In the summer period, markets witness neutral performance in regard to most assets. Notable movements have been observed in developing countries. In previous issues [available in Russian], we wrote about inactivity among market participants in the summer months. The themes of trade wars and political events make news headlines, but they have no great impact on the price yet. The rhetoric of protectionism gives reason for revising the structure and conditions of world trade. The proposed tariffs in trade between large players will have little effect on economic growth in the next 6 to 9 months. Meanwhile, embarking on a course of tough competition in trade, the area which does not always progress smoothly anyway, but have been mutually beneficial for all parties, is dangerous for the sustainability of economic development in the world.
Active world trade has historically been fostering the growth of economic activity in the countries that are incorporated in the global system of exchange of goods and services. The aggregate value of world exports and imports reaches about half of global GDP. The value of exports was $15.5 trillion at the beginning of 2017.
On average, the US trade deficit for the period from 1950 to 2018 was $14.3 billion. The maximum surplus was recorded at $1.95 billion in 1975, the deficit – at $65 billion in 2006. The deficit of the US trade balance sharply declined to $43.7 billion in May. However, the deficit in trade relations with China and Mexico, actively discussed by politicians, grew by about 18% for each country. In the post-crisis years, the trade balance deficit was steadily decreasing due to less dependence on imports of crude oil. The reduction in the US current account deficit in recent years was offset by an equivalent drop in the capital account surplus. Consequently, the amount of investment from the US to foreign countries was growing. Generally, the assets included in the capital account are stocks, government and corporate bonds, and other financial instruments. As soon as the dollar started to strengthen in the first half of this year and the rise in prices of foreign assets stopped offsetting it, speculative investments began to leave these markets. Most of all, it affected the developing markets.
Macroeconomic data in the US allows the Fed to tighten monetary policies. The Consumer Price Index (CPI) reached the level of 2.3% YoY. The Personal Consumption Expenditures, an indicator used by the Fed to monitor prices, is now close to the target level of 2.0% YoY. Data on GDP growth for the last quarter makes the current post-crisis economic recovery closer to the longest expansion periods. According to recent data, annualized US GDP increased by 4.1%. The ISM Manufacturing Index remains at around 60.0 points, which also indicates the stable state of the US economy. For the most part, good figures for the ISM are supported by the US oil industry. It should be noted that that the Citi’s index of leading indicators (CESI) went into negative territory. Potentially, the deterioration of the ISM data along with CESI will mean that the economy is cooling. However, now it is too early for such observations.
There have been a lot of updates in the global monetary policy in recent weeks. The actions of central banks are still the main driving force in the markets. Liquidity flows, which used to reach $1.5 to 2.0 trillion a year, are gradually decreasing and will be depleted by the end of 2019 if the current pace is maintained. At the last meeting, members of the Federal Open Market Committee raised the Fed funds rate to 2.00%. FOMC plans to raise the rate to 3.00% by the second half of next year. The ECB adheres to the plan to curtail the quantitative easing program in the euro area in December this year, but rates will remain at a record low for an undetermined period. The Bank of Japan is also starting to talk about changing the rate. In general, large central banks, in communication with market participants, have become more tolerant of a possible correction, as the tightening of financial conditions will inevitably put pressure on price levels.