Trump tariffs comment spark risk-off

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Equities are retreating today on Trump's comments as the US-China trade deal again seems uncertain. In today's equity update we also focus on the OECD leading indicators released yesterday showing the global economy's growth momentum eased for the 20-straight month with most worryingly no signs of stabilising in the US leading indicators. Finally we take a look at China's broken credit channel and Italy seemingly being the big winner of ECB's new tiering system on excess reserves in the euro area.


Global equities are downhill today as the US president at the Economic Club of New York said that tariffs on China would be “raised very substantially” if the “phase one” US-China trade deal did not go through. It’s clear that behind the glossy comments in October about a tentative agreement from both sides that things are not progressing as well as initially thought. In addition, the protesters in Hong Kong are becoming more and more violent adding to risk-off sentiment. The STOXX 600 Index in Europe is down 0.8% and safe-haven assets such as JPY and JGBs are bid overnight. This seems to be the never-ending story of US-China trade deal.

Source: Saxo Bank

The ongoing tensions between the two largest economies are beginning to have a serious impact on businesses’ willingness to invest. A recent study released yesterday by the German Chamber of Commerce in China indicates that 25% of German companies operating in China are planning to source production elsewhere. This follows the same trend from US companies putting more on the Chinese economy. Yesterday, the OECD also released its global leading indicators (CLI) and they showed that growth momentum eased for the 20-straight month in August. While the global leading indicators show sign of stabilizing the US leading indicators are worsening with no imminent sign of stabilizing. This highlights that the current macro environment remains extremely fragile and sensitive to the slightest shocks.

China issues are not only related to the US-China trade war but also a seemingly broken credit channel. The Q3 earnings releases from Chinese banks have allowed us to update our market cap to total assets ratio for the four largest commercial banks in China. The ratio hit a new all-time low of 5.8 in Q3 driven total assets growing annualized 8% in Q3 while market cap of the four banks declined. Our interpretation is that Chinese investors are not valuing these new assets as high quality and the most likely dynamic in China right now is that the current credit expansion is just offsetting the rise in bad loans. The net effect is zero credit transmission to the real economy in China constraining economic growth.

There are also positive stories most notably in Italy where the FTSE MIB Index has been very strong lately as evidence shows that the ECB’s new tiering system for excess deposits is doing considerable redistribution inside the euro area. Italian banks are benefitting the most with banks moving excess reserves from Germany, Belgium and the Netherlands as excess reserves above the limit staying in those countries would be penalized relative to move them to Italy. Italian banks deposits with the ECB have increased by €37bn to €138bn and thus reduced the net claims inside the euro area. In addition, recent data from Bank of Italy showed that non-performing loans are declining in Italy improving balance sheets and credit quality. On top of these good news for Italian banks several Italian companies including Enel have delivered better than expected earnings. Italian equities are up 33% year-to-date making them one of the best performing equities globally this year. Adding to the attractiveness of Italian equities is the fact that they are valued at a 40% discount to global equities. The risks in Italian equities are heavy debt financed companies, low profitability and a constant uncertain political situation.

Source: Saxo Bank
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
3 Church Street, #30-00
Samsung Hub
Singapore 049483

All departments are available 08:30 to 17:30 Monday to Friday.

Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.