What worries investors
The two largest worries for investors are rising interest rates and US-China trade war. What will higher rates do to economic expansion? How will a trade war damage China’s already-weak growth and erode corporate profits? The recent US GDP acceleration was due to Trump’s deficit spending: this suggests a natural business cycle in a late stage. Investors are now drilling deep into economic reports and company reports to uncover evidence of further weakness. Risk appetite rallied back in Asia today, with equities higher across the board and even the much-maligned Shanghai Composite rising 1.35%. European futures are pointing to a higher open.
The trade war is moving to the World Trade Organization. At the WTO summit in Geneva, several countries continue to dispute the US tariffs on steel and aluminium. However, given the tone of the US administration, a WTO negative ruling would not be respected. The international community recognizes that Trump tariffs indicate a shift in American thinking. Old bilateral relationships are on the verge of collapse. Even the most active diplomacy is unlikely to regain past geopolitical status.
Japan hangs loose, yen strengthens
The Japanese economy is facing a difficult slowdown. So the Bank of Japan revised its estimates downward, starting with inflation: now not expected to reach the long-maintained target of 2% by year-end. Economic growth is now forecast at 1.40% (prior: 1.50%) and to weaken further when the country’s consumption tax rises from 8% to 10% by October 2019. Therefore, interest rates remained unchanged -0.10%. The BoJ will continue supporting the economy with purchases of Japanese government bonds at USD 710 billion per year. The Japanese yen is expected to strengthen today, approaching the 112.70 range.
