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Trade Tensions Threaten Markets More Than Korean Nuke Fears

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Tuesday, 12 June 2018 08:28 AM Current | Bio | Archive

North Korean Situation

North Korean President Kim and President Trump have shaken hands today, apparently without either breaking the other’s hand in the process. The summit in Singapore could therefore be described as “the beginning of the beginning.”

The potential for economic or market upside from the North Korean situation is limited as the threats and bluster were also largely ignored by the financial markets as downside risks.

For example, when last year there were those North Korean missile tests, South Korean equities experienced an only average single-day decline of just 0.1 percent. When on May 24, President Trump canceled in writing today’s highly anticipated summit with the North Korean leader Kim Jong-un about discussing denuclearization, the financial markets initial risk-off turn in markets faded swiftly.

Anyway, both leaders signed a document, which Mr. Trump described as “very comprehensive,” but that provided almost no particulars on how to make the denuclearization process quick, verifiable or irreversible, which are often stated U.S. goals.

Conclusion: Nothing happened at the Trump-Kim summit in Singapore that could be of concern for financial markets.

In fact, the still-escalating tensions between the United States and the countries it trades with are a bigger concern to financial markets perhaps.

Emerging Markets

The Turkish economy grew by 7.4 percent year-on-year in Q1, following a 7.3 percent expansion in Q4 of 2017. Household consumption and fixed investment rose at a faster pace while net trade contributed negatively to GDP growth, due to a jump in imports.

Turkey’s robust growth has come, however, at a high cost. Turkish consumer price inflation jumped to a six-month high of 12.15 percent year-on-year in May from 10.85 percent in April. Also, May's CPI rate was the second-highest since February 2004, mainly due to rising prices of food & non-alcoholic beverages, transportation and housing & utilities.

In another sign of imbalances, Turkey’s current account deficit hit $5.42 billion in April, up $1.70 billion from the same month last year.

The Turkish lira remained steady on Monday but is still down 15.4 per cent against the dollar this year.

Goldman Sachs expects Turkish economic growth to moderate, over the short term at least, as tighter financial conditions will weigh on economic activity because of the fiscal measures that have been put in place by the government of President Erdogan to counter-balance some of the effects of the rising interest rates, which by the way, at the start of June the one-week repo rate was increased by 1.25 percent to 17.75 percent.

To what extend the measures will be able to slow down the economy remains of course to be seen.

Besides all that, investors should keep in mind that President Erdogan and the ruling Justice and Development party (AKP) are facing snap elections scheduled for June 24 that could, which doesn’t mean will, alter the Turkish political landscape.

US Inflation Data

While markets are waiting for what the Federal Open Market Committee (FOMC) and the Fed Chair will tell us tomorrow, today is mainly focused on inflation. U.S. consumer price inflation (CPI) is due out. Although this is not the Fed’s favored inflation measure, it is the measure that financial markets pay most attention to.

It is directly linked to the TIPS inflation linked bonds and is used for stipulating the conditions of the Treasury Inflation-Protected Securities (TIPS), which are ILBs issued by the U.S. government. Inflation-linked bonds (ILBs) are fixed income bonds whose principal value is periodically adjusted according to the rate of inflation. ILBs decline in value when real interest rates rise.

The higher oil price will have an impact on the headline consumer price inflation (CPI) rate and some of the oil price move will leak in to the core measure of inflation, which contains oil indirectly, in things like for example air fares.

It’s worth monitoring in case the economic consensus is surprised by the inflation data.

Economists should not be surprised by an oil price move. It’s not that difficult to calculate the consequences.

However, some companies may use the oil price move as an excuse to sneak in some other price increases and also to raise prices out of sync with their normal price change schedules. Those effects would create surprise to the market consensus, the consensus being for fairly modest rise in the inflation rate today.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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HansParisis
The still-escalating tensions between the United States and the countries it trades with are a bigger concern to financial markets perhaps.
inflation, emerging, markets, investors, trump, korea
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2018-28-12
Tuesday, 12 June 2018 08:28 AM
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