“Central bankers debated for a second day at the Kansas City Federal Reserve’s annual policy retreat in Jackson Hole, Wyoming…
In the closing session of the conference, Reserve Bank of Australia Governor Philip Lowe told the audience that central bankers have limited ability to cushion the global economy from the headwinds of mounting political uncertainty.
“We are experiencing a period of major political shocks,” Lowe said, citing developments in the U.S., Brexit, Hong Kong, Italy and elsewhere. “Political shocks are turning into economic shocks.”
“Warning flags are flying: The world economy is heading into a slowdown, and possibly a recession…
“If a recession arrives, international cooperation could — with luck — make it shorter and milder. But what happens if the United States no longer wants to lead in that effort? Under Trump, we may find out.”
“China’s currency slid on Monday to its weakest point in more than 11 years as concerns over the US trade war and the potential for global recession weighed on markets.
“The onshore yuan was around 7.1425 to the US dollar in late morning Asian trading, its weakest point since early 2008…”
“The foreign debt built up by Chinese companies is about a third bigger than official data show, adding to the pressure on the country’s currency reserves as a wave of repayment obligations approaches in 2020.
“On top of the $2 trillion in liabilities to foreigners captured in official data, mainland Chinese firms have around another $650 billion in debts built up by subsidiaries overseas…”
“There is one fundamental cause behind the turmoil that has been shaking global markets since the beginning of the month: China.
“As growth in Asia’s largest economy slows, the rest of the world finds itself in the throes of its first China-induced economic downturn. And investors fear that matters will only worsen…”
“As one of the world’s most important trade and business hubs, Hong Kong was always going to struggle this year because of the escalating U.S.-China tariff war…
“But after three months of anti-government protests, the semi-autonomous Chinese city, a shopper’s paradise and gourmet destination for millions of tourists each year, is facing an existential as well as an economic crisis.”
“Macau has entered into a recession after data from the government showed a second consecutive quarter of economic decline… “Given the incessant increase in external uncertainty, it is expected that the local economy will continue to experience recessionary pressure during the second half of this year,” the Office of the Secretary noted.”
“The word being whispered in financial markets around the world is this: recession. The long run of post-GFC growth is beginning to tire, and technical indicators are hinting the US economy could soon enter recession…
“Would Australia be insulated? …we have already cut interest rates to record lows… What’s more, our household debt is very high and our wages growth is very low. The state of the household sector is fragile…”
“Most public and private pensions in the United States are underfunded, many severely so… Ultra-low interest rates have pushed pensions into riskier assets such as corporate equities and bonds.
“Pension demand for corporate bonds has facilitated a surge of debt-funded buybacks. What happens when pensions are no longer able to keep up their massive procurement of corporate debt?”
“In retrospect, it was probably not a fantastic idea to leave Iceland’s economic fortunes tethered to an airline called WOW. …
“Now, five months after WOW’s purple jets ceased flying, Iceland is suffering a pronounced drop in tourists that threatens to push the country into recession.”
“Boris Johnson has said the £39bn Brexit divorce bill would not “strictly speaking” be owed to Brussels in full in the event of no deal, insisting: “It’s not a threat. It’s a reality.”
“…His intervention came after Tusk warned Johnson against going down in history as “Mr No Deal”.”
“Business Minister Heather Humphreys has told Irish firms to “prepare for the worst” Brexit outcome, admitting: “We don’t know what’s going to happen on October 31.”
“Ms Humphreys separately confirmed that talks are ongoing between Ireland and the European Commission about “some checks” on goods crossing the border.”
“The name of the next Italian prime minister is the main hurdle in talks between the anti-establishment Five Star Movement (M5S) and the centre-left Democratic party (PD) as they scramble to form a new government by Tuesday and avoid early elections that could put Matteo Salvini at the head of a far-right coalition.”
“The index of European bank stocks fell to an all-time low this month. The decline reflects poor earnings prospects for European banks, in particular German banks. If the fall continues at its current rate, there is an increasing risk that European governments may be forced to nationalise parts of the banking system.”
““The only thing that will lift the storm clouds over oil markets this week will be if both China and the U.S. talk and decide to mutually take a step back,” said Jeffrey Halley, market analyst at Oanda. “I can’t see that happening.”
“…exacerbating concern over the possibility of recession, U.S. manufacturing industries registered their first month of contraction in almost a decade.”
“Europe and Japan are currently caught in what might be called a monetary black hole – a liquidity trap in which there is minimal scope for expansionary monetary policy. The United States is one recession away from a similar fate…
“…there will not be nearly sufficient room to cut interest rates when the next downturn comes. And with 10-year rates in the range of 1.5% and forward real rates negative, the scope for quantitative easing and forward guidance to provide incremental stimulus is very limited – even assuming that these tools are effective (which we doubt).”
“…banks have a way of failing us when we need them most and that is a big part of why liquidity is generally the first casualty in a financial crisis.
“A huge part of the problem is rooted in the economic tool known as leverage.
“The same massive gains leverage brings, also showers us with huge losses that rapidly paralyze both individuals and financial institutions.”
“Investors are piling into bonds at a record pace as economists warn that the risk of a damaging US recession has hit its highest level in a decade.
“More money was invested into fixed income funds than ever during the week of Aug 12 – an increase of 25pc, or almost $2bn, on the previous record, according to Bank of America Merrill Lynch. It was the second consecutive week of record inflows into the funds.”