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LGT Navigator: Aggravated geopolitical tensions

January 8, 2020

Investors on capital markets continue to watch with interest the further development of the conflict between the US and Iran. A further escalation will certainly intensify geopolitical tensions and drive investors increasingly into safe havens such as gold. In this context, the development of oil prices remains a particular focus.

Aggravated geopolitical tensions

In retaliation for the killing of General Soleimani, last night Iran attacked US troops stationed in Iraq with some 15 ballistic missiles. So far there have been no reports of casualties or damage. The missile attacks on targets in Iraq were only the first step, Tehran said. Possible further actions on the part of Iran are likely to fuel fears of a military conflict in the Middle East. The US government had previously also warned against Iranian retaliatory attacks on merchant ships on the Strait of Hormus, which is most important for global energy supply. Last summer there were already several attacks on oil tankers in the waterway. Earlier, the head of state Ayatollah Ali Khamenei and Iran's foreign minister had threatened the US with revenge. Tehran was examining several retaliation scenarios against the United States. In Asia, the stock markets posted losses across the board. In Tokyo, Japan's leading index, the Nikkei, fell by more than -1.5% in the course of trading. In contrast, oil prices rose again and the price of gold climbed to over USD 1,600 per troy ounce at times.

Services sector remains the mainstay of the US economy

Growth in the US non-manufacturing sector accelerated more strongly than expected towards the end of the year. The corresponding purchasing managers' index of the Institute for Supply Management (ISM) improved from 53.9 points in the previous month to the current 55.0 points. Analysts had predicted an increase to 54.3. In contrast to the weakening industrial sector (ISM-PMI 47.2), the services sector thus remains a mainstay of the world's largest economy.

US trade deficit falls to three-year low

The trade deficit of the USA declined more than expected in November by around -8%, reaching its lowest level since October 2016. The liabilities balance decreased from USD 46.94bn in October to USD 43.6bn in November. US exports rose by +0.7% month-on-month to USD 208.63bn, while imports declined by -1% to USD 251.72 bn. The trade deficit with China collapsed by almost -16% to USD 26.4bn in November against the backdrop of the trade conflict and the trade deficit with the EU also fell by around -20% to USD 13.1bn.

Inflation slightly higher in the euro zone

The cost of living in the euro area rose noticeably at the end of 2019. Year-on-year consumer price inflation was +1.3% in December compared with +1.0% in the previous month. This was the strongest increase in consumer prices since April 2019. The price increases were most pronounced for food, alcohol and tobacco (+2%). On a monthly basis, the cost of living rose by +0.3%. Excluding the often volatile energy and food prices, the inflation rate was also +1.3%. This means that inflation in the euro zone remains well below the ECB's medium-term target of just under 2%.

Socialist Pedro Sanchez new Prime Minister of Spain

After a prolonged political blockade, yesterday Pedro Sanchez was elected Spain's new prime minister in parliament. The Socialist very narrowly secured the required simple majority by 167 votes to 165. For the first time in Spain's recent history, there will now be a coalition government with the Left Party Unidas Podemos and smaller regional parties. Catalonia's independence aspirations played a central role in the election campaign. Sanchez and his Socialist Workers' Party (PSOE) stand for a more moderate pace in this respect. Without a solid majority in parliament, however, the new government will have difficulty pushing through its agenda with plans such as tax increases for the rich and companies and a reversal of the labor market reforms implemented by the conservatives. For the time being, investors hope that the election will calm the political situation in Spain.



Economic Indicators January 8

MEZ Country Indicator Last
08:00 GE Factory Orders (y/y) -5.5%
08:45 FR Consumer Confidence 106.0
11:00 EZ Economic Sentiment 101.3
11:00 EZ Business Climate -0.23
11:00 EZ Consumer Confidence -8.1
14:15 US ADP employment grwoth 67,000

Earnings Calendar January 9, 2020

Country Corporate Period
US Duke Energy Q4



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Source: LGT Bank (Switzerland) Ltd.

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