July 2, 2018
Asian markets fall as China weakens again with the prospect of new tariffs on the horizon
The main Asian markets fell on Monday 2 July, the first trading day of the second half of the year. Heavy losses were recorded in China, before the imminent deadline by which both Washington’s and Beijing’s tariffs are expected to enter into force.
In Tokyo, the Nikkei 225 fell despite the yen’s continued weakness. Losses were widespread, with retailers and the food sector among the worst performers. In China, further declines occur after markets have experienced a rebound in the previous session. The S&P/ASX 200 erased gains at the start of the session and remained almost flat, as the consumer sector and gold producers traded lower. Hong Kong markets closed on Monday for holidays.
The cautious mood in the market is due to the fact that investors are watching for trade tensions between the United States and its trading partners, especially China. U.S. tariffs on $34 billion of Chinese products are expected to come into effect July 6 and China is expected to retaliate with its own tariffs on American products.
Despite this uncertainty, Wall Street closed slightly higher on Friday, June 29. The United States has been supported by the energy sector’s momentum, also after the banks passed the Federal Reserve stress tests and gave good dividends. In addition, Nike has reported results with good sales within the United States and this is making the discretionary consumer sector one of the best.
The euro fell in the early hours of Monday, after the German Chancellor suffered another blow when her Home Secretary resigned because of the conflict over immigration policy.
On the energy front, President Donald Trump unexpectedly announced that there was a new deal with Saudi Arabia. Trump said they had agreed to increase production by up to two million barrels a day. Oil prices fell by more than 1 percent in Monday’s Asian session as supplies from Saudi Arabia, the largest exporter, rose and signs of an economic slowdown in Asia eroded demand prospects.
On Monday’s Asian trading day, gold fell on the Asian market, as the Dollar rose sharply from Friday’s gains in five sessions for the first time.
European markets are expected to open lower on Monday.
Banking stocks are also on the rise
The secretary of state denies that Trump said he wants to leave the World Trade Organization.
These comments have caused a rally in the stock markets on Friday, June 29th. The Dow is preparing to go up more than 100 points, but still has a weekly loss.
U.S. equity index futures pointed to an upward opening, with market sentiment disturbed by tensions in world trade.
Banking stocks are also on the rise, after announcing buybacks and dividend increases following the Federal Reserve’s annual stress test.
Strong rises in stock markets following the European Council’s pact on immigration. European stock markets are rising sharply on Friday 29 June, the last session of the week, following the agreement on immigration reached by political leaders at the European Council.
China is spending billions to develop an army of robots to fuel its economy
In 2014, Chinese President Xi Jinping called for a ‘robotic revolution’ in manufacturing. Now it is on the move to boost productivity.
After decades of growth, rising wages are consuming profits and pushing manufacturing into Southeast Asia. The monthly minimum wage in Shanghai, for example, the highest in China, is 2,420 yuan (US$366), two and a half times higher than a decade ago.
Not being able to compete with cheap labour means raising overall manufacturing capabilities, said Jing Bing Zhang, director of market intelligence research.
According to the International Federation of Robotics, China added 87,000 industrial robots in 2016. It is slightly below Europe and the United States combined, but China’s growth is forecast to exceed 20 percent annually by 2020.
Data from the euro area. Preliminary CPI rises a bit higher
The preliminary consumer price index for the euro area in June rose by 2%.
It’s up from the previous 1.9% and it’s just what expected.
The underlying is just the other way around. From a growth of 1.1% it drops to 1%.
The upward thrust of fuels continues to be very noticeable.
Agreement in Europe on the problem of migration
As soon as the news broke, the euro began to rise sharply against all the crosses.
It is expected that this agreement will reduce the strong political tensions that were originating, mainly in Germany, with the danger of breaking up the governing coalition.
Exchanges also benefit from this appreciation.
Why when the recession comes, the rate curves are reversed?
Those who manage 99% of the fixed income market are the strong hands.
When they see serious danger in the economy, they start to discount that at some point the central bank will lower rates. Or, at the very least, it will take steps to try to support the economy.
In such a situation it is no longer in their best interest to buy bonds in the short term, which may not benefit from this decline. It pays more to buy long-term bonds because they know for sure that sooner or later there will be a rate cut and this will give more value to your bonds.
Thus, long bonds fall in yield because there are many purchases, and short bonds rise because they have fewer purchases.
The alarm would come if the spread were to approach the 60 basis point range. It is currently at just over 30 basis points.
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