Date: October 19, 2018
United States:
U.S. Futures Gain as Europe Struggles; Dollar Dips: Markets Wrap
U.S. equity futures rose, pointing to a stronger open in New York as European shares drifted lower and Asian peers were mixed. Treasuries were steady as the dollar edged down. Futures on the Dow Jones, S&P 500 and Nasdaq advanced, while the Stoxx Europe 600 index declined as warnings from companies including Michelin and Atlas Copco AB clouded the outlook for corporate earnings. Shares in Shanghai and Hong Kong gained earlier as financial regulators vowed to keep risks under control, though the MSCI Asia Pacific Index slipped with benchmarks in Tokyo, Mumbai and Taiwan. Europe’s peripheral debt fell and Italian stocks sank as EU nations warned Italy’s populist government its budget won’t fly. China’s efforts to stem a selloff came as growth data for the world’s second biggest economy registered slightly below expectations, as the trade showdown with the U.S. starts to bite. A slew of other risks muddy the outlook, and investors are wading through company results as they grapple with Brexit, Italy’s confrontation with the EU over its budget and worsening American-Saudi relations over the disappearance of journalist Jamal Khashoggi. Elsewhere, oil recovered from near the lowest level in almost a month. Emerging-market stocks climbed and currencies advanced, rounding out a second week of gains.
Europe:
Euro May Take Lower Path Into ECB as Draghi to Maintain Rhetoric
The euro could revisit its year-to-date low as persistent political risks may lead Mario Draghi to refrain next week from painting a rosier picture for the bloc’s economy. Market dynamics have shifted only slightly since the European Central Bank’s last meeting, yet not in a supportive way for the common currency. Data may be suggesting the forecasts for growth are broadly on track with the Governing Council’s projections, but on the other hand subdued inflation, early signs of contagion in peripheral bonds, deadlocked Brexit negotiations and a hawkish Federal Reserve could mean the euro could test its $1.1301 mid-August low. Draghi said he sees a “relatively vigorous” pickup in underlying euro-area inflation following the September monetary policy decision and while wage pressure is building, the pass-through to prices is yet to be seen. At a time when the market looks behind the curve when it comes to additional U.S. tightening, there may be little room for the ECB president to downplay monetary policy divergence projections at the next gathering on Oct. 25. Price action in the spot market this month showed that the euro could benefit from a Brexit resolution. U.K. and EU officials keep kicking the can down the road however as obstacles remain, with focus now turning to a December EU summit, as volatility shows. European Council President Donald Tusk and European Commission President Jean-Claude Juncker present conclusions from the Oct. 18-19 summit to the EU Parliament next week, with the bar high for a positive surprise. For the short-term, investors are looking closely at the performance of euro-area peripheral bonds as the rift between Italy and the EU widens. Italy’s 10-year yield spread over Germany touched the highest in more than five years following a letter from the European Commission to Rome that said its spending plans were excessive. While resilience was the name of the game initially, Spanish bonds led the widening versus bunds on Thursday and the 10-year Portugal yield rose by 8 basis points Friday to 2.11 percent, highest since May.
Asia:
China’s Problems Keep Piling Up With Trump, Economy, and Markets
Stock-market turbulence and a sharper-than-expected economic slowdown are ratcheting up pressure on China’s leaders, just as Donald Trump does the same. A day after the Shanghai Composite Index plunged to a four-year low and Trump took new steps to escalate his trade war with Beijing, third-quarter growth figures showed China’s economy expanding at the weakest pace since the depths of the global financial crisis in 2009. Faced with a growing panic in the stock market, the chiefs of China’s market regulator, central bank and financial watchdog all issued statements calling for investor calm. Economic policy makers including Vice Premier Liu He, who also weighed in on Friday, are now left walking a tightrope. To fortify the nation’s negotiating position on trade with the Trump administration, they need to stem the $3 trillion stock rout and support growth at home — all without giving up on their goal of containing soaring debt levels. “China is under pressure on multiple fronts,” said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. “Logically, all this pushes China to make a deal, yet I don’t think there is a deal to be had.” While the Shanghai Composite opened lower on Friday morning after the officials’ statements, it rallied in the afternoon and closed with a 2.6 percent gain. Some investors speculated that China’s “National Team” of state-backed funds stepped in to add some oomph to policy makers’ verbal intervention. China’s stock market is still the world’s worst performer since January — losing nearly enough value to wipe out the combined market capitalization of Brazil, India and Russia. Losses in China have largely been fueled by concerns over trade and economic growth, but the rout accelerated this month amid a wave of forced selling by leveraged investors. About $600 billion of Chinese shares have been pledged as collateral for loans, leaving their owners vulnerable to margin calls as prices sink.
