China unveiled a new round of retaliatory tariffs on Friday with President Trump vowing to respond. In this new episode of escalation in trade tensions, China announced that it will impose tariffs ranging from 5% to 10% on $75 billion worth of U.S. goods in two batches, effective on 1 Sept and 15 Dec, including a 25% tariff on U.S. cars. President Trump immediately responded, stating that he will be raising tariffs to 30% on some Chinese imports. He also announced he was “ordering” U.S. companies with China facilities to move them somewhere else.
At the annual central bank summit in Jackson Hole, Fed Chair Powell left the door open for another rate cut when the committee meets next month, acknowledging the risks to global and U.S. growth from trade uncertainty. Most officials saw the last 25bps cut as a response to the deteriorating macro outlook but there’s a wide range of views, ranging from those that believed a 50bps cut was required to fight stubbornly low inflation vs. those that wanted to keep rates steady, judging that the U.S. economy is in a decent position.
U.S. factory activity contracted in August for the first time since September 2009 as new orders shrank, consistent with an ongoing global manufacturing slump. The IHS Markit manufacturing Purchasing Managers’ Index slipped to 49.9 from a final July reading of 50.4, according to a preliminary August report.
The ECB hinted at a significant new stimulus package after the release of minutes from its July 25 meeting, which suggested that policy makers are contemplating a package that would include cutting policy rates further into negative territory and new purchases of financial assets.
The German Bundesbank stated in its latest monthly report that German growth contracted in the second quarter on slumping exports as a global trade war, China's slowdown and Brexit uncertainty sapped confidence, dealing a blow to an export-focused economy.
CPI in the eurozone recorded a rise of 0.9% in July on a YoY basis, in line with expectations whilst manufacturing PMI continued to contract, registering a reading of 47.00 in August (below 50 signalling a contraction).
Japanese manufacturing PMI recorded a reading of 49.50 in August, lower than the market expectations of 49.80. CPI was also below expectations at 0.5% (YoY) in July, compared to expectations for an advance of 0.6%.
Central Banks across the globe continue to cut interest rates. This week saw Indonesia, Egypt and Sri Lanka all cut interest rates.
For the week, global equity markets were mixed. In the U.S., the Dow Jones (-0.99%), S&P 500 (-1.44%) and Nasdaq (-1.83%) Indices were all weaker. In Europe, the Euro Stoxx 50 (+0.16%) and FTSE 100 (-0.31%) ended the week largely unchanged, whilst Asian markets were stronger with the Nikkei 225 (+1.43%) and Shanghai Composite Index (+2.61%) both positive.
Market Moves of the Week
Locally, SA CPI registered a rise of 4.0% YoY in July, below market expectations for an advance of 4.3%.
Moody’s issued a statement in the week, stating that they believe that South Africa’s government will try to absorb the additional support for Eskom, with new revenue or expenditure measures in the mid-term budget.
In company news, Naspers Ltd announced that it has received enough votes from shareholders to proceed with a listing of international assets including a stake in China’s Tencent Holdings Ltd in Amsterdam next month. It needed support from at least 75% of investors to spin off the newly created entity, known as Prosus NV.
The JSE All Share Index ended the week marginally up +0.23%, with all three of the major sectors also positive including the resource sector (+0.22%), industrials (+0.16%) and financials (+0.30%).
Chart of the Week
The Pound Sterling is trading at levels relative to the U.S. Dollar not seen since the mid-1980s as concerns about the country leaving the European Union without a deal before the Oct 31 Brexit deadline intensifies. Why did the Sterling get “killed” in early-to-mid 1980’s? It turns out that the answer has more to do with USD strength than GBP weakness. The mass destruction during the 2nd World War meant that in the subsequent couple of decades (while Europe’s manufacturing capability was being rebuilt), the U.S. enjoyed something close to a manufacturing monopoly. The prosperity in the 50’s, coupled with large degrees of union representation and low levels of unemployment led to skyrocketing U.S. inflation, further compounded by the 70’s oil crisis. In response to this, the U.S. Fed hiked interest rates which topped out at around 15%. This kick-started the USD rally (and it appreciated around 50% vs the other major currencies over the next few years). It all ended with the Plaza Accord in 1985, an agreement among the G-5 nations, to manipulate exchange rates by depreciating the U.S. dollar.
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