Uddrag fra BNP Paribas:
Big picture: Conflicts of interest weigh on sentiment
Trade tensions have rattled markets, prompting a somewhat softer tone from the White
House. But the underlying tensions remain and Washington’s winds are very variable.
China has eased monetary policy in response to trade, and stocks have slipped this year.
World trade and PMIs are drifting south and the best is behind us.
Europe is facing challenges over eurozone reform, which we see as vital, immigration and
Brexit. All share the feature of conflicting interests (as with trade), making resolution tough.
Global trade and European politics continue to grab the headlines, with Donald Trump
threatening 20% tariffs on European cars and markets having been nervous about burgeoning tensions between the US and China. Weaker stock markets have prompted something of a calmer tone from the White House, but the substance of tensions has not changed and the wind could shift direction again in coming months. Chinese oil imports from Iran could become a point of tension.
Meanwhile, the PBoC has announced selective easing of banks’ required reserve ratios (RRR). We see this as an acknowledgement of their anticipating increased external pressure on the economy. The Chinese stock market has been weak recently and is
down substantially from the start of the year days but almost throughout 2018.
We have seen a sharp deterioration in flows to emerging markets in the second quarter. Though equity weakened from February, only from April did we start to see debt outflows, according to IIF data. With only partial figures available, it looks as though portfolio flows into EM in Q2 may have been the weakest since mid-2015. In April and May, emerging Asia seems to have seen the weakest performance, with Brazil and Turkey also seeing pressures (IIF does not report figures for Argentina).
Things deteriorated in June, with the escalation of trade tensions, which intensified pressure on a wide range of EM stock indices, including China. Weak risk asset prices – BBB bond spreads have continued to widen, for example – reflect idiosyncratic developments. But one reason for spill-overs, in addition to global trade worries, may be the slower pace of expansion of central bank balance sheets.
With a faster pace of reduction in the Fed’s balance sheet coming, and fewer ECB purchases, the QE backdrop is becoming less favorable, increasing the risk of shocks riling markets and higher spill-overs, even if we get relief in the near-term. Uncertainties over Chinese activity in response to trade tensions may be one of the drivers of weaker global PMIs and world trade growth (Chart 3), with Europe also suffering.
This has predated the imposition of most tariffs, with earlier tighter Chinese monetary policy perhaps playing a part. Trade tensions will certainly not help and probably will hurt open economies more than relatively closed ones like the US. Despite likely 4% growth in Q2, the US yield curve continues to flatten and corporate spreads widen (Chart 4), signaling slowing growth down the track.
Europe is embroiled in the EU summit. One key topic will be the reform of the eurozone. This follows the Macron-Merkel agreement at Meseberg, against which 12 countries are opposed. The creation of a eurozone budget from 2021, along with other reforms, is quantitatively modest but qualitatively symbolic.
From little acorns mighty oak trees grow. Opponents worry about moral hazard and the ever-extending maturity of Greek debt encourages concern that what starts out as a loan may eventually transform into a transfer. We side with the view that eurozone reform is essential, particularly on the fiscal front, and we’d like it to be beefy. The ECB has already been overburdened, and as former ECB vice-president Vitor Constancio has said, it may test the limits of its mandate in the next recession.
Our current view is that it will start to raise rates in September 2019, but if global trade takes a significant hit from protectionism, it is conceivable that the ECB would not deliver rate hikes before the next recession. While we have little doubt that the ECB would be inventive, it could face all sorts of legal and political opposition along the way.
We note IMF Chief Economist Maurice Obstfeld’s comments that “…without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks”. Constancio has made a strong case for a variety of reforms and French Finance Minister Bruno Le Maire has been very robust in demanding progress. We see discussions on this topic as extremely important to how the next shock, whether symmetric or asymmetric between eurozone states, affects markets and the economy.
Immigration continues to be a European bone of contention. Under domestic pressure from her CSU coalition partner, Mrs Merkel suggested that migrants could be returned to their original point of registration in Europe. This runs counter to the new Italian government’s objective, which is to get other countries to take more of the immigrants landing on its shores. Mr Salvini, deputy prime minister and interior minister and leader of La Lega, has seen his standing rise in opinion polls in Italy following his hard line on immigration. Tough talks lie ahead.
Meanwhile, Brexit negotiations are proceeding more slowly than envisaged and there are
increasing signs of firms starting to anticipate a hard Brexit, moving or threatening to move
operations offshore. Mrs May continues to struggle to thread a route between Scylla and
Charybdis, trying to prevent Leavers and Remainers bringing down the government.
It seems likely that a showdown will come at some stage. The European Banking Authority is telling banks to prepare better for a hard Brexit, in case this is where we end up. There have been concerns expressed from a number of quarters about such an eventuality possibly resulting in a financial crisis, with potential issues including the continuity of contracts.
Tensions in Europe, together with issues over trade, have softened the currency, though spreads have narrowed in recent weeks thanks to emollient talk on the Italian fiscal plans. But immigration concerns are unlikely to be solved quickly, given the conflicting interests between initial recipient states and others.
Neither are fiscal issues susceptible to a quick fix, and we worry insufficient progress
until the next crisis. All this seems set to reinforce the ECB’s cautious mood. Thankfully, as
Draghi has made clear, next September is the earliest possible date for a rate hike.
