IMF Report
The International Monetary Fund’s latest report estimates global economic growth at 3.7%, which is 0.2% less than previous predictions. The IMF claims this adjustment is due to the trade tensions between China and the USA. The report also adjusted the 2019 economic outlook for both China and the United States for the worse, with a 6.2% and 2.5% respective predicted economic growth next year according to the organization. Other than trade problems the IMF also pointed out the uncertainty of emerging markets, where the weakening of national currencies leads to a lack of investments and loss of capital.
Chinese Stocks Rising
Yesterday Chinese stocks opened with miniature crash and have since then slightly recovered via a minor price correction. The Shanghai Composite’s 0.17% increase is unfortunately not enough for a full recovery. Other Asian indices were also trending downwards, all declining by approximately 1%. The worst result was Nikkei’s 1.32% drop. Meanwhile on the commodities market natural gas reached an all-year high recently, despite China announcing that they’ll completely halt their import of liquefied natural gas from the United States. The asset is now at 3.3 dollars, a price it hasn’t been at seen since this January and it’s part of a larger rising trend since mid September.
EURUSD
News coming out of the European Union has been almost entirely negative lately. Italy and its government have been pushing the EU’s rules to their limits and to the point of being accused of blackmailing the Union. Adding to worries over their annual budget, Matteo Salvini also raised concerns over Italy’s migration situation. The Deputy Prime Minister threatened to shut down all Italian airports if the EU were to try and force Italy into taking back all migrants who initially arrived there. This crisis has the yield of Italian treasuries on the rise and the price of Italian stocks on the decline. Italy’s benchmark stock market index, the FTSE MIB, dropped from 21500 to 19900.
The chart clearly illustrates how the euro began to plummet at the same time as the Italian market took a nose dive. There could of course be another explanation for the euro’s simultaneous weakening, however, this correlation is still significant enough to be worth noting. The pair found support at the 1.1461 line and has been attempting to break it ever since. Although the line has been tested three times unsuccessfully, that’s still no guarantee that it will continue to hold. An increasing number of analysts suggest the European Central Bank may end up raising interest rates sooner than expected, although at the moment market participants seem to consider it unlikely. Meanwhile the widening gap between EU and US interest rates continues to pressure the euro.
DOW
As the third quarter draws to a close, Flash Report season is already on the horizon. The US economy’s growth has obviously exceeded expectations, which leads to the assumption that corporate income should be on the rise as well. The main question is how much the rate hikes increased the cost of financing and whether major corporations suffered any losses from the recent difficulties in trade. As of last week we’re certain that US trade deficit was at a record high of 53 billion dollars in August. The rising deficit could be explained with the increasing difficulties of exporting US companies face. The strengthening dollar increases the relative price of US products, meanwhile China has reduced it’s US imports in several product categories. The USA’s deficit with China swelled to record 38.6 billion dollars. The recent tariffs have not yet had the desired effect of reducing trade deficit. They did on the other hand already diminish US exports.
That said, the domestic market is still large enough to give US companies room for growth. In many cases weakening domestic currencies in the imported goods’ countries of origin have caused the prices of said products to remain virtually unchanged (or in some cases even decrease) despite higher tariffs. Dissatisfied with the result, Trump attempted to pressure the Fed on multiple occasions, into putting the brakes on their policy of strengthening the USD. In the end it’ll Flash Report season that determines which companies thrived under these new economic conditions. The Dow seems fundamentally optimistic. It’s been rising in a gradual and consolidated trend channel since June. The upwards trendlines parallel to the moving averages, also act as support to stop any potential dip in price. Yesterday a sizable downwards price spike reached the 200-period moving average, however, it reversed shortly thereafter. A series of positive Flash Reports could give the index enough momentum to surge even higher and potentially reach up to 27000.
Sincerely,
Laszlo | Market Analyst
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