Any day now, the Permanent Court of Arbitration in The Hague will hand down its judgment in the case brought by the Philippines about the validity of some of China’s claims in the South China Sea. Attention is focused mostly on the tribunal’s ruling on Beijing’s claim to some kind of ill-defined ownership of all the waters that lie within the famous ‘nine-dash line’.
Amid a better if not strong risk appetite, sterling has rallied two cents from yesterday’s lows near $1.28 to poke through the $1.30 level in the European morning. It was helped by an industrial production report that was better than expected. Industrial and manufacturing output fell 0.5% in May. This was around half of the expected decline after a strong April advance (2.1% and 2.4% respectively).
This weekend G20 trade ministers shall meet in Shanghai. It is an opportunity for China to pave the way for the G20 Summit in Hangzhou in September. Led by China, G20 economies could refocus global attention to world trade and investment, even amid rising economic uncertainty, market volatility and political risk.
Indeed, one of the greatest risks the global economy is currently facing is world trade. It has not just slowed down. It has nearly collapsed. What world trade needs is aggressive, multi-front acceleration.
World trade is falling
Donald Trump has been bashing free trade for much of his campaign. However, in recent weeks he’s taken his anti-trade tirades to a whole new level in lashing out at the Trans-Pacific Partnership (TPP), a deal that was signed by its 12 Asia-Pacific members but has yet to be ratified.
The conventional narrative has it backward. It worries about the threats to stability emanating from the periphery in Europe. Policymakers, investors, and economists still refer to the “Greek, Irish, Portugal and Cyprus’ bailouts. The biggest threats do not come from the periphery but the core. The peripheral countries were not bailed out, the official and many private sector creditors were made whole.
Ireland has been slowly recovering from a long economic roller coaster that started with the global financial crisis in 2008 and has not improved as quickly as the rest of the world has. Canada, on the other hand, is also facing economic uncertainty thanks to a significant downturn in the commodities trade around the world.
What a difference a few days make. Many saw last week’s equity market advance a sign that Brexit anxiety was overdone. However, quarter-end position adjustments appear to have been misread. Equity markets are falling now. Bond yields in the US, Japan, and Germany, are at new record lows. Japan’s 20-year bond yield briefly dipped below zero for the first time.
On 10 July, Japanese voters will go to the polls in the triennial upper house election. The candidates will be all-too-familiar faces; the party leaders wooden; and policy menus unpalatable. The contest is for only half the seats and voters are expected to either vote for the political status quo or not vote at all.
Talks just concluded in Auckland, New Zealand on Saturday show that plans for the Regional Comprehensive Economic Partnership (RCEP) are advancing. Just as both Hillary Clinton and Donald Trump, the next potential leaders of the Trans-Pacific Partnership’s (TPP) biggest partner—the US—have distanced themselves from the agreement. Some even suggest that the US Congress won’t ratify the TPP agreement, and warn that the world economy risks US isolationism.
Monday, while Americans were celebrating the original Brexit, the US dollar drifted lower. The Australian dollar fully recovered from electoral uncertainty drop to finish about 0.5% higher. Asian and emerging market equities rallied, but Europe faltered. The MSCI Asia-Pacific Index gained 0.8% to extend the advancing streak to a fourth session. MSCI Emerging Market equity index extended its streak to five sessions by rising 0.5%.
