The impact of global trade tensions

Today's news headlines:

‘Germany says it could spend extra $55 billion if crisis hits'. Germany's Finance Minister, Olaf Scholz, put a number on the potential size of fiscal stimulus at 50b Euros, but only in the event of an economic crisis. While Scholz signalled that stimulus was not imminent, his comments open the door for Germany to move away from its balanced-budget policy. Scholz said there would be fiscal leeway in a crisis because Germany has taken steps to reduce its debt figure to less than 60% of Gross Domestic Product in recent years. He cited uncertainty stemming from the US-China trade war as the principal global problem. (Bloomberg)
'Investors move into position for fresh wave of stimulus measures'. Market participants anticipate a significant number of stimulus measures from governments and central banks in the coming months to combat flagging global growth. Central bankers from all parts will gather at the annual Jackson Hole Symposium in Wyoming later this week and are expected to respond to warning signals of upcoming turmoil in financial markets. Concern over the global economy has seen investors flock into the perceived safety of government bonds, driving longer-term yields to record lows and causing the inversion of the benchmark US and UK yield curves. (Financial Times)

Japan’s dismal outlook

The regional effect of the US-China trade war has begun to manifest itself in Japan's export and manufacturing confidence data, raising fears of an upcoming recession. Released overnight, Japan's exports declined for an eighth consecutive month in July, spurred by a fall in demand for car parts and chip-making equipment. The 1.6% decline was slower than the 2.2% predicted by economists, but was likely due to temporary factors including shipments of aircraft-related products to the US and ships to Europe. Clearly, the worsening outlook for the global economy has hit the export-reliant nation. Year-on-year exports to China, Japan's largest trading partner, fell 9.3% as a rush in demand for semi-conductors wound down. This is in part due to the US ban on federal purchases from Chinese telecommunications giant, Huawei. Certainly, the Yen's strength as a safe-haven currency will threaten future exports to emerging market economies, many of which have seen their currencies devalue significantly as global growth fears mount.

A coordinated programme of global monetary policy easing, caused by a slowdown in economic growth, also threatens to put the Bank of Japan in a difficult situation. As the pioneers of long-term ultra-low interest rates, the BOJ has limited capacity to support the domestic economy by aligning monetary stimulus with its global counterparts. According to Bloomberg implied probabilities, the percentage chance of the central bank cutting rates to -0.2% have roughly doubled since the beginning of the month. We've also seen the BOJ shift to a pre-emptive easing stance, last month policymakers committed to lowering rates' without hesitation' if overseas risks continue to threaten the economy's momentum.

Bottom line: Clearly, ongoing global trade tensions are causing a slowdown in demand for Japanese exports while the strengthening of the Yen only serves to exacerbate the issue. The BOJ has signalled its willingness to ease monetary conditions, but this is only likely if the Yen strengthens below 100 to the Dollar, especially when factoring in GDP growth that has been positive for the last three quarters.

GBP/USD

Data and politics spurred a big gain in the trade-weighted Sterling Index during Friday's trading session. The Pound advanced from the bottom of its range to an eight-day high against the greenback as opposition to Boris Johnson's plan to take the UK out of the EU 'do or die' mounted. The Pound also benefitted from a week of positive data releases in labour, inflation, and retail sales.

GBP/EUR

The Pound also jumped against the Euro to the tune of 1.0%, its single biggest daily rise since late March. Comments from Olli Rehn regarding the need for more fiscal stimulus from the European Central Bank also contributed to broad Euro weakness that took the pair to an eleven-day high.

EUR/USD

Although stable, the pair is still languishing around the bottom of its one-year trading range. From a technical perspective, the pair's repeated rejection to break through the 100-day moving average suggests that near-term selling pressure has far from subsided and that the pair may target the recent low of 1.1027.