The arrival of U.S. large cap equities earnings seasons provides investors with a welcome opportunity to focus on granular earnings reports rather than the macroeconomic and policy factors that have dominated market narratives for weeks. Global fast-food behemoth Yum! Brands will announce third-quarter earnings today after U.S. market close. The performance of Yum!, the parent company of KFC, Pizza Hut and Taco Bell, will provide insight into the health of the global consumer, particularly in China, where same-store sales have been under pressure for the fast food segment. Aluminum producer Alcoa’s quarterly earnings release tomorrow may shed some light on industrial demand.
Financial institutions subject to new 25 percent loss-absorbency rule. An internal document dated last month by the Basel, Switzerland–based Financial Stability Board (FSB) asked members to comment on proposed increases in bank capital requirements. The FSB, the Group of 20’s financial regulatory coordinating board, proposed a base requirement of 20 percent of risk-weighted assets with additional benchmarks that will see the final level rise to nearly 25 percent.
Germany factory activity shows slowdown. More bearish data arrived in Germany today, with August industrial production levels contracting by 4 percent month-over-month versus consensus forecasts for a 1.5 percent drop. Recent declines in factory orders and lower trending purchasing managers’ index (PMI) index levels suggest the German industrial sector is now in a recessionary cycle, with negative implications for gross domestic product.
U.K. industrial production data is flat. U.K. National Statistics Office industrial production data for August released today was flat versus July, with production shutdowns at some oil and gas sites in the North Sea distorting the data. While total production expanded on a year-over-year basis, with significant gains in manufacturing, U.K. industrial production still remains well below prerecession highs.
Bank of Japan stays the course. As anticipated, the Bank of Japan monthly monetary policy announcement contained no change in its current asset purchase facility. The central bank will continue to target an annual expansion of the nation’s monetary base by 60 trillion to 70 trillion yen ($645 billion) through quantitative easing in an attempt to spur inflation.
U.S. credit purchases expected to show contraction. The Federal Reserve will release U.S. August consumer credit data later today. Consensus forecasts call for a marginal decrease in the pace of new loans after a major expansion in revolving debt, primarily credit cards, helped drive the total to $26 billion. During the recovery from the 2008–’09 financial crisis, nonrevolving credit such as automotive and student loans have been major catalysts for expanding household debt.
Dust settles in Hong Kong. The Hong Kong dollar rose to 7.7549 versus the U.S. dollar in trading today, as prodemocracy protests showed signs of dissipating. Government negotiators have struck a partial bargain with students groups on minor points and have scheduled official talks to discuss larger issues.
Portfolio Perspective: Hong Kong — The Impact of Protests on Global Markets and China’s Economy — John Vail, Nikko Asset Management
Could the Hong Kong protests be positive for mainland Chinese equities?
The impact of the protests on the Hong Kong market is quite substantially negative — at least until there is some inkling of compromise. Quite the reverse could be true for the mainland, however, as this development, plus the weaker economy there, will likely force the Chinese leadership to stimulate growth and reduce its quadruple crackdown — property prices, pollution, corruption and shadow banking — to a significant, although not complete, degree. Otherwise, dissent might arise among the citizens and government officials. The crackdown on pollution, however, will likely accelerate, as it is a key quality-of-life issue for all Chinese people. On the other hand, in the increasingly unlikely event that the Hong Kong protest is violently suppressed by the government, there would likely be global sanctions on China along the lines of the Tiananmen experience.
If the protest drags on, China might start taking back the economic benefits of Hong Kong, such as scaling down the through-train/bilateral investment scheme. Regardless of the outcome, however, the Chinese and Hong Kong governments will likely institute populist policies that bring down Hong Kong real estate prices. They might also force mainlanders to stop taking advantage of Hong Kong services and pushing up consumer prices. Indeed, any factor caused by mainland Chinese that decreases the standard of living for the average young Hong Konger will likely be strongly curtailed. Hopefully, this will also cause China’s leadership to start thinking about political reform for Hong Kong and China. But there will not likely be any short-term progress.
These protests, as long as they do not linger too long, may not lead to immediate political reform in Hong Kong, but are likely to have some positive intermediate-term ramifications for China and Hong Kong in terms of policymaking.
John Vail is the chief global strategist for Nikko Asset Management in Tokyo.
