Date: July 5, 2018
U.S. Stock Futures Follow Europe Jump; Euro Rises: Markets Wrap
U.S. equity futures rallied alongside European peers, while Asian shares dropped to a nine-month low as traders prepare for the implementation of fresh trade restrictions between America and China. The euro advanced on the prospect of earlier-than-anticipated monetary tightening. Futures on the S&P 500, Nasdaq and Dow all jumped, while European automakers headed for the biggest gain in two years on hopes of a cross-Atlantic tariff deal. That helped spur the Stoxx Europe 600 Index after gauges in Tokyo, China and Hong Kong all fell. The dollar and Treasuries both dropped, while the yuan held steady. Commodities, heavily exposed to international trade, edged lower. Iron ore futures in Singapore hit the lowest since November. The common currency strengthened and European sovereign bonds fell as investors repriced the trajectory of ECB rate increases and after data showed German factory orders surged in May. The pound climbed as U.K. Prime Minster Theresa May continues to seek backing for her vision of Brexit. The trade conflict is poised to enter a new phase on Friday, with the imposition of fresh tariffs between the world’s two biggest economies. China said that it won’t be the first to act, and will hold off on enforcement until the U.S. does. Investors are also preparing for more end-of-week action in the shape of the latest Federal Reserve minutes and American jobs data. Elsewhere, West Texas Intermediate crude advanced. Emerging-market shares dropped for the eighth time in nine days, and developing-nation currencies also weakened.
Stronger U.K. Growth Shows Need for Higher Rate, Carney Says
The U.K. economy is showing signs of rebounding from a sluggish first quarter of the year, supporting the view that it will require higher interest rates, according to Bank of England Governor Mark Carney. “Domestically, the incoming data have given me greater confidence that the softness of U.K. activity in the first quarter was largely due to the weather, not the economic climate,” Carney said, speaking in Newcastle, north-east England, on Thursday. His upbeat remarks on growth leave the door open to a BOE interest-rate increase as early as the next meeting on Aug. 2, when officials also update their forecasts. Investors currently see about an 80 percent chance of a quarter-point move next month. The pound rose after the speech and was trading up 0.2 percent at $1.3258 as of 12:19 p.m. in London. Carney didn’t offer specifics on the timing of the next hike. If the economy continues to perform as policy makers expect, “an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target,” he said. When the BOE made its last policy decision, statistics showed the economy nearly stopped growing in the first three months of the year. That figure has since been revised up to 0.2 percent by the Office for National Statistics, and incoming data for the current quarter have been stronger. “Indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness” in the first quarter, he said.
Pound Gets a Boost From Carney’s `Confidence’ on U.K. Economy
The pound gained and gilts slid as Bank of England Governor Mark Carney said the U.K. economy is supporting the case for higher rates. Sterling rose for a third day as Carney said incoming data had given him “greater confidence” that a sluggish first quarter was due to poor weather. Market pricing for an August interest-rate hike from the central bank moved to 80 percent, from around 75 percent before his speech. “It sounds like the bank are ready to hike in August,” said Viraj Patel, an analyst at ING Groep NV. “But it’s worth noting that pound markets aren’t fully buying it. There are two major elephants in the room — trade wars and Brexit.” Carney’s speech came ahead of a key moment in the Brexit talks, with Prime Minister Theresa May preparing for a gathering of her ministers Friday to try to agree on a Brexit strategy. While Brexit Secretary David Davis has reportedly rejected attempts at a compromise, if the government can get its strategy resolved, sterling could be set for more sustained gains, according to Patel. The pound climbed 0.2 percent to $1.3259 by 11:20 a.m. in London, taking its rally over the past three days to 0.8 percent. It was little changed at 88.18 pence per euro, while the yield on U.K. two-year government bonds rose two basis points to 0.75 percent.
Chinese Stocks Slide to More Than Two-Year Low Ahead of Tariffs
China’s bear market slump deepened, with the Shanghai gauge closing at its lowest since March 2016, and the yuan resumed its decline as traders braced for U.S. tariffs. The Shanghai Composite Index dropped 0.9 percent, extending its loss in the past four weeks to 12 percent. Hong Kong’s Hang Seng Index closed down 0.2 percent, paring a 1.5 percent retreat, while the offshore yuan fell 0.1 percent after a two-day advance. Stock indexes in Shanghai and Hong Kong have fallen further than any other tracked by Bloomberg worldwide in the past month as investors fear China’s slowing economy will struggle to cope with the cost of a protracted trade war. A slumping yuan has damped the attraction of Chinese assets even as policy makers vowed not to use the currency as a weapon against the U.S. “The trade war is a constant overhang and I don’t see it being removed any time soon,” said Zhang Gang, Central China Securities strategist in Shanghai. “The yuan is under pressure again today, which is bad for sentiment.” The first wave of U.S. tariffs on $34 billion of Chinese exports will take effect on July 6, according to a statement from the U.S. Trade Representative, which didn’t specify a time. China’s response of additional tariffs on U.S. goods will become effective “immediately” thereafter. If the U.S. tariffs come in at midnight Friday U.S. time, that’s midday Friday in Beijing.
Here’s Where China Stands as Hour of U.S. Tariffs Approaches
The world’s two largest economies are set Friday to slide deeper into a trade conflict that’s roiled markets and cast a shadow over the global growth outlook. In Beijing, policy makers are digging in for what could be a protracted fight — one in which they say they won’t be the aggressor. If the U.S. begins imposing additional steep tariffs on Chinese imports as of Friday, then Beijing is poised to respond in kind. With further tit-for-tat levies already threatened, this week could mark the start of a new and damaging phase. The U.S. imposition of tariffs on $34 billion of China’s exports will not only hurt China, but America itself and the rest of the world, Gao Feng, China’s Commerce Ministry spokesman, said at a regular press conference in Beijing Thursday. Beijing’s retaliatory tariffs will become effective “immediately” after the U.S. acts, according to the customs authority. The looming tariffs have also weighed on markets, prompting central bank officials to seek to reassure investors. On June 15, President Donald Trump said the U.S. would begin charging additional duties of 25 percent on $50 billion worth of Chinese imports in response to what he says is theft of American intellectual property. That’s split into two rounds — $34 billion now and $16 billion later. China responded with a statement saying it would fight back with “equal scale, equal intensity.” Beijing is targeting soybeans, corn, wheat, rice, sorghum, beef, pork, poultry, fish, diary products, nuts and vegetables, and autos in its first round of counter measures.