Date: June 22, 2018
U.S. Growth Is ‘Close to a Peak’, But Risks Are Mounting
The U.S. economy is booming this quarter as tax cuts power consumers and businesses. Yet risks are mounting that the high will be short-lived. The housing market is struggling to build on its progress thanks to supply constraints and soaring property values, with data Tuesday showing an unexpectedly large drop in construction permits. Manufacturing is coming off the boil amid lengthening order backlogs and accelerating input prices, particularly for oil and partly due to tariffs on metals. On top of that, President Donald Trump has brought the U.S. to the verge of a trade war with China that could see levies on hundreds of billions of dollars in goods. It all amounts to increasing headwinds on economic growth that has a fair shot this quarter at reaching 4 percent, the fastest since 2014. While the Trump administration said such strength makes it a good time to tighten the screws on U.S. trading partners, especially China, markets gave a less-sanguine judgment on Tuesday, and economists caution that prolonged pain from trade will complicate the path for companies and consumers. With the U.S. economy about to enter the 10th year of expansion — a time where growth typically faces hurdles in reaching new heights — any slowdown would arrive just as the rest of the world shows signs of losing steam. U.S. growth “is close to a peak” and momentum will be “cooling from here,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York. The trade risks “come at a point when the economy itself is in the late stage of the business cycle, it’s already close to capacity, where you can’t easily substitute for imports, and businesses are worried about trade tensions.”
Euro-Area Economy Sees Silver Lining as Growth Momentum Picks Up
The much awaited rebound in euro-area growth momentum may have finally begun. A gauge measuring private-sector activity unexpectedly increased in June, suggesting the economy is gathering pace after a slow start to the year. With output strengthening in the bloc’s two largest economies, Germany and France, the numbers underpin the European Central Bank’s prediction that a rebound is on the cards, even if it arrives later than expected. Japan’s manufacturing sector also strengthened in a sign global economic prospects remain favorable. A gauge for the U.S. is due later on Friday. But the better figures comes amid the shadow of a looming trade war, with the U.S. and Europe announcing tit-for-tat tariffs on products, and Daimler AG saying that profit will suffer as a result. Policy makers including ECB President Mario Draghi issued warnings this week, while multiple other central banks have singled out protectionism as a threat to the outlook. Despite that, ECB officials decided last week that it’s time to unwind crisis-era stimulus. A day after the Fed raised interest rates for the second time this year, European policy makers announced they will end bond purchases by December, trusting that heightened global uncertainty won’t derail growth. “The euro-area composite PMI survey suggests the economy is continuing to expand at a healthy pace. We view it as pointing to a rebound in GDP growth from the slowdown in 1Q, especially after the headline rose for the first time since January. The ECB is likely to see confirmation in the report that it made the right decision.” The euro area’s composite purchasing managers’ index climbed to 54.8 in June from 54.1 in May, according to IHS Markit. The median estimate in a Bloomberg survey was for a drop to 53.9. The increase was driven by services, while a slowdown in manufacturing persisted. Growth in the region slowed to 0.4 percent in the first quarter from 0.7 percent at the end of last year.
Asia Stocks Bear the Brunt of a Brutal $2.1 Trillion Selloff
It’s been a brutal two weeks for global equities, but for those invested in Asia it’s been even worse. More than three-fourths of the $2.1 trillion lost in stock values worldwide came from the region. China bore the brunt, with the selloff erasing $746 billion as the Shanghai Composite Index came close to entering a bear market. While some analysts say dumping Chinese shares is a mistake, strategists from Goldman Sachs Group Inc. to Morgan Stanley slashed forecasts for Asian markets this week. The Philippine benchmark equity index joined Vietnam’s into a bear market, and gauges of Malaysia, Hong Kong, Thailand and Indonesia are down more than 10 percent from their highs. Indian equities were the only ones in Asia adding value in the two weeks through June 21. Minutes from the recent RBI policy meeting showed the central bank was less hawkish than some market participants had expected.
Forced Stock Sales Haunt China as UBS Sees $68 Billion at Risk
Three years after a wave of forced selling by margin traders fueled a collapse in China’s stock market, a new breed of leveraged shareholders is threatening to trigger another downward spiral. More than 5 trillion yuan ($770 billion) of Chinese shares, or about 12 percent of the country’s market capitalization, have been pledged as collateral for loans, according to data compiled by China Securities Co. and Bloomberg. The pledges, popular among company founders and other major shareholders in need of cash, have become a growing source of concern for analysts and the Chinese government after the Shanghai Composite Index tumbled to within a few points of its first bear market since the aftermath of the 2015 crash. The worry is that pledged stocks will be liquidated, dragging down prices, if borrowers can’t meet demands for additional collateral. While Chinese regulators told brokerages this week to seek government approval before dumping large chunks of pledged stock, some analysts say the threat of forced sales will continue to hurt the market. UBS Group AG estimates that about $68 billion of shares have dropped to levels below the threshold for liquidation. “It will remain one of the major overhangs for the stock market in the near term,” Hao Hong, chief strategist at Bocom International Holdings Co., said in an interview from Shanghai. Few are calling for a 2015-style collapse. But any sign of increased turbulence in China’s $6.7 trillion stock market could unnerve global investors. Their list of worries already includes a trade war, a rout in smaller emerging markets and tighter monetary policy in the U.S. and Europe. That said, Chinese regulators have plenty of tools to reduce the odds of a cascading selloff. This week’s instructions to brokerages may slow the pace of forced liquidations, while a widely expected cut to banks’ reserve requirements is one of many monetary policy options to boost market sentiment. Authorities have already put caps on the amount of shares that can be pledged in an effort to limit risks.