Market Insights – 11 June 2018

Weekly financial & economic analysis.

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Essentials

Apple has allegedly warned its suppliers to produce 20% fewer components as iPhone sales drop off. In the past, such rumours have often proved to be unfounded, but they nevertheless weigh on the share prices of semi-conductor manufacturers around the world.

Swiss consumer prices rose 1% in April, reaching a new recent high. This increase comes as Europe – Switzerland’s main trading partner – is getting ready to normalise monetary policy. Higher prices could prompt the Swiss National Bank to adopt a less accommodative policy while still keeping its eye on the value of the franc.

Several emerging currencies have come under pressure on the back of a rising US dollar, higher yields and/or (geo)political uncertainties. Central banks in India, Indonesia and Turkey have tried to calm investors’ fears by raising interest rates, while Brazil’s intervened in the forex markets and Argentina’s obtained a USD 50 billion credit line from the IMF.

You can almost forget about football!

The world’s major central banks will all hold meetings this week. The US Federal Reserve, the European Central Bank and the Bank of Japan will be analysing how their respective economies are doing and sending out messages to investors before the summer holidays. But Donald Trump seems intent on stealing the limelight from the industrialised world’s most powerful central bankers. His meeting this week with North Korean leader Kim Jong-un will be crucial: the global proliferation of nuclear weapons, the stability of the Korean peninsula, and the power play between the world’s two super powers – the USA and Pyongyang’s ally China – all hang in the balance. It’s hard to know what will happen given just how unpredictable the US president is when it comes to political decisions, as events at last weekend’s G7 summit clearly showed. President Trump unilaterally refused to sign a fiercely negotiated joint communiqué at a summit where tensions were already running high owing to the tariffs imposed by the USA on steel and aluminium. In all truth, Trump’s recent actions seem to have been largely dictated by US domestic policy and the mid-term elections. Given that the inquiry into Russian interference in the presidential election is still under way, it looks like the president is pandering to his electorate in order to maintain a Republican majority in Congress, even if that means ruffling the feathers of America’s long-standing allies. Investors will nevertheless have to pay careful attention to the statements released by central banks this week. After all, monetary policy normalisation is still on the table. Recent comments by the ECB’s chief economist suggest that Europe’s central bankers will confirm that the asset purchase programme will be wrapped up by the end of the year despite the new-fangled turmoil caused by political uncertainties in the Mediterranean countries. The Fed is expected to announce a further rate hike and will perhaps focus some attention on inflation, which appears to be gaining ground on the back of higher energy prices. The aforementioned political developments have not unsettled Wall Street, which is nearing new highs. The indexes of US tech stocks and small and mid caps already reached new peaks last week as a result of very buoyant economic indicators.

Japan: inflation seems hard to get

In Japan, economists were surprised by just how much GDP contracted in Q1, with annualised growth down 0.6% compared with the forecast of −0.1%. This was primarily due to weaker exports and lacklustre consumer spending. What’s more, the GDP deflator came in at −0.8%, versus the 0.5% forecast. The sharp decline in this inflation indicator must have caught many observers off guard, as such data show just how difficult – if not impossible – it is for the Bank of Japan to stimulate inflation. Despite all of this, the outlook remains bright, and upcoming forecasts might even be revised upwards shortly – if the recently published corporate investment intentions are anything to go by, that is. In addition, household income figures are encouraging, rising at an annualised rate of 3.2% from January to March 2018. On the downside, however, GDP figures for the last two quarters of 2017 have been lowered. And these adjustments could lead to future GDP estimates being revised downwards as well. This kind of macro climate could well stifle the Bank of Japan’s hopes of changing its monetary policy and encourage it to continue printing money. Keeping the stimulus policy in place would prevent the yen from rallying, which would be good for exporting companies and the Japanese stock exchange.

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