“The economic impact of the intensifying trade war between Washington and Beijing appeared to deepen last month with factory activity and export orders weakening across Asia, but analysts warned the worst was yet to come.
“In a sign conditions for exporters and factories were deteriorating, manufacturing surveys showed marginal growth in China, a slowdown in South Korea and Indonesia and a contraction in activity in Malaysia and Taiwan.
“Those figures follow weaker-than-expected industrial production data from Japan and South Korea on Wednesday, with output in the latter shrinking the most in over 1-1/2 years.
“Worryingly, the prospects for higher U.S. rates could feed back more market pain for the region’s externally vulnerable economies — Indonesia, India and the Philippines, which have already been forced to raise rates to mitigate a sell-off in currencies, stocks and bonds.
““You have a tightening of monetary conditions around the world, a slowdown in Chinese demand, and financial market turmoil that affects sentiment and investment decisions,” said Aidan Yao, senior Asia EM economist at AXA Investment Managers.
“Yao said many orders from abroad are still frontloaded in anticipation of yet more tariffs and the impact is still mostly indirect, through the business confidence channel.
““The real economic shock is yet to come,” he said…”
“China’s leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn’t working.
“The nation’s economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping.”
“The tension in India mirrors central bank fights playing out in countries as varied as the U.S. and Turkey, and is unlikely to go away soon. Modi faces reelection next year, and he wants banks to dole out loans quickly to keep the world’s fastest growing major economy firing. Wary of already high bad debts, emerging market strains that are pressuring the rupee and threatening to add to inflation, central bank Governor Urjit Patel has other priorities.”
“Months after the summer selloff, with only two months left in the year, major emerging markets currencies are still struggling with idiosyncratic economic and political issues, as well as worries about global growth.
“Emerging economies are often heavily reliant on exports, leaving them exposed to global demand swings, much of which is in turn increasingly reliant on the health of China’s economy.”
“Fitch Ratings changed its outlook on Mexico’s long-term foreign-currency debt issues Wednesday from “stable” to “negative,” citing the potential policies of President-elect Andres Manuel Lopez Obrador.
“The leftist Lopez Obrador has tried to smooth anxieties in the business community, but upset many on Monday by cancelling a partly built, $13 billion new airport on the outskirts of Mexico City.”
“The IMF officially increased the size of a standby financing agreement for Argentina to $56.3 billion on Friday, up from an originally agreed upon $50 billion in June. The extra money comes with tougher fiscal measures.
“The IMF says that in order to get the payout, the government needs to make deeper spending cuts and—in typical IMF fashion—increase taxes to bring Argentina’s primary fiscal deficit…”
“Australian housing prices have continued to slide, with the market facing its sharpest annual decline in six-and-a-half years…
“Sydney and Melbourne were, once again, the weakest housing markets — their values falling by 7.4 and 4.7 per cent respectively in the last year.”
“A short-term indicator of gross fixed-capital formation in the [EU] region, developed by Natixis economist Dirk Schumacher, shows a “clear loss of momentum.”
“This comes as the overall expansion slowed to 0.2 percent in the third quarter, with sluggish consumer confidence suggesting a rebound may not be on the cards.”
“Italian banks have lost nearly 40 billion euros ($45 billion) of market capitalization since May…
“…with small and mid-sized lenders worst-hit by a sell-off on concerns that Rome’s budget crisis will lead to a capital crunch in the third-largest euro zone economy.”
“It’s not just Italian lenders that should be worried about Europe’s toughest-ever bank test: German firms will also feel the pain.
“Deutsche Bank AG will be particularly hard hit because of the more severe stress scenario applied to German lenders, according to two people familiar with the matter, who asked not to be named because the results haven’t been published.”
“October was a rough ride for U.S. stocks, which despite regaining a portion of the month’s losses Wednesday ended as one of the worst months since the financial crisis.
“The S&P 500 lost $1.91 trillion in October, according to S&P Dow Jones Indices analyst Howard Silverblatt. Losses were spread widely across industry sectors. October was the worst month for the S&P 500 since September 2011.”
“It’s the worst October for U.S. junk bonds since 2008…
“The equity and oil slump, VIX jump and rising concerns about trade wars, Brexit and Italy all dented risk appetite in October.”
“The slowing world economy is not strong enough to handle an oil supply shock.
“At this juncture it would trigger a full-blown slump. Yet that is exactly what we risk as Donald Trump tries to drive every last barrel of Iranian crude oil off the global market.
“A spike in Brent oil to $120 by early next year would probably be enough to tip the eurozone and Japan into recession, and would be the coup de grace for large parts of the emerging market nexus.
“It would amplify the effects of monetary tightening by the US Federal Reserve and the European Central Bank already in the pipeline, and which will hit with full force in the first quarter of 2019.”
“We need a long warning because we are unprepared for a recession. Monetary policy is the fast and effective method to fight a recession. But with rates so low, that cannot help much. Fiscal policy is the second big tool. Trump’s tax cuts… will make that more difficult to use.
“My best guess: it won’t be pretty. My advice: expect the unexpected.”