Niall Paul

Market Outlook

International Outlook

Outlook

Latest International economic and market outlook. 

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Economic momentum continues to ebb away in the US. This can be seen in the ISM index, which fell to its lowest level since 2009, raising concerns of a manufacturing recession. Meanwhile, slower job creation suggests that the labour market may be hitting its peak. Thankfully, data has been more encouraging in other areas of the economy. For example, strong retail sales and higher wages show that consumer spending should continue to support growth. With regard to the trade negotiations, it is extremely difficult to forecast the eventual outcome. We have been pessimistic for some time, believing that many of the issues are intractable. However, our network of experts and politicians is becoming more constructive, arguing that there has been sufficient deterioration in the US economy and political backdrop to warrant some concessions to the Chinese in return for more agricultural purchases. Data certainly suggests that Trump’s approval ratings are suffering from incremental tariffs. Moreover, we note that the Chinese have recently increased their agricultural purchases twice. Hopefully this will be enough to persuade the US to at the very least maintain the status quo and not ratchet up tariffs further. If trade tensions do deteriorate again, we expect this to be in the form of restrictions on capital flows or technology access rather than further tariffs.   

Europe also seems to have shifted to a lower gear of growth. Germany and Italy, the Euro Area’s largest and third-largest economies, are both on the edge of recession, while inflation in the region remains well below the ECB’s target. Consequently, the central bank unveiled a fresh stimulus package in September, loosening policy for the first time since 2016, as it tries to revive growth and inflation. Its task is being made more difficult by the ongoing uncertainty over Brexit. While the UK has passed legislation that should in theory eliminate the risk of a No Deal exit at the end of the month, Boris Johnson remains resolute that the country will be leaving on 31st October. This has raised concerns that he might provoke another EU member state into blocking a further Brexit delay over fears that a mutinous UK would become uncooperative.

Japanese manufacturing activity shrank at its quickest pace in seven months in September, while consumer price growth slipped to a two-year low in August. Despite a fragile economy, Prime Minister Shinzo Abe decided to implement a long-delayed sales tax hike from 8% to 10% on 1st October. A prior increase in the sales tax in 2014 caused serious damage to the Japanese economy, with private spending registering the largest drop in history following the hike. This time around the government has planned a range of fiscal countermeasures to mitigate the economic fallout. However, consumer confidence fell to an over five-year low in August, suggesting that private consumption could struggle in the coming months. More encouragingly, Japan and the US have signed a partial trade deal, which should offer greater comfort that Japanese carmakers will not be hit by US tariffs on automotive imports.

It is interesting to note that, at least from a Chinese earnings perspective, the trade war is having less of an impact than initially feared. Looking at the most exposed industrial Chinese A-share companies, their revenues have missed by 2% on average, yet earnings beat estimates by 7%. This suggests that tariffs have been offset by falling material costs or that these companies have been able to pass on the tariffs successfully by squeezing suppliers. Either way, it is a good sign. Another good sign is that the Chinese government has allowed more bond issuance to finance various infrastructure projects. This suggests that Beijing recognises that Fixed Asset Investment has been too low and that further loosening will be required. At the same time, data out of the Chinese property sector has improved, which could boost consumer confidence and support a recovery. 


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