Market Insights – 15th of July 2019

Each week, a team of experts shares its market views with you.

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Cityscape on smartphone. View through the screen at Shanghai City on women screen, China.

Essentials

China’s structural decline in economic growth continued last month, with GDP expanding 6.2% on an annualised basis, in line with expectations. However, short-term indicators already show the effects of the government’s stimulus programme – industrial production, retail sales and capital spending all came in above the June consensus estimates.

June also saw a sharp rebound in US job creation: over 220,000 new positions were added, abating fears that unemployment could spike in the near term and thereby limiting the likelihood of a recession. Another reassuring sign was the continued steady increase in wages.

In the eurozone, industrial production was up 0.9% in May – much better than most analysts expected after the slide in April. But new orders remain weak and manufacturing companies appear hesitant, indicating that this pace may not continue in the coming months.

Currency markets under influence of central banks

Traders on the international forex market have to turn their attention to the central banks to find any action. Less than six months after its last rate hike, the US Federal Reserve is getting ready to cut rates once or twice over the summer, and this drastic about-turn is now being felt on the forex market. Minutes from the Fed’s June meeting indicated that it could slash its policy rate by 50 bp if economic readings don’t improve. And here the US central bank is looking at global readings in particular, out of concerns that the world’s major economic blocs might be hurt by Trump’s protectionist measures. Risk assets have been the main beneficiaries of the Fed’s more dovish stance; the S&P 500 just set a new record high as it crossed the 3,000 mark. However, interest-rate spreads, which have provided a real boost to the US dollar in recent months, will most likely take a hit as a result of the cuts, since investors will be less tempted to place their money in the USA and won’t want to help fund the superpower’s enormous twin deficits (i.e. both a fiscal and a current account deficit). The US dollar’s long-running rally may thus be nearing an end. That said, the ECB has also said it intends to loosen its monetary policy over the coming months, which will limit the dollar’s downside against the euro. But some other major central banks – like the SNB and the BoJ – have remained strangely silent. The Swiss franc and the yen may gain ground if those two central banks don’t strengthen their monetary policies in order to keep the speculators at bay. Meanwhile in Norway, where the central bank is the only one in the developed world to still be hiking rates, the krone offers the greatest upside potential among industrialised nations. And if the ceasefire in the US-China trade war holds, investors’ renewed interest in emerging-market currencies could become an enduring trend.

We could be in for another about-turn

The White House took things up a notch a few weeks ago when it banned US companies from exporting their technology to the Chinese giant Huawei. This frontal offensive heightened tensions between the world’s two superpowers. The tariffs put in place so far were always going to weigh on short-term growth, but they could be offset by stimulus measures. But this direct attempt to rein in the Chinese tech mam moth could interfere with Beijing’s strategy – and that’s a risk that President Xi is not prepared to take. Despite the ceasefire negotiated at the G20 summit in Japan, we could still see new offensives from the USA given the country’s track record on changing tactics. We therefore suggest adopting a cautious stance and limiting exposure to markets and sectors that could be in Trump’s line of fire.

More broadly, the idea that the negative factors that weakened emerging markets in 2018 would lose their potency this year still holds true. The US dollar’s rally has  eased and is unlikely to resume given the expected rate cuts in the USA. And oil prices, a major source of inflation in some emerging markets, have dropped by over 10% in recent months. That has reduced pressure on emerging markets and stabilised their currencies. Unless tariffs go up sharply, it’s unlikely the yuan will weaken any further given Beijing’s strategic focus on internationalising its currency.

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