Europe: The Week Ahead (July 15-19), Trade Concerns Across The Finnish Line
Market participants will receive fresh updates on Finland’s consumer prices and economic growth in the week ahead, as slowing rates of inflation across the globe spur a wave of monetary policy easing.
The European Central Bank (ECB) recently highlighted that market-based expectations of interest rates have been continuing their downward path.
ECB president Mario Draghi said at the bank’s press conference in early June that while the central bank is taking this slide “seriously,” there is “no probability of deflation” and “a very low probability of recession.”
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Draghi continued that there are “no threats of de-anchoring inflation expectations, but certainly there is a considerable mass of distribution between zero and 1.5% now,” which is not happening only in Europe, but “also happening elsewhere” – albeit from higher starting levels.
Finland has been no exception to lower consumer prices.
Monday, July 15
- Consumer Price Index (June)
According to Statistics Finland, the country’s Consumer Price Index (CPI) slowed to 1.2% year-on-year in May from 1.5% in the prior month, mainly on the back of lower vegetable prices. On a month-over-month basis, consumer prices registered -0.2% in May.
While inflation appears to have decelerated across Europe — even in countries such as Sweden and Switzerland where their central banks’ are committed to negative interest rate policies — other nations have also signaled lower CPIs, including the Philippines, Australia and New Zealand.
Finland Faces Trade War Casualties
Meanwhile, investors Tuesday are set to receive Finnish growth figures for May after industrial output grew 2.8% year-on-year in the previous month.
Tuesday, July 16
- GDP (May)
However, the Bank of Finland recently observed that uncertainty over international growth trends “subdues the outlook for the Finnish economy.”
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The country’s central bank expects gross domestic product (GDP) to rise 1.6% in 2019, then 1.5% in 2020 and “close to its potential” of 1.3% in 2021.
The bank warned that economic growth will likely be “subdued both in the euro area and around the world, and the uncertainty will undermine the corporate sector’s willingness to invest.” Finland’s economic growth is expected to mainly rely on domestic demand, as export markets slow. However, uncertainty over the direction of the economy, in general, is set to hamper households’ appetite for consumption.
Moreover, growth in the euro area could face further risks of deceleration after the Office of the U.S. Trade Representative (USTR) recently released a supplemental list of products that could potentially be subject to additional tariffs, including cheese, pasta, olives and scotch whiskey.
This supplemental list adds around US$4bn worth of duties to an initial list published on April 12, which included tariffs with a trade value of around US$21bn.
The announcement was made in connection with a dispute over aircraft subsidies involving Boeing (NYSE: BA) and Airbus Group (OTCMKTS: EADSY) that date back roughly 15 years.
The U.S. has already placed levies on European steel and aluminum, which was met with more than US$3bn in retaliatory tariffs by the EU.
Further threats by U.S. President Donald Trump to impose tariffs of as much as 25% on imported EU autos would likely further damage Europe’s struggling auto industry – notably Germany, which is among Finland’s top importers.
Finland’s central bank acknowledged that if the “already observed slowdown in growth in Europe, and particularly in Germany, were to last longer” than expected, it would “cause both a slowdown in Finnish export growth and an even weaker trend in the economy.”
Easing Debt Burdens, Improving Credit Metrics
Against this backdrop, market participants generally continue to wager that further easing of monetary policy will ultimately prevent the continent from slipping into a recession.
Fitch Ratings analyst Michele Napolitano noted that weak growth and low inflation will likely prompt the ECB to restart net asset purchases in 4Q’19, and low interest rates and additional QE “will support debt burdens in highly indebted sovereigns but will also ease pressure on governments to reduce public debt and implement structural reforms.”
Fitch had affirmed Finland’s sovereign credit rating at ‘AA+’ in February after downgrading it from its pristine ‘AAA’ status in March 2016. The ratings agency pegged the country’s general government debt at 59.4% of GDP at end-2018.
More recently, Fitch added its ‘Positive Outlooks’ on Austria and Finland’s ‘AA+’ ratings reflect a downward trajectory of their general government debt-to-GDP ratios, and if these two countries earn upgrades, they would be the first sovereigns to regain ‘AAA’ status after having had their ratings slashed. Also, the number of ‘AAA’ sovereigns in the region would increase from its all-time low of seven.
Investors have been generally optimistic about Finland’s ability to honor its public debt obligations. Spreads on its five-year credit default swaps (CDS) were recently quoted about 8 basis points tighter over the past three months to around of 13.25bps.
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However, Finnish company stocks have generally yet to recover from their slump in H2’18.
The iShares MSCI Finland ETF (BATS: EFNL), for example, which includes among its top holdings Nokia (NYSE: NOK), financial sector firm Sampo (OTCMKTS: SAXPY) and industrial company Kone (OTCMKTS: KNYJY), has risen less than 8.5% from its most recent 52-week low set on December 24, 2018.
The ETF had plunged nearly 19.5% from its latest 52-week peak at end-August 2018 to its December trough and has only retraced roughly 8.5% of that value since that time.
Investors will likely be watching global trade-related developments unfold, along with any further dovish shifts in global central bank policies, incoming economic data, and news of geopolitical risks, for further insights into Finland’s economic health and financial well-being.
In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this ...
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