Date: December 13, 2018
U.S. Futures, Europe Stocks Pare Gain; Bonds Rise: Markets Wrap
U.S. equity futures and European shares surrendered early gains as investors weighed the latest developments in America-China trade relations. The euro edged up and bonds stayed higher as the ECB confirmed an end to its asset purchase program. Futures on the S&P 500 gave up most of an earlier advance made after news that Chinese importers have bought U.S. soybeans, while declines in energy and media shares led the Stoxx Europe 600 Index lower after a positive start. General Electric climbed in pre-market trading after an upgrade from JPMorgan. Hong Kong and Chinese stocks outperformed as equities across Asia bucked the trend and continued their rebound. Treasuries and European bonds advanced in a rally led by Italy’s securities after the country offered a significant concession to the European Commission on its deficit target. The dollar drifted while the pound added to its advance after the U.K.’s prime minister survived an attempted ouster Wednesday. Investors are studying the latest moves in the global trade tug of war, as China resumed purchases of American soybeans and reiterated its officials were in close contact with U.S. counterparts on negotiating details of a broader deal. Worries for global relations remain. The Asian nation detained a second citizen of Canada for questioning, further heightening tensions between those two countries. Trump administration officials on Wednesday signaled that Beijing will have to do more to end the tariff war. In the U.K., gilts climbed and the FTSE 100 edged lower after Theresa May won a vote of confidence in her leadership of the Conservative Party, though it’s likely to be only a temporary reprieve as the embattled premier faces hardened opposition to her Brexit deal.
ECB to Lower 2019 Inflation Forecast as Bond-Buying Ends
The European Central Bank is set to lower its inflation forecast for 2019 when it publishes an updated outlook on Thursday, according to people familiar with the matter. Staff projections foresee consumer-price growth slightly weaker than the 1.7 percent previously expected for next year, and the outlook for economic growth has also been revised down, the people said. They asked not to be named as the forecasts aren’t final until they’re unveiled by President Mario Draghi. An ECB spokesman declined to comment. The euro fell as much as 0.1 percent on the news before recovering. It was trading at $1.1382 at 11:12 a.m. in Frankfurt. Downgrading the inflation outlook now, even mildly, complicates the ECB’s plan to end its asset-purchase program. Policy makers are widely expected to confirm that the four-year-old stimulus measure will be capped at 2.6 trillion euros ($3 trillion) at the end of this month, despite a fragile economic outlook amid a range of euro-zone and global risks. Inflation is seen picking up gradually in 2020 and 2021, one of the people said. The ECB’s goal is to keep inflation just under 2 percent without extraordinary monetary stimulus. Bloomberg Economics predicts that the ECB will lower its inflation and growth forecasts, saying that will help the Governing Council stick to its assessment that risks to growth are balanced.
Trade War Damage to China’s Economy Is Already Done, Citi Says
The damage to China’s economy from the trade war with the U.S. can’t be immediately made good even in the case of a resolution with President Donald Trump, Citigroup economists say. That’s because the tariff war is underlining China’s rising cost of labor at a time when the job market is under pressure, Citi economists led by Liu Li-Gang said in their 2019 economic outlook report. The trade war with the U.S. could cut China’s export growth by almost half next year, putting around 4.4 million jobs at risk, the economists wrote. “It is a reality that China is losing some of its cost competitiveness, especially in labor-intensive and low-value-added sectors,” according to the report. “Although shifting the supply chains is not feasible in real time, manufacturers may seriously weigh the option of leaving China if punitive tariffs last longer than expected.” Even amid signs of a detente between Beijing and Washington, Citi’s baseline scenario is still that the 15 percent additional tariff will be levied on Chinese exports after March 1, as 90 days may be insufficient to resolve “large differences” between the two countries on issues of IP protection, forced technology transfer, state support to state-owned enterprises, and cyber intrusion and theft. The economists expect the trade war will cut China’s export growth by almost half to 5.1 percent in 2019. The 25 percent tariffs on US $250 billion worth of imports from China would reduce China’s exports by 5.6 percentage points, denting GDP growth by 1.04 percentage points.