After the brilliant recovery of the global stock markets in January with a positive performance of over 7 percent, the positive trend continued in February, albeit at a slower pace. On average, about 3 per cent was earned on the stock markets. The continued defensive stance of bond investors remains interesting. The yield on 10-year German government bonds has reached a level of only 0.04 percent following the ECB's announced support measures (source: Thomson Reuters Datastream, 21.03.2019).
Flat yield curve in the USA
The steepness of the yield curve, which is the difference in yields between 2-year and 10-year bonds, has also received a great deal of attention and has moved very little in the USA, for example. The yield curve remains rather flat, indicating a rather moderate economic development with low inflation. Fears of central bank interest rate hikes have completely disappeared. In the USA, market participants would not even be surprised to see interest rates cut in the second half of the year.
Equity allocation in YOU INVEST funds reduced slightly
Against this background, we have decided to reduce the equity quota in the YOU INVEST funds to about 70 percent (from 80 percent) of the maximum possible quotas. In the bond segment, the proportion of European corporate bonds in the lower high-yield rating segment was reduced. We are therefore still overweight in equities and especially in emerging market bonds, but not as strongly as in recent months.
Forecasts are no reliable indicator for future developments.
Early last week, hopes for a timely solution to the trade conflict between the US and China soared: “substantial progress” in the recent negotiations caused US President Donald Trump to postpone a deadline for additional tariffs on imports from China. As is his wont, Trump announced this on Twitter. Without any agreement, punitive duties on Chinese goods could have been raised or new tariffs introduced from 1 March. However, this case seems to be averted for the time being.
US economic growth fell in Q4
Current economic data shows a mixed picture for the impact of the trade dispute on the US economy so far. While the GDP grew by 2.9 percent in 2018 overall – the strongest growth in three years – the growth lost momentum in Q4 (Source: U.S. Department of Commerce, 28 February 2019). The Department of Commerce in Washington announced on Thursday that annualised US economic growth fell to 2.6 per cent between October and December, from 4.1 per cent in Q2. The OECD’s calculation method, which compares a quarterly result with that of the previous year, yielded 3.0 per cent growth in Q3, compared with 2.9 per cent in Q2.
Chinese economy extremely weak
However, according to official data, Chinese economic growth has suffered an even more serious setback, falling to 6.4 per cent in Q4 – this is the lowest rate in 28 years, never mind the 2008 financial crisis (Source: National Bureau of Statistics of China, 21 January 2019).
The extent to which the world's two largest economies would suffer as a result of a more intense trade war is one of the subjects of a recent study by Munich-based Ifo Institute (Source: „Trump’s trade attack on China – who laughs last?“, EconPol Policy Brief 13, February 2019). In the study, conducted as part of the EconPol Europe research network, Gabriel Felbermayr and Marina Steininger investigated the impact, the two superpowers’ threats of a 25 per cent surcharge on all goods would have: “China would lose much more than the USA in absolute and relative terms,” the Ifo researchers conclude. US economic output would fall by 9.5 billion euros, China’s by as much as 30.4 billion euros.
Even without new tariffs the US Congressional Budget Office (CBO) foresees a definite negative impact: on average, the GDP will be 0.1 per cent lower over the next ten years if tariffs remain at the current level, according to a CBO report published at the end of January (Source: „The Budget and Economic Outlook: 2019 to 2029“, 28 January 2019).
Customs dispute causing an emotional roller coaster ride
Just how fervently market players are hoping for a resolution of the dispute was evidenced by the reactions of the stock markets to Trump’s confident news last Monday. The Shanghai Composite, the leading index for the Chinese mainland stock exchange, jumped a whopping 5.60 per cent after Trumps tweet. Wall Street, reacting likewise to the relaxation between the US and China, closed with some satisfying consolidation.
However, hopes did not last even a week: On the day the first estimate of US GDP growth in Q4 2018 was published, Trump left Hanoi early and without reaching the much anticipated agreement in the disarmament negotiations with North Korean ruler Kim Jong-un. Still in Vietnam, The US President put a damper on hopes of an end to new punitive tariffs by announcing that he would also break off the negotiations with China.
Prognoses are no reliable indicator for future performance.
Last week, British Prime Minister Theresa May called on members of London’s parliament to “hold their nerves”: As of 29 March, Great Britain will no longer be part of the European Union. However, as the UK Parliament has now once more rejected May’s Brexit deal in a vote on Thursday, it is still not clear what relations between the former Empire and the EU will look like in the future.
Economic data recently provided a glimpse of the Brexit consequences. Gross domestic product (GDP) rose by only 0.2 per cent between October and December 2018 compared to the previous quarter (Source: Nationales Statistikamt (ONS), 11.Februar 2019). In December, production by British companies declined for the fifth consecutive month, with carmakers and the steel industry in particular cutting back production. As the Brexit approaches, experts see the uncertainty businesses are feeling increasing reflected in the investment mood. Even in the event of a compromise there would be a noticeable slowdown over the course of the year.
The magnitude of businesses’ uncertainty is already very much evident: instead of manufacturing the next generation of its SUV model X-Trail for the European market in England as planned, Japanese car manufacturer Nissan will manufacture the model in Japan. Ford is also making arrangements for moving its production from the UK. Aviation and Arms Corporation Airbus is threatening to shut down factories in the UK in the event of an unregulated EU withdrawal.
“Deal”, or “No Deal”?
Without a proper Brexit treaty the British would suddenly be subject to World Trade Organisation (WTO) rules only. A recent study by the Salzburg Centre of European Studies shows (Source: „Brexit: Folgen für Österreich und die EU“,6. Februar 2019), that a Hard Brexit would not only harm the UK as a business location, but would also result in an estimated immediate drop in the UK industry’s production of up to 7.6 percentage points compared with the previous year. As a result, production in the Austrian industrial sector could decrease by up to 4.5 percentage points, while Germany could suffer a 4.2 percentage point decline. The estimates for France and Italy are even worse.
A study by the Halle Institute for Economic Research (IWH) and the Martin Luther University of Halle-Wittenberg concludes that 612,000 jobs globally would be at risk after an unregulated Brexit: “In Austria, 2,000 jobs could be affected directly, and 4,000 jobs indirectly,” says study author Oliver Holtemöller. The study assumes that Britain’s imports would decline by 25 per cent as a result of an unregulated EU withdrawal.
With the – for now – once again rejected Brexit agreement, little would change economically until the end of 2020. The British would have to continue to comply with EU law, but no longer participate, explains Stefan Griller, Professor of European Law at the University of Salzburg. According to the university’s projections, this scenario would have a much smaller impact on industrial production in the UK and EU countries.
Conservatives, however, are particularly opposed to the border regulation between Northern Ireland and Ireland laid out in May’s deal. The EU does not want border controls between Northern Ireland and Ireland. The British, on the other hand, do not want border controls between the British mainland and Northern Ireland. A supplementary agreement to the Brexit treaty could at least partially mitigate this issue. But in order to negotiate such an agreement, Theresa May not only needs her members to “keep calm”, she also requires more time and the members to support her work. However, this the UK MPs clearly refused in the vote on Thursday. Furthermore, the PM also lost support among her own party again, which not only weakens her negotiating position in Brussels, but ultimately also makes a regulated and thus smoother Brexit less likely than ever.
Legal note: Prognoses are no reliable indicator for future performance.
Heads of state, high-ranking economic experts and business leaders came together at the World Economic Forum’s annual meeting in Davos, Switzerland, to exchange views and opinions. Amid concerns about the Chinese-US trade war, Brexit and a looming economic downturn, this year’s WEF meeting saw numerous calls for increased international cooperation.
The International Monetary Fund (IMF) opened the meeting prominently, warning in its “World Economic Outlook” about an impending downturn of the world economy. Against the background of the trade dispute and other uncertainties, the outlook for the global economy has dimmed somewhat, the current IMF forecast finds. The global GDP growth estimate has been reduced to 3.5 per cent this year and 3.6 percent for 2020, where the forecasts still lay at 3.7 per cent respectively in October.
“A global recession is certainly not yet imminent,” said IMF Managing Director Christine Lagarde at the report’s presentation in Davos. “But the risk of a stronger decline in global growth has certainly increased.”
“The slowdown seems to be coming sooner than expected," IMF Deputy Managing Director David Lipton told Reuters TV. While the economy is still doing well, there are numerous risks, ranging from trade disputes to poorer financing conditions, Lipton said.
Merkel bangs the drum for multilateral cooperation
Against this background, several heads of state called for increased international cooperation and a renunciation of protectionism in Davos. Germany's Chancellor Angela Merkel called for further free trade agreements, explaining that she is seeking allies for multilateralism: “Anything else would lead to misery,” Merkel emphasised, adding that she would like to see a reform of the major international organisations to reflect the massively increased influence of economies such as China or India.
Japan, which currently heads the group of the 20 largest industrialised and emerging countries (G-20), also spoke out in favour of strengthening the multilateral order. “Japan is determined to maintain and develop free, open and rule-based international order,” Prime Minister Shinzo Abe declared at the WEF.
Without naming the US, Abe called for confidence in the international trade regime to be restored. The World Trade Organization (WTO) has an important role to play as the guardian of free trade. However, US President Donald Trump, seeing his country badly treated by the WTO, went as far as to threaten the US’s resignation.
China’s Vice President Wang Qishan sees international trade regime seriously endangered, criticising that many countries were looking inwards more and more, putting a damper on international trade and investment, while unilateralism, protectionism and populism are increasing. Wang described economic globalisation as an “inevitable trend”. Wang emphasised the enormous potential utilizable, if the individual countries’ competitive advantages were exploited and economic ties strengthened. In response to the challenges facing the world, he declared that countries must take this course of action jointly and actively.
Wang made no mention of the ongoing trade war with the USA in his speech. A scheduled meeting in Davos to discuss the trade conflict with US President Trump was not held due to Trump’s cancellation at short notice. However, Trump’s was not the only prominent cancellation: France’s President Emmanuel Macron and UK Prime Minister Theresa May also did not attend the WEF this year due to domestic political problems. Austria was represented by Federal Chancellor Sebastian Kurz and Foreign Minister Karin Kneissl.
Forecasts are not a reliable indicator for future developments.
As hopes for an end to the trade war between the US and China increase, the stock markets reflected the sentiment with gains at the outset of the new year. After recent talks between representatives of the two countries in Beijing, the leading US index, Dow Jones, gained almost 3 per cent by Friday. Major European stock indices such as the DAX or the Euro-Stoxx-50 also gained between 2 and 3 per cent. Outperforming them, Austrian stock index ATX even gained over 6 per cent since the start of the year. However, while the stock markets saw the most gains during the eagerly awaited talks, the unresolved differences after the end of the negotiations halted the positive development again.
Negotiators from China and the USA met in Beijing for talks in the second week of January. The negotiations to end the trade dispute were originally scheduled for two days, but were then surprisingly extended, to close scrutiny by the markets. These were the first direct talks since US President Donald Trump and China’s Head of State Xi Jinping had agreed a 90-day break in the customs dispute at the beginning of December after a series of escalating mutual punitive tariffs in the billions.
Progress after negotiations, but many differences still unresolved
Both countries reported constructive talks. China’s Ministry of Commerce stated that the talks fostered mutual understanding and yielded a basis for addressing the concerns of both sides. Yet despite the initial progress, much work still needs to be done to end the trade war.
According to the US Department of Commerce, China has kept its promises to buy “significant quantities” of US products and to allow more service deals. According to the Wall Street Journal, progress has been made regarding additional imports and the opening of the Chinese market to US capital. However, differences remain over issues such as protection of intellectual property and subsidies for Chinese companies.
During the talks, the Chinese government agreed to open its market to further genetically modified grains, which was considered a sign of progress as the US had been demanding this for years. According to insiders cited by the Wall Street Journal, the trade talks also paved the way for possible further higher-level negotiations. A possible next step would be a meeting between China’s Vice Premier Liu He and US Trade Representative Robert Lighthizer. US President Trump could also meet China’s Vice President Wang Qishan for talks at the World Economic Forum in Davos.
However, time is of the essence. In December, US President Trump had promised to provisionally suspend the announced further increase in US punitive tariffs on Chinese imports to the tune of USD 200bn until 1 March. If no agreement is reached by then, the dispute could escalate again, which could impact not only the economy in China and the USA, but also some European countries hard.
Meanwhile, Trump’s policy continues to make headlines in other areas. The trade dispute between the US and the EU recently saw some progress after high-ranking representatives of both sides came together to discuss an agreement. However, the conflict over possible US punitive tariffs on European cars is not yet resolved, and neither is the dispute over Trump’s planned border wall to Mexico, which is preventing the adoption of a budget law by Congress. As a result, most of the federal authorities have been shut down since 22 December.
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