Shocks & Surprises - Week Ending 10th August

·        World trade contracted in June and July, as precautionary dynamics dominated. Globally, industry is clearing the decks, and its suppliers are clearing distribution channels. Hence the sharpest trade contraction is coming from industrial supplies and intermediates, rather than consumer or capital goods. This shows up in the details of trade data, and also in producer pricing indexes and in US wholesale numbers.

·        It’s a popular narrative, but the contraction is not simply or even mostly a case of exports falling because Europe is in recession. Rather, this contraction identifies and punishes those economies restructuring the slowest relative to their underlying challenge: those economies where policy implicitly anticipates a return to pre-Crisis ‘normality’.  So trade balances have deteriorated most sharply in China, UK and France, whilst rewarding with improved balances those furthest along the financial restructuring road (the US, Italy), or, in Germany’s case, those finding protection in an artificially weak currency.

·        Overall, there were more shocks than surprises for a third successive week, and the six-week trend is now plainly deteriorating. The deterioration is most obvious in Asia, but is also newly present in the US. Not an encouraging environment for equities.

This is an excerpt from the four-page Global Shocks & Surprises weekly summary. It maintains the brevity of the Shocks & Surprises service, but relaxes discipline just sufficiently to allow  short commentaries on the meaning and impact of shocks and surprises on the US, Europe and Asia.  If you would like to take a look, please email me: michael.taylor18@btconnect.com.