Duncan Donald

Mon, Jun 3

KYLIN TALK | Weekly Markets Update 03.06.19

Those, state side who were thinking US President Donald Trump had already won the trade war might now need to re-think about it given the recently released trade results. International trade in goods April data showed 1% rise, while imports followed at 0.9%. The monthly deficit continued to suffer at $72.1bn with exports and imports edging down 4.2% yoy and 2.7% yoy, respectively.


The deficit has increased by circa $1bn, compared to the average for the first three months of the year. Sector-wise, Capital goods have historically been the largest US’s export component and fell 6.5% from last month. On an annual basis, Cap Goods are down 3.7%, while autos (which represent c.$13bn in goods exported) plummeted by 7.2%.


To worsen the current geopolitical situation, Trump announced the implementation of a new 5% tariff for Mexico, beginning in early June. The bill is expected to increase until the “ongoing illegal immigration” towards the Southern border of the US shows improvement.



In the meantime, the Bureau of Economic Association released the latest estimate for US Q1 2019 real GDP growth which posted a rise of 3.1% (vs Q4 2018 at 2.2%). The figure has been slightly lowered reflecting downward revisions to non-residential fixed investment and private inventory investment and upward revisions to exports and personal consumption expenditures.


The US Dollar has strengthened versus the Euro by circa 26bps over the last week, while versus the GBP it jumped 60bps, reflecting the lowest level of the Pound seen since the beginning of the year. The British Pound has dropped by more than 3% against the EUR and the USD over the last month amid Brexit developments, Theresa May’s resignation and general political uncertainty.

The currency depreciation reflects poor economic sentiment around the UK with the retail sector stagnating in April and the European Commission business sentiment index that continued to dive in May, despite accelerating consumer confidence. All-in-all the car production plateau by more than 7pc QoQ may cause as much as 100 bps drop for Q2 GDP growth. In this way, weaker wage and employment growth along with rising inflation seem to suggest the underlying drivers of consumer spending are softening. Theresa May’s resignation, a downturn in economic data, interest rates, gilt yields and the pound will all stay lower for longer and this would leave the economy more exposed to “external” headwinds, throughout the extended trade tensions.


In mainland Europe, Matteo Salvini, Italy deputy premier, threatened a government collapse, whereby his coalition partner 5 Stars Movement will not move forward his proposed flat-tax plan. This political alliance could last another 4 years as much as further 3 months. However, the likelihood of an early election in September still seems quite limited. Italian vs German 10Y government bonds spread skyrocketed to 281 points after Salvini’s statement. Di Maio, the 5 Stars Movement leader, saw his party’s consensus halved in the European elections (vs 32% in the last winning elections), while the rightist League came out as the party with the largest support at 34%.  


Global trade tensions, slowing economic growth and Italian political risks have pushed investors towards safer assets. 10Y German bonds yields fell below the 3 years low of -0.20%, when Brexit, Trump election and ECB stimulus were the main market drivers. This is happening while yield curves are inverting and the Street concerns about the global economy health. US Treasuries with same maturity are not immune either. Yields have been tumbling further, with the 10Y and 2Y below 2.151% and 2%, respectively.

The week ahead


Monday – UK Market Manufacturing PMI (Previous at 53.1, Consensus at 52)


Tuesday – UK Market Construction PMI (Previous at 50.5, Consensus at 50.4)


Wednesday – UK Market Service/Composite/All-Sectors PMI (Previous at 50.4/50.9/50.9, Consensus at 50.6/50.7/50.6)


Thursday – UK BoE governor Mark Carney speech


Friday – UK Theresa May resigns as PM & UK Halifax House Price Index - May (Previous at +5%, Consensus at +4.9%)