The world economy falters

China turbulence knocks Asian shares to nine-month low as trade war fears grow

Reuters,

3 July, 2018

TOKYO (Reuters) - Chinese stocks went into a tail spin on Tuesday as turbulence gripped equity markets in Asia, which sank to nine-month lows as investors feared the Sino-U.S. trade row could derail a rare period of synchronized global growth.

Speculation was rife the central bank in China was intervening in the currency market to staunch losses and prevent a potentially destabilising sell-off in the yuan.

Chinese financial markets have been jittery ahead of a July 6 deadline, when the U.S. is set to slap tariffs on $34 billion worth of Chinese goods that Beijing has vowed to match with tariffs on U.S. products.

The trade row between the United States and major economies has rattled financial markets in the past several weeks, with no sign U.S. President Donald Trump is about to back down from his ‘America First’ protectionism policies that many fear will harm the global economy.

The Asia Pacific MSCI index ex-Japan .MIAPJ0000PUS tumbled 1.4 percent to its lowest since September 29, while Japan's Nikkei average .N225 was down 0.86 percent to a near three-month low.

Chinese stocks were hit the most, with Hong Kong's Hang Seng index .HSI diving 3.3 percent to its lowest level in ten months, the Shanghai Composite Index .SSEC shedding 1.9 percent to hit a fresh 28 month low.

“It’s not clear yet if the trade row will derail the global economy as a whole but it’s already clear that it will harm Chinese companies,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

“That is why we’ve seen Chinese yuan and Chinese stocks have suffered selloffs. I think this will continue at least until the July 6 deadline.”

The Chinese yuan CNY=CFXS, on a downward spiral since mid-June, slipped past 6.7 per dollar in early trading on Tuesday for the first time since Aug. 9, 2017 before paring losses on talk of intervention by the Chinese central bank.

The central bank put the midpoint CNY=PBOC roughly in line with market expectations at 6.6497 yuan per dollar, its weakest level in about 10 months, setting the stage for the day's drop.

The yuan was last traded at 6.6998 per dollar.

“I detected increasing alarm over trade tensions and a lot of nervousness about a full blown trade war, which comes at a bad time for China where the economy is undergoing a downdraft at the same time the United States is seeing a sharp upturn,” said Aninda Mitra, Singapore-based senior sovereign analyst at BNY Mellon Investment Management, who visited Shanghai last week.

Trump told the World Trade Organization on Monday that “we’ll be doing something” if the United States is not treated properly, just hours after the European Union said that U.S. automotive tariffs would hurt its own vehicle industry and prompt retaliation.

Officials in China, the epicentre of the international trade row, have warned the United States that the ti-for-tat tariffs on each others goods will ultimately prove detrimental for American businesses and jobs. L4N1TN1RH

Elsewhere in currency markets, the euro EUR=, which had been pressured by political uncertainty in Germany, pared losses after Chancellor Angela Merkel's conservatives settled a row over migration that threatened to topple her governing coalition after interior minister Horst Seehofer dropped his threat to quit.

The euro last traded at $1.1632 EUR=, after shedding 0.45 percent overnight.

The dollar last stood at 110.82 yen, giving up gains following sharp falls in Chinese shares.

Investors are also keeping an eye on the Reserve Bank of Australia’s (RBA) policy meeting later on Tuesday for any mention of the U.S.-China trade tensions. The central bank is considered certain to maintain rates at 1.5 percent, where they have been since mid-2016.

China is Australia’s major export market and its currency, the Australia dollar, is considered a liquid proxy for China-related risk.

The Aussie dollar was not far off a 1-1/2-year low of $0.7311 AUD=D4 plumbed on Monday, fetching $0.7328.

Oil prices climbed on Tuesday after Libya declared force majeure on some of its supplies, with Brent crude LCOc1 rising 0.83 percent to $77.94 per barrel and West Texas Intermediate (WTI) crude CLc1 was up 0.87 percent to $74.58 a barrel.

Investors are yanking money out of global stocks at levels not seen since the 2008 financial crisis

• Investors pulled $12.4 billion from global stock-focused funds in June, the highest level since October 2008 amid the worst of the financial crisis.
• A slowing global economy is spooking some investors as are fears of a trade war.
• Emerging market stocks soared in 2017 but have slumped in 2018, adding to the outflow of investor cash.

MSNBC,

29 June, 2018

Investor money is hemorrhaging out of global stock funds at a pace not seen since just after the financial crisis exploded.

Global equity funds have seen outflows of $12.4 billion in June, a level not seen since October 2008, according to market research firm TrimTabs. Lehman Brothers collapsed in September of that year, triggering the worst economic downturn since the Great Depression and helping fuel a bear market that would see major indexes lose more than 60 percent of their value.

The most recent exodus, which includes exchange-traded and mutual funds, comes amid worries that the much-touted synchronized global expansion is running out of gas, as well as some unwinding of what had been a hugely successful trade in emerging market stocks.

The iShares MSCI Emerging Markets ETF, which tracks the group, surged more than 18 percent in a five-month span from July 2017 to January 2018, but has given back a big chunk of those gains in 2018 and is down about 10.3 percent year to date. By comparison, the S&P 500 has risen nearly 1 percent during a volatile 2018, while the Vanguard FTSE All-World ex-US Index Fund, which tracks global equities minus the U.S., is off more than 6.5 percent this year.

As the emerging market and non-U.S. trade has unwound and fears have intensified over a trade war, investors have fled global stocks and returned to the U.S., where funds have seen $6.3 billion in inflows. The iShares emerging market ETF has seen $5.4 billion in outflows in June, the most of any fund, according to ETF.com.

"U.S. dollar strength and persistent underperformance seem to be driving fund investors away from non-U.S. equities," TrimTabs said in a note.

Interestingly, one of the regions suffering the lowest level of investor fear is China, where funds have seen a net inflow of $150 million even though the nation's main stock index has plunged into a bear market, defined as 20 percent below its most recent high.

For investors, then, the main question may be whether the outflows elsewhere are signaling something more ominous or are merely setting up another buying opportunity as valuations get cheaper.

"Cumulative flows for the year [across asset classes] are still up [thanks] to strong inflows in January. Russia and [South] Africa are now driving the outflows, as the most crowded markets at the eve of recent weakness," Gabriele Foa, cross asset strategist for emerging markets at Bank of America Merrill Lynch, said in a note. "Selected opportunities are emerging thanks to weak levels."

In fact, if the trend holds up through the end of June, it will make the first time global equities have seen net outflows since November 2016, according to TrimTabs.

Investors, however, remain bullish on Latin America, which has seen $30 million in inflows to ETFs in June even though the funds have lost 10 percent in June and more than 25 percent since May.

There Are Now Barely Two Workers per Senior in Most Developed Economies

the Sounding Line,

3 July, 2018

For every American 65 years of age or older, there are now barely three people working and paying into the country’s safety-net, Social Security, and Medicare programs. In France there are barely two workers per senior. In Japan there are slightly less than two. In Italy and Greece there are barely more than 1.5 workers per senior, less than half the ratio in the 1960s. In each case, the definition of a ‘worker’ includes anyone working as little as one hour a week.

Data Source: OECD & World Bank

At the same time, government entitlement spending is surging in virtually every developed economy. In the US, a full 73% of government revenues are already being spent on entitlement programs and over 60% of those entitlements go to senior citizens via Social Security and Medicare. With the bulk of the baby-boomer generation reaching retirement age right now, the problem is only going to get worse.

With fewer and fewer workers per retiree, with entitlement spending already consuming the vast majority of tax revenues across the developed world, with governments already running large perennial deficits, with most developed world governments already weighted down with over 100% debt-to-GDP, and with interest rates set to rise, there is a funding crisis coming to governments across the developed world.

In many of these same countries, whatever tax revenue is not being spent on entitlement programs is already being spent servicing huge national debts.

Data Source: NationalDebtClocks.org; The Sounding Line

The time to balance government budgets is now.

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This is as close as NZ media can get to acknowledging that all is not right with the economy. It will all be put down to the Labour government

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