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Investors Should Beware US Pressuring China Over North Korea

Investors Should Beware US Pressuring China Over North Korea
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Tuesday, 03 October 2017 08:13 AM Current | Bio | Archive

The ISM opinion poll of U.S. manufacturing sentiment or the Manufacturing ISM Report On Business showed strength yesterday coming in at 60.8 percent, an increase of 2 percentage points from the August reading of 58.8 percent.

Now, the correlation of the ISM opinion poll of manufacturing sentiment with the actual manufacturing output has been negative over the period since 2010.

The correlation of the ISM opinion poll of manufacturing sentiment employment subcomponent with actual manufacturing employment has also been negative over the period since 2010. The correlation of ISM opinion poll of manufacturing sentiment inventory subcomponent with actual manufacturing inventory has also been negative over the period since 2010.

As usual, U.S. equity markets rallied on the news, but I don’t think that it could be such a bad idea for the long-term investor to keep that situation in mind.

Besides that, the White House Press Secretary Sarah Huckabee Sanders has said: “Now is not the time to talk with North Korea. The only conversations that have taken place, or that would, would be on bringing back Americans who have been detained like that with Otto (Warmbier, the late U.S. student), those were the type of conversations that this administration was willing to have. Beyond that, there will be no conversations with North Korea at this time.”

In simple words, at a moment of escalating military concerns with nuclear overtones is clearly not the time that one should have been having a dialog.

Also, the commander of the USS Ronald Reagan aircraft carrier strike group has told reporters in Hong Kong that his ships have an ironclad commitment to defending U.S. allies, including Japan and South Korea. Rear Admiral Marc Dalton reiterated President Donald Trump’s “resolve to use every lever available to us to convince North Korea to alter its dangerous and aggressive behavior.” Dalton would not confirm South Korean media reports that the Reagan would head to Korean Peninsula waters.

It is a fact that financial markets are very unlikely to price in extreme risks, and so there is expected to be a pretty limited reaction.

However, if the United States was to increase pressure on China by threatening sanctions or something similar, that is something that financial markets are likely to factor in as a risk.

The Euro area gave us producer price inflation (PPI) today, which came in at +0.3 percent month-on-month that was larger than expected and lifted annual PPI by 0.5 percentage points to 2.5 percent, a 3-month high.

The PPI is a pretty reasonable indicator of corporate pricing power. It is certainly a more effective indicator than consumer price inflation (CPI).

There is of course the impact of higher energy costs, which is starting to seep into the data.

Notwithstanding, I think this is unlikely to change the will of the European Central Bank (ECB) to tighten its monetary policy in the new year one way or another.

The current level of accommodation is simply not needed. In fact, quantitative policy accommodation is probably not needed at all.

In an interview given a couple of days ago, Peter Praet, Member of the Executive Board of the ECB gave some interesting statements that an investor who has euro-based instruments in his/her portfolio should take note of.

For example, Mr. Praet stated: “The question is knowing whether the central bank has gone too far in its monetary policy easing. Now that the gap between growth potential and real activity is narrowing, have we accomplished our mission? At this stage, my reply is no. The economic expansion that is under way is not yet feeding through into higher inflation. We are not changing our priorities, but we must take into account the improvement in economic conditions when calibrating our measures.”

I’d like to add to that, all that sounds as if the tightening next year would be extremely moderate, but the point is approaching where accommodation risks could be doing more harm than good.

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

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HansParisis
I’d like to add to that, all that sounds as if the tightening next year would be extremely moderate, but the point is approaching where accommodation risks could be doing more harm than good.
investors, china, north korea, united states
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2017-13-03
Tuesday, 03 October 2017 08:13 AM
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