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05 June 2019


In yesterday’s ‘tweet economy’, the global financial markets were dancing to the tune of President Trump’s latest drum beat. And they didn’t like what they heard.

Last week’s tweet declaring that Mexican imports into the US will be subject to 5% tariffs from 10 June stirred quite a commotion. It is yet another page in the global trade war, even if this measure is linked to an immigration issue between the US & Mexico. Over the weekend we also learned that China is making up a list of ‘unreliable entities’, that is, foreign companies which may be targeted. A clear sign of retaliation following the Huawei story. Also in China, last Friday’s manufacturing PMI fell to a lower than-expected level below the 50 threshold, implying contraction. The Caixin PMI was, however, a bit better. This week, both in Europe and in the US, more manufacturing confidence data will be published. Not a lot is needed to tilt the global manufacturing gauge into contraction. Note that in Asia PMIs for Japan, Korea, Taiwan and Malaysia are all below 50. Meanwhile, the JP Morgan global manufacturing PMI stands at 50.3, just slightly above 50. But it could fall below 50 as well. Last week, in Mexico and Brazil, first-quarter GDP growth showed contraction in both Latam countries’ economies. The upshot is that unless the global services sector holds up, the risks are growing for a global economic slump. In fact, it will be about domestic consumption and the service sector.

Bond markets have been sensing the economic danger already for some time now. Last week, 10-year Bund yields touched upon their historic lows of 2016 of -20bps. The German yield curve has now fallen entirely below the Japanese one. In the US, the yield curve between the three-month T-Bill and the 30-year T-Bond is almost completely inverted. Optimists might indicate that the 2-10-year spread is still positive by about 20bps. Big deal. The equity markets have now also arrived at make-or-break levels indicated by technical analysts. It’s time for a rebound, if not, further losses could change the technical outlook and dash trader optimism. Perhaps the good news is that the MSCI Emerging Markets Index has rebounded the past couple of days. Have we seen the worst?

This week’s data might be crucial. Central banks will also have their say. The European Central Bank is meeting and in the US the Federal Reserve will shed some light on how they see future inflation and possibly rate policy.

Meanwhile the well-known safe havens outperformed last week. Gold was up and so were the Swiss franc and the yen.