As the world turns, so do risk-on and risk-off trades around the world. Some are for the short term and based on technical factors. Others are for the long term and based on fundamentals. Let's take a quick tour around the world:
As the world turns, so do risk-on and risk-off trades around the world. Some are for the short term and based on technical factors. Others are for the long term and based on fundamentals. Let's take a quick tour around the world:
(1) Japan. While pessimists have been predicting an imminent sovereign debt crisis in the US, it seems to be unfolding in Japan currently. Amid a shrinking economy and growing mountain of debt, Prime Minister Shigeru Ishiba issued a harsh warning this week, "Our country's fiscal situation is undoubtedly extremely poor," adding, "worse than Greece's.” Japan's GDP shrank in Q1; and on Monday, the cost of borrowing increased after yields on its 40-year government bond reached highs last seen about 20 years ago (chart). The slump in Japanese bonds worsened today after the weakest demand at a government debt auction in more than a decade. The bid-to-cover ratio at Tuesday’s 20-year bond sale fell to the lowest since August 2012.
The Bank of Japan has stopped increasing its holdings of Japanese government bonds over the past two years (chart).
(2) China. On Monday, official data showed that China's industrial output in April grew 6.1% y/y, while inflation-adjusted retail sales increased 5.4% (chart). The data followed firmer-than-expected exports last month. In other words, China continues to export its excess production, which is exacerbating global trade frictions and deflation around the world. China cut its key lending rates by 10 basis points on Tuesday.
(3) United States. Meanwhile, the US economy remains resilient, as the Index of Coincident Economic Indicators rose to yet another record high in April (chart). The Index of Leading Economic Indicators continues to be a very misleading indicator, as it has been predicting a recession since early 2022.
(4) Europe. In its spring economic forecast, the European Commission, the trade bloc’s administrative arm, said it expected the real GDP of the 20 countries using the euro to grow just 0.9% in 2025, down from the 1.3% that had been forecast last fall. Economic growth across the European Union (EU) is expected to increase 1.1% in the same period, down from a previous expectation of 1.5%, the commission said. Heightened global uncertainty and trade tensions are weighing on EU growth. On Monday, Britain and the European Union reached a deal aimed at removing some of the barriers to trade that Brexit had introduced.
Until the past couple of years, Germany's industrial economy was a major source of strength for the EU (chart). Now it is weighing on the regional economy as Chinese competition, particularly in the auto sector, is depressing Germany's factories.
(5) Gold. The price of an ounce of gold has corrected by about 10% so far in May, especially following the May 12 postponement of most of the reciprocal tariffs imposed on China during "Liberation Day" on April 2. Turmoil in the Japanese bond market seems to be giving the price of gold a boost today (chart).
(6) The dollar. Yesterday afternoon, the Fed released daily data for last week's broad trade-weighted dollar (TWD) (chart). The MSCI dollar index closely follows the Fed's measure. Both show a modest recent decline in the TWD, with a solid upward trend remaining intact. The Dollar Index (DXY) seems to be bottoming. It is a very misleading indicator because it is not trade-weighted as widely believed. It is a fixed-weight index for developed currencies only and gives the euro a 57.6% weight.
