Week in Review: Global Trade and Yield Curve Worries

It was another volatile week for global equity markets as trade and growth worries continued to unsettle investors. U.S. long-term bond yields moved sharply lower over the week sending a negative signal about the health of the global economy with the yield of the 10-year Treasury note falling below that of the two-year note, setting off recession warning bells.

These worries were countered by a jump in US retail sales in July, indicating that consumer spending remains robust and partly soothing fears over the health of the world’s biggest economy. Overall, retail sales rose 0.7 per cent in July, the Commerce Department said on Thursday.

Continued tensions in the U.S.-China trade dispute also loomed large over market sentiment. On Tuesday, stocks rallied after President Trump announced that some of the 10% tariffs set to be imposed on Chinese goods on September 1 would be delayed until mid-December. This did not dissuade China from announcing that it intends to take counter measures to match the U.S. tariffs. Face-to-face negotiations are expected to resume within two weeks, with China asking the U.S. to meet it halfway on trade issues.

Eurostat reported that the eurozone economy barely grew in the second quarter of 2019, expanding just 0.2%, as economies across the bloc lost steam. The region’s largest economy, Germany, shrank by 0.1% in the second quarter as the protracted US-China trade war impacted exports. A strong package of easing measures is now expected from the European Central Bank at its September meeting.

Chinese stocks posted a weekly gain after Beijing pledged to roll out measures to boost disposable incomes for the next two years to offset the slowing economy.

Argentinian financial markets suffered a brutal three day sell-off following the upset defeat of incumbent Argentine President Macri in the primary stage of Argentina's presidential election last Sunday, losing to Peronist Alfredo Fernandez by 15 points. Fernández and his running mate, former Argentine president Cristina Fernández de Kirchner won the primary round of the election with 48% of the vote, making him the overwhelming favourite to win the presidency in the scheduled October elections. Current President Macri received 32% of the votes, having angered voters with austerity measures that have led to a deep recession and soaring inflation. Argentina’s equity market reacted violently to the news, with the local index falling 48% in U.S. dollar terms, according to Bloomberg. The market's decline reflected fears that a Fernández‑Kirchner victory would see a return to a Peronist government characterized by populist policies, currency and capital controls, and debt defaults.

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Market Moves of the Week

South Africa’s rand firmed on Friday, adding to previous session’s gains on the back of hopes of further stimulus in China and continued global monetary policy easing. The rand has weakened by more than 6% since the beginning of August, pressured by the rising likelihood of a credit ratings downgrade by Moody’s and signs of slower global growth.

On Thursday President Ramaphosa signed into law the controversial National Credit Amendment Bill which provides for the extinguishing of the debt of heavily indebted consumers who earn a gross monthly income of no more than R7,500; have unsecured debt amounting to R50,000; and who have been found to be critically indebted by the National Credit Regulator (NCR). The industry body representing all registered banks in the country, warned that the recently promulgated debt-relief bill will send the wrong message to investors.

In company news Sasol slumped 4.73% to R265 after the company said on Friday that it would have to delay the release of its annual results after an investigation found “possible Lake Charles Chemicals Project control weaknesses”.

The all share was down 2.99% for the week, cutting its 2019 gains to just 2.16%.

Weekly
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Chart of the Week

The yield curve is a graph showing the relationship between interest rates earned on lending money for different durations. In the US in recent days the ten-year bond rate has fallen to the point at which the ten-year rate is below the two-year rate – so the yield curve is inverted. This inversion came as a result of long-dated yields coming down, rather than because short-dated yields went up. Recessions usually come as the Federal Reserve raises short-term rates.

Inverted Yield

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For assistance or more information, contact your Carrick Wealth Specialist directly or alternatively contact us at

[email protected].

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