June 26, 2018
Trade Tensions Rattle U.S. Stocks, Dollar Weakens: Markets Wrap
Escalating trade tensions sent U.S. stocks to the steepest drop since early April, as President Donald Trump’s threats of more protectionism against major partners were met with Chinese and European vows of retaliation. The S&P 500 Index fell 1.4 percent, though comments from National Trade Council Director Peter Navarro brought the measure back from losses that topped 2 percent. The Dow Jones Industrial Average closed below its 200-day moving average. Selling was heaviest in tech shares, with the Nasdaq 100 Index sinking 2.2 percent. Equities tumbled around the world on reports that the Treasury department will propose limits on Chinese technology investment, straining already tense relations between the world’s two largest economies. Navarro said on CNBC that there were no plans to impose restrictions, sparking a late-day rebound. China and Europe warned the escalating trade war could trigger a global recession. The selling in American stocks spread from Asia, where equities in Shanghai and Hong Kong declined despite China’s central bank freeing up liquidity in the banking system. European shares also tumbled, with the Stoxx 600 Index down 2.1 percent. Political concerns hit Italian bonds and stocks after the nationalist League party won municipal elections. Emerging-market equities slid. U.S. crude pushed toward $69 a barrel. After an early surge, Turkey’s lira swung between gains and losses as traders digested Recep Tayyip Erdogan election victory. The rising tensions have weighed on stocks ahead of the second-quarter earnings season that so far has seen estimates keep rising. Daimler AG dented that notion last week, warning that tariffs will lower its profits. Germany’s DAX Index was among the worst performers of the region’s stock gauges as data showed business sentiment slipped. Automakers were the big losers after more tariff threats from Trump at the end of last week.
Italy’s Crunch Moment in the Bond Market
Italy’s auction of five and 10-year government bonds on Thursday will be the most important test of investor appetite since the country’s political crisis subsided. Buyers are understandably skittish. Appetite for the 10-year securities the government sold at the end of May was poor, something I remarked on at the time. Since then, yields on Italy’s two-year bonds have climbed back above one percent, and the premium investors demand to hold 10-year Italian bonds over their German counterparts has increased to 250 basis points, about twice its average this year. In recent weeks, yields have jumped after two euroskeptic professors were named to important parliamentary committee posts and Matteo Salvini’s League polled strongly in the weekend’s municipal elections. Such volatility in Europe’s largest bond market is unsettling for investors — and contrasts starkly with France and Spain. France is preparing to tap an existing green bond due in 2039, a sign it is after several billion euros. Spain is preparing to sell as much as 9 billion euros ($10.5 billion) of debt maturing in a decade — a sign of how demand has rebounded following the collapse of Mariano Rajoy’s Popular Party government. To get a sense of how deep demand for Italian debt really is, you need to look at three things: the amount of bids submitted compared with the amount of bonds sold; the sum raised versus the maximum the government initially seeks; and the difference between the price the securities are sold for in the auction compared with the market price when investors submit their bids.
BOE Could Target U.K. Productivity Goal Under Labour Government
The Bank of England’s remit should be overhauled to include a 3 percent target for productivity growth, according to a report commissioned by the U.K.’s opposition Labour Party. The central bank should also have its toolkit expanded to include credit guidance and greater use of macro-prudential policy, said the study, led by GFC Economics’ Graham Turner. The proposals, for consideration in Labour’s policy review ahead of the next election, recommend that the BOE should keep its independence, and that it should open an office in Birmingham. Poor productivity has dogged the U.K. economy for years, leaving policy makers struggling to explain the puzzle of why output per hour has failed to return to its pre-crisis growth rate. It’s a crucial topic for BOE officials, since the trend means the economy has less room to grow without generating inflation than it did in the past. In a report in April, ONS deputy chief economist Richard Heys said output per hour rose just 1 percent in 2017, half the historic average rate. That left productivity more than 16 percent below its pre-crisis trend. The Labour-commissioned report recommended that the BOE should sign an accord with the government detailing how each will work toward achieving the 3 percent target, and be required to report after each budget. The BOE’s current remit is to target inflation of 2 percent. Labour’s finance spokesman, John McDonnell, said in April that he was “quite attracted” by the U.S. Federal Reserve’s dual mandate for stable inflation at 2 percent and maximum employment. McDonnell is due to speak at the launch of the report at an event in London on Wednesday.
Chinese Stocks Enter Bear Market as Trade, Growth Risks Increase
Chinese stocks fell, with the benchmark gauge entering a bear market, amid growing concern about the country’s resilience to a trade war with the U.S. The Shanghai Composite Index fell 0.5 percent at the close, taking its loss since a January high to more than 20 percent. Airlines extended a rout as a slumping yuan boosted the cost of their dollar-denominated debt, while property developers also sank. Investors have largely ignored government measures to support market sentiment, including a weekend reserve-ratio cut and scrutiny on the liquidation of pledged stock, as trade tensions added to concern about Beijing’s deleveraging campaign and weaker-than-expected economic data. The latest stock rout, coming three years after China’s equity bubble burst, has now wiped out $1.8 trillion through Monday since January’s high. “Pessimism will keep growing as many companies are on the edge of margin calls and bond defaults,” said Sun Jianbo, China Vision Capital president in Beijing. “The benchmark Shanghai Composite Index will fall at least 10 percent from the current level.” The yuan weakened 0.3 percent to a six-month low, while the offshore exchange rate slid for a ninth day, its longest losing streak in more than four years. Bonds rose, with the 10-year government yield dropping one basis point to 3.59 percent. “I don’t see the bottom,” said Qian Qimin, a strategist at Shenwan Hongyuan Group Co. in Shanghai. “The weakening yuan is hurting companies with high levels of dollar debt.” Such is the depth of selling in Hong Kong that 26 percent of the companies on the Hang Seng China Enterprises Index fell to fresh one-year lows on Monday — the biggest proportion since a market shake up in early 2016.