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Geopolitical concerns ease
International Perspective - April 20, 2018
By Anne D. Picker, Chief Economist


Global Markets

The focus of investors began to shift away from geopolitical concerns and the potential trade war between the U.S. and China, and toward corporate earnings. Most equity indexes advanced as geopolitical tensions eased and first quarter earnings — mostly favorable — began to be released. Equities were mixed in Asia but advanced in Europe and the U.S. on the week.


Bank of Canada

As pretty much expected, the Bank of Canada maintained its target for its overnight rate at 1.25 percent for the second consecutive meeting. But the Bank signaled that more rate increases are likely going forward thanks to a pickup in inflation and expectations that the economy will rebound in the second quarter. The Bank Rate is correspondingly 1.5 percent and the deposit rate is 1.0 percent. The BoC continues to be data driven.


While the BoC has raised rates three times since last summer, the markets have started to back away from expectations for further tightening after the country recorded a sharper than expected slowdown during the fourth quarter of 2017 and following a spate of mixed economic readings. But the Bank struck a decidedly more bullish tone saying that the first quarter sluggishness is expected to be temporary. The transitory impact of higher gasoline prices and recent minimum wage increases might cause 2018 inflation to be modestly higher than the Bank expected in its January Monetary Policy Report (MPR), but it is expected return to the 2 percent target for the rest of the projection horizon.


Canada’s GDP growth in the first quarter was weaker than expected, but should rebound in the second quarter, resulting in 2 percent average growth in the first half of 2018. The Bank anticipates that Canadian exports will strengthen as foreign demand increases, but not sufficiently to recover the ground lost during recent quarters. Export growth is being increasingly limited by capacity constraints in some sectors.


Analysts noted that the Bank of Canada is limited by the uncertainties over the ongoing renegotiation of the North American Free Trade Agreement with the U.S. and Mexico.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 April 13 April 20 Week 2018
Australia All Ordinaries 6167.3 5924.7 5964.38 0.7% -3.3%
Japan Nikkei 225 22764.9 21778.7 22162.24 1.8% -2.6%
Topix 1817.56 1729.36 1751.13 1.3% -3.7%
Hong Kong Hang Seng 29919.2 30808.4 30418.33 -1.3% 1.7%
S. Korea Kospi 2467.5 2455.1 2476.33 0.9% 0.4%
Singapore STI 3402.9 3501.3 3573.38 2.1% 5.0%
China Shanghai Composite 3307.2 3159.1 3071.54 -2.8% -7.1%
India Sensex 30 34056.8 34192.65 34415.58 0.7% 1.1%
Indonesia Jakarta Composite 6355.7 6270.3 6337.70 1.1% -0.3%
Malaysia KLCI 1796.8 1868.5 1887.75 1.0% 5.1%
Philippines PSEi 8558.4 7900.0 7726.72 -2.2% -9.7%
Taiwan Taiex 10642.9 10965.4 10779.38 -1.7% 1.3%
Thailand SET 1753.7 1767.2 1801.28 1.9% 2.7%
UK FTSE 100 7687.8 7264.6 7368.17 1.4% -4.2%
France CAC 5312.6 5315.0 5412.83 1.8% 1.9%
Germany XETRA DAX 12917.6 12442.4 12540.50 0.8% -2.9%
Italy FTSE MIB 21853.3 23330.3 23829.34 2.1% 9.0%
Spain IBEX 35 10043.9 9767.3 9884.20 1.2% -1.6%
Sweden OMX Stockholm 30 1576.9 1526.7 1572.58 3.0% -0.3%
Switzerland SMI 9381.9 8776.2 8807.80 0.4% -6.1%
North America
United States Dow 24719.2 24360.14 24462.94 0.4% -1.0%
NASDAQ 6903.4 7106.7 7146.13 0.6% 3.5%
S&P 500 2673.6 2656.3 2670.14 0.5% -0.1%
Canada S&P/TSX Comp. 16209.1 15274.0 15484.32 1.4% -4.5%
Mexico Bolsa 49354.4 48768.3 48431.58 -0.7% -1.9%


Europe and the UK

Equities advanced last week as geopolitical concerns eased and investors directed their attention to the flow of earnings reports. The FTSE was up 1.4 percent, the CAC gained 1.8 percent, the DAX added 0.8 percent and the SMI climbed 0.4 percent.


Anticipation of a Bank of England interest rate increase at its May 10 monetary policy committee meeting initially sent sterling higher. But BoE Governor Mark Carney on Thursday dampened widespread expectations for a May interest rate increase, pointing out there were also “other meetings” this year. Sterling dropped to its lowest level since April 9 on the back of the comments, in which Carney highlighted "mixed" economic data. Carney said that he did not want to get too focused on the precise timing — it is more about the general path. He added that a rate increase this year was “likely”. He said Britain should prepare for “a few interest rate increases over the next few years”.


A slew of UK data this week were mixed. The unemployment rate fell to a 42-year low, but inflation dropped more sharply in the first quarter than the BoE expected. Retail sales data for March also disappointed thanks to poor weather. Carney also said uncertainty around Brexit had prevented what would otherwise have been a “surge in investment”. Ultimately, the outcome of Britain’s divorce talks with the European Union would be the biggest factor in economic decisions in the coming years, Carney said.


Asia Pacific

Equities were mixed for the week.  Both the Shanghai Composite and Hang Seng retreated after the People’s Bank of China lowered the reserve requirement ratio for most commercial banks in a bid to free up funds for lending and improve liquidity. The Shanghai Composite lost 2.8 percent while the Hang Seng was 1.3 percent lower. The Nikkei climbed 1.8 percent on the week. Asian stocks advanced as the week wore on as trade tensions faded and commodities rallied thanks to optimism about global economic growth. Japanese shares hit a seven-week high after Prime Minister Shinzo Abe and U.S. President Donald Trump said they had agreed to intensify consultations for expanding investment and trade. Investors were relieved that the United States did not make new trade demands at this week’s summit.


The People’s Bank of China (PBoC) said on its website it would cut the reserve requirement ratio (RRR) — currently at 17 percent for large institutions and 15 percent for smaller banks — by 100 basis points. The cut is effective on April 25 and applies to most banks, with the exception of policy lenders such as China Development Bank. The PBoC said it would continue to implement a stable and neutral monetary policy while maintaining reasonable and stable liquidity in the financial system. China’s central bank also said it still needs to maintain relatively high reserve requirement ratios for banks to fend off financial risks.


The PBOC requires financial institutions to mainly use the newly-released funds from the reserve cut to provide loans to small and micro companies and lower funding costs for them, which it said would be included as a requirement in its macro-prudential assessment for banks. Banks included in the cut are large commercial banks, joint-stock commercial banks, city commercial banks, non-county-level rural commercial banks and foreign banks. The PBoC also said it would guide reasonable and steady growth in credit and social financing.


China's gross domestic product rose 6.8 percent in the first quarter of 2018 when compared with a year ago and in line with expectations. China's industrial production and fixed asset investment rose in March, but missed forecasts, while retail sales growth exceeded expectations. Industrial output advanced an annual 6.0 percent in March and retail sales jumped 10.1 percent from last year, while fixed asset investment climbed an annual 7.5 percent.



The Swiss franc briefly edged above SFr1.20 to the euro late on Thursday and again early on Friday — the first time this level has been breached since the Swiss National Bank abandoned efforts to keep the franc weaker than that point early in 2015. SNB chief Thomas Jordan said Thursday that he sees no need for a tweak to policy now the franc has broken this symbolic level. “We remain very prudent,” he said in an interview, in a typical refrain. The Swiss currency remains a safe haven and is highly valued. A longer spell at weaker levels would be needed to convince the SNB that threats to financial stability had passed. In addition, “currency moves need to be larger than in the past in order to generate inflation shocks meaningful enough to require immediate monetary policy response; arguably, we are not there yet”, the bank said.


The pound sterling declined Thursday after BoE governor Mark Carney, who was once likened to an “unreliable boyfriend” for his confusing messages over the likely path of UK interest rates, sent sterling sliding by referring to a possible economic blow from Brexit and suggesting an interest rate increase in May is not the foregone conclusion that many market watchers have been assuming. The currency fell against the U.S. dollar Thursday evening after Mr Carney said in an interview with the BBC that although several interest rate rises are "likely" over the next few years, softer economic data are giving the Bank of England pause for thought.


The U.S. dollar advanced against all of its major counterparts including the euro, pound sterling, Swiss franc, yen and the Canadian and Australian dollars.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 April 13 April 20 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.777 0.767 -1.3% -1.6%
New Zealand NZ$ 0.709 0.736 0.720 -2.1% 1.6%
Canada C$ 0.796 0.793 0.784 -1.2% -1.4%
Eurozone euro (€) 1.194 1.234 1.228 -0.5% 2.8%
UK pound sterling (£) 1.344 1.425 1.402 -1.6% 4.3%
Currency per U.S. $
China yuan 6.534 6.275 6.296 -0.3% 3.8%
Hong Kong HK$* 7.816 7.850 7.844 0.1% -0.4%
India rupee 64.081 65.215 66.108 -1.4% -3.1%
Japan yen 112.850 107.360 107.580 -0.2% 4.9%
Malaysia ringgit 4.067 3.880 3.898 -0.5% 4.3%
Singapore Singapore $ 1.338 1.312 1.316 -0.3% 1.7%
South Korea won 1070.630 1069.720 1067.150 0.2% 0.3%
Taiwan Taiwan $ 29.775 29.307 29.408 -0.3% 1.2%
Thailand baht 32.696 31.146 31.346 -0.6% 4.3%
Switzerland Swiss franc 0.979 0.9623 0.975 -1.3% 0.3%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


April ZEW survey found analysts notably more cautious about the state of the German economy. Not only has the assessment of the current situation been revised less bullish but expectations have also been downgraded significantly. The current conditions index fell a relatively modest 2.8 points to 87.9. However, this was its third decline in as many months and its weakest reading since last October. At the same time, expectations were cut 13.3 points to minus 8.2. This made for a cumulative slide of nearly 29 points since January and the worst result since November 2012.


United Kingdom

The March claimant count unemployment climbed by 11,600 after a steeper revised 15,100 jump in February. On this measure, the jobless rate was unchanged at 2.4 percent, a near record low. ILO unemployment for the three months to February declined 16,000 with the unemployment rate at 4.2 percent and equaling its lowest reading since the first quarter of 1975. Moreover, the single month rate for February touched a new record low of just 4.0 percent. At the same time, employment expanded a further 55,000, well short of the 168,000 surge in November to January but still enough to lift the employment rate to 75.4 percent, a new all-time high. Average annual earnings growth in the three months to February was 2.8 percent, only matching the previous rate. Excluding bonuses, growth was also 2.8 percent — up from 2.6 percent last time and potentially indicative of a pick-up in the underlying pace.


March consumer prices edged up a monthly 0.1 percent and were up 2.5 percent from a year ago after increasing 2.7 percent last time. The decline in the yearly headline rate was largely due to clothing and footwear which saw a smaller 0.7 percent monthly increase in prices after a 2.0 percent jump in March 2017. Alcohol and tobacco also subtracted as the increase in duty a year ago was not matched last month. In addition, there were smaller negative contributions from miscellaneous goods and services and furniture and household equipment. A partial offset was provided by a monthly rise in the price of recreational goods and cultural services but even this could prove short-lived as an early Easter probably provided for some upside bias. Consequently, core prices were almost as soft as the headline, recording a 0.2 percent monthly gain which lowered their annual rate by a tick to 2.3 percent, a 12-month low.


March retail sales volumes dropped a weather-impacted 1.2 percent on the month, their worst performance since December 2016. Annual growth slowed from 1.5 percent to just 1.1 percent, its weakest pace since last October. Excluding auto fuel the picture was not as soft. Purchases were still down a monthly 0.5 percent following a smaller revised 0.4 percent gain in February which reduced yearly growth to 1.1 percent, a five month low. Unseasonably freezing weather and heavy snowfall clearly had some impact, as testified in a 7.4 percent slump in petrol sales. This should give way to a rebound in April. However, non-store retailing was only flat which also suggests little strength in underlying demand. Elsewhere, non-specialized stores (0.8 percent) posted the only increase as textiles, clothing and footwear dropped 0.7 percent, household goods 0.2 percent and the other stores category 1.8 percent.




Japan’s March merchandise trade surplus expanded to ¥797.3 billion. Exports increased 2.1 percent on the year and were up for the 16th straight month. Imports however, declined 0.6 percent from a year ago for their first drop in 15 months. Exports to Asia were up 4.5 percent from a year ago while imports dropped 6.0 percent. Exports to Australia jumped 10.5 percent while imports added 4.8 percent. Exports to the U.S. crept up only 0.2 percent while imports were not much better, rising 0.6 percent. Trade with the EU indicated that exports to the EU edged up 0.3 percent while imports advanced 11.7 percent.



March seasonally adjusted employment increased by 5,000, substantially lower than the expected 20,000. The seasonally adjusted unemployment rate remained at 5.5 percent after the February number was revised down and the seasonally adjusted labour force participation rate decreased slightly to 65.5 percent from 65.7. The trend participation rate increased to a record high of 65.7 percent in March 2018. The labour force participation rate is now the highest it has been since the series began in 1978, indicating that the population is participating in the labour market at a record high level. On a trend basis, employment increased by around 14,000 persons. Part-time employment increased by 13,000 persons and full-time employment by 1,000 persons, reflecting a slowing in full-time employment growth.



First quarter gross domestic product was up 6.8 percent from a year ago. This matched growth in the third and fourth quarters of 2017. GDP expanded faster than the government's target of around 6.5 percent for 2018. Consumer spending was a main contributor to growth. On the quarter, GDP was up 1.4 percent down from 1.6 percent in the fourth quarter of 2017. On an annualized basis, GDP was up about 5.7 percent. Strong exports helped offset weak infrastructure investment and slumping property sales due to stricter financial regulations. However, the outlook for exports remains cloudy as trade frictions with the U.S. rise. The GDP data continued the recent pattern of remarkable stability in Chinese economic growth data, with the annual change in GDP reported at between 6.7 percent and 7.0 percent in every quarter since the start of 2015.




February manufacturing sales increased a monthly 1.9 percent following two months of declines. The growth was spurred by higher transportation equipment sales. Sales were up in 14 of 21 industries, representing 72.2 percent of the total Canadian manufacturing sector. In constant Canadian dollars, sales rose 2.0 percent, slightly more than the gain in current dollar sales, reflecting a slight decrease in prices of products sold by Canadian manufacturers in February. On the year, sales were up 4.6 percent. Unfilled orders rose 3.0 percent for a second consecutive monthly gain. The growth in unfilled orders was largely driven by the aerospace product and parts, fabricated metal product and computer and electronic product manufacturing industries. New orders were up a monthly 5.0 percent, the third consecutive monthly increase. The transportation equipment and fabricated metal product industries were largely responsible for the gain in new orders nationally.


Bottom line

Most equity indexes advanced in choppy trading during the week as investors shifted their focus to earnings from geopolitical worries. Economic data were mixed. Japan was unable to secure a U.S. tariff exemption after talks with U.S. President Trump even though there was progress in the talks elsewhere.


Two central banks meet next week — the European Central Bank (Thursday) and the Bank of Japan (Friday). Neither bank is expected to alter their respective policies. There are several important releases out of Europe including, UK and French GDP and the manufacturing PMIs for the overall Eurozone, Germany and France. In the Asia Pacific, Japan posts industrial production and employment while Australia reports first quarter consumer price index data.


Looking Ahead: April 23 through April 27, 2018

Central Bank activities
April 26 Eurozone European Central Bank Monetary Policy Announcement
April 27 Japan Bank of Japan Monetary Policy Announcement
The following indicators will be released this week...
April 23 Eurozone Manufacturing, Services & Composite PMI (April flash)
Germany Manufacturing, Services & Composite PMI (April flash)
France Manufacturing, Services & Composite PMI (April flash)
April 24 Germany Ifo Survey (April)
April 27 Eurozone EC Economic Sentiment (April)
Germany Unemployment (April)
France Gross Domestic Product (Q1. 2018 flash)
Consumption of Manufactured Goods (March)
Producer Price Index (March)
Asia Pacific
April 23 Japan Manufacturing PMI (April flash)
April 27 Japan Unemployment (March)
Retail Sales (March)
Consumer Price Index — Tokyo (April)


Anne D Picker is the author of International Economic Indicators and Central Banks.


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