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LGT Navigator: Declining global interest rates create negative sentiment

August 12, 2019

Seven central banks lowered their interest rates last week. Weak German industry data, the US accusation of Chinese currency manipulation and low inflation figures from China also contributed to the global fall in interest rates.

Navigator_Low interest rates

Last week was marked by falling interest rates. Seven central banks have lowered their interest rates: New Zealand, India, Thailand, Belarus, the Philippines, Serbia and Peru. The yield on German ten-year government bonds fell below -0.6%. After the Irish ten-year government bond also fell below zero last week, euro government bonds of this maturity are only yielding in positive territory in Spain, Portugal, Cyprus, Italy and Greece. Even a drop in the yields on ten-year US Treasuries is now considered by some analysts to be not entirely absurd.

Political risk puts Italy's bond market under pressure again

The faction leaders in the Italian Senate are today discussing Matteo Salvini's motion for a vote of no confidence against the government of Giuseppe Contes and possible new elections. Salvini's Lega party is clearly ahead in current polls with 38% and caused a drop in the prices of Italian government bonds with its demand for new elections. The vote of no confidence must be taken by 20 August. Political risk is thus returning to the Italian bond market, which has recently been driven by the global pursuit of yields. According to June data, Japanese investors invested a record 2.3 billion euros in Italian securities. Recent developments have now led to the biggest sell-off in 2019. The yield on ten-year Italian bonds has risen in recent days from 1.4% to almost 1.8%.

"Germany on the verge of recession"

The political instability in Italy was one of the main reasons for the slide of the Dax into the loss zone to below 11,700 points at the end of last week. The international trade conflicts hit German exporters, who are used to success, with full force. In June alone, exports shrank by 8% within the space of a year and thus not as sharply as since mid-2016, as the Federal Statistical Office announced last Friday. After the first half of the year, growth was only 0.5%. "For the year as a whole, hopes of an at least meagre increase in exports are crumbling," said DIHK Foreign Trade Director Volker Treier. "If we were to leave the year with a weak zero – and thus with the worst result since the financial crisis – this would be a success in view of the conflict- and crisis-laden global economy". Above all, the trade dispute between China and the USA and the feared Brexit chaos without an agreement are creating uncertainty in world trade. "In summer 2019, Germany will be on the borderline between stagnation and recession," said KfW economist Klaus Borger. The Statistical Office will publish data on gross domestic product (GDP) for April to June on Wednesday. Economists surveyed by Reuters expect a minus of 0.1%.

Investors flee from Boris Johnson and Brexit from British funds

The fear of a disorderly Brexit on 31 October is also making itself felt on the markets. Investors are increasingly concerned about the Brexit price of the new government under Boris Johnson. The pound sterling is weaker than it has been for years – to the great annoyance of many British tourists who are on their summer holidays these days. Also the desire of the investors on funds decreases noticeably, as current statistics show.

 

 

Economic Indicators August 12

MEZ Country Indicator Last
08:00 DE Consumer Prices (y/y) 0.6%
08:00 RO Consumer Prices (y/y) 3.8%
09:00 CZ Consumer Prices (y/y) 2.7%

Earnings Calendar August 12

Country Corporate Period
CA Barrick Q2

 

 

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Source: LGT Bank (Switzerland) Ltd.

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Core Personal Consumption Expenditure
MEZCountryIndicatorLast08:00DERetail Sales (y/y)-1.7%08:45FRConsumer Prices EU Harmonized (y/y)1.4%09:00ESGDP (y/y)2.4%09:55DEUnemployment Rate5.0%11:00EUGDP (y/y)1.2%11:00EUCore Consumer Prices (y/y)1.1%11:00EUUnemployment Rate7.5%11:00ITConsumer Prices EU Harmonized (y/y)0.8%12:00ITGDP (q/q)0.12%14:15USADP Employment Report102k20:00USFederal Funds Target Rate2.5%