FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. This edition covers a challenging and tumultuous week for many markets globally, including the latest developments in the US-China trade war, the German industrial downturn, Russia’s protests, and more. 

Trump delays some China tariffs, but market panic continues
Key Takeaways
  • Less than two weeks after President Donald Trump announced 10% tariffs on all remaining Chinese exports (~$300bn) beginning September 1st, he announced that ~$160bn of those tariffs would be delayed until December 15th.
  • Trump stated that the reason for the delay was to avoid raising prices on popular consumer goods prior to the holiday season. The next round of tariffs covers significant amounts of low-margin consumer goods that would result in direct consumer pass-through.
  • Despite Trump’s tariff delay, and the further announcement that the US and China would resume talks in mid-September, a global sell-off in equities and cyclical commodities resumed on Wednesday. Oil is down over 10% since the initial tariff announcement.
  • More worrisome, there was such strong demand for long-dated US government bonds that the 30yr US Treasury hit an all-time low of 2.03%, while the 10-yr US Treasury yield fell below the yield of the 2-yr US Treasury. The latter is one of the most common forward-looking market indicators that predicts a US recession.

News: Treasury Curve

Our View

The threat of further escalation in the US-China trade war has clearly spooked markets. Combined with consistent data that points to weak growth in China and Germany (see story below), even the promise of a delay to the US-China tariffs was not enough to sustain a multi-day rally in risk assets. The fact that markets failed to rally once Trump walked back some of the tariff hikes must have spooked him as well – normally, he has been able to trigger market rallies by walking back tariff plans. While Trump took to twitter to blame the Fed, he might behave a bit more cautiously when making tariff threats if he feels like he no longer has firm control over the market response.

Business Implications

Despite positive US economic data and evidence that core inflation is rising, the Fed is likely to cut rates again at its next meeting due to sharp movements in the bond markets. But the direct support from the Fed will have a limited impact on the global economy. We also expect China, Germany, and the European Central Bank to add in a mix of new fiscal and monetary stimulus over the coming months to support their own domestic economies, and in doing so, stabilize global growth heading into 2020.

Ryan Connelly, Practice Leader for Global Economics and Scenarios

Argentina peso collapses on unexpected primary results
Key Takeaways
  • The Argentine peso dove approximately 20% on Monday after opposition presidential candidate Alberto Fernández performed far better than expected in the presidential primaries. Furthermore, the country’s stock index (MERVAL) lost 48% of its value, and the country’s implied probability of default increased from around 50% to over 70%.
  • Fernández garnered 47.8% of the total vote compared to 32.2% for current President Mauricio Macri. This was a greater margin than the two to eight percentage point gap predicted by the polls.
  • If October’s first-round elections repeat primary results, Fernández would win the presidency outright. To avoid a run-off, a presidential candidate needs either 45% of the vote, or 40% of the vote with a victory margin of 10%.

Our View

Our previous downside electoral scenario for Argentina is now our base case; we believe there is a 90% probability that Fernández will win the election. Macri’s re-election is now our upside scenario at only 10%. Only a significant shift by voters worried about economic well-being in a Fernández administration would reverse the vote differential back in Macri’s favor. We will revise down our Argentina forecasts this month due to Monday’s market meltdown and, assuming a Fernández victory, we expect accelerating inflation and a prolonged recession.

Business Implications

Deteriorating economic fundamentals will delay the long-awaited rebound of customer demand in Argentina until 2020 at the earliest. Moreover, pricing will become even more complicated following the peso’s massive depreciation and its inevitable impact on consumer prices. We also expect financial conditions in Argentina to significantly regress as the central bank hikes interest rates to fight the currency depreciation’s impact on inflation. Key uncertainties including central bank independence, fiscal responsibility, and the willingness and ability to pay interest on Argentina’s sovereign debt in 2020 and 2021 will continue to weigh on the future administration.

Alex Schober, Senior Analyst for Latin America

German industrial downturn deepens, spurring recession fears
Key Takeaways
  • In June, German industrial production moved into further contractionary territory at -5.2% YOY- recording the steepest decline since 2000 – on the back of weaker Asian and other emerging markets’ export demand for vehicles and machinery.
  • Producer prices grew at a much softer pace in line with the industrial slowdown, especially for energy and capital goods. The German Statistics Office confirmed the German economy grew at only 0.4% YOY in Q2.
  • In July, the Ifo Business Climate Index highlighted a continued deteriorating confidence trend in the manufacturing, services, retail, and wholesale sectors.

Source: Federal Statistics Office of Germany

Our View

Industrial demand, especially for autos, will remain sluggish in Q3 and only slightly recover YOY in Q4 2019 due to a low base effect. Despite contracting industrial production, consumer demand has strengthened and the government is poised to increase spending the rest of the year to further aid it. Likewise, the ECB is ready to take additional measures to stimulate liquidity. On the other hand, construction will remain the bright spot of the economy, though competitive pressures and labor shortages will somewhat restrain its momentum the rest of the year.

Business Implications

Industrial sector firms should identify the more niche opportunities within Germany or other European markets to win in a slow economy.

Athanasia Kokkinogeni, Senior Analyst for Western Europe

Russia sees largest protests since 2011
Key Takeaways
  • Some 50-60,000 people protested in Moscow over the past weekend, the fourth weekend in a row of demonstrations, with thousands more in St. Petersburg, Rostov, Novosibirsk, and elsewhere.
  • Roughly 1,000 people were arrested nationwide as the Kremlin tried to combat the most serious protests since the 2011 contested Duma elections.
  • Protests began in July in support of opposition candidates who had been barred from running in the Moscow City Council elections for September.
Our View

Violence used against the protesters in previous weeks has inflamed the situation, dramatically increasing the size of the most recent demonstrations and expanding the grievances of the population beyond the initial issue of the Moscow City Council elections. However, protests are very unlikely to escalate from here and firms should not expect threats to the government’s rule in the coming months or years, as it has recently in Ukraine and the CIS region. Russians want change, but gradual and stable change over time.

Business Implications

The Kremlin will likely make some minor political concessions and raise social spending for 2020 to help contain the protest movement from expanding to include wide-ranging social grievances. Firms will see restored political and social stability, aiding the ruble and economic sentiment gradually

Mark McNamee, Practice Leader for Europe

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