The global economy was battered in August by a considerable resurgence in the trade war between the US and China, while fears of a US recession increased after another inversion in the US yield-curve. Global markets weakened for the month on the back of these developments.
What happened in the US-China trade war?
Both the US and China imposed tariffs on each other at multiple points in August. Importantly, the tariffs that the US imposed on China also included tariffs on end-consumer products for the first time. Analysts worry that this could end up harming the US consumer, one of the only bright spots in the US economy. If the trade war escalates any further, a weakening of US consumer and labour markets could easily push the country towards economic downturn.
Why was there talk of a US recession?
At a few times throughout the month, the US bond yield curve inverted, with the return from 10 year bonds dropping below the return from 2 year bonds, a sign of economic uncertainty in the short term. Such inversions have usually preceded a recession in the US economy, and analysts are beginning to feel the possibility of a recession once more.
Combined with the direct impact of the US-China trade war and the continued weakness in global manufacturing performance, a US recession could easily push the global economy into recession as well. Other economies aren’t in a good place either, with Japan, Europe, and China all weakening. This weakness is pushing central banks towards more dovish policy, and all eyes are on the US Federal Reserve for guidance on US rates.
What has the Fed been saying?
Following its rate cut in July, the US Federal Reserve has been oscillating between providing further signs of dovish policy and signaling its independence in the midst of direct attacks by the US president. After an initial statement declaring the July cut a “mid-cycle” correction, the Fed has more recently noted its awareness of increasing dangers to the US economy.
Analysts are now all but assured of a Fed rate cut in September, but few expect anything more than a small cut. Such a Fed cut is likely to help the developing world significantly, allowing more rate cuts of their own without fear of the impacts on their currencies.
How have commodities been performing?
The impact of the negative stories in the global economy weighed heavily on expectations for global energy demand and pushed the price of oil down significantly. Brent crude saw a high point of US$ 61.89 per barrel and traded at a low of US$ 56.23 per barrel. On the other hand, the price of gold rose to a high of US$ 1,537.60 per ounce, as risk in the global economy pushed investors to safe assets such as the golden metal.
As numerous points of weakness grip the global economy, economists and investors are turning increasingly pessimistic about the future for the world. They expect a significant economic downturn to be a very real possibility now, and that both accommodative monetary policy and a considerable settling down of Sino-American trade tensions will be required to avoid this.
Top 5 Views
Is a recession coming? Here's how to tell
The US consumer remains one of the few bright spots preventing the US economy from a recession, and analysts warn that if consumer performance turns negative, the economy is all but assuredly going to contract. Performance in automobile purchases and slowdowns in hiring could point towards such weakness and could have dire consequences.
Bond Investors Battle Over Whether Inversion Means Recession
Markets are embroiled once again in a debate on whether the inversion of the US yield curve, with 10 year rates falling below 2 year rates, signals an economic recession in the coming year. The wealth management units at UBS and Morgan Stanley are among those betting the U.S. economy will avoid recession as long as the Fed helps to steepen the curve by cutting interest rates.
The Fed can’t rescue us from the coming supply-shock recession
While expectations of further rate cuts by the US Fed add some optimism to a battered global economy, monetary policy might not be enough to address some of the underlying supply-side weaknesses in the global economy. Trade tensions, technology races leading to increased productions, and volatile political tensions could all end up adding far more negative pressure than global central banks can handle.
Emerging markets bear the brunt of U.S.-China tariff fight
Emerging market nations tend to have considerable portions of their economies dependant on global trade, making them additionally vulnerable to the impacts of the US-China trade war. Ups and downs in trade tensions could make these nations unattractive, drawing investor money away from them.
Volatile Politics Rattle the Global Economy
Political uncertainties and political conflicts are having increasingly damaging impacts on the global economy. Key markets are being undermined by internal political crises and a rise of economic nationalism worldwide could also mean that in the case that a recession materialises, countries might not work as closely to get out of it.
Compiled by: Chayu Damsinghe
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.