As the European election is underway and Brexit appears further than ever from being resolved, political uncertainty has once again reared its ugly head. Financial markets are feeling the pinch, but the underlying economy is holding up.
1. It’s not the economy that has contracted the most this week, nor the S&P 500: it is inflation expectations that have plummeted.
Less than six months ago, as the Federal Reserve abandoned its hawkish monetary policy in favour of a much more accommodative stance, financial markets were counting on rising inflation. At the same time, Chinese authorities were starting to enact a raft of fiscal stimulus measures which were due to further contribute to a reflationary environment. This week, in spite of rising oil prices, we have witnessed a change of minds, partly triggered by the relapse in trade hostilities between China and the U.S., which is putting the brakes on international trade. Adding fuel to the fire, what used to be a dispute about import tariffs has escalated into a broader debate about intellectual property and cybersecurity that strikes to the heart of key communication networks such as 5G. For this reason, even though we still count on a trade agreement further down the line, international commerce has woken up to the threat of new non-tariff barriers that may prove to be rather harder to tame. Lastly, while the European Union has so far managed to avoid the imposition of new tariffs on its exports to the U.S., the risk hasn’t disappeared. Investors have concluded that as long as these uncertainties linger, inflation will remain subdued.
2. With European manufacturing still depressed, the ECB has joined the Fed in thinking aloud about how to revive inflation.
Over in Europe, on the other hand, it is political uncertainty that’s once more on investors’ minds. With the European elections in full swing, early next week we will know if there are going to be wider repercussions in individual member states. The UK and Italy are in the spotlight, much like last year, because in both countries the key political issues, Brexit and the budget deficit, have been merely postponed, not solved. This year, however, one way or another these issues will need to be addressed, potentially adding to market jitters.
3. The latest data out of trade-oriented Singapore reveal how emerging Asia is grappling with China’s moderate slowdown.
The city state of Singapore is of course by itself far too small to determine the economic fortune of South East Asia. However, as emerging Asia’s financial hub, it reflects developments in its larger neighbours, thus serving as a useful gauge of what is going on in the region. On page 5 we analyse the state of Singapore’s economy and attempt to dissect what the latest data mean for the region at large, in particular in view of current concerns about a slowdown in global trade.
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