended declines. The MSCI Asia Pacific Index fell nearly 1% initially before recovering to close less than 0.1% lower. It was near the high of the session, barely it back into yesterday’s range.
European bourses are mostly edging higher in quiet turnover. The Dow Jones Stoxx600 is up about 0.3%, led by utilities, information technology, and materials. Telecom and health care are laggards. Italy’s bourse is outperforming and with its nearly 0.8% gain, today pushes the DAX to the bottom of the major markets over the past five sessions with almost a 3% loss. However, in the fixed income side, Italian bonds are softening in line with other peripheral bond markets, with a 2-3 bp increase in yields. Greek bonds stand out. They are rallying in the aftermath of S&P’s decision to boost the country’s credit rating one notch to B+ and changed the outlook to stable from positive.
